Chapter 1

Question 1

T or F: The business entity assumption means that a business is accounted for separately from other business entities and its owner(s).

Answer 1

True

Question 2

T or F: The accounting equation can be restated as: Assets - Equity = Liabilities

Answer 2

True

Question 3

T or F: The measurement principle prescribes that accounting information is based on subjective opinion rather than cost.

Answer 3

False

Question 4

T or F: Investing activities on the statement of cash flows include buying equipment that is held for long-term use.

Answer 4

True

Question 5

T or F: Investing activities on the statement of cash flows include long-term borrowing, and repaying of cash from lenders.

Answer 5

False

Question 6

T or F: Financing activities on the statement of cash flows include long-term borrowing, and repaying of cash from lenders.

Answer 6

True

Question 7

The description of the relation between a company’s assets, liabilities, and equity, which is expressed as assets = liabilities + equity, is known as the:

Answer 7

Accounting equation.

Question 8

The difference between a companies, assets and its liabilities, or net assets is:

Answer 8

Equity.

Question 9

Chou Company has a net income of $62,000, assets at the beginning of the year are $269,000 and the assets at the end of the year are $319,000. Compute its return on assets.

Answer 9

21.1%

ROA = Net Income / Average Total Assets
ROA = $62,000/$294,000 =0.211 = 21.1%

Question 10

When expenses exceeded revenues, the result is called:

Answer 10

Net Loss.

Question 11

Rushing had net income of $189 million an average total assets of $1,940 million. It’s returned on assets (ROA) is:

Answer 11

9.7%

ROA = Net Income / Average Total Assets
ROA = $189/$1,940 =0.0974 = 9.7%

Question 12

If the assets of a business increased $89,000 during a period of time and its liabilities increase $67,000 during the same period, equity in the business must have:

Answer 12

Increased $22,000.

Assets = Liabilities + Equity
+$89,000 = +$67,000 + Equity
Equity = Increase of $22,000

Question 13

If the liabilities of a company increased $78,000 during a period of time and equity in the company decreased $21,000 during the same period, what was the effect on the assets?

Answer 13

Assets would’ve increased $57,000.

Assets = Liabilities + Equity
Change in assets = +$78,000 - $21,000
Change in assets = +$57,000

Question 14

Billington corporation borrows $80,000 cash from US Bank. How does this transaction affect the accounting equation for Billington?

Answer 14

Assets would increase $80,000 and liabilities would increase $80,000.

Question 15

The going concern assumption:

Answer 15

Means that accounting information presumes that the business will continue operating instead of being closed or sold.

Question 16

If a company is considering the purchase of a parcel of land that was originally acquired by the seller for $85,000, is currently offered for sale at $150,000, is considered by the purchaser as easily worth $140,000, and is finally purchased for $137,000, the land should be recorded in the purchasers book at:

Answer 16

$137,000.

Question 17

T or F: A partnership has unlimited liability for its partners.

Answer 17

True.

Question 18

T or F: A lender is an external user of accounting information.

Answer 18

True.

Question 19

What would make you report a net loss on the income statement.

Answer 19

If total revenues are smaller than total expenses.