ACG 2021 Exam 1 CH 1-3 Test Questions
and Correct Answers
If the assets of a company are $4,000,000 and its total liabilities equal $1,500,000, then
total common stock equals $2,500,000. ✅false, A=L+SE(SE+CS+RE) therefore, this
could only be true if RE =$0
The resources (assets) that the company owns are reported on the balance sheet.
✅True
The accounting period can be one month, three months, six months, one year or any
time frame specified by management. ✅True
Generally Accepted Accounting Principles (GAAP) are measurement rules used to
develop information provided in the financial statements. ✅True
The audit report is a report that describes the auditors' opinion of the fairness of the
financial statement presentations and the evidence gathered to support that opinion.
✅True
The report of management indicates that the auditor has the primary responsibility for
providing the financial statement information. ✅False, management has primary
responsibility
A balance sheet is used to report the activities involving assets, liabilities, and
stockholders' equity over a specific time period. ✅false, the balance sheet reports the
financial position at a specific date
The income statement is used to report the results of operations over a specific time
period. ✅true
The statement of stockholders' equity is used to report the changes in common stock
and retained earnings attributed to issuance of additional stock, net income (or net loss)
and dividends. ✅true
An entity's assets come from three primary sources: creditors, investors, and profits
retained in the business. ✅true
Buying equipment for use in the business is an operating activity. ✅false, buying
equipment for use is an investing activity
Borrowing money from the bank is a financing activity. ✅true
, What items on the balance sheet are considered to be sources for financing economic
resources (assets). ✅D (Liabilities and SE)
Assets total $450,000, liabilities total $120,000, and common stock totals $200,000.
What is the dollar amount of retained earnings? $_____________ ✅130,000
(A=L+CS+RE) or (450,000=120,000+200,000+RE)
The net income reported on the income statement for the accounting period is reported
on what other financial statement? ✅Statement of stockholders equity (b)
Financing activities of a company include which of the following? ✅issuing stock to
new owners (b)
The primary purpose of an audit (examination) of the financial reports of a company is
to ✅determine whether the financial reports conform to GAAP
The ending amount reported on the statement of cash flows is also reported on what
other financial statement? ✅balance sheet
What are the five main financial statement Elements and give a short definition of each
and one example of each? ✅Asset (cash, accounts receivable, supplies, inventory,
land, buildings, equipment)
Liability (accounts payable, wages payable, interest payable, income tax payable ,notes
payable)
stockholders equity (common stock, retained earnings, dividends)
revenue (sales, service revenue)
expenses (rent expense, salaries and wages, utilities expense, insurance expense)
What are the four items needed in the heading of a financial statement and why do we
need them? ✅Name of entity (so reader knows what company the data refers to)
name of financial statement (so reader knows they are looking at a financial statement)
date or period of time it covers (know the time)
unit of measure (if amounts have been altered or abbreviated)
What are the three business activities to measure? ✅operating, investing, financing
What is the retained earnings equation? ✅BRE+NI-DIV=ERE
