Accounting and reporting for business entity

1. When accounting and reporting for a business entity, the accounting and reporting for the business must be kept separate from other economic affairs of its owners.


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2. A balance sheet should be dated for a period (such as “For the year ended December 31, 2006”), whereas an income statement should be dated at a point in time (such as “December 31, 2006”).


3. Companies prepare financial statements at the end of each year and more often as needed.


4. Generally accepted accounting principles (GAAP) are essentially identical in most developed countries.


5. An audit guarantees that the financial statements are free of all misstatements.


Multiple Choice Questions

1. The primary purpose of the balance sheet is to

A) measure the net income of a business up to a particular point in time.

B) report the difference between cash inflows and cash outflows for the period.

C) report the financial position of the reporting entity at a particular point in time.

D) None of the above is correct.


2. On January 1, 2006, two individuals invested $500,000 each to form Jordan Corporation. Jordan had total revenues of $200,000 during 2006 and $250,000during 2007. Total expenses for the same periods were $120,000 and $140,000respectively. Cash dividends paid out to stockholders totaled $20,000 in 2006 and$25,000 in 2007. What was Jordan’s total stockholders’ equity at the end of 2006and 2007?

A) $1,000,000 and $1,065,000 respectively.

B) $1,060,000 and $1,145,000 respectively.

C) $1,100,000 and $1,170,000 respectively.

D) $1,210,000 and $1,410,000 respectively


3. Atlantic Corporation reported the following amounts at the end of the first year of operation, December 31, 2006: contributed capital $100,000; sales revenue $400,000; total assets $300,000; $20,000 dividends; and total liabilities $160,000. Retained earnings and total expenses would be

A) retained earnings $40,000 and expenses $340,000.

B) retained earnings $60,000 and expenses $320,000.

C) retained earnings $140,000 and expenses $240,000.

D) retained earnings $160,000 and expenses $220,000.

E) None of the above is correct.


4. Financial accounting

A) provides information primarily for external decisionmakers.

B) is required for corporations but probably would not be done by other business entities.

C) provides information primarily for the use of managers of the company.

D) has been practiced in this country for approximately the past 15 years


5. Hong Kong companies prepare their financial reports in terms of Hong Kong dollars, whereas Japanese companies report results in yen. This practice is an example of the:

A) Historical cost principle.

B) Materiality constraint.

C) Full disclosure principle.

D) Unit-of-Measure Assumption.


6. A company purchased a car, office furniture, and office supplies by issuing a check for $5,000 and a note payable for $19,500. The market value of the items was $28,500. The total recorded value of the items is

A) $28,500.

B) $19,500.

C) $24,500.

D) $31,300.


7. On a balance sheet, assets are listed in the order of

A) dollar amount (largest first).

B) date of acquisition (earliest first).

C) ease of conversion to cash.

D) importance to the operation of the business.


8. MJ company declares a cash dividend to be paid to its stockholders next month.The effect of the transaction is to:

A) decrease assets and liabilities.

B) increase assets and stockholders’ equity.

C) decrease assets and stockholders’ equity.

D) increase liabilities and decrease stockholders’ equity.


9. “Accounts Payable” refers to

A) an amount owed to a business.

B) an amount a business owes to a third party.

C) the bottom line on the income statement.

D) the total cash paid by a business during the year


10. When delivery of goods and services for $25,000 results in a cash receipt of$15,000 and the balance of $10,000 on account, the reported revenues for the time period are

A) $15,000.

B) $25,000.

C) $10,000.

D) $35,000





1. Using the income statement model and the balance sheet model, fill in the missing amounts for each independent case below. Assume the amounts given are at the end of the company’s first year of



Company Total Total Total Total Net Income/ Stockholder

Name Revenue Assets Expenses Liabilities Loss Equity

Randolph  $600,000  $350,000  $450,000  $130,000  ?  ?

Newman  $125,000  ?  ?  $90,000  $20,000  $55,000

Wiseman  ? $160,000  $90,000 ?  ($20,000)  $110,000









2. On December 1, 2009, Lucky SK Company, was started with $100,000 invested by the owners as contributed capital. On December 31, the accounting records contained the following amounts:



Accounts payable  $  100  Office supplies  $  500

Accounts receivable  3,900  Rent expense  1,500

Cash  25,000  Salaries expense  2,000

Contributed capital  50,000 Supplies expense  100 Consulting fees earned 10,500  Telephone expense  200 Dividends declared  2,100

Office equipment  24,100


Prepare an income statement in good form for December 31, 2009 which is the first month of operation.

Ignore taxes.

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