Using All Four Financial Statements

Self Test

Introduction to Accounting

Using All Four Financial Statements

Key Things to Know

h

Practice as You Learn

b

Self Test

b

Easy Practice Test

b

Medium Practice Test

b

Hard Practice Test

Self Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Which of the following will be reported on the statement of owner’s equity for the current period?

a. the amount of cash paid to suppliers during the period
b. the cost of treasury stock purchased during the period
c. the cost of equipment purchased to date
d. the value of goods provided to customers during the period
Answer

B. Treasury stock is common stock that is purchased from previous owners (investors in the company). This is a transaction with owners. Only transactions with owners during the period are reported on the statement of owner’s equity.

2. Which column on the statement of stockholder’s equity has an amount for dividends declared?

a. common stock
b. treasury stock
c. retained earnings
d. paid in capital

Answer
C. Dividends declared to owners is a decrease to retained earnings. The account that changes is the column that reports the amount.

3. Which column on the statement of stockholder’s equity reports an amount for net income?

a. common stock
b. treasury stock
c. retained earnings
d. paid in capital
Answer
C. Net income increases retained earnings. All profits and losses are moved to retained earnings. The account that changes is the column that has the amount.

4. The purpose of the statement of stockholder’s equity is to

a. report cash paid to owners during the period
b. report transactions with owners during the period
c. report what the cash collected from owners was used for during the period
d. report the cash paid for assets purchased during the period
Answer
B. The statement of stockholder’s equity reports transactions with owners during the period. This statement does not report cash. The statement of cash flows reports cash collected or paid during the period for long-term assets, long-term liabilities, and owner’s equity transactions.

5. An amount in the treasury stock column on the statement of stockholder’s equity indicates

a. the cost of purchasing the company’s stock from other owners during the period
b. the cumulative cash paid to purchase the company’s stock from other owners to date
c. investments in other companies that are held in treasury
d. the cumulative amount earned from owning the company’s own stock to date
Answer
A. The statement of stockholder’s equity reports transactions with owners in the current period only. This statement does not report the cash amount; the cash flow statement reports the cash amount. Investments in other companies are reported as an asset on the balance sheet.

6. The cash flow statement presents ______ different sections.

a. 2
b. 4
c. 5
d. 3
Answer
D. The three sections of the cash flow statement are 1) operating activities, 2) investing activities, and 3) financing activities.

7. The operating activities section of the direct cash flow statement generally reports

a. all revenues and expenses from operations
b. cash collected from customers and cash paid for expenses
c. cash collected from customers and cash paid for all assets and expenses
d. non cash expenses, revenues, gains, and losses
Answer
B. The direct cash flow statement directly reports the amount of cash collected from customers and the amount of cash paid for expenses. The investing section reports cash paid for assets. Non cash items are reported on the indirect cash flow statement.

8. The investing activities section of the cash flow statement generally reports

a. cash from day to day operations
b. cash related to investments in long-term assets
c. cash related to borrowing and repayments
d. cash related to transactions with owners
Answer
B. The investing section reports cash related to long-term assets. A company will either buy or sell long-term assets. The amount on the cash flow statement in the investing section is the amount of cash paid or received.

9. The financing activities section of the cash flow statement generally reports

a. cash from day to day operations
b. cash related to long-term assets
c. cash related to current liabilities and long-term liabilities
d. cash related to long-term liabilities and transactions with owners

Answer
D. The financing section reports cash related to borrowing and repaying long-term liabilities. It also reports cash related to transactions with owners. The operating section reports a. The investing section reports b. Current liabilities are a part of day to day business and is reflected in the operating section.

10. The operating section of the indirect method cash flow statement

a. directly reports cash from day to day operations
b. reports all indirect transactions of the company
c. reconciles net income to cash from operations
d. reports cash paid indirectly for operating assets

Answer
C. The indirect method starts with net income (which is not cash) and reconciles to cash from operations. Reconciling items include non-cash revenues, expenses, gains and losses, and the change in current assets and current liabilities. Current asset and current liability accounts reflect cash paid or received in a different period than the income was earned.

11. The operating section of the direct method cash flow statement reports

a. cash paid directly for long-term investments
b. reports all direct transactions of the company
c. cash related to major revenues and expenses reported on the
income statement
d. reconciles net income to cash from operations

Answer
C. The direct method cash flow statement reports separate line items stating the cash received from major sources and the cash paid for major items. All line items are related to day to day primary business operations.

12. Amounts “owed” will be reported on which financial statement?

a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Stockholder’s Equity

Answer
A. Amounts owed are liabilities. Liabilities are reported on the balance sheet.

13. Cash “paid during the period” for equipment will be reported on which financial statement?

a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Stockholder’s Equity
Answer
C. Cash paid for long-term assets is reported in the investing activities section of the cash flow statement. The balance sheet reports cumulative amounts, not the amount during the period. The income statement shows “what happened” and does not report cash collected or cash paid. Purchasing equipment is not a transaction with owners.

14. The amount earned during the period will be reported on which financial statement?

a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Stockholder’s Equity
Answer
B. The income statement reports amounts earned and amounts incurred during the period.

15. Transactions with owners during the period will be reported on which financial statement?

a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Stockholder’s Equity
Answer
D. The statement of stockholder’s equity reports transactions with owners during the period.