Equity In A Business F4 Quiz
Questions and Answers
- 1.
Instead of issuing a statement of stockholders’ equity, a corporation that does not have any changes in contributed capital and that has not issued any common or preferred stock may want to prepare a:
- A.
Statement of retained earnings
- B.
Statement of cash flows
- C.
Combined income statement and balance sheet
- D.
None of these answers is correct
Correct Answer
A. Statement of retained earningsExplanation
A corporation that does not have any changes in contributed capital and has not issued any common or preferred stock may want to prepare a statement of retained earnings. This statement shows the changes in the retained earnings balance over a specific period, including net income or loss, dividends, and any adjustments. It helps stakeholders understand how the company's profits are being retained and used within the business.Rate this question:
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- 2.
What is the impact of net income on the owners’ equity in a business?
- A.
Net income increases owners’ equity.
- B.
The answer depends on whether the business is a proprietorship or a partnership.
- C.
Net income does not directly affect owners’ equity, since it is an income statement amount.
- D.
Net income decreases owners’ equity.
Correct Answer
A. Net income increases owners’ equity.Explanation
Net income increases owners' equity because it represents the amount of profit that a business has earned after deducting expenses and taxes. This profit is then added to the owners' equity, which is the residual interest in the assets of the business after deducting liabilities. Therefore, when net income is positive, it contributes to the growth of owners' equity and increases the value that owners have in the business.Rate this question:
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- 3.
In what order should financial statements be prepared?
- A.
Statement of owners’ equity, balance sheet, income statement
- B.
Balance sheet, statement of owners’ equity, income statement
- C.
Balance sheet, income statement, statement of owners’ equity
- D.
Income statement, statement of owners’ equity, balance sheet
Correct Answer
D. Income statement, statement of owners’ equity, balance sheetExplanation
Financial statements should be prepared in the following order: income statement, statement of owners' equity, balance sheet. The income statement shows the company's revenues, expenses, and net income or loss for a specific period. The statement of owners' equity shows the changes in the owners' equity during the same period, including investments, withdrawals, and net income. Finally, the balance sheet presents the company's assets, liabilities, and owners' equity at a specific point in time. This order allows for a logical flow of information, starting with the company's financial performance, then the changes in owners' equity, and finally the overall financial position.Rate this question:
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- 4.
Gross margin represents:
- A.
The amount the products cost the company
- B.
How much more a company received from the sale of its products than what the products cost the company
- C.
The amount available from sales to cover all other expenses the company incurs
- D.
Answers b and c are both correct.
Correct Answer
D. Answers b and c are both correct.Explanation
Gross margin represents how much more a company received from the sale of its products than what the products cost the company, and it also represents the amount available from sales to cover all other expenses the company incurs.Rate this question:
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- 5.
Expenses take various forms as shown on the income statement. The cost of the products that merchandisers and manufacturers sell make up an expense called:
- A.
Cost of goods sold
- B.
Cost of products sold
- C.
Cost of sales
- D.
All of these answers are correct
Correct Answer
D. All of these answers are correctExplanation
The correct answer is "All of these answers are correct" because the cost of goods sold, cost of products sold, and cost of sales all refer to the expenses incurred by merchandisers and manufacturers when selling their products. These terms are used interchangeably to describe the cost associated with the production and sale of goods.Rate this question:
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- 6.
The income that is produced by the major business activity of the company is shown on the income statement as:
- A.
Net income
- B.
Operating income
- C.
Gross income
- D.
Net profit
Correct Answer
B. Operating incomeExplanation
The income that is generated from the primary business operations of the company is referred to as operating income. It represents the revenue earned from the core activities of the company, excluding any non-operating income or expenses. Operating income is a key measure of the company's profitability and indicates how well it is performing in its main line of business. It is typically calculated by subtracting the cost of goods sold and operating expenses from the revenue.Rate this question:
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- 7.
What information will a multiple-step income statement show that a single-step will omit?
- A.
Total expenses and operating income
- B.
Gross profit and net income
- C.
Gross margin and operating income
- D.
Gross margin and net loss
Correct Answer
C. Gross margin and operating incomeExplanation
A multiple-step income statement provides more detailed information compared to a single-step income statement. It includes multiple sections such as gross profit, operating income, and net income. In contrast, a single-step income statement only presents total revenues and total expenses, without breaking them down into different categories. Therefore, a multiple-step income statement will show the gross margin (gross profit as a percentage of sales) and operating income (income generated from core operations) which a single-step income statement will omit.Rate this question:
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- 8.
Gross profit can be calculated as:
- A.
Sales - cost of goods sold
- B.
Sales + cost of goods sold
- C.
Sales - total expenses
- D.
Sales + operating income
Correct Answer
A. Sales - cost of goods soldExplanation
The correct answer is sales - cost of goods sold. Gross profit is calculated by subtracting the cost of goods sold from the total sales. This calculation helps determine the profitability of a company's core operations before considering other expenses such as operating expenses or taxes. By subtracting the cost of goods sold, which includes the direct costs associated with producing or purchasing the goods sold, from the sales revenue, the gross profit represents the amount of money left over to cover other expenses and generate net income.Rate this question:
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- 9.
The advantage for users of a multiple-step income statement over the single-step is that it clearly shows:
- A.
Total expenses
- B.
Gross profits
- C.
Net loss
- D.
Total revenues
Correct Answer
B. Gross profitsExplanation
The advantage of using a multiple-step income statement over a single-step income statement is that it clearly shows the gross profits. A multiple-step income statement breaks down the revenues and expenses into different categories, allowing for a more detailed analysis of the company's financial performance. By separating the gross profits from other expenses, such as operating expenses, interest, and taxes, it provides a clearer picture of the profitability of the company's core operations. This can be useful for management and investors in assessing the company's financial health and making informed decisions.Rate this question:
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- 10.
The excess of the rewards over the sacrifices for a given time period is the monetary reward of doing business, which is also known as:
- A.
Net earnings
- B.
Net profit
- C.
Earnings
- D.
All of these answers are correct.
Correct Answer
D. All of these answers are correct.Explanation
The excess of rewards over sacrifices for a given time period is the monetary reward of doing business. This can be referred to as net earnings, net profit, or simply earnings. All of these terms accurately describe the concept of the excess of rewards over sacrifices in business.Rate this question:
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- 11.
Which ratio uses net income as its denominator?
- A.
Earnings per share
- B.
Rate of return on assets ratio
- C.
Dividend payout ratio
- D.
Net profit margin ratio
Correct Answer
C. Dividend payout ratioExplanation
The dividend payout ratio is a financial ratio that uses net income as its denominator. This ratio measures the proportion of net income that is distributed to shareholders in the form of dividends. It is calculated by dividing the dividends paid out by the net income. This ratio is important for investors as it indicates how much of the company's earnings are being returned to shareholders. A higher dividend payout ratio suggests that the company is distributing a larger portion of its profits as dividends.Rate this question:
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- 12.
The statement of cash flows provides a wealth of important information. Activities related to the items found on the income statement may appear in which section of the statement of cash flows?
- A.
Financing activities
- B.
Operating activities
- C.
Investing activities
- D.
Earnings activities
Correct Answer
B. Operating activitiesExplanation
The statement of cash flows provides information about the cash inflows and outflows of a company. It categorizes these activities into three sections: operating activities, investing activities, and financing activities. The correct answer is operating activities because this section includes cash flows from the company's core operations, such as revenue from sales, payments to suppliers, and salaries paid to employees. It shows how much cash is generated or used by the company's day-to-day operations.Rate this question:
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- 13.
On the income statement, when the cost of goods sold is subtracted from sales, the result is:
- A.
Net loss
- B.
Gross margin
- C.
Net income
- D.
Operating income
Correct Answer
B. Gross marginExplanation
The correct answer is gross margin. The gross margin is the amount of profit a company makes after subtracting the cost of goods sold from its sales. It represents the profitability of a company's core operations before considering other expenses such as operating expenses and taxes. A positive gross margin indicates that the company is generating profit from its primary business activities.Rate this question:
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- 14.
When preparing financial statements, accountants prepare which statement first?
- A.
Balance sheet
- B.
Statement of owners’ equity
- C.
Statement of cash flows
- D.
Income statement
Correct Answer
D. Income statementExplanation
When preparing financial statements, accountants typically prepare the income statement first. This statement provides a summary of a company's revenues, expenses, and net income or loss for a specific period. It helps to assess the profitability and overall financial performance of the business. The income statement is usually prepared before other statements like the balance sheet, statement of owners' equity, and statement of cash flows, as it provides crucial information for decision-making and analysis.Rate this question:
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- 15.
It is generally better to see cash outflow than inflow from which business activity?
- A.
Operating activities
- B.
Investing activities
- C.
Financing activities
- D.
Investing and/or financing activities
Correct Answer
D. Investing and/or financing activitiesExplanation
Cash outflow refers to the money going out of a business, which can include expenses, payments, and investments. In the context of investing and financing activities, it is generally better to see cash outflow because it indicates that the business is actively investing in assets or making payments towards debts or equity financing. This can be a positive sign as it shows that the business is using its resources to grow, expand, or improve its financial position. On the other hand, cash inflow from these activities may indicate that the business is receiving returns on investments or generating funds from financing, which may not necessarily be a negative sign but could indicate a lack of growth or investment opportunities.Rate this question:
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- 16.
The link between the income statement and the balance sheet is called:
- A.
Dividends
- B.
Revenue
- C.
Expenses
- D.
Articulation
Correct Answer
D. ArticulationExplanation
Articulation refers to the connection or relationship between the income statement and the balance sheet. It represents how the information from the income statement, which includes revenues and expenses, flows into the balance sheet, which shows the financial position of a company at a specific point in time. This connection is crucial in understanding the financial health and performance of a company as it ensures that the numbers in both financial statements are consistent and accurate.Rate this question:
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- 17.
A dividend is actually paid on the date of:
- A.
Record
- B.
Declaration
- C.
Liability
- D.
Payment
Correct Answer
D. PaymentExplanation
A dividend is actually paid on the date of payment. This is the day when the company distributes the dividend to its shareholders. The payment date is usually determined by the company's board of directors and is announced in advance. It is the final step in the dividend process, following the declaration of the dividend, the establishment of the record date, and the determination of liability. The payment date is when shareholders receive the actual funds or shares from the company as their dividend.Rate this question:
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- 18.
The basic formula used by a company to compute its income tax is:
- A.
Sales x tax rate
- B.
Total assets x tax rate
- C.
Taxable income x tax rate
- D.
Cost of goods sold x tax rate
Correct Answer
C. Taxable income x tax rateExplanation
The correct answer is taxable income x tax rate. This formula is used by a company to calculate its income tax. Taxable income refers to the portion of a company's income that is subject to taxation after deducting allowable expenses and exemptions. The tax rate is the percentage at which the taxable income is taxed. By multiplying the taxable income by the tax rate, the company can determine the amount of income tax it owes.Rate this question:
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- 19.
The ending capital balance found in a statement of owners’ equity is also found on:
- A.
The statement of cash flows
- B.
The income statement
- C.
The balance sheet
- D.
The ending capital balance is not found on any other financial statement.
Correct Answer
C. The balance sheetExplanation
The ending capital balance is found on the balance sheet because the balance sheet provides a snapshot of a company's financial position at a specific point in time. It includes information about the company's assets, liabilities, and equity. The ending capital balance represents the owner's equity, which is the residual interest in the assets of the company after deducting liabilities. Therefore, it is appropriate for the ending capital balance to be reported on the balance sheet.Rate this question:
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- 20.
The relationship among the accounting elements found on the income statement can be represented by the following equation:
- A.
Revenues – expenses = net loss
- B.
Revenues – expenses = net income
- C.
Answers a and b are both correct
- D.
Assets – liabilities = net income
Correct Answer
C. Answers a and b are both correctExplanation
The equation "revenues - expenses = net loss" represents the relationship among the accounting elements found on the income statement. It shows that when the expenses are subtracted from the revenues, the result is a net loss. Similarly, the equation "revenues - expenses = net income" also represents the relationship among the accounting elements on the income statement. In this case, when the expenses are subtracted from the revenues, the result is a net income. Therefore, both answers a and b are correct because they accurately represent the relationship among the accounting elements on the income statement.Rate this question:
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- 21.
The statement that provides a “bridge” between the information the income statement provides and the information the balance sheet provides is the:
- A.
Statement of financial position
- B.
Statement of owners’ equity
- C.
Statement of cash flows
- D.
None of these answers is correct
Correct Answer
B. Statement of owners’ equityExplanation
The statement of owners' equity provides a link between the income statement and the balance sheet. It shows the changes in the owners' equity over a specific period, including net income from the income statement and any additional investments or withdrawals. This statement helps reconcile the net income reported on the income statement with the owners' equity reported on the balance sheet. Therefore, it serves as a bridge between the two financial statements.Rate this question:
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- 22.
The financial statement that would provide the best information on a firm's past performance is the:
- A.
None of these answers is correct
- B.
Income statement
- C.
Balance sheet
- D.
Owners' equity statement
Correct Answer
B. Income statementExplanation
The income statement provides a comprehensive overview of a firm's financial performance over a specific period. It includes information on revenues, expenses, and net income, which allows stakeholders to assess how well the company has performed in generating profits. By analyzing the income statement, investors, creditors, and management can evaluate the firm's profitability, efficiency, and potential for growth. Therefore, the income statement is considered the best financial statement for understanding a company's past performance.Rate this question:
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- 23.
The equation used in the statement of owners’ equity starts with beginning owners’ equity, then:
- A.
Adjust for changes in stock ownership and any net income or loss
- B.
Add contributions by owners, plus net income or minus net loss, and minus distributions to owners
- C.
Add contributions by owners and subtract distributions to owners
- D.
Add any net income or subtract any net loss for the income statement period
Correct Answer
B. Add contributions by owners, plus net income or minus net loss, and minus distributions to ownersExplanation
The equation used in the statement of owners' equity starts with the beginning owners' equity and then adjusts for changes in stock ownership and any net income or loss. It also adds contributions by owners and subtracts distributions to owners. This equation takes into account the initial equity, any changes in ownership, and the financial performance of the company through net income or loss. It also considers the contributions made by owners and any distributions made to them.Rate this question:
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- 24.
The shareholder who will receive the dividend is the one who holds one or more shares of stock on the:
- A.
Declaration date
- B.
Record date
- C.
Distribution date
- D.
Payment date
Correct Answer
B. Record dateExplanation
The correct answer is the record date. The record date is the specific date set by the company on which it determines the shareholders who are eligible to receive the dividend payment. Shareholders who hold one or more shares of stock on the record date will be entitled to receive the dividend. The declaration date is the date on which the company announces its intention to pay a dividend, the distribution date is the date on which the dividend is actually distributed, and the payment date is the date on which the dividend is paid to the shareholders.Rate this question:
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- 25.
The following information is available for a company: Net sales, $750,950; Cost of goods sold, $330,418; total expenses, $214,775; average total assets for the year, $459,785. What is the company’s rate of return on assets ratio (round your answer to two decimal places)?
- A.
45%
- B.
27%
- C.
56%
- D.
The ratio cannot be computed from the information given.
Correct Answer
A. 45%Explanation
The rate of return on assets ratio is calculated by dividing the net income by the average total assets. In this case, the net income is not given, so we cannot compute the ratio. Therefore, the correct answer is that the ratio cannot be computed from the information given.Rate this question:
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