Chapter 1 - Accounting in Action
Chapter 1 - Accounting in Action
Summary:
- Accounting is the language of business used to communicate financial information.
- The basic accounting equation: Assets = Liabilities + Owner's Equity.
- Types of business structures: Sole proprietorship, partnership, and corporation.
- Financial statements include the income statement, owner's equity statement, and balance
sheet.
Recall Quiz:
1. What is the basic accounting equation?
2. List the three types of business ownership.
3. What does the income statement show?
4. What is the purpose of the balance sheet?
5. Name three users of financial information.
Practice:
1. A company has $5,000 in assets and $3,000 in liabilities. What is owner's equity?
2. Write down the name and purpose of each financial statement.
3. Identify if the following is an asset, liability, or owners equity: Cash, Accounts Payable, Capital.
Flashcards:
- Asset: A resource owned by a business.
- Liability: An amount owed by a business.
- Equity: The owner's claim on total assets.
Chapter 1 - Accounting in Action
- Income Statement: Shows revenues and expenses.
- Balance Sheet: Shows assets, liabilities, and equity.
====================[ Chapter 1 - Accounting in Action: MCQs ]====================
Q1. The basic accounting equation is:
a) Assets + Liabilities = Owner's Equity
b) Assets = Liabilities + Owner's Equity
c) Assets = Revenues - Expenses
d) Liabilities = Assets - Owner’s Equity
Q2. Which financial statement reports revenues and expenses?
a) Balance Sheet
b) Statement of Owner’s Equity
c) Income Statement
d) Trial Balance
Q3. What is the purpose of the balance sheet?
a) To show company profitability
b) To report cash flows
c) To show financial position at a point in time
d) To list all journal entries
Q4. The owner invests cash into the business. What increases?
a) Assets and Liabilities
b) Assets and Owner’s Equity
c) Liabilities only
d) Expenses and Revenue
Q5. Revenues do what to Owner’s Equity?
a) Increase it
b) Decrease it
c) Do nothing
d) Cancel it out
Q6. Which is not a form of business organization?
a) Sole Proprietorship
b) Corporation
c) Partnership
d) Private Trust Fund
Q7. Expenses are:
a) The same as assets
b) Increases to equity
c) Costs of running the business
d) Revenue from sales
Q8. A withdrawal by the owner causes:
a) An increase in liabilities
b) A decrease in revenue
c) A decrease in Owner’s Equity
d) No effect on the accounting equation
Q9. Which of the following is an external user?
a) Marketing Manager
b) Production Supervisor
c) Investor
d) Internal Auditor
Q10. Which is classified as an asset?
a) Accounts Payable
b) Capital
c) Supplies
d) Drawings
Q11. Which statement is prepared first?
a) Balance Sheet
b) Owner’s Equity Statement
c) Income Statement
d) Cash Flow Statement
Q12. What does the Owner’s Equity Statement report?
a) All assets
b) Changes in Owner’s Equity
c) Revenues only
d) Changes in liabilities
Q13. Which of the following increases assets and increases liabilities?
a) Owner investment
b) Purchase of supplies with cash
c) Purchase of equipment on credit
d) Payment of rent
Q14. The primary objective of financial reporting is:
a) To comply with tax laws
b) To provide useful information to decision makers
c) To help internal users manage
d) To create trial balances
Q15. Which of the following is considered an expense?
a) Owner’s Drawings
b) Rent Paid
c) Revenue from sales
d) Cash in hand
Q16. What is NOT true about assets?
a) They are future economic benefits
b) They include equipment and supplies
c) They always equal liabilities
d) They appear on the balance sheet
Q17. Which of the following reduces Owner’s Equity?
a) Revenue
b) Investments
c) Drawings
d) Asset purchase
Q18. Owner’s Equity at the beginning is $10,000. During the year, revenue is $5,000, expenses
are $2,000, and the owner withdrew $1,000. Ending Equity is:
a) $12,000
b) $13,000
c) $14,000
d) $15,000
Q19. The accounting equation must always:
a) Be positive
b) Be in balance
c) Include revenue
d) Exclude owner’s drawings
Q20. If total liabilities increase by $5,000 and assets increase by $5,000, equity:
a) Increases
b) Decreases
c) Stays the same
d) Doubles
====================[ Answer Key – Chapter 1 ]====================
Q1: b
Q2: c
Q3: c
Q4: b
Q5: a
Q6: d
Q7: c
Q8: c
Q9: c
Q10: c
Q11: c
Q12: b
Q13: c
Q14: b
Q15: b
Q16: c
Q17: c
Q18: b
Q19: b
Q20: c
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