Fundamental Financial Accounting Concepts Thomas Edmonds 10th Edition-Test Bank

Fundamental Financial Accounting Concepts, 10e (Edmonds) Chapter 1 An Introduction to Accounting Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. (Note that "No Effect" means that the event does not effect that element of the financial statements or that the event causes an increase in that element is offset by a decrease in that same element.) Increase = I Decrease = D No Effect = NA 1) Walker Co. issued common stock for $150,000 cash. Answer: (I) (NA) (I) (NA) (NA) (NA) (I) Issuing common stock is an asset source transaction that increases the business's assets (cash) and its stockholders' equity (common stock). It does not affect the income statement, but is reported as a cash flow from financing activities in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 2) Nguyen Co. borrowed $50,000 cash from Metropolitan Bank. Answer: (I) (I) (NA) (NA) (NA) (NA) (I) Borrowing cash is an asset source transaction that increases a business's assets (cash) and its liabilities (notes payable). It does not affect the income statement, but is reported as a cash flow from financing activities in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows 3) Bell Co. provided consulting services for $20,000 cash. Answer: (I) (NA) (I) (I) (NA) (I) (I) This is an asset source transaction that increases the business's assets (cash). When a business provides services, it earns revenue. Revenue increases net income, which will increase equity (retained earnings) at the end of the accounting period. This event is reported as a cash flow from operating activities in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 4) Pierce Co. paid $40,000 cash to purchase land. Answer: (NA) (NA) (NA) (NA) (NA) (NA) (D) Purchasing land for cash is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). It does not affect the income statement, and is reported as an investing activity in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5) Perez Co. paid $220,000 cash for salaries expense. Answer: (D) (NA) (D) (NA) (I) (D) (D) Paying expenses is an asset use transaction that decreases the business's assets (cash) and decreases its equity (retained earnings). Note that the expense decreases net income, and will decrease retained earnings at the end of the accounting period. It is reported as a cash flow for operating activities in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 6) Epstein Co. paid $20,000 in cash dividends to its owners. Answer: (D) (NA) (D) (NA) (NA) (NA) (D) Paying a cash dividend is an asset use transaction that decreases a business's assets (cash) and its equity (retained earnings).The dividends account will decrease the retained earnings at the end of the accounting period. It does not affect net income, and is reported as a cash flow for financing activities in the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) North Co. issued a note to purchase a building. Answer: (I) (I) (NA) (NA) (NA) (NA) (NA) Issuing a note to purchase a building is an asset source transaction that increases a business's assets (building) and increases its liabilities (notes payable). It does not affect net income or the statement of cash flows. Difficulty: 2 Medium Topic: The Horizontal Financial Statements Model Learning Objective: 01-10 Record business events using a horizontal financial statements model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 8) Name the group that has the primary authority for establishing U.S. GAAP. Answer: The Financial Accounting Standards Board (FASB) The Financial Accounting Standards Board (FASB) is a privately funded organization with the primary authority for establishing accounting standards in the United States. Difficulty: 1 Easy Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 9) Who are the three distinct types of participants in the market for business resources? Briefly describe the role of each group of participants. Answer: Markets include consumers, conversion agents, and resource owners. Consumers use resources. Conversion agents are businesses that convert resources to the form that consumers want. Resource owners control the distribution of resources to conversion agents. Difficulty: 2 Medium Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Industry 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Assets Liabilities Equity Revenues Expenses Net Income Stmt of Cash Flows 10) What is meant by the term "stakeholders"? Answer: Stakeholders are the parties that are interested in operations of an organization. Stakeholders often are users or potential users of accounting information. Stakeholders include resource providers, financial analysts, brokers, attorneys, government regulators and news reporters. Difficulty: 2 Medium Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Industry; FN Measurement 11) What is meant by the term "global GAAP"? How does it impact U.S. companies? What body is responsible for setting global standards? Answer: International Financial Reporting Standards (IFRS) have been adopted by most countries outside of the United States, and are becoming "global GAAP." Many believe that U.S. companies will be allowed to use either IFRS or U.S. GAAP in the future, and there is an ongoing process to reduce the differences between IFRS and GAAP. The International Accounting Standards Board (IASB), headquartered in London, is responsible for forming these standards. Difficulty: 2 Medium Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Diversity AICPA: BB Global; FN Measurement 12) Briefly distinguish between financial accounting and managerial accounting. Answer: Financial accounting is designed to satisfy the needs of external resource providers (external users), and must adhere to Generally Accepted Accounting Principles. Managerial accounting, however, provides information that is useful to managers within a business (internal users), and does not have to follow GAAP. Difficulty: 2 Medium Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Communication; Reflective Thinking AICPA: BB Industry; FN Measurement 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13) Explain some of the similarities and differences between not-for-profit organizations and other types of businesses. Answer: Similarities: Both types of organizations commonly use specific resources to satisfy consumer demand. These resources are financial resources, physical resources, and labor resources. Accounting systems are used by both types of organizations to measure the cost of the goods and services that are provided, the efficiency and effectiveness of the organizations' operations, and the ability of the organizations to continue to provide goods and services. Differences: Not-for-profit organizations are established primarily for motives other than making a profit, while most other businesses are motivated by profit. As a result, factors other than profitability influence the resource allocation priorities of not-for-profit organizations. Difficulty: 2 Medium Topic: Role of Accounting in Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Communication; Reflective Thinking AICPA: BB Industry 14) What financial statement elements are reported on a balance sheet? Answer: A business's balance sheet shows the elements: assets, liabilities, and stockholders' equity. Difficulty: 1 Easy Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 15) From what three sources does a business obtain its assets? Answer: A business obtains its assets from creditors, from investors, and from operations. Difficulty: 2 Medium Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 16) How does providing services for cash affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction? Answer: Providing services for cash increases assets and increases equity. It is considered an asset source transaction. Providing services for cash increases cash, an asset, and revenue increases equity (retained earnings). Difficulty: 2 Medium Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Understand AACSB: Reflective Thinking; Analyze AICPA: BB Critical Thinking; FN Measurement 17) How does the payment of cash dividends to stockholders affect the accounting equation? Is it considered an asset source, asset use, or asset exchange transaction? Answer: Payment of cash dividends decreases assets and decreases equity. It is considered an asset use transaction. Paying dividends decreases assets (cash) and decreases equity (retained earnings). Difficulty: 2 Medium Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 18) If total stockholder's equity is $150,000 and liabilities are $75,000, what are total assets? Answer: $225,000 Assets = Liabilities $75,000 + Equity $150,000; Assets = $225,000 Difficulty: 2 Medium Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 19) What is meant by the term stockholders' equity? Answer: When a business acquires assets from investors, it commits to keep the assets safe and to use the assets in a manner that benefits the investors. The business also grants the investor an ownership interest in the business, thereby allowing the investor (owner) to share in the profits generated by the business. In accounting terms investors are called stockholders. A business's commitment to its stockholders is called stockholders' equity. Difficulty: 2 Medium Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 20) Give three examples of asset use transactions. Answer: Paid loan, paid expense, and paid dividends to stockholders. Asset use transactions involve a decrease in assets (for example, cash) and will also result in a decrease in either liabilities (paid loan) or equity (paid expense or dividends). Difficulty: 2 Medium Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Measurement 21) What does a company's statement of cash flows tell you about the company? Answer: The statement of cash flows tells how a company obtained and used cash during the accounting period. The statement of cash flows explains the change in cash from the beginning to the end of the period. Difficulty: 1 Easy Topic: Preparing a Statement of Cash Flows Learning Objective: 01-08 Prepare a statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 22) If a corporation issues common stock for $50,000 cash, in which section of the statement of cash flows will this transaction be reported? Answer: Issuing stock is reported in the financing activities section. All cash exchanged between a company and its stockholders is considered a financing activity. Difficulty: 1 Easy Topic: Preparing a Statement of Cash Flows Learning Objective: 01-08 Prepare a statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 23) Which types of accounts are closed out to the Retained Earnings account at the end of an accounting period? Answer: Revenues, expenses, and dividends are temporary accounts and are closed at the end of the accounting period. These accounts are called temporary, or nominal, accounts. Note that dividends are reported on neither the income statement nor the balance sheet. Difficulty: 1 Easy Topic: The Closing Process Learning Objective: 01-09 Close revenue, expense, and dividend accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 24) Name and briefly describe each of the four financial statements. Answer: The balance sheet lists the assets of a business and corresponding claims (liabilities and stockholders' equity) on those assets. It draws its name from the accounting equation. The income statement matches revenue (benefits) with the expenses (sacrifices) that were incurred to generate the revenue. The statement of changes in stockholders' equity is used to explain the effects of transactions on stockholders' equity during an accounting period. The statement of cash flows explains how a company obtained and used cash during the accounting period. The statement classifies cash receipts (inflows) and payments (outflows) into three categories: financing activities, investing activities, and operating activities. Difficulty: 3 Hard Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity and a Balance Sheet; Preparing a Statement of Cash Flows Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet.; 01-08 Prepare a statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 25) Define the term "accounting period." How does this term relate to the "matching concept" as it pertains to the income statement? Answer: An accounting period is the span of time covered by the financial statements, normally one year; the span of time for which income is measured. The practice of pairing together on the income statement revenues and expenses that were incurred in the same accounting period is known as the matching concept. Difficulty: 2 Medium Topic: Preparing an Income Statement, a Statement of Changes in Stockholders' Equity, and a Balance Sheet Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 26) Which of the following groups has the primary responsibility for establishing generally accepted accounting principles for business entities in the United States? A) Securities and Exchange Commission B) U.S. Congress C) International Accounting Standards Board D) Financial Accounting Standards Board Answer: D Explanation: The Financial Accounting Standards Board is a privately funded group charged with establishing accounting standards for the U.S. It is not a branch of the U.S. government. Difficulty: 1 Easy Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement; BB Legal 10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 27) The Heritage Company is a manufacturer of office furniture. Which term best describes Heritage's role in society? A) Conversion agent B) Regulatory agency C) Consumer D) Resource owner Answer: A Explanation: Businesses serve as conversion agents in the marketplace, transforming basic resources provided by resource owners into goods and services that consumers demand. Regulatory agencies set policies that affect the way that businesses operate. Difficulty: 2 Medium Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Industry 28) Which resource providers lend financial resources to a business with the expectation of repayment with interest? A) Consumers B) Creditors C) Investors D) Owners Answer: B Explanation: Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the business. Consumers demand goods and services from businesses. Difficulty: 1 Easy Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 29) Which type of accounting information is intended to satisfy the needs of external users of accounting information? A) Cost accounting B) Managerial accounting C) Tax accounting D) Financial accounting Answer: D Explanation: Financial accounting is intended to satisfy the needs of external users of accounting information. Managerial accounting, including cost accounting, is intended for the needs of internal users, or managers, of a business. Tax accounting is specifically intended for tax regulatory agencies. Difficulty: 1 Easy Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 30) Which of the following statements is false regarding managerial accounting information? A) It is often used by investors. B) It is more detailed than financial accounting information. C) It can include nonfinancial information. D) It focuses on divisional rather than overall profitability. Answer: A Explanation: Managerial accounting provides information primarily for internal users, or managers, of businesses. Managers require more detailed information about a business than do external users, and sometimes that information is nonfinancial in nature. Managerial accounting information focuses on divisional rather than overall profitability and is not typically made available to external users, such as investors. Difficulty: 2 Medium Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Industry 12 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 31) Financial accounting standards are known collectively as GAAP. What does that acronym stand for? A) Generally Accepted Accounting Principles B) Generally Applied Accounting Procedures C) Governmentally Approved Accounting Practices D) Generally Authorized Auditing Principles Answer: A Explanation: Generally Accepted Accounting Principles are established by the Financial Accounting Standards Board. Difficulty: 1 Easy Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 32) International accounting standards are formulated by the IASB. What does that acronym stand for? A) Internationally Accepted Standards Board B) International Accounting Standards Board C) International Accountability Standards Bureau D) International Accounting and Sustainability Board Answer: B Explanation: The International Accounting Standards Board establishes accounting standards for most countries outside of the U.S. Difficulty: 1 Easy Topic: Role of Accounting In Society Learning Objective: 01-01 Identify the ways accounting benefits society. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement; BB Global 13 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 33) Which of the following is an example of revenue? A) Cash received as a result of a bank loan B) Cash received from investors from the sale of common stock C) Cash received from customers at the time services were provided D) Cash received from the sale of land for its original selling price Answer: C Explanation: Cash received from providing services to customers is an example of revenue, and is an asset source transaction. Cash received from the result of a bank loan results in a liability, notes payable. Cash investments made by owners increase the stockholders' equity account common stock. Cash received from the sale of land for its original selling price is an asset exchange transaction that decreases one asset, land, and increases another asset, cash. Difficulty: 2 Medium Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 34) Which of the following is not an element of the financial statements? A) Net income B) Revenue C) Assets D) Cash Answer: D Explanation: Cash is not an element of the financial statements. It is an account that is part of the element assets. Difficulty: 2 Medium Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 35) Algonquin Company reported assets of $50,000, liabilities of $22,000 and common stock of $15,000. Based on this information only, what is the amount of the company's retained earnings? A) $7,000. B) $57,000. C) $13,000. D) $87,000. Answer: C Explanation: Assets = Liabilities + Equity; Equity includes common stock and retained earnings. $50,000 = $22,000 + $15,000 + Retained earnings; Retained earnings = $13,000 Difficulty: 3 Hard Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 36) Stosch Company's balance sheet reported assets of $40,000, liabilities of $15,000 and common stock of $12,000 as of December 31, Year 1. Retained earnings on the December 31, Year 2 balance sheet is $18,000 and Stosch paid a $14,000 dividend during Year 2. What is the amount of net income for Year 2? A) $17,000 B) $19,000 C) $13,000 D) $21,000 Answer: B Explanation: If assets on December 31, Year 1 totaled $40,000, total claims (including liabilities, common stock, and retained earnings) on that date must have also been $40,000. If liabilities were $15,000 and common stock was $12,000, retained earnings on December 31, Year 1 must have been $13,000. At the end of Year 2, the company reported $18,000 in retained earnings, a $5,000 increase. During Year 2, Stosch paid a $14,000 cash dividend, which reduced retained earnings. Therefore, Year 2 net income must have been $5,000 greater than the dividend paid. $14,000 + $5,000 = $19,000. Difficulty: 3 Hard Topic: Role of Accounting In Society Learning Objective: 01-07 Prepare an income statement, a statement of changes in stockholders' equity, and a balance sheet. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 37) Hazeltine Company issued common stock for $200,000 cash. What happened as a result of this event? A) Assets increased. B) Equity increased. C) Claims increased. D) Assets, claims, and equity all increased. Answer: D Explanation: Issuing common stock increases both assets (cash) and equity (common stock). Equity and liabilities collectively make up claims in the accounting equation. Difficulty: 2 Medium Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking; FN Measurement 38) Ballard Company reported assets of $500 and liabilities of $200. What amount will Ballard's report for stockholders' equity? A) $300 B) $500 C) $700 D) Cannot be determined Answer: A Explanation: In the accounting equation, assets equal claims (liabilities + equity). If assets are $500, total claims must also be $500. Therefore, stockholders' equity must be $500 − $200, or $300. Difficulty: 1 Easy Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking; FN Measurement 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 39) A company's total assets increased during the period while its liabilities and common stock were unchanged. No dividends were declared or paid during the period. Which of the following would explain this situation? A) Revenues were greater than expenses during the period. B) Retained earnings were less than net income during the period. C) No dividends were paid during the period. D) The company must have purchased assets with cash during the period. Answer: A Explanation: Assets = Liabilities + Stockholders' equity Assets = Liabilities + Common stock + Retained earnings If a company's total assets increased while liabilities and common stock were unchanged, retained earnings must have increased. In order for retained earnings to increase, the company must have reported net income. In other words, its revenues must have been greater than its expenses. Difficulty: 3 Hard Topic: Elements of Financial Statements Learning Objective: 01-03 Identify the components of the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 40) Li Company paid cash to purchase land. What happened as a result of this business event? A) Total assets decreased. B) Total assets were unaffected. C) Total equity decreased. D) Both assets and total equity decreased. Answer: B Explanation: Paying cash for land is an asset exchange transaction that increases one asset (land) and decreases another asset (cash). The result is no overall change in total assets. Difficulty: 1 Easy Topic: Recording Business Events Under the Accounting Equation Learning Objective: 01-04 Show how business events affect the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement fundamental accounting principles - test bank , basic accounting test bank pdf, basic accounting principles test, fundamental accounting, fundamental accounting principles answer key, accounting fundamentals practice test,