Title: Financial Statements of Business Organizations
Course: Question Banks

Q: ________ is an example of an accounting transaction.
- Hiring a new production manager
- Issuing a purchase order for inventory
- Receiving inventory against a purchase order
A: Receiving inventory against a purchase order

Q: ________ would be classified as an accounting transaction.
- Hiring a new production manager
- Issuing a purchase order for inventory
- Receiving inventory against a purchase order
A: Receiving inventory against a purchase order

Q: A business event having a monetary impact on the financial statements of a business is usually called a(n) ________.
- classification
- event
- Transaction
A: Transaction

Q: A=L+E is a mathematical representation of which one of the following accounting concepts?
- The going concern assumption
- Double entry bookkeeping
- The accounting equation
A: The accounting equation

Q: In the financial statements, the accounting equation is BEST represented by the ________?
- income statement
- statement of owner’s equity
- balance sheet
A: balance sheet

Q: In the accounting equation, liabilities are equal to ________.
- resources owned by the company
- the amount of assets owned outright by the owners
- debts owed to others
A: debts owed to others

Q: In accounting, resources with economic value that are expected to provide future benefits are called ________.
- liabilities
- equity
- assets
A: assets

Q: In accounting, ownership interests in the company are called ________.
- liabilities
- assets
- equity
A: equity

Q: In accounting, claims arising out of past or current transactions or actions are called ________.
- assets
- equity
- liabilities
A: liabilities

Q: Transferring transactions from a journal to the ledgers is called ________.
- journalizing
- running
- Posting
A: Posting

Q: The term “debit” indicates ________.
- an increase in a liability account
- revenue was earned
- an entry on the left side of a ledger
A: an entry on the left side of a ledger

Q: As they happen, transactions are originally recorded in a ________.
- ledger
- trial balance
- journal
A: journal

Q: Which one of the following journal entries would represent payment of insurance expense for the month?
- debit insurance expense, debit checking account
- debit checking account, credit insurance expense
- debit insurance expense, credit checking account
A: debit insurance expense, credit checking account

Q: A credit to the checking account and a corresponding debit to accounts payable would represent ________.
- receipt of cash or check for services rendered
- a refund of cash received for services rendered
- payment of a bill for goods or services received
A: payment of a bill for goods or services received

Q: In recording wages earned in the period earned rather than the period paid, which accrual basis accounting principle are you following?
- conservatism
- verifiability
- matching
A: matching

Q: The statement that shows revenues less expenses is the ________.
- statement of cash flows
- statement of owners’ equity
- income statement
A: income statement

Q: The statement based on the relationship between assets, liabilities and equity is the ________.
- income statement
- statement of owners’ equity
- balance sheet
A: balance sheet

Q: The statement that reconciles beginning and ending equity is known as the the ________.
- income statement
- statement of cash flows
- statement of owners’ equity
A: statement of owners’ equity

Q: A business purchases inventory from a vendor and writes a check for the merchandise at the time of purchase. The correct journal entry to record this transaction would be ________.
- Debit Inventory, Credit Accounts Payable
- Credit Inventory, Debit Cash (checking account)
- Debit Inventory, Credit Cash (checking account)
A: Debit Inventory, Credit Cash (checking account)

Q: A journal entry is made that debits inventory and credits cash (checking account). This journal entry represents which of the following transactions?
- The business purchases inventory from a vendor and agrees to pay the vendor within 30 days.
- A customer purchases merchandise and writes a check to the business for the merchandise at the time of purchase.
- The business purchases inventory from a vendor and writes a check for the merchandise at the time of purchase.
A: The business purchases inventory from a vendor and writes a check for the merchandise at the time of purchase.

Q: In April a business records the monthly cost of their annual insurance premium. The entire year’s premium was paid on January 1. In order to properly record this transaction which of the following journal entries are accurate?
- Debit Insurance Expense, Credit Checking Account (Cash)
- Debit Prepaid Insurance, Credit Insurance Expense, Credit Checking Account (Cash)
- Debit Prepaid Insurance, Debit Insurance Expense, Credit Checking Account (Cash)
A: Debit Prepaid Insurance, Debit Insurance Expense, Credit Checking Account (Cash)

Q: In order for a business to properly record their annual insurance premium which is paid on January 1, the following journal entry is accurate:
- Debit Insurance Expense, Credit Checking Account (Cash)
- Debit Prepaid Insurance, Credit Insurance Expense, Credit Checking Account (Cash)
- Debit Prepaid Insurance, Debit Insurance Expense, Credit Checking Account (Cash)
A: Debit Prepaid Insurance, Debit Insurance Expense, Credit Checking Account (Cash)

Q: The following journal entries were made on April 1: Debit Prepaid Insurance, Debit Insurance Expense, Credit Checking Account (Cash). What transaction corresponds with this series of journal entries?
- Record the prepayment of an annual insurance premium
- Record the payment of a monthly invoice for an insurance premium
- Record the use of one month’s prepaid insurance
A: Record the use of one month’s prepaid insurance

Q: The income statement is the ________ statement to be created from the adjusted trial balance.
- last
- Second
- First
A: First

Q: Ending capital flows from the ________.
- income statement to the balance sheet
- balance sheet to the statement of owners’ equity
- statement of owners’ equity to the balance sheet
A: statement of owners’ equity to the balance sheet

Q: The statement of cash flows reconciles ________.
- beginning and ending owners’ equity
- net income to owners’ equity
- accrual basis transactions to cash basis
A: accrual basis transactions to cash basis

Q: Which of the following calculations would you use to compute gross profit?
- Net sales less operating expenses
- Operating income less other income and expenses
- Net sales less cost of goods sold
A: Net sales less cost of goods sold

Q: Net income increases ________.
- total liabilities
- gross profit
- owners’ equity
A: owners’ equity

Q: Upon which of the following statements would you find total net assets?
- Statement of owners’ equity
- Income statement
- Balance sheet
A: Balance sheet

Q: Presenting inventory at cost is ________.
- not in compliance with GAAP
- equal to the fair market value
- verifiable and conservative
A: verifiable and conservative

Q: For a merchandising firm (retail store), inventory usually consists of ________.
- work in process
- raw materials
- finished goods
A: finished goods

Q: On the balance sheet, assets are generally presented ________.
- in alphabetical order
- in numerical order, largest to smallest
- in the order of liquidity
A: in the order of liquidity

Q: Current assets include ________.
- Cash and cash equivalents, fixed assets, and intellectual property
- Property, plant, and equipment
- cash and cash equivalents, accounts receivable, and inventory
A: cash and cash equivalents, accounts receivable, and inventory

Q: Current assets show up ________.
- after fixed and non-current assets on the balance sheet
- after fixed assets but before non-current assets on the balance sheet
- in the first section of the balance sheet
A: in the first section of the balance sheet

Q: Intellectual property, goodwill, and long-term investments are examples of ________.
- current assets
- fixed assets
- non-current assets
A: non-current assets

Q: Property, plant and equipment, are presented after ________ on the balance sheet.
- fixed assets
- non-current assets
- current assets
A: current assets

Q: Which of the following would not be presented as an asset on the balance sheet?
- Goodwill paid in purchasing another company
- Intellectual property, such as cost to develop patents
- The value of customer lists
A: The value of customer lists

Q: On the Balance Sheet, Assets minus Liabilities is represented by which of the following?
- Net Income
- Current Assets
- Stockholders or Owners Equity
A: Stockholders or Owners Equity

Q: Stockholders or Owners Equity is calculated and presented on the Balance Sheet as ________.
- Gross Revenue minus Expenses
- Current Assets minus Current Liabilities
- Capital plus Retained Earnings
A: Capital plus Retained Earnings

Q: Owners or Stockholders Equity is presented on the Balance Sheet and is calculated by which of the following methods?
- Assets plus Liabilities
- Capital minus Retained Earnings
- Capital plus Retained Earnings
A: Capital plus Retained Earnings

Q: The gross revenues that make up the income of a business are reported on the ________.
- Balance Sheet
- Statement of Owners’ Equity
- Income Statement
A: Income Statement

Q: One of the key components of the Income Statement is the presentation of ________.
- Current Assets
- Owners’ Equity
- Gross Income
A: Gross Income

Q: In order to have the Accounting Equation balance, managers will need ________ from the Income Statement.
- Owners’ Equity
- Current Liabilities
- Gross Revenue
A: Gross Revenue

Q: On the Income Statement, ________ are deducted from Gross Revenue to arrive at net Income.
- Current Liabilities
- Cost of Goods Sold
- Expenses
A: Expenses

Q: On the Income Statement, Expenses are deducted from Gross Revenue to calculate ________.
- Owners’ Equity
- Cost of Goods Sold
- Net Income
A: Net Income

Q: Net income divided by total assets yields ________.
- gross profit
- dividend yield
- return on assets
A: return on assets

Q: The ________ measures the company’s ability to meet short-term obligations.
- gross profit percentage
- return on assets
- current ratio
A: current ratio

Q: The current ratio measures ________.
- the company’s ability to meet short-term obligations.
- the company’s cash position at the end of the year
- the company’s ability to meet short-term obligations.
A: the company’s ability to meet short-term obligations.

Q: Dividing current assets by current liabilities gives the ________.
- Gross profit percentage
- Amount of working capital
- Current ratio
A: Current ratio

Q: The debt ratio measures ________.
- the relationship between the capital contributions of the owners and the capital contributed by lenders
- a business’s ability to make its interest payments on borrowed capital
- the percentage of the company’s total assets that are financed by creditors and lenders as opposed to the owners.
A: the percentage of the company’s total assets that are financed by creditors and lenders as opposed to the owners.

Q: Dividing total debt by total assets gives the ________.
- debt-to-net-worth ratio
- times interest earned ratio
- debt ratio
A: debt ratio

Q: Which ratio measures the frequency that a company’s inventory turns over or sells out during the accounting period?
- Average-Collection-Period Ratio
- Average-Payable-Period Ratio
- Average-Inventory-Turnover Ratio
A: Average-Inventory-Turnover Ratio

Q: What information does the Average-Inventory-Turnover ratio tell you?
- It shows a company’s ability to generate sales revenue based upon the assets of the business.
- The number of days it takes a company to pay its accounts payable.
- The number of times that a company’s inventory turns over or sells out during the accounting period.
A: The number of times that a company’s inventory turns over or sells out during the accounting period.

Q: The ________ratio is often referred to as a return on net worth ratio because it measures the owner’s return on investment (ROI).
- Net-Profit-to-Assets
- Net-Profit-on-Sales
- Net-Profit-to-Equity
A: Net-Profit-to-Equity

Q: The Net-Profit-to-Equity Ratio measures ________.
- a company’s profit per dollar of sales.
- how much profit a company is generating for every dollar it has invested in the assets of the company
- the owner’s return on investment (ROI).
A: the owner’s return on investment (ROI).

Q: Dividing net profit by owners’ equity gives the ________.
- Net-Profit-to-Assets
- Net-Profit-on-Sales
- Net-Profit-to-Equity or ROI
A: Net-Profit-to-Equity or ROI

Q: Using historical cost to report assets is ________.
- optional under GAAP
- prohibited by GAAP
- required by GAAP
A: required by GAAP

Q: The financial statements of publicly traded entities are required to be audited in order to ________.
- ensure perfect accuracy in all accounts
- comply with IFRS
- guard against fraud and material misstatements
A: guard against fraud and material misstatements