AccHor 7e CH 01

Accounting
Accounting and
and the
the Business
Business
Environment
Environment
Chapter 1
1
Copyright © 2007 Prentice-Hall. All rights reserved
A corporation with 2 stockholders goes bankrupt
owing $10,000. How much does each stockholder
owe the creditors?
2
Answer: $0.
The stockholders of a corporation have limited
liability, which means that stockholders are not
responsible for the debts of the corporation.
3
Land was acquired for a future building site at a
cost of $80,000. An appraiser placed its value at
$85,000. Another company offered to buy the land
for cash of $90,000. At what amount should land
be reported in the financial statements?
4
Answer: $80,000.
The cost principle states that assets should be
recorded at their cost.
5
The assumption that the entity will remain in
operation for the foreseeable future is the:
1. Reliability principle
2. Entity concept
3. Going concern concept
4. Cost principle
6
Answer: 3
This is the definition of the going concern
concept.
7
A basic principle of accounting that requires
activities of an entity be kept separate from other
organizations and individuals as a separate
economic unit is the
1. Reliability principle
2. Entity concept
3. Going concern concept
4. Cost principle
8
Answer: 2
This is the definition of the entity concept.
9
Which of the following is a correct expression of
the accounting equation?
1. Assets = revenues + expenses
2. Assets = revenues - expenses
3. Assets = liabilities – owner’s equity
4. Assets = liabilities + owner’s equity
10
Answer: 4. Assets = liabilities + owner’s equity
11
If a company’s assets total $400 and owner’s
equity totals $300, how much are total liabilities?
12
Answer: $100.
The accounting equation is:
Assets = liabilities + owner’s equity
$400 = ? + $300
13
Owner's equity can be described as
1. Creditors’ claims on total assets
2. Owner’s claim on total assets
3. Current obligations of the company
4. Economic resources of the company
14
Answer: 2.
Assets = Liabilities + Owner’s Equity
Creditors’ Owner’s
claims to claims to
assets assets
15
What is the effect on the accounting equation if a
company collects $50 of an Accounts Receivable?
1. increases an asset $50; decreases an asset $50

2. decreases an asset $50; decreases a liability $50
3. increases an asset $50; decreases a liability $50
4. decreases a liability $50; increases owner's equity $50
16
Answer: 1
When a company collects on an accounts
receivable, cash is increased. Accounts
receivable is decreased by the same amount
since customers owe the company less.
17
What is the effect on the accounting equation if a
company pays the monthly rent in cash?
1. Assets decrease and liabilities increase

2. Liabilities decrease and owner’s equity decreases
3. Owner's equity increases and assets increase
4. Assets decrease and owner’s equity decreases
18
Answer: 4.
Assets decrease: Cash is paid and
decreases.
Owner’s equity decreases: Costs incurred to
earn revenues decrease the owner’s interest
in the assets.
19
The balance sheet reports:
1. Revenues and expenses on a specific date

2. Assets, liabilities, and owner’s equity for a
specific period
3. Changes in owner’s equity for a specific period
4. Assets, liabilities, and owner’s equity on a
specific date
20
Answer: 4.
The balance sheet reports the amount of
assets, liabilities and owner’s equity on a
specific date.
21
An income statement reports
1. Revenues and expenses on a specific date

2. Revenues and expenses for a specific period of time
3. Changes in owner’s equity for a specific period of time
4. Assets, liabilities, and owner’s equity on a specific date
22
Answer: 2.
The income statement presents revenues and
expenses of a company for a specific period of
time.
23
Determine the amount of net income (loss) given
the following information:
Accounts payable……………. $ 700
Service revenue……………….. 900
Supplies expense……………… 300
Cash…………………………….. 800
Salaries expense………………. 400
24
Answer:
Service Revenue $900
Less Expenses:
Supplies expense $300
Salaries expense 400 700
Net income $200
25
At the beginning of the year, owner’s equity was
$100. The owner invested $200 cash to the
business during the year and earned a net income
of $600. The owner also withdrew $500 during the
year. What was the balance in owner’s equity at
the end of the year?
26
Answer:
Beginning owner’s equity $100
Add: Net income 600
Investment by owner 200
Subtotal $900
Less: Owner’s withdrawal (500)
Ending owner’s equity $400
27
Presented below are balance sheet items for Alt
Co.
Accounts payable………….. $200
Accounts receivable……...… 300
Cash……………………….... 100
Furniture…………………….. 500
Norris, capital……….………. 300
Notes payable………………. 400
Compute total assets
28
Answer:
Cash $100
Accounts receivable 300
Furniture 500
Total assets $900
29
Presented below are balance sheet items for Alt
Co.
Accounts payable…………..$200
Accounts receivable……...…300
Cash……………………….... 100
Furniture…………………….. 500
Norris, capital……….………. 300
Notes payable………………. 400
Compute total liabilities
30
Answer:
Accounts payable $200
Notes payable 400
Total liabilities $600
31
32

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AccHor 7e CH 01

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Accounting

Assets = Liabilities + Owner’s Equity

1. increases an asset $50; decreases an asset $50

1. Assets decrease and liabilities increase

1. Revenues and expenses on a specific date

1. Revenues and expenses on a specific date

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