Multiple Choice
What is the impact on the fundamental accounting equation when a company issues common stock for cash?
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1. Introduction to Accounting
Fundamental Accounting Equation
Multiple Choice
Which of the following statements is correct regarding the relationship between accounts on the income statement and the balance sheet?A) No account appears in both the income statement and the balance sheet.B) Revenue accounts appear on both the income statement and the balance sheet.C) Expense accounts appear on both the income statement and the balance sheet.D) The Retained Earnings account links the income statement and the balance sheet, but does not appear on both.
A
A) No account appears in both the income statement and the balance sheet.
B
B) Revenue accounts appear on both the income statement and the balance sheet.
C
D) The Retained Earnings account links the income statement and the balance sheet, but does not appear on both.
D
C) Expense accounts appear on both the income statement and the balance sheet.
Verified step by step guidance1
Understand the purpose of the income statement and the balance sheet: The income statement reports a company's financial performance over a specific period, including revenues and expenses, while the balance sheet provides a snapshot of the company's financial position at a specific point in time, including assets, liabilities, and equity.
Recognize that accounts on the income statement (e.g., revenues and expenses) are temporary accounts that are closed at the end of the accounting period, and their balances are transferred to the Retained Earnings account on the balance sheet.
Note that the Retained Earnings account is part of the equity section of the balance sheet and reflects the cumulative net income (or loss) retained by the company after dividends are paid. It acts as a link between the income statement and the balance sheet.
Clarify that revenue and expense accounts do not appear on the balance sheet because they are temporary accounts that are closed to Retained Earnings. Only the net result of these accounts (net income or loss) impacts the balance sheet through Retained Earnings.
Conclude that the correct statement is: 'The Retained Earnings account links the income statement and the balance sheet, but does not appear on both,' as it serves as the connection between the two financial statements without being present on both.
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