Mock Exam 1 ? Chapters 1 & 2 1. What is the primary purpose of financial accounting? a. Determine the amount of tax liability owed to the government. b. Communicate business transactions to internal management. c. Measure business transactions and communicate those measures to external users to make decisions. d. Measure the profitability of the company in order to assist employees with making decisions. 2. Which statement below best describes the accounting equation? a. The change in retained earnings equals net income less dividends. b. Equality of revenue and expense transactions over time. c. Resources of the company equal creditors? and owners? claims to those resources. d. Financing activities equal investing and operating activities. 3. Johnson had the following final balances after the first year of operations: Assets, $26,000; stockholders? equity, $10,000; dividends, $2,000; and net income, $6,000. What is the amount of Johnson?s liabilities? a. $36,000. b. $20,000. c. $16,000. d. $10,000. 4. Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as: a. Investing activities. b. Management activities. c. Operating activities. d. Financing activities. 5. Which business form has the advantage of limited liability? a. Corporation. b. Sole proprietorship. c. Partnership. d. All business forms share equal limited liability. 6. The costs of providing goods and services to customers are referred to as: a. Assets. b. Expenses. c. Liabilities. d. Revenues. 7. The owners? interest in a corporation is called: a. Dividends b. Assets c. Liabilities d. Stockholders? equity 8. Liabilities are best defined as: a. Amounts the company expects to collect in the future from customers. b. Debts or obligations the company owes resulting from past transactions. c. The amounts that owners have invested in the business. d. Payments to stockholders. 9. Use the following amounts to calculate net income. Revenues, $14,000; Liabilities, $6,000; Expenses, $5,800; Assets, $21,000; Dividends, $1,200. a. $29,200. b. $15,200. c. $5,800. d. $8,200. 10. Which of the following accounts appears in the statement of stockholders? equity? a. Prepaid rent b. Cash c. Unearned revenue d. Retained earnings 11. Which of the following is the correct order for preparing the financial statements? a. Balance sheet, statement of stockholders? equity, and income statement. b. Balance sheet, income statement, and statement of stockholders? equity. c. Statement of stockholders? equity, income statement, and balance sheet. d. Income statement, statement of stockholders? equity, and balance sheet. 12. DW has an ending retained earnings balance of $52,000. If during the year DW paid dividends of $5,000 and had net income of $22,000, then what was the beginning retained earnings balance? a. $69,000. b. $35,000. c. $25,000. d. $30,000. 13. The major underlying assumptions of accounting include all of the following except: a. Economic entity. b. Monetary unit. c. Legal liability. d. Going concern. 14. When a company incurs workers? salaries but does not pay them, how will the basic accounting equation be affected? a. Stockholders? equity decreases. b. Revenues decrease. c. Expenses decrease. d. Liabilities decrease. 15. Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11 Pumpkin collected the cash from that customer. What is the impact on Pumpkin?s accounting equation from the collection of cash? a. No net effect to the accounting equation. b. Decrease assets and increase liabilities. c. Increase assets and increase liabilities. d. Decrease assets and decrease liabilities. 16. A company receives a $50,000 cash deposit from a customer on October 15 but will not provide services until November 20. Which of the following statements is true? a. The company records service revenue on October 15. b. The company records cash collection November 20. c. The company records an unearned revenue on October 15. d. The company records nothing on October 15. 17. An expense has what effect on the accounting equation? a. Decrease liabilities. b. Decrease stockholders? equity. c. Increase assets. d. No effect. 18. Providing services and receiving cash will: a. Increase assets and increase stockholders? equity. b. Increase assets and increase liabilities. c. Decrease assets and increase liabilities. d. Decrease liabilities and increase stockholders? equity. 19. Dividends normally carry a _______ balance and are shown in the ______________. a. Debit; Statement of stockholders? equity. b. Debit; Income statement. c. Credit; Balance sheet. d. Debit; Balance Sheet. 20. Which of the following accounts would normally have a credit balance? a. Accounts payable, service revenue, common stock. b. Salaries payable, unearned revenue, telephone expense. c. Income taxes payable, service revenue, dividends. d. Cash, maintenance expense, dividends. 21. Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a: a. Debit to investments. b. Credit to retained earnings. c. Credit to liabilities. d. Credit to expenses. 22. A company received a bill for newspaper advertising services received, $400. The bill will be paid in 10 days. How would the transaction be recorded today? a. Debit advertising expense $400, credit accounts payable $400. b. Debit accounts payable $400, credit advertising expense $400. c. Debit accounts payable $400, credit cash $400. d. Debit advertising expense $400, credit cash $400. 23. Assume that cash is paid for rent to cover the next year. The appropriate debit and credit are: a. Debit rent expense, credit cash. b. Debit prepaid rent, credit rent expense. c. Debit prepaid rent, credit cash. d. Debit cash, credit prepaid rent. 24. Styleson Inc. performed cleaning services for their customers for cash. These transactions would be recorded as: a. Debit service revenue, credit cash. b. Debit cash, credit service revenue. c. Debit cash, credit accounts receivable. d. Debit accounts receivable, credit service revenue. 25. On December 1, 2010, Bears Inc. signed a contract with a retailer to supply stuffed animal toys for the next calendar year. How should this transaction be recorded on December 1, 2010? a. Debit cash, credit sales revenue. b. Debit cash, credit accounts receivable. c. Debit accounts receivable, credit sales revenue. d. No transaction should be recorded on December 1, 2010. 26. The body primarily responsible for establishing a single set of global accounting standards is the: a. IASB b. SEC c. FASB d. IOSCO
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