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QUESTIONS FOR FINANCIAL ACCOUNTING MOOC: Module 1 – Financial Statements and Business Decisions Question 1: 1.1 Why we study accounting Which of the following best describes accounting? A. It records economic data but does not communicate the data to users according to any specific rules. B. It is an information system that provides reports to users regarding economic activities and condition of a business. C. It is of no use by individuals outside of the business. D. It is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements. Question 2: 1.2 Accounts "Revenues" are best described as A. decreases in assets resulting from the sale of products or services. B. increases in assets resulting from the sale of products or services. C. assets used or consumed in the sale of products or services. D. an increase in the financing activities. Question 3: An income statement represents: A. a list of resources available, resources committed, and the difference between the two B. the flows of cash into and out of an organization over a period of time C. the amount of money which a company would raise if sold D. the resources acquired and consumed through an organization’s operations over a period of time Question 4: 1.2 Four Basic Financial Statements A business's balance sheet cannot be used to accurately predict what the business might be sold for because A. it identifies all the revenues and expenses of the business. B. assets are generally listed on the balance sheet at their historical cost, not their

current value. C. it gives the results of operations for the current period. D. some of the assets and liabilities on the balance sheet may actually be those of another entity. Question 5: 1.2 Accounts Which financial statement reports the dividends declared by a business? A. income statement. B. statement of stockholders’ equity. C. statement of cash flows. D. balance sheet.

Question 6: 1.1 Intro to Financial Accounting Financial statements are prepared: A. Only for publicly owned business organizations. B. For corporations, but not for sole proprietorships or partnerships. C. Primarily for the benefit of persons outside of the business organization. D. In either monetary or nonmonetary terms, depending upon the need of the decision maker. Explanation: Financial statements are prepared by all organizations, and are meant to be used by individuals and entities external to the organization in order to evaluate the organization’s performance.

Question 7: Which of the following best describes the amounts reported as shareholders’ equity? A. Investments by owners and cash received from operations. B. Investments by owners plus net income earned minus dividends distributed to owners since the company began its operations. C. Cash received from operations minus cash paid for operations plus amounts invested by owners. D. Total assets owned by the company minus amounts paid out as dividends since the company began its operations. Explanation: Stockholders’ Equity is the sum of Paid in capital and Retained Earnings. Paid in capital represents investments by owners/stockholders, and Retained Earnings is the cumulative net income of the company since it began operations reduced by payments of dividends to its shareholders.

Question 8: 1.2 Accounts Which of the following best describes the amounts reported as shareholders’ equity? A. Investments by owners and cash received from operations. B. Investments by owners plus net income earned minus dividends distributed to owners since the company began its operations. C. Cash received from operations minus cash paid for operations plus amounts

invested by owners. D. Total assets owned by the company minus amounts paid out as dividends since the company began its operations. Explanation: Stockholders’ Equity is made up of Paid in capital and Retained Earnings. Paid in capital represents investements by owners, and Retained Earnings is the cumulative net income of the company since it began operations reduced by payments of dividends to its shareholders. Question 9: 1.2 Basic Accounting Equation A company would report a net loss when A. retained earnings decreased due to paying dividends to shareholders. B. its assets decreased during an accounting period. C. its liabilities increased during an accounting period. D. its expenses exceeded its revenues for an accounting period. Explanation: Net Income, which is reported in the Income Statement is the difference between Revenues and Expenses. When expenses are higher than revenues, it is reported as a Net Loss.

Question 10: 1.2 Four Basic Financial Statements Which one of the following financial statements show the end of the year balance for Cash and Cash Equivalents for a business entity? A. Income Statement and Statement of Retained Earnings B. Balance Sheet and Statement of Cash Flows C. Statement of Retained Earnings and Statement of Cash Flows D. Balance Sheet and Statement of Retained Earnings Explanation: The Cash balance reported in the Statement of Cash Flows must match the amount reported in the Balance Sheet.

Question 11: Which of the following statements is false? A. The balance sheet reports the beginning balance of retained earnings. B. A balance sheet provides information at a specific point in time, while the other three statements provide information for a specific period of time. C. When an entity’s revenues exceed its expenses for a period of time, the entity reports a net profit for that period. D. A company’s assets come from three primary sources: creditors, investors and profits from the business. Explanation: A Balance Sheet only reports the ending balance of retained earnings for the period.

Question 12 (testing the balance sheet is snapshot): 1.1 GAAP

Which of the following is the correct date format for the financial statement heading? A. Balance Sheet for the Year January 1st 2013 through December 31st, 2013 B. Income Statement at December 31, 2013 C. Income Statement for the Year Ended December 31, 2013 D. Statement of Retained Earnings at December 31, 2013 Explanation: Income Statement, Statement of Retained Earnings and the Statement of Cash Flows report the result of operations for an entire period, whereas a Balance Sheet represents a snapshot of the financial condition of a company on a specific date (the end of the period).

Question 13: 1.2 Accounts Common Stock, as shown in the balance sheet of a corporation, always represents: A. The amount invested in the business by stockholders when shares of stock were initially issued by a corporation. B. The total owners' equity for a business organized as a corporation. C. The owners' equity accumulated through profitable operations that has not been paid out as dividends. D. Price paid by corporation to purchase shares of stock in the corporation from other stockholders.

Question 14: 1.1 Intro to Financial Accounting Which one of the following groups is considered an internal user of financial statements? A. A bank reviewing a loan application from a corporation. B. Government regulators monitoring the industry. C. The financial analysts for a brokerage firm who are preparing recommendations the firm’s brokers on companies in a certain industry D. Factory managers that supervise production line workers. Explanation: The others are all external users of financial statements.

Question 15: Which of the following transactions would cause an increase in both assets and owners' equity? A. Providing service to a customer to generate revenue. B. Paying dividends to shareholders. C. Borrowing money from a bank. D. Sale of land for cash at a price equal to its cost. Explanation: Generating revenue by providing service (or selling a product) to a customer increases an asset (such as cash or accounts receivable), and also increases Retained Earnings, which increases Owners’ Equity.

Question 16:

All of the following are interrelationships that are important to understand when preparing financial statements except: A. The net income from the income statement is used in the retained earnings statement. B. The ending retained earnings from the Retained earnings statement is used in the stockholder's equity section of the balance sheet. C. The cash on the balance sheet should be equal to the cash at the end of the period on the statement of cash flows. D. All of the expenses on the income statement must match the cash payments for operating activities on the statement of cash flows. Explanation: Expenses may include non cash items such as depreciation which are never paid. Also expenses are often recorded as a liabilities and do not need to be paid in the same accounting period.

Question 17: 1.2 Basic Accounting Equation Linda Corporation receives payment of $200,000 from customers for amounts previously owed to Linda. The recording of this event in Linda’s financial statement will A. increase total assets B. decrease total assets C. have no effect on total assets D. decrease total liabilities Explanation: Receiving cash from credit customers reduce the accounts receivable accounts for these customers, and increase the cash account. Since accounts receivable and cash are both asset accounts, the balance of Total Assets remain unchanged.

Question 18: 1.2 Four Basic Financial Statements The natural progression in the preparation of financial statements is best represented by the following order: A. Balance sheet and statement of cash flows > statement of stockholders equity > income statement B. Balance sheet and statement of cash flows > income statement > statement of stockholders equity. C. statement of stockholders equity > income statement > balance sheet > statement of cash flows D. Income statement > statement of stockholders equity > balance sheet > statement of cash flows Question 19: 1.2 Basic Accounting Equation If retained earnings decreased during the year, and no dividends were paid, which of the following must be true? A. Expenses for the year exceeded revenues B. The company did not have enough cash to pay its expenses C. Total equity decreased D. Liabilities increased during the year Explanation: Retained Earnings is increased when a company generates net income, and is reduced when a company pays dividends. In this situation no dividends were paid, and retained earnings decreased during the year. So the possible explanation is that the company suffered a net loss during the year, which means expenses were higher than revenues.

Question 20: 1.2 Basic Accounting Equation Sara Company received a bill for phone services for the month of February to be paid in the month of March. How does receiving the bill affect the accounting equation for February? A. assets decrease; stockholders' equity decreases B. assets increase; liabilities increase C. liabilities increase; stockholders' equity decrease D. liabilities increase; stockholders' equity increases Explanation: The phone services represent an expense, hence recognizing it reduces stockholders’ equity. Also, the bill is to be paid in the following month, a liability will be recognized. Question 21: 1.2 Four Basic Financial Statements Which two statements report changes in financial conditions over a period of time, similar to a motion picture? A. balance sheet and income statement B. income statement and statement of cash flows C. balance sheet and statement of cash flows D. balance sheet and statement of stockholders’ equity Explanation: A balance sheet acts as a snapshot of a company’s financial condition, and reports the assets, liabilities and stockholders’ equity at a specific point in time. The other three statements reports financial results of operations over a time period. Question 22: With regard to relationships among financial statements, which of the following is true? A. The statement of stockholders' equity affects the income statement. B. The income statement affects the statement of stockholders' equity. C. The balance sheet affects the income statement. D. The statement of cash flows affect the statement of stockholders' equity. Question 23: this is from slide 27: 1.2 Basic Accounting Equation Which of the following would cause a change in a corporation's retained earnings? A. Net income or net loss and declaration of dividends. B. Declaration of dividends and issuance of common stock to new stockholders. C. Net income and issuance of stock to new stockholders. D. Declaration of dividends and purchase of new machinery. Question 24: 1.2 Four Basic Financial Statements Which financial statement would you analyze to determine whether a company will be able to pay liabilities which are due in 30 days? A. Income statement. B. Balance sheet. C. Statement of stockholders' equity. D. Statement of cash flows. Explanation: The analyst will need to determine which liabilities are due in 30 days, and whether the company has sufficient cash or other current assets to pay for these liabilities. Both assets and liabilities are reported in the Balance Sheet.

Question 25: Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This transaction could have been a(n): A. Purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance. B. Investment of $5,000 cash in the business by the stockholders. C. Purchase of office equipment for $5,000 cash. D. Repayment of a $5,000 bank loan. Explanation: Purchasing the equipment will increase assets by $12,000 and decrease assets (cash) by $7,000, resulting in a net increase in cash of $5,000. The note payable will increase liabilities by $5,000. Question 26: 1.23 Basic Accounting Equation Which of the following direct effects on the fundamental accounting equation is not possible as a result of transactional analysis? A. An increase in an asset and a decrease in another asset. B. A decrease in a liability and an increase in an asset. C. A decrease in stockholders' equity and a decrease in an asset. D. An increase in an asset and an increase in stockholders' equity. Explanation: The accounting equation must always remain in balance. If assets increase, the right hand side of the equation (liabilities plus owners’ equity) must also increase.

Question 27: The accounting equation for Eeyore Enterprises is as follows: Assets Liabilities Stockholders' Equity $120,000 = $60,000 + $60,000 If the company purchases office equipment on account for $12,000, the accounting equation will change to Assets Liabilities Stockholders' Equity A. $120,000 = $60,000 + $60,000 B. $132,000 = $60,000 + $72,000 C. $132,000 = $66,000 + $66,000 D. $132,000 = $72,000 + $60,000 Explanation: Purchasing an asset on account (on credit) will increase assets by $12,000, and liabilities by $12,000. Stockholders’ Equity will not be affected.

Question 28: 1.3 Exploring Financial Statements Elston Company compiled the following financial information as of December 31, 2018: Revenues $140,000 Common stock 30,000 Equipment 40,000 Expenses 125,000 Cash 35,000 Dividends 10,000 Supplies 5,000 Accounts payable 20,000 Accounts receivable 15,000 Retained earnings, 1/1/10 75,000 Elston’s Total Assets on December 31, 2010 are: A. $ 95,000 B. $170,000 C. $ 80,000 D. $ 235,000 Explanation: Here, asset accounts are Equipment ($40,000), Cash ($35,000), Supplies (5,000), and Accounts Receivable ($15,000), which add up to Total Assets of $95,000.

Question 29: 1.3 Exploring Financial Statements Marilu Company began the year 2018 with stockholders' equity of $30,000. During the year, Marilu issued additional shares of stock in exchange for cash of $42,000, recorded expenses of $120,000, and paid dividends of $8,000. If Marilu’s stockholders' equity at the end 2018 was $92,000, what was the company’s revenue for the year 2018? A. $140,000. B. $148,000. C. $182,000. D. $190,000. Explanation: We know, Beginning Owners’ Equity + Investment by owners + Revenues – Expenses – Dividends = Ending Owners’ Equity. So, $30,000 + $42,000 + Revenues - $120,000 - $8,000 = $92,000 Solving for the missing Revenues, we get Revenues = $(92,000 - 30,000 - 42,000 + 120,000 + 8,000) = $148,000

Question 30: 1.2 Basic Accounting Equation At the beginning of 2018, Buck Corporation had assets of $540,000 and liabilities of $320,000. During the year, assets increased by $50,000 and liabilities decreased by $10,000. What was the total amount of stockholders' equity at the end of 2018? A. $220,000 B. $280,000 C. $380,000 D. $500,000 Explanation: At the end of the year, Assets = $540,000 + $50,000 = $590,000, Liabilities = $320,000 $10,000 = $310,000. Since the accounting equation must always remain in balance, Stockholders’ Equity = Assets – Liabilities = $590,000 - $310,000 = $280,000. Question 31: As of December 31, 2010, the Balance Sheet of Sparkling Products, Inc. contain the following items (in random order): Accounts Payable $6,000 Land 45,000 Building 125,000 Notes Payable 67,500 Accounts Receivable 15,000 Cash 3,500 Retained Earnings 50,000 Common Stock 94,000 Equipment ? Determine the amount of Equipment. A. $ 21,000 B. $ 21,750 C. $ 29,000 D. $172,500 Example: In this situation, Assets include Land ($45,000), Building ($125,000), Accounts Receivable ($15,000), Cash ($3,500), and Equipment (unknown). Liabilities include Accounts Payable ($6,000), Notes Payable ($67,500). Stockholders’ Equity include Retained Earnings ($50,000) and Common Stock ($94,000). So, the accounting equation (A = L + E) will be $45,000 + $125,000 + $15,000 + $3,500 + Equipment = ($6,000 + $67,500) + ($50,000 + $94,000) Solving for Equipment, we get Equipment = $217,500 - $188,500 = $29,000

Question 32: On January 1, Bonita Corporation's Total Assets were $1,350,000, and Total Liabilities were $565,000. During the year, Bonita had revenues of $135,000 and expenses of $93,000. On December 31, the company’s Total Assets were $1,590,000, and Total Liabilities were $778,500. What amount of dividends were paid during the year? A. $42,500 B. $30,750 C. $15,500 D. $13,250 Explanation: At the beginning of the year, Assets = $1,350,000, and Liabilities = $565,000. Using the accounting equation, Owners’ Equity at the beginning of the year = $1,350,000 - $565,000 = $785,000 At the end of the year, Assets = $1,590,000, and Liabilities = $778,500. Using the accounting equation, Owners’ Equity at the end of the year = $1,590,000 - $778,500 = $811,500 Also, Beginning Owners’ Equity + Investment by owners + Revenues – Expenses – Dividends = Ending Owners’ Equity. Here, $785,000 + 0 + $135,000 - $93,000 – Dividends = $811,500 Solving, Dividends = $785,000 + $135,000 - $93,000 - $811,500 = $15,500 Question 33: 1.2 Basic Accounting Equation During the year 2018, Jillian Company’s Total Assets increased $25,000, and Total liabilities decreased $15,000. During the same year, the company’s investors invested an additional $30,000 and the company paid dividends of $5,000. What must have been Jillian Company’s Net Income for 2018? A. $25,000 B. $15,000 C. $20,000 D. $10,000 Explanation: Assets increased by $25,000. In order for accounting equation to remain in balance, the right hand side must have increased by $25,000. Since Liabilities decreased by $15,000, Owners’ Equity must have increased by ($25,000 + $15,000) $40,000. Owners’ Equity is increased by Investments by owners, Net Income and decreased by Dividends. Here, $40,000 = $30,000 + Net Income - $5,000. Solving we get, Net Income = $40,000 - $30,000 + $5,000 = $15,000

Question 34: 1.2 Basic Accounting Equation Davis Company reported total stockholders’ equity of $145,000 on its Dec 31, 2017, balance sheet. The following information is available for the year ended Dec 31, 2018: Revenues...................................................$ 210,000 Expenses................................................... 165,000 Liabilities, on December 31, 2018 ………. 72,000 What are the total assets of Davis Company on December 31, 2018? A. $92,000 B. $190,000 C. $210,000 D. $262,000 Explanation: Beginning Owners’ Equity + Investment by owners + Revenues – Expenses – Di...