Financial Accounting - Chapter 1

Which of the following forms of business organization is an “artificial person” and must obtain legal approval from the federal or provincial government to conduct business?

Law Firm

Partnership

Sole Propietorship

Corporation

You have purchased some T-shirts for $6,000 and can sell them immediately for $8,000. What accounting assumption, criteria, or constraint governs the amount at which to record the goods you purchased?

Economic entity assumption

Reliability characteristic

Cost principle

Going concern assumption

The economic resources of a business are called

Assets

Liabilities

Owner’s equity

Accounts payable

If the assets of a business are $200,000 and the liabilities are $90,000, how much is the owner’s equity?

$290,000

$110,000

$90,000

If the owner’s equity in a business is $70,000 and the liabilities are $35,000, how much are the assets?

$35,000

$70,000

$105,000

$45,000

Purchasing office supplies on account will

Increase an asset and increase a liability

Increase an asset and increase owner’s equity

Increase one asset and decrease another asset

Increase an asset and decrease a liability

Performing a service for a customer or client and receiving the cash immediately will

Increase one asset and decrease another asset

Increase an asset and increase owner’s equity

Decrease an asset and decrease a liability

Increase an asset and increase a liability

Paying an account payable will

Increase one asset and decrease another asset

Decrease an asset and decrease owner’s equity

Decrease an asset and decrease a liability

Increase an asset and increase a liability

The financial statement that summarizes assets, liabilities, and owner’s equity is called the

Cash flow statement

Balance Sheet

Income statement

Statement of owner’s equity

The financial statements that are dated for a time period (rather than for a specific point in time) are the

Balance sheet and income statement

Balance sheet and statement of owner’s equity

Income statement, statement of owner’s equity, and cash flow statement

All financial statements are dated for a time period

Accounting is an information system for measuring, processing, and communicating financial information.

True

False

The three basic forms of business organizations are

Proprietorship

Partnership (a limited liability partnership is a special form of partnership)

Corporation

All of the above

Which of the following is false?

The primary objective of financial statements is to provide information that is useful for users in their decision making.

To be useful, the information must have the qualitative characteristics of understandability, reliability, relevance, and comparability.

Key assumptions and principles discussed in this chapter are the economic entity assumption, the going concern assumption, the stable monetary unit assumption, and the cost principle of measurement. They are subject to both the cost–benefit and materiality constraints.

The accounting equation is Asset = Liability - Equity

For each of the users of accounting information, indicate whether they are an external decision maker (E) or an internal decision maker (I).

	Internal (I) or External (E)
Marketing Manager
Canada Revenue Agency
Investor
Controller
Supplier

Identify each of the following accounts as: Asset (A), Liability (L), or Owner’s Equity (OE).

	Asset	Liability	Owner's Equity
Accounts Payable
Cash
M. Abbas, Capital
Accounts Receivable
Rent Expense
Service Revenue
Office Supplies
M. Abbas, Withdrawals
Land
Salaries Expense

Accounting equation is the basic tool of accounting, stated as Assets = Liabilities + Equity

True

False

Asset is an economic obligation (a debt) payable to an individual or an organization outside the business

True

False

Balance sheet is a report that shows an entity’s assets, liabilities, and owner’s equity as of a specific date

True

False

Expense is the decrease in equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers

True

False

Income statement is a report that shows an entity’s revenues, expenses, and net income or net loss for a period of time

True

False

Liability is an economic resource that is expected to be of benefit in the future

True

False

Net income is the excess of total expenses over total revenues

True

False

Net loss is the excess of total revenues over total expenses

True

False

Revenues are the amounts earned by delivering goods or services to customers

True

False

Statement of owner’s equity is a report that shows the changes in owner’s equity for a period of time

True

False

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