Solved Questions on Accounting in Business | ACC 101, Study notes of Financial Accounting

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ACC101 – CHAPTER 1

Accounting in Business

Key Terms and Concepts to Know

Accounting Principles: GAAP Business Entity, Cost, Going Concern, Monetary Unit, Objectivity, Revenue Recognition

Accounting Equation and components: Assets, Liabilities, Stockholders Equity, Revenue, Expense, Dividends The accounting equation must always balance

Transactions: External transactions occur between two different entities and are easy to record because there are always source documents evidencing the transaction Internal transactions occur within a single entity and are more difficult to record because source documents my not always be present

Basic Financial Statements: Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows Interrelationship among the financial statements

Profitability: Revenues – Expenses Net Income vs. Net Loss

Return on Assets ratio

Practice Problem #1 : Sarah Jones is the sole stockholder and operator of Sarah’s Catering. At the end of the accounting period, December 31, 2000, Sarah’s Catering has assets of $135,000 and liabilities of $72,000. Using the accounting equation and considering each case independently, determine the following amounts:

a. Stockholder’s equity on 12/31/00. b. The amount and direction (increase or decrease) of the period’s change in stockholder’s equity if, during 2001, assets decreased by $22,000 and liabilities decreased by $7,000. c. Net income (or net loss) during 2001, assuming that as of December 31, 2001, assets were $148,000, liabilities were $75,000, capital stock of $25,000 was issued, and dividends of $12,000 were paid.

Effect of Transactions on the Accounting Equation

Example #2: Read each of the following transactions. For each one, indicate which elements of the accounting equation are effected (minimum of 2 per transaction) and whether the element has increased or decreased as a result.

a. Paid rent for August, $3,000. b. Received cash from cash customers, $7,500. c. Received cash for capital stock, $15,000. d. Paid creditors on account, $800. e. Received cash from customer’s on account, $1,200.

Solution #2:

a. Asset – decrease Stockholder’s equity – decrease b. Asset – increase Stockholder’s equity – increase c. Asset – increase Stockholder’s equity – increase d. Asset – decrease Liabilities – decrease e. Asset – increase Asset – decrease

Practice Problem #2: Read each of the following transactions. For each one, indicate which elements of the accounting equation are effected (minimum of 2 per transaction) and whether the element has increased or decreased as a result.

a. Purchased supplies for cash, $120. b. Paid cash dividends, $1,000. c. Billed customers for services rendered on account, $2,800. d. Paid utilities for September, $85. e. Purchased equipment on account, $3,200. f. Received cash for services rendered, $900. g. Determined that the cost of supplies on hand was $30; therefore, $90 of supplies had been used during the month. h. Paid $1,000 toward equipment purchased in (e) above.

SAMPLE MULTIPLE CHOICE QUESTIONS

1. Which of the following best describes accounting? a. Can be thought of as the “language of business” b. Is of limited or little use by individuals outside of the business c. Records economic data but does not communicate the data to users d. Relies upon concepts and principles that are independent of specific user needs
2. The two most common specialized fields of accounting in practice are: a. environmental accounting and financial accounting b. managerial accounting and tax accounting c. financial accounting and accounting systems d. managerial accounting and financial accounting
3. Equipment with an estimated market value of $80,000 is offered for sale at $85,000. The equipment is acquired for $10,000 in cash and a note payable of $65,000. The amount used in the buyer’s accounting records to record this acquisition is: a. $80, b. $85, c. $10, d. $75,
4. The business entity concept means that: a. An entity is organized according to state or federal statutes. b. An entity is organized according to the rules set by the FASB c. The entity is an individual economic unit separate and apart from its owners d. The owner is the entity.

11. The cost principle requires that assets be reported on the balance sheet at their current cost. a. True b. False
12. Which of the following would not appear on the income statement? a. Service Revenue b. Interest Expense c. Net income d. Dividends paid
13. Which of the following would not appear on the Retained Earnings Statement? a. Beginning retained earnings balance b. Dividends c. Service Revenue d. Net Income
14. The financial statements are usually prepared in which of the following sequences? a. Income Statement, Balance Sheet, Retained Earnings Statement, Statement of Cash Flows b. Balance Sheet, Retained Earnings Statement, Statement of Cash Flows, Income Statement c. Balance Sheet, Retained Earnings Statement, Income Statement, Statement of Cash Flows d. Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows
15. Cindy’s Maid Service began the year with total assets of $120,000 and stockholders’ equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. Stockholder’s equity at the end of the year was: a. $130, b. $110, c. $150, d. $135,
16. Same information as Question 15. Total liabilities at the end of the year were: a. $80, b. $90, c. $110, d. $105,

SOLUTIONS TO PRACTICE PROBLEMS

Practice Problem #

Assets = Liabilities + Stockholder’s Equity

a. $135,000 = $72,000 + X $63,000 = X

b. -$22,000 = -$7,000 + X -$15,000 = X

c. $148,000 = $75,000 + X $73,000 = X

Beginning SE $63,000 [from (a) above] +Capital Stock +25, -Dividends -12, +Net Income/Loss X Ending SE $73,000 [from (c) above]

X = -3,000 Net Loss

Practice Problem #

a. Asset – increase Asset – decrease b. Asset – decrease OE – decrease c. Asset – increase OE – increase d. Asset – decrease OE – decrease e. Asset – increase Liabilities – increase f. Asset – increase OE – increase g. Asset – decrease OE – decrease h. Asset – decrease Liabilities – decrease