MGT 6201 ACCOUNTING | PRACTICE QUESTIONS & ANSWERS
COMPREHENSIVE PREP
Table of Contents
SECTION I: ACCOUNTING EQUATION & TRANSACTION ANALYSIS
1. At the beginning of the year, Zephyr Co. reports Assets of $850,000
and Liabilities of $340,000. During the year, the company issues
additional common stock for $50,000 cash and pays dividends of
$15,000. What is the ending Equity?
a. $560,000
b. $545,000
c. $510,000
d. $595,000
Correct Answer: B
Rationale: Beginning Equity = 850,000 - 340,000 = 510,000. Issuing stock
increases equity (+50,000). Dividends decrease equity (-15,000). Ending
Equity = 510,000 + 50,000 - 15,000 = 545,000.
2. Which of the following transactions decreases both total assets and
total equity?
a. Paying cash dividends to shareholders
b. Purchasing equipment on account
c. Borrowing cash from a bank
d. Providing services on account
Correct Answer: A
Rationale: Paying cash dividends reduces cash (assets) and retained
earnings (equity). Purchasing equipment on account increases assets
and liabilities. Borrowing cash increases assets and liabilities. Providing
services on account increases assets and equity.
,3. A company collects a $10,000 accounts receivable. What is the
effect on the accounting equation?
a. Assets increase and equity increases
b. Assets increase and liabilities increase
c. Assets decrease and equity decreases
d. Assets remain unchanged
Correct Answer: D
Rationale: Collecting accounts receivable increases cash (one asset) and
decreases accounts receivable (another asset). Total assets remain
unchanged. Equity and liabilities are unaffected.
4. If total liabilities increase by $30,000 and total equity decreases by
$10,000, what is the net change in total assets?
a. Increase of $40,000
b. Decrease of $20,000
c. Increase of $20,000
d. Decrease of $40,000
Correct Answer: C
Rationale: The accounting equation is Assets = Liabilities + Equity.
Change in Assets = (+30,000) + (-10,000) = +20,000. Therefore, assets
increase by $20,000.
5. Which transaction represents an exchange of one asset for another
asset?
a. Purchasing land by issuing common stock
b. Paying off accounts payable with cash
c. Purchasing supplies for cash
d. Receiving cash for services performed
Correct Answer: C
Rationale: Purchasing supplies for cash increases supplies (asset) and
,decreases cash (asset). This is an asset exchange. Issuing stock increases
assets and equity. Paying A/P decreases assets and liabilities. Receiving
cash increases assets and equity.
SECTION II: FINANCIAL STATEMENTS & RETAINED EARNINGS
**6. A company has Beginning Retained Earnings of $200,000, Net
Income of $80,000, and Dividends declared and paid of $30,000. What
is the Ending Retained Earnings?**
a. $250,000
b. $280,000
c. $220,000
d. $310,000
Correct Answer: A
Rationale: Ending Retained Earnings = Beginning Retained Earnings +
Net Income - Dividends = 200,000 + 80,000 - 30,000 = 250,000.
7. Which financial statement reports a company's financial position at
a specific point in time?
a. Income Statement
b. Statement of Retained Earnings
c. Balance Sheet
d. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet reports assets, liabilities, and equity at a
specific point in time. The Income Statement and Cash Flow Statement
cover a period of time.
8. A company reports total revenues of $500,000 and total expenses
of $350,000. What is the company's net income?
a. $850,000
, b. $150,000
c. $500,000
d. $350,000
Correct Answer: B
Rationale: Net Income = Revenues - Expenses = 500,000 - 350,000 =
150,000.
9. Which financial statement provides a link between the income
statement and the balance sheet?
a. Statement of Retained Earnings
b. Statement of Cash Flows
c. Income Statement
d. Notes to the Financial Statements
Correct Answer: A
Rationale: The Statement of Retained Earnings uses the Net Income
from the Income Statement and updates the Retained Earnings balance
reported on the Balance Sheet.
10. If a company's liabilities increase by $15,000 and its assets
increase by $15,000, what must happen to equity?
a. Increase by $30,000
b. Remain unchanged
c. Decrease by $15,000
d. Increase by $15,000
**Correct Answer: B**
Rationale: Assets = Liabilities + Equity. If both assets and liabilities
increase by the same amount ($15,000), equity remains unchanged
(15,000 = 15,000 + 0).
SECTION III: ACCRUALS & RECEIVABLES
COMPREHENSIVE PREP
Table of Contents
SECTION I: ACCOUNTING EQUATION & TRANSACTION ANALYSIS
1. At the beginning of the year, Zephyr Co. reports Assets of $850,000
and Liabilities of $340,000. During the year, the company issues
additional common stock for $50,000 cash and pays dividends of
$15,000. What is the ending Equity?
a. $560,000
b. $545,000
c. $510,000
d. $595,000
Correct Answer: B
Rationale: Beginning Equity = 850,000 - 340,000 = 510,000. Issuing stock
increases equity (+50,000). Dividends decrease equity (-15,000). Ending
Equity = 510,000 + 50,000 - 15,000 = 545,000.
2. Which of the following transactions decreases both total assets and
total equity?
a. Paying cash dividends to shareholders
b. Purchasing equipment on account
c. Borrowing cash from a bank
d. Providing services on account
Correct Answer: A
Rationale: Paying cash dividends reduces cash (assets) and retained
earnings (equity). Purchasing equipment on account increases assets
and liabilities. Borrowing cash increases assets and liabilities. Providing
services on account increases assets and equity.
,3. A company collects a $10,000 accounts receivable. What is the
effect on the accounting equation?
a. Assets increase and equity increases
b. Assets increase and liabilities increase
c. Assets decrease and equity decreases
d. Assets remain unchanged
Correct Answer: D
Rationale: Collecting accounts receivable increases cash (one asset) and
decreases accounts receivable (another asset). Total assets remain
unchanged. Equity and liabilities are unaffected.
4. If total liabilities increase by $30,000 and total equity decreases by
$10,000, what is the net change in total assets?
a. Increase of $40,000
b. Decrease of $20,000
c. Increase of $20,000
d. Decrease of $40,000
Correct Answer: C
Rationale: The accounting equation is Assets = Liabilities + Equity.
Change in Assets = (+30,000) + (-10,000) = +20,000. Therefore, assets
increase by $20,000.
5. Which transaction represents an exchange of one asset for another
asset?
a. Purchasing land by issuing common stock
b. Paying off accounts payable with cash
c. Purchasing supplies for cash
d. Receiving cash for services performed
Correct Answer: C
Rationale: Purchasing supplies for cash increases supplies (asset) and
,decreases cash (asset). This is an asset exchange. Issuing stock increases
assets and equity. Paying A/P decreases assets and liabilities. Receiving
cash increases assets and equity.
SECTION II: FINANCIAL STATEMENTS & RETAINED EARNINGS
**6. A company has Beginning Retained Earnings of $200,000, Net
Income of $80,000, and Dividends declared and paid of $30,000. What
is the Ending Retained Earnings?**
a. $250,000
b. $280,000
c. $220,000
d. $310,000
Correct Answer: A
Rationale: Ending Retained Earnings = Beginning Retained Earnings +
Net Income - Dividends = 200,000 + 80,000 - 30,000 = 250,000.
7. Which financial statement reports a company's financial position at
a specific point in time?
a. Income Statement
b. Statement of Retained Earnings
c. Balance Sheet
d. Statement of Cash Flows
Correct Answer: C
Rationale: The Balance Sheet reports assets, liabilities, and equity at a
specific point in time. The Income Statement and Cash Flow Statement
cover a period of time.
8. A company reports total revenues of $500,000 and total expenses
of $350,000. What is the company's net income?
a. $850,000
, b. $150,000
c. $500,000
d. $350,000
Correct Answer: B
Rationale: Net Income = Revenues - Expenses = 500,000 - 350,000 =
150,000.
9. Which financial statement provides a link between the income
statement and the balance sheet?
a. Statement of Retained Earnings
b. Statement of Cash Flows
c. Income Statement
d. Notes to the Financial Statements
Correct Answer: A
Rationale: The Statement of Retained Earnings uses the Net Income
from the Income Statement and updates the Retained Earnings balance
reported on the Balance Sheet.
10. If a company's liabilities increase by $15,000 and its assets
increase by $15,000, what must happen to equity?
a. Increase by $30,000
b. Remain unchanged
c. Decrease by $15,000
d. Increase by $15,000
**Correct Answer: B**
Rationale: Assets = Liabilities + Equity. If both assets and liabilities
increase by the same amount ($15,000), equity remains unchanged
(15,000 = 15,000 + 0).
SECTION III: ACCRUALS & RECEIVABLES
