Chapter 1

Chapter 1—Introduction to Accounting and Business
TRUE/FALSE
1. Three types of businesses that operate for profit are manufacturing, merchandising and service
businesses.
ANS: T DIF: 1 OBJ: 01
2. An example of a business stakeholder is a bank that has lent money to the business.
3. Accounting is an not an information system and is often called the "language of business."
ANS: F DIF: 1 OBJ: 02
4. An individual who wishes to practice public accounting as a CPA must meet the requirements of
the United States Bureau of Accountancy.
5. The Institute of Certified Management Accountants, an affiliate of the American Institute of

Certified Public Accountants (AICPA), sponsors the Certified Management Accountant (CMA)
program.
6. Managerial accounting is primarily concerned with the recording and reporting of economic data
and activities for an entity for use by owners, creditors, governmental agencies, and the public.
7. The initials GAAP stand for generally accepted accounting practices.
8. A business transaction is the occurrence of an event or condition that must be recorded.
9. The business entity concept requires that monetary business transactions be recorded at market
value.
10. The Financial Accounting Standards Board is the authoritative body that has primary
responsibility for developing accounting principles.

11. The business entity concept is based on the applicability of accounting to individual economic
units of society.
12. If a building is offered for sale at $100,000 and the buyer pays $85,000 cash for it, the buyer
would record the building at $100,000.
13. Land with an appraisal value of $40,000 for property tax purposes is offered for sale at $110,000.
If a buyer pays $105,000 in cash for the land, the buyer would record the land in the records at
$40,000.
14. The accounting equation can be expressed as Revenues + Assets = Owner's Equity.
15. The accounting equation can be expressed as Assets = Liabilities + Expenses.
16. The accounting equation can be expressed as Assets - Liabilities = Owner's Equity.
17. The rights or claims to the assets of a business may be subdivided into rights of creditors and
rights of employees.
18. Owners' rights to the assets rank ahead of the creditors' rights to the assets.
19. If the liabilities owed by a business total $500,000, then the assets also total $500,000.
20. If the assets owned by a business total $500,000, the owner's equity totals $400,000 and liabilities
total $100,000.
21. If the assets owned by a business total $100,000 and liabilities total $50,000, owner's equity totals
$50,000.
22. If the assets owned by a business total $100,000 and liabilities total $50,000, owner's equity totals
$150,000.
23. If a business has liabilities of $100,000 and owner's equity of $55,000, assets total $155,000.
24. If the total assets owned by a business total $100,000 and owner's equity totals $40,000, liabilities
total $60,000.
25. If total assets decreased by $40,000 during a specific period and owner's equity decreased by
$45,000 during the same period, the period's change in total liabilities was a $85,000 increase.
26. If total assets decreased by $60,000 during a specific period and owner's equity decreased by
$50,000 during the same period, the period's change in total liabilities was a $10,000 decrease.
27. If total assets increased by $175,000 during a specific period and liabilities decreased by $10,000
during the same period, the period's change in total owner's equity was an $185,000 increase.
28. If net income for a proprietorship was $25,000 for a period of time and the owner withdrew
$10,000 in cash during the same period, the capital of the owner increased by $15,000 during that
period.
29. If net income for a proprietorship was $50,000 for a period of time and the owner withdrew
$30,000 in cash during the same period, the capital of the owner increased by $70,000 during that
same period.
30. If net income for a business was $175,000 for a period of time, withdrawals were $40,000 in cash
during the same period, and the owner made no investment during the period, the owner's equity
increased $215,000 during that same period.
31. An account receivable is a claim against a customer arising from a sale that allows the customer
to pay later.
32. An account receivable is a record of the amount to be received by the business for services
already performed.
33. Paying an account payable increases liabilities and decreases assets.
34. Receiving payments on an account receivable increases both equity and assets.
35. Cash investments by owners increase both equity and assets.
36. Cash withdrawals by owners decrease both liabilities and assets.
37. Purchasing supplies on account increases liabilities and decreases equity.
38. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the
amount is paid.
39. The excess of revenue over the expenses incurred in earning the revenue is called capital.
40. The excess of expenses over revenues is called net income.
41. The principal financial statements of a proprietorship are the income statement, statement of cash
flows, balance sheet, and expenses statement.
42. A balance sheet is a list of the assets, liabilities, and owner's equity of a business as of a specific
date.
43. A balance sheet reports the assets and expenses of a business for a period of time.
44. An income statement is a summary of the revenues and expenses of a business for a specific
period of time.

45. The statement of cash flows consists of an operating section, an income section, and an equity
section.
46. A low ratio of liabilities to owner's equity indicates that a business is near bankruptcy.
47. The ratio of liabilities to owner's equity can be expressed, "total owner's equity divided by total
assets."
MULTIPLE CHOICE
1. Profit is the difference between:

a. assets and liabilities
b. assets and equities
c. the assets purchased with cash contributed by the owner and the cash spent to operate the
business
d. the assets received for goods and services and the amounts used to provide the goods and
services
ANS: D DIF: 1 OBJ: 01
2. Which of the following is not a business organization form?

a. governmental unit
b. proprietorship
c. partnership
d. corporation
ANS: A DIF: 1 OBJ: 01
3. An entity that is organized according to state or federal statutes and in which ownership is
divided into shares of stock is a:
a. corporation
b. proprietorship
c. partnership
d. governmental unit
4. Which of the following best describes accounting?

a. records economic data but does not communicate the data to users according to any
specific rules
b. can be thought of as the "language of business"
c. is of no use by individuals outside of the business
d. is used only for filling out tax returns and for financial statements for various type of
governmental reporting requirements
ANS: B DIF: 1 OBJ: 02
5. The two most common specialized fields of accounting in practice are:
a. forensic accounting and financial accounting
b. managerial accounting and financial accounting
c. managerial accounting and environmental accounting
d. financial accounting and tax accounting systems
6. Public accountants are normally:

a. Certified Public Accountants
b. forensic accountants
c. Certified Internal Auditors
d. Certified Management Accountants
7. The initials GAAP stand for:

a. General Accounting Auditing Procedures
b. Generally Accepted Auditing Principles
c. Generally Accepted Accounting Principles
d. Generally Accepted Audit Practices
ANS: C DIF: 1 OBJ: 05
8. Presently the dominant body in the development of accounting principles is the:

a. American Institute of Certified Public Accountants (AICPA)
b. American Accounting Association (AAA)
c. Financial Accounting Standards Board (FASB)
d. Institute of Management Accountants (IMA)
9. The business entity concept means that:

a. the owner is part of the business entity
b. an entity is organized according to state or federal statutes
c. an entity is organized according to the rules set by the FASB
d. the entity is an individual economic unit for which data are recorded, analyzed, and
reported
10. McGee Company purchased $122,000 of computer equipment from SyTech. McGee Company
paid for the equipment using cash that had been obtained from the initial investment by Connie
McGee. The transaction involving the computer equipment should be recorded on the accounting
records of which of the following entities?
a. McGee Company and Connie McGee's personal records
b. SyTech and Connie McGee's personal records
c. Only on SyTech
d. McGee Company and SyTech
11. John Smith owns and operates Indoor Advertising Company. Recently, John withdrew $22,000
from Indoor Advertising, and he contributed $10,000, in his name, to the Red Cross. The
contribution of the $10,000 should be recorded on the accounting records of which of the
following entities?
a. Indoor Advertising and the Red Cross
b. John Smith's personal records and the Red Cross
c. John Smith's personal records and Indoor Advertising
d. John Smith's personal records, Indoor Advertising, and the Red Cross
12. John Ward owns and operates Outdoor Advertising Company. Recently, John withdrew $2,000
from Outdoor Advertising, and he contributed $1,000, in the name of Outdoor Advertising, to the
Red Cross. The contribution of the $1,000 should be recorded on the accounting records of
which of the following entities?
a. Outdoor Advertising and the Red Cross
b. John Ward's personal records and the Red Cross
c. John Ward's personal records and Outdoor Advertising
d. John Ward's personal records, Outdoor Advertising and the Red Cross
13. Equipment with an estimated market value of $45,000 is offered for sale at $65,000. The
equipment is acquired for $10,000 in cash and a note payable of $40,000 due in 30 days. The
amount used in the buyer's accounting records to record this acquisition is:
a. $50,000
b. $65,000
c. $10,000
d. $45,000
14. Resources owned by a business are referred to as:

a. assets
b. liabilities
c. equities
d. revenues
15. Assets are:

a. always greater than liabilities.
b. either cash or accounts receivables
c. the same as expenses because they are acquired with cash
d. financed by the owner and or/creditors
16. Debts owed by a business are referred to as:

a. accounts receivables
b. equities
c. owners' equity
d. liabilities
17. The accounting equation may be expressed as:

a. Assets = Equities - Liabilities
b. Assets + Liabilities = Owner's Equity
c. Assets = Revenues less Liabilities
d. Assets = Liabilities + Owner's Equity
18. Which of the following is not a business transaction?

a. make a sales offer
b. sell goods for cash
c. receive cash for services to be rendered later
d. pay for supplies
19. If total liabilities increased by $30,000 during a period of time and owner's equity increased by
$5,000 during the same period, the amount and direction (increase or decrease) of the period's
change in total assets is:
a. $35,000 increase
b. $20,000 decrease
c. $25,000 increase
d. $25,000 decrease
20. If total liabilities decreased by $22,000 during a period of time and owner's equity increased by
$29,000 during the same period, the amount and direction (increase or decrease) of the period's
change in total assets is:
a. $7,000 increase
b. $3,000 decrease
c. $12,000 increase
d. $21,000 decrease
21. A business paid $9,000 to a creditor in payment of an amount owed. The effect of the transaction
on the accounting equation was to:
a. increase one asset, decrease another asset
b. increase an asset, increase a liability
c. decrease an asset, decrease a liability
d. increase an asset, increase owner's equity
22. Earning revenue:

a. increases assets, increases owners' equity.
b. increases assets, decreases owner's equity
c. increases one asset, decreases another asset
d. decreases assets, increases liabilities
23. The amount charged to customers for goods or services sold is called a(n):
a. revenue
b. net income
c. capital
d. asset
24. Goods purchased for future use in the business, such as supplies, are called:
a. prepaid liabilities
b. revenues
c. prepaid expenses
d. liabilities
25. A claim against a customer for a sale made on account is called a(n):
a. account payable
b. account receivable
c. expense
d. prepaid expense
26. The debt created by a business when it makes a purchase on account is referred to as a(n):
a. account payable
b. account receivable
c. asset
d. expense payable
27. If total liabilities decreased by $22,000 during a period of time and owner's equity increased by
$6,000 during the same period, then the amount and direction (increase or decrease) of the
period's change in total assets is:
a. $16,000 increase
b. $16,000 decrease
c. $6,000 decrease
d. $6,000 increase
28. If total assets decreased by $47,000 during a period of time and owner's equity increased by
$24,000 during the same period, then the amount and direction (increase or decrease) of the
period's change in total liabilities is:
a. $23,000 increase
b. $47,000 decrease
c. $71,000 decrease
d. $71,000 increase
29. The asset created by a business when it makes a sale on account is termed:
a. accounts receivable
b. prepaid expense
c. unearned revenue
d. accounts payable
30. Owner's withdrawals:

a. increase liabilities
b. decrease expenses
c. increase cash
d. decrease owner's equity
31. Owner's equity is increased by:

a. owner's investments
b. owner's withdrawals
c. expenses
d. liabilities
32. How does the purchase of supplies on account affect the accounting equation?
a. assets increase; owner's equity decreases
b. assets increase; liabilities increase
c. assets increase; liabilities decrease
d. liabilities increase; owner's equity decreases
33. How does the rendering of services on account affect the accounting equation?
a. assets increase; owners' equity increases
b. assets decrease; owner's equity decrease
c. liabilities increase; owner's equity increases
d. liabilities increase; owner's equity decreases
34. A vacant lot, originally purchased for $40,000, is sold for $80,000 in cash. What is the effect of
the sale on the accounting equation?
a. assets increase $80,000; owner's equity increases $80,000
b. assets increase $40,000; owner's equity increases $40,000
c. assets increase $80,000; liabilities decrease $40,000; owner's equity increases $40,000
d. assets increase $40,000; no change for liabilities; owner's equity increases $80,000
35. The Medved Company sold vacant land for $60,000 in cash. The land was originally purchased
for $40,000, and at the time of the sale, $15,000 was still owed to First National Bank on that
purchase. After the sale, The Medved Company paid off the loan to First National Bank. What is
the effect of the sale and the payoff of the loan on the accounting equation?
a. assets increase $20,000; liabilities decrease $15,000; owner's equity increases $5,000
b. assets increase $5,000; liabilities decrease $15,000; owner's equity increases $20,000
c. assets increase $60,000; liabilities decrease $15,000; owner's equity increases $20,000
d. assets increase $20,000; liabilities decrease $15,000; owner's equity increases $35,000
36. On November 1 of the current year, the assets and liabilities of Jim Maza, M.D., are as follows:
Cash, $10,000; Accounts Receivable, $8,200; Supplies, $1,050; Land, $25,000; Accounts
Payable, $6,530. What is the amount of owner's equity (Jim Maza's capital) as of November 1 of
the current year?
a. $37,720
b. $44,430
c. $21,500
d. $48,780
37. Hal Sharp is the sole owner and operator of SawTooth Company. As of the end of its accounting
period, December 31, 20X1, SawTooth Company has assets of $925,000 and liabilities of
$285,000. During 20X2, Hal Sharp invested an additional $50,000 and withdrew $30,000 from
the business. What is the amount of net income during 20X2, assuming that as of December 31,
20X2, assets were $980,000, and liabilities were $255,000?
a. $ 95,000
b. $ 65,000
c. $165,000
d. $725,000
38. The total assets and the total liabilities of a business at the beginning and at the end of the year
appear below. During the year, the owner had withdrawn $50,000 for personal use and had made
an additional investment of $35,000 in the business.
Assets Liabilities
Beginning of year $295,000 $190,000
End of year 355,000 220,000
The amount of net income for the year was:

a. $85,000
b. $40,000
c. $135,000
d. $45,000
39. The total assets and the total liabilities of a business at the beginning and at the end of the year
appear below. During the year, the owner had withdrawn $24,000 for personal use and had made
an additional investment of $15,000 in the business.
Assets Liabilities
Beginning of year $395,000 $190,000
End of year 555,000 320,000
The amount of net income or net loss for the year was:
a. net income of $30,000
b. net income of $39,000
c. net income of $54,000
d. net loss of $15,000
40. If beginning capital was $25,000, ending capital is $40,000, and the owner's withdrawals were
$25,000, the amount of net income or net loss was:
b. net loss of $40,000
c. net loss of $5,000
d. net income of $15,000
41. If beginning capital was $85,000, ending capital is $65,000, and the owner's withdrawals were
$15,000, the amount of net income or net loss was:
b. net income of $15,000
c. net loss of $20,000
d. net loss of $5,000
42. Transactions affecting owner's equity include:

a. owner's investments and owner's withdrawals.
b. owner's investments and owner's withdrawals, revenues, and expenses
c. owner's investments, revenues, and expenses
d. owner's withdrawals, revenues, and expenses
43. The financial statement that presents a summary of the revenues and expenses of a business for a
specific period of time, such as a month or year, is called a(n):
a. prior period statement
b. statement of owner's equity
c. income statement
d. balance sheet
44. The financial statement that presents a summary of the assets, liabilities, and owner's equity as of
a specific date is called a(n):
a. balance sheet
c. statement of cash flows
d. income statement
45. All of the following are financial statement(s) of a proprietorship except the:
a. statement of retained earnings
c. income statement
d. statement of cash flows
46. Which of the following financial statements reports information as of a specific date?
a. income statement
d. balance sheet
47. Four financial statements are usually prepared for a business. The statement of cash flows is
usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the
income statement (I) are prepared in a certain order to obtain information needed for the next
statement. In what order are these three statements prepared?
a. I,OE, B
b. B, I, OE
c. OE, I, B
d. B,OE, I
48. Assets are reported on the:

a. statement of retained earnings
b. balance sheet
c. statement of owner's equity
d. statement of liabilities and capital
49. Liabilities are reported on the:

a. income statement
d. balance sheet
50. Cash investments made by the owner to the business are reported on the statement of cash flows
in the:
a. financing activities section
b. investing activities section
c. operating activities section
d. supplemental statement
51. The balance of the owner's capital account appears in:

a. both the statement of owner's equity and the income statement
b. only the statement of owner's equity
c. both the statement of owner's equity and the balance sheet
d. both the statement of owner's equity and the statement of cash flows
52. A debt to equity ratio of 1 indicates:

a. the business cannot pay its debts
b. the business is in danger of being closed
c. the assets equal the equities
d. the liabilities equal the equities
53. All other things being equal, a bank would most likely prefer to lend to a company with a debt to
equity ratio of:
a. .30
b. 1.00
c. .15
d. 2.00
PROBLEM
1. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets
based on appraisals and opinions.
ANS:
Accounting reports would become unstable and unreliable.
DIF: 1 OBJ: 05
2. Determine the missing amount for each of the following:
Assets Liabilities Owner's Equity

(a) ? $15,000 $ 6,000
(b) $30,000 ? $14,000
(c) $50,000 $ 5,000 ?
ANS:
(a) $21,000
(b) $16,000
(c) $45,000
DIF: 1 OBJ: 06
3. Indicate whether each of the following represents (1) asset, (2) liability, or (3) owner's equity:
(a) accounts receivable

(b) wages payable
(c) capital
(d) cash
(e) withdrawal
(f) land
ANS:
(a) 1; (b) 2; (c) 3; (d) 1; (e) 3; (f) 1
DIF: 1 OBJ: 07
4. Selected transactions completed by a proprietorship are described below. Indicate the effects of
each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "-" for
decrease in the appropriate columns at the right. If appropriate, you may insert more than one
symbol in a column.
A L OE
(a) Received cash from owner as an _____ _____ _____
additional investment
(b) Purchased supplies on account _____ _____ _____
(c) Paid rent for the current month _____ _____ _____
(d) Received cash for services sold to _____ _____ _____
customers
(e) Returned defective supplies purchased _____ _____ _____
in (b)
(f) Paid insurance premiums in advance _____ _____ _____
(g) Paid cash to creditor for purchases in _____ _____ _____
(b)
(h) Charged customers for services sold on _____ _____ _____
account
(i) Paid cash to a customer as a refund _____ _____ _____
for an overcharge
(j) Received cash on account from _____ _____ _____
customers
(k) Paid cash to owner _____ _____ _____
(l) Recorded the cost of supplies used _____ _____ _____
during the year
(m) Received invoice for power used _____ _____ _____
(n) Paid expenses _____ _____ _____
(o) Purchased a truck for cash _____ _____ _____
ANS:
A L OE
(a) + +
(b) + +
(c) - -
(d) + +
(e) - -
(f) +,-
(g) - -
(h) + +
(i) - -
(j) +,-
(k) - -
(l) - -
(m) + -
(n) - -
(o) +,-
DIF: 3 OBJ: 07
5. Identify each of the following as (1) asset, (2) liability, or (3) owner's equity:
(a) Accounts Payable

(b) Accounts Receivable
(c) W. Keskey, Capital
(d) Prepaid Rent
(e) Cash
(f) Land
ANS:
(a) liability
(b) asset
(c) owner's equity
(d) asset
(e) asset
(f) asset
DIF: 1 OBJ: 07
6. From the following list of accounts taken from Compliment's accounting records, identify those
that would appear on the Income Statement.
(a) Rent Expense

(b) Land
(c) Capital
(d) Fees Earned
(e) Cash
(f) Wages Expense
(g) Accounts Payable
ANS:
(a), (d), (f)
DIF: 3 OBJ: 08
7. Identify which of the following accounts appear on a balance sheet.
(a) Cash
(b) Fees Earned
(c) Jane Smith, Capital
(d) Wages Payable
(e) Rent Expense
(f) Supplies
(g) Land
ANS:
(a), (c), (d), (f), (g)
DIF: 1 OBJ: 08
8. Indicate whether each of the following activities would be reported on the Statement of Cash
Flows as an Operating Activity, an Investing Activity, a Financing Activity, or does not appear on
the Cash Flow Statement.
(a) Cash paid for building

(b) Cash paid to suppliers
(c) Cash paid for owner's withdrawal
(d) Cash received from customers
(e) Cash received from the owner's investment
(f) Cash received from the sale of a building
(g) Borrowed cash from a bank
ANS:
(a) Investing
(b) Operating
(c) Financing
(d) Operating
(e) Financing
(f) Investing
(g) Financing
DIF: 4 OBJ: 08
9. For each of the following, determine the amount of net income or net loss for the year.
(a) Revenues for the year totaled $100,500 and expenses totaled $54,500. The owner
made an additional investment of $20,000 during the year.
(b) Revenues for the year totaled $85,500 and expenses totaled $120,500. The owner
withdrew $30,000 during the year.
(c) Revenues for the year totaled $188,000 and expenses totaled $95,000. The owner
invested an additional $30,000 and withdrew $18,000 during the year.
(d) Revenues for Smith Co. totaled $373,500 and expenses totaled $363,800. Cash
withdrawals of $35,000 were paid during the year.
ANS:
(a) $46,000 net income ($100,500 - $54,500)

(b) $35,000 net loss ($85,500 - $120,500)
(c) $93,000 net income ($188,000 - $95,000)
(d) $9,700 net income ($373,500 - $363,800)
DIF: 1 OBJ: 08
10. The total assets and total liabilities of Missy's Draperies, a proprietorship, at the beginning and at
the end of the current fiscal year are as follows:
January 1 December 31
Total assets $250,000 $430,000
Total liabilities 200,000 140,000
(a) Determine the amount of net income earned during the year. The owner did not
invest any additional assets in the business during the year and made no
withdrawals.
(b) Determine the amount of net income during the year. The assets and liabilities at
the beginning and at the end of the year are unchanged from the amounts presented
above. However, the owner withdrew $32,000 in cash during the year (no
additional investments).
(c) Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the owner invested an additional $40,000 in
cash in the business in June of the current fiscal year (no withdrawals).
(d) Determine the amount of net income earned during the year. The assets and
liabilities at the beginning and at the end of the year are unchanged from the
amounts presented above. However, the owner invested an additional $10,000 in
cash in August of the current fiscal year and made twelve monthly cash
withdrawals of $3,000 each during the year.
ANS:
(a) Owner's equity at end of year $290,000

Owner's equity at beginning of year 50,000
Net income $240,000
========
(b) Increase in owner's equity as in (a $240,000
Add withdrawals 32,000
Net income $272,000
========
(c) Increase in owner's equity as in (a) $240,000
Deduct additional investment 40,000
Net income $200,000
========
(d) Increase in owner's equity as in (a) $240,000
Add withdrawals 36,000
$276,000
Deduct additional investment 10,000
Net income $266,000
========
DIF: 3 OBJ: 08
11. Selected transaction data of a business for June are summarized below. Determine the following
amounts for June: (a) total revenue, (b) total expense, (c) income from operations.
Service sales charged to customers on account during June $45,000

Cash received from cash customers for services performed 40,000
in June
Cash received from customers on account during June:
Services performed and charged to customers prior to 15,000
June
Services performed and charged to customers during June 30,000
Expenses incurred prior to June and paid during June 10,250
Expenses incurred and paid in June 48,500
Expenses incurred in June but not paid in June 9,000
Expenses for supplies used and insurance (not included 750
above) applicable to June
ANS:
(a) $85,000 ($45,000 + $40,000)

(b) $58,250 ($48,500 + $9,000 + $750)
(c) $26,750 ($85,000 - $58,250)
DIF: 1 OBJ: 08
12. On May 1, 2002, the amount of Nancy Mo's capital in Pro-Mo Services Company was $103,000.
During May, she withdrew $15,500 from the business. The amounts of the various assets,
liabilities, revenues, and expenses are as follows:
Accounts payable $11,900

Accounts receivable 29,950
Cash 13,390
Fees earned 80,800
Insurance expense 1,475
Land 80,000
Miscellaneous expense 1,510
Prepaid insurance 2,000
Rent expense 8,000
Salary expense 38,300
Supplies 950
Supplies expense 825
Utilities expense 3,800
Present in good form (a) an income statement for May, (b) a statement of owner's equity for May,
and (c) a balance sheet as of May 31.
ANS:
(a)
Pro-Mo Services Company

Income Statement
For the Month Ended May 31, 2002
Fees earned $80,800
Operating expenses:
Salary expense $38,300
Rent expense 8,000
Supplies expense 825
Insurance expense 1,475
Total operating expenses 53,910
Net income $26,890
=======
(b)

Statement of Owner's Equity
For the Month Ended May 31, 2002
Nancy Mo, capital, May 1, 2002 $103,000

Net income for the month $26,890
Less withdrawals 15,500
Increase in owner's equity 11,390
Nancy Mo, capital, May 31, 2002 $114,390
========
(c)

Balance Sheet
May 31, 2002
Assets Liabilities
Cash $ 13,390 Accounts payable $ 11,900
Accounts receivable 29,950
Prepaid insurance 2,000 Owner's Equity
Supplies 950 Nancy Mo, capital 114,390
Land 80,000 Total liabilities
and
Total assets $126,290 owner's equity $126,290
======== ========
DIF: 5 OBJ: 08
13. Cessna Consultants began operations on December 1, 2002. The financial statements for Cessna
Consultants are shown below for the month ended December 31, 2002 (the first month of
operations). Determine the missing amounts for letters (a) through (o).
Cessna Consultants
Income Statement
For the Month Ended December 31, 2002
Fees earned $20,000
Operating expenses:
Wages expense $6,250
Rent expense (a)
Supplies expense 1,600
Utilities expense 900
Total operating expenses (b)
Net income $ (c)
=======
Cessna Consultants
Barry Schiff, capital, December 1, 2002 0
Investment on December 1, 2002 $30,000
Net income for December (d)
$ (e)
Increase in owner's equity (f)
Barry Schiff, capital, December 31, 2002 $32,100
=======
Cessna Consultants
Balance Sheet
December 31, 2002
Assets Liabilities
Cash $ (g) Accounts payable $ (i)
Supplies 1,100 Owner's Equity
Land (h) Barry Schiff, (j)
capital
Total assets $45,900 Total liabilities
and
======= owner's equity $ (k)
======
Cessna Consultants
Statement of Cash Flows
Cash flows from operating activities:
Cash received from customers $20,000
Deduct cash payments for expenses and 1,200
payments to creditors
Net cash flow from operating activities $ 18,800
Cash flows from investing activities:
Cash payments for acquisition of land (20,000)
Cash flows from financing activities:
Cash received as owner's investment $ (l)
Deduct cash withdrawal by owner (m)
Net cash flow from financing activities (n)
Net cash flow and Dec. 31, 2002 cash balance $ (o)
========
Place your answers in the space provided below. Hint: Use the interrelationships among the
financial statements to solve this problem.
(a) ___________
(b) ___________
(c) ___________
(d) ___________
(e) ___________
(f) ___________
(g) ___________
(h) ___________
(i) ___________
(j) ___________
(k) ___________
(l) ___________
(m) ___________
(n) ___________
(o) ___________
ANS:
a. $ 3,600
b. $ 13,900
c. $ 6,100
d. $ 6,100
e. $ 36,100
f. $ 32,100
g. $ 24,800
h. $ 20,000
i. $13,800
j. $32,100
k. $45,900
l. $30,000
m. $4,000
n. $26,000
o. $24,800
DIF: 5 OBJ: 08
14. Jackie Purcell, CPA, was organized on January 1, 2002, as a proprietorship. List the errors that
you find in the following financial statements and prepare the corrected statements for the three
months ended March 31, 2002.
Jackie Purcell, CPA

Income Statement
For the Three Months Ended March 31, 2002
Fees earned $40,000

Operating expenses:
Rent expense 3,200
Wages expense 1,950
Answering service expense 550
Net income $11,000
=======
Jackie Purcell, Attorney-at-Law

March 31, 2002
Jackie Purcell, capital, January, 1, 2002 $ 0

Investment on January 1, 2002 $20,000
Net income for the month 11,000
Withdrawals 5,000
Jackie Purcell, capital, March 31, 2002.
$36,000
=======
Balance Sheet
Assets Owner's Equity

Land $10,000 Jackie Purcell, $36,000
capital
Cash 15,860 Liabilities
Accounts payable 2,670 Accounts receivable 12,225
Supplies 925 Total liabilities and
Total assets $48,125 owner's equity 48,125
======= =======
ANS:
Errors in the Jackie Purcell, CPA, financial statements include the following:
(1) Miscellaneous expense is incorrectly listed after utilities expense in the income
statement. Miscellaneous expense should be listed as the last expense, regardless
of the amount.
(2) The operating expenses are incorrectly added. Instead of $29,000, the total
should be $18,660.
(3) Because operating expenses are incorrectly added, the net income is incorrect. It
should be listed as $21,340.
(4) The statement of owner's equity should be for a period of time instead of a
specific date. That is, the statement of owner's equity should be reported "For the
Three Months Ended March 31, 2002."
(5) The amount of the owners' equity is incorrect. It should be $36,340.
(6) The name of the company is missing from the balance sheet heading.
(7) The balance sheet should be as of "March 31, 2002," not "For the Three Months
Ended March 31, 2002."
(8) Cash, not Land, should be the first asset listed in the balance sheet.
(9) Accounts Payable is incorrectly listed as an asset in the balance sheet. Accounts
Payable should be listed as a liability.
(10) Liabilities should be listed in the balance sheet ahead of owner's equity.
(11) Accounts Receivable is incorrectly listed as a liability in the balance sheet.
Accounts Receivable should be listed as an asset.
(12) The total assets and the total liabilities do not foot.
Correctly prepared financial statements for Jackie Purcell, CPA, are shown below.
Jackie Purcell, CPA

Income Statement
Fees earned $40,000

Operating expenses:
Rent expense 3,200
Wages expense 1,950
Answering service expense 550
Net income $21,340
=======
Jackie Purcell, CPA

Jackie Purcell, capital, January, 1, 2002 $ 0

Investment on January 1, 2002 $20,000
Net income for three months 21,340
$41,340
Jackie Purcell, capital, March 31, 2000 $36,340
=======
Jackie Purcell, CPA

Balance Sheet
March 31, 2002
Assets Liabilities
Cash $15,860 Accounts payable $ 2,670
Accounts receivable 12,225 Owner's Equity
Supplies 925 Jackie Purcell, 36,340
capital
Land 10,000 Total liabilities and
Total assets $39,010 owner's equity $39,010
======= =======
DIF: 5 OBJ: 08
15. Based on the Bell Company account balances, calculate the liabilities to equity ratio. Please show
all calculations.
Account Amount
Cash $200
Accounts receivable 300
Supplies 100
Accounts payable 100
Wages payable 200
Bell, capital 300
ANS:
(Accounts Payable + Wages Payable) ÷ Bell, Capital
( 100 + 200 ) ÷ 300 = 1
DIF: 4 OBJ: 09

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Chapter 1

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Chapter 1—Introduction to Accounting and Business

ANS: T DIF: 1 OBJ: 01

ANS: T DIF: 5 OBJ: 01

ANS: F DIF: 1 OBJ: 02

ANS: F DIF: 1 OBJ: 04

5. The Institute of Certified Management Accountants, an affiliate of the American Institute of

ANS: F DIF: 1 OBJ: 04

ANS: F DIF: 1 OBJ: 04

7. The initials GAAP stand for generally accepted accounting practices.

ANS: F DIF: 1 OBJ: 05

8. A business transaction is the occurrence of an event or condition that must be recorded.

ANS: T DIF: 1 OBJ: 05

ANS: F DIF: 1 OBJ: 05

ANS: T DIF: 1 OBJ: 05

ANS: T DIF: 1 OBJ: 05

ANS: F DIF: 5 OBJ: 05

ANS: F DIF: 5 OBJ: 05

ANS: F DIF: 1 OBJ: 06

15. The accounting equation can be expressed as Assets = Liabilities + Expenses.

ANS: F DIF: 1 OBJ: 06

ANS: T DIF: 1 OBJ: 06

ANS: F DIF: 1 OBJ: 06

ANS: F DIF: 1 OBJ: 06

ANS: F DIF: 5 OBJ: 06

ANS: T DIF: 5 OBJ: 06

ANS: T DIF: 5 OBJ: 06

ANS: T DIF: 5 OBJ: 06

ANS: T DIF: 5 OBJ: 07

ANS: F DIF: 3 OBJ: 07

ANS: T DIF: 3 OBJ: 07

ANS: T DIF: 3 OBJ: 07

ANS: T DIF: 3 OBJ: 07

ANS: F DIF: 3 OBJ: 07

ANS: F DIF: 3 OBJ: 07

ANS: T DIF: 1 OBJ: 07

33. Paying an account payable increases liabilities and decreases assets.

ANS: F DIF: 5 OBJ: 07

ANS: F DIF: 5 OBJ: 07

35. Cash investments by owners increase both equity and assets.

ANS: T DIF: 5 OBJ: 07

36. Cash withdrawals by owners decrease both liabilities and assets.

ANS: F DIF: 5 OBJ: 07

37. Purchasing supplies on account increases liabilities and decreases equity.

ANS: F DIF: 5 OBJ: 07

ANS: F DIF: 5 OBJ: 07

ANS: F DIF: 1 OBJ: 08

40. The excess of expenses over revenues is called net income.

ANS: F DIF: 1 OBJ: 08

ANS: F DIF: 1 OBJ: 08

ANS: T DIF: 1 OBJ: 08

ANS: F DIF: 1 OBJ: 08

ANS: T DIF: 1 OBJ: 08

ANS: F DIF: 1 OBJ: 08

ANS: F DIF: 5 OBJ: 09

ANS: F DIF: 5 OBJ: 09

1. Profit is the difference between:

2. Which of the following is not a business organization form?

4. Which of the following best describes accounting?

6. Public accountants are normally:

7. The initials GAAP stand for:

8. Presently the dominant body in the development of accounting principles is the:

9. The business entity concept means that:

14. Resources owned by a business are referred to as:

15. Assets are: