$$\text{Assets} = \text{Liabilities} + \text{Contributed Capital} + \text{Retained Earnings}$$

$$\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}$$

$$\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}$$; it measures the proportion of assets financed by debt

Question 1

Which of the following best describes the expanded accounting equation for a corporation?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Contributed Capital} + 	ext{Retained Earnings}$$

Question 2

If a company issues new common stock for cash, which accounts are affected and how?

Accepted Answer

Assets increase; Contributed Capital increases

Question 3

Which formula correctly calculates ending retained earnings?

Accepted Answer

$$	ext{Beginning Retained Earnings} + 	ext{Net Income} - 	ext{Dividends} = 	ext{Ending Retained Earnings}$$

Question 4

A company has total assets of $$500,000 and total liabilities of 200$$,000. What is its equity?

Accepted Answer

$$\300$$,000$

Question 5

Which of the following accounts normally has a credit balance?

Accepted Answer

Common Stock

Question 6

Which entry records the payment of $3,000 for three months' rent in advance?

Accepted Answer

Debit Prepaid Rent $$3,000; Credit Cash 3$$,000

Question 7

Using the straight-line depreciation method, what is the monthly depreciation expense for equipment costing $14,400 with a useful life of 4 years?

Accepted Answer

$$\1$$,200$

Question 8

Which financial statement shows a company's assets, liabilities, and equity at a specific point in time?

Accepted Answer

Balance Sheet

Question 9

What is the debt ratio formula, and what does it measure?

Accepted Answer

$$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}$$; it measures the proportion of assets financed by debt

Question 10

If a company has total liabilities of $$60,000 and total assets of 240$$,000, what is its debt ratio?

Accepted Answer

$$0.25$$

Question 11

Which of the following statements is true regarding accrual basis accounting?

Accepted Answer

Revenues are recorded when earned, and expenses are recorded when incurred

Question 12

Which account is credited when closing revenue accounts at period end?

Accepted Answer

Income Summary

Question 13

A company purchases $5,000 of merchandise inventory on account. Which entry is correct?

Accepted Answer

Debit Merchandise Inventory $$5,000; Credit Accounts Payable 5$$,000

Question 14

Which of the following is a temporary account that is closed at the end of the accounting period?

Accepted Answer

Service Revenue

Question 15

If Smart Touch Learning returns 20 tablets costing $350 each to the vendor, what is the correct journal entry?

Accepted Answer

Debit Accounts Payable $$7,000; Credit Merchandise Inventory 7$$,000

Question 16

Which of the following best describes the operating cycle of a merchandising business?

Accepted Answer

Cash is paid for inventory, inventory is sold to customers, and cash is collected from customers

Question 17

Which account is debited when a company performs services on account for $5,000?

Accepted Answer

Accounts Receivable

Question 18

Which of the following is NOT a component of stockholders' equity in the expanded accounting equation?

Accepted Answer

Accounts Payable

Question 19

Which of the following correctly describes the effect of paying a cash dividend?

Accepted Answer

Assets decrease; Retained Earnings decrease

Question 20

A company has beginning retained earnings of $$50,000, net income of 20$$,000, and dividends of $5,000. What is ending retained earnings?

Accepted Answer

$$\65$$,000$

Fundamentals of the Accounting Equation in Financial Accounting

Study Guide - Practice Questions