Practice Questions

1. Which of the following is a correct fundamental accounting equation?
   

   	a.	Assets + Liabilities = Equity
   	b.	Assets + Retained Earnings = Equity
   	c.	Assets + Equity = Liabilities
   	d.	Assets = Liabilities + Equity

2. The assets and liabilities of the company are $175 000 and $40 000, respectively. Equity should equal:
   

   	a.	$215 000
   	b.	$135 000
   	c.	$175 000
   	d.	$40 000

    

3. During March, Musk purchased supplies for cash. The supplies will be used in April. What effect does this transaction have on the accounting equation at the time the supplies are purchased?
   

   	a.	Assets increase and shareholders’ equity decreases
   	b.	Assets and liabilities increase
   	c.	There is no effect on the accounting equation, as one asset account increases while another asset account decreases
   	d.	There is no effect on the accounting equation, as the transaction should not be recognised until April

4. Elvin made cash sales to customers. What effect does this transaction have on the accounting equation?
   

   		a.	Liabilities and retained earnings increase
   		b.	Assets and liabilities increase
   		c.	Assets and retained earnings increase
   		d.	There is no effect on the accounting equation, as one asset account increases while another asset account decreases

    

5. When a business borrows money, one effect on the accounting equation is:
   

   	a.	a decrease in contributed equity
   	b.	an increase in assets
   	c.	a decrease in liabilities
   	d.	a decrease in assets

6. The Gates Company purchased equipment for $60 000 cash. What is the effect on assets?
   

   	a.	An increase
   	b.	A decrease
   	c.	No net effect
   	d.	Cannot be determined from this limited information.

7. A list of all asset, liability, equity, revenue, expense, and dividend accounts which are used by the company is called a:
   

   	a.	chart of accounts
   	b.	general journal
   	c.	general ledger
   	d.	trial balance

8. The system of accounting in which there are at least two accounts affected in every transaction so that the accounting equation stays in balance is called:
   

   	a.	a debit
   	b.	a credit
   	c.	full disclosure
   	d.	the dual nature of accounting

9. All of the following are external transactions except, when a grocery store:
   

   	a.	recognises losses from spoilage
   	b.	runs an ad in a local newspaper
   	c.	purchases produce from a local farmer
   	d.	sells groceries to customers on credit

10. Which of the following transactions affects the liabilities for the Xero business?
    

    	a.	Services are provided for a customer for credit
    	b.	Payment is made on a bank loan
    	c.	Equipment is purchased for cash
    	d.	Shares are issued

Solutions:

(1) d – A=L+OE;

(2) b – A= L=OE; $175000 = $40000 + OE, thus OE = $175000 – 40000 = $135000;

(3) c – As cash leaves the business, asset decreases and supplies enter the business, asset increases, thus no effect on accounting equation;

(4) c – Cash enters the business, so asset increases and so does revenue which increases retained earnings; (5) b – When the bank loans money, cash enters the business and thus asset increases;

(6) c – no net effect because cash leaves the business in the form of payment for the equipment and the equipment enters the business, increasing assets;

(7) a – refer to Chapter 1.2;

(8) d – refer to Chapter 1.3;

(9) a – spoilage within the grocery store does not involve an external party and thus is an internal transaction;

(10) b – a bank loan is classified as a liability and a payment to reduce the bank loan will reduce liability