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Chapter 1 Unit Exam: The Accounting Equation

True/False
Indicate whether the statement is true or false.
 

 1. 

A business that performs an activity for a fee is a service business.
 

 2. 

When recording financial information, the assets of the business and the personal assets of the owner can be mixed together.
 

 3. 

Anything of value that is owned is a liability.
 

 4. 

Assets have value because they can be used to acquire other assets or be used to operate the business.
 

 5. 

Individuals or other business to whom a business owes money have rights to the business assets.
 

 6. 

A record summarizing all the information pertaining to a single item in the accounting equation is called an account.
 

 7. 

When an owner invests cash in a business, owner’s equity decreases.
 

 8. 

Financial statements are prepared with the expectation that a business will remain in operation indefinitely.
 

 9. 

When a business pays cash for insurance, a liability is increased.
 

 10. 

The total of the left side of the balance sheet must equal the total of the right side of the balance sheet.
 

 11. 

Detailed information about changes in owner’s equity is needed by owners and managers to make sound business decisions.
 

 12. 

A transaction is a normal business activity that changes assets, liabilities, or owner’s equity.
 

 13. 

Revenue is a decrease in owner’s equity  resulting from the operation of a business.
 

 14. 

Withdrawals are assets taken out of a business for the owner’s personal use.
 

 15. 

The most common type of withdrawal by an owner from a business is the withdrawal of cash.
 

 16. 

An established business should rarely experience a decrease in owner’s equity.
 

 17. 

A balance sheet can only be prepared at the end of the month to report information about assets, liabilities, and owner’s equity.
 

 18. 

Asset accounts are shown on the right side of the balance sheet.
 

 19. 

The accounts on the left side of the accounting equation include the liabilities and owner’s equity.
 

 20. 

The heading of the balance sheet contains the name of the business, name of the financial statement, and the date of the report.
 

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 

 21. 

Recording and reporting a business’ financial information separately fro mthe owner’s personal financial information is an application of the accounting concept:
a.
Unit of Measurement
c.
Going Concern
b.
Business Entity
d.
Realization of Revenue
 

 22. 

The accounting equation is most often stated:
a.
Assets = Liabilities
c.
Assets = Liabilities + Owner’s Equity
b.
Cash = Assets
d.
Liabilities = Assets + Owner’s Equity
 

 23. 

In the United States, recording business transactions in dollars is an application of the accounting concept:
a.
Unit of Measurement
c.
Going Concern
b.
Business Entity
d.
Realization of Revenue
 

 24. 

The account used to summarize the owner’s equity in a business is:
a.
Equity
c.
Capital
b.
Owner’s Equity
d.
A Liability
 

 25. 

Prepaid Insurance is a(an):
a.
Asset Account
c.
Owner’s Equity Account
b.
Liability Account
d.
None of the above
 

 26. 

Buying items and paying for them at a future date is:
a.
Not recommended
c.
Illegal
b.
Not a common business practice
d.
A common business practice
 

 27. 

When supplies are bought on account, the business to whom money is owed is a(an):
a.
Asset Account
c.
Equity Account
b.
Liability Account
d.
Capital Account
 

 28. 

When cash is paid on account,
a.
Two assets are changed
b.
One asset and owner’s equity are changed
c.
One liability and owner’s equity are changed
d.
One asset and one liability are changed
 

 29. 

A balance sheet is a financial statement that reports assets, liabilities, and owner’s equity
a.
for a period of time
c.
for the business and the owner together
b.
on a specific date
d.
at current selling values
 

 30. 

Preparing financial statements with the expectation that a business will remain in operation indefinitely is an application of the accounting concept:
a.
Unit of Measurement
c.
Going Concern
b.
Business Entity
d.
Realization of Revenue
 

 31. 

A normal business activity that changes assets, liabilities, or owner’s equity is a(an)
a.
transaction
c.
withdrawal
b.
receipt of revenue
d.
expense
 

 32. 

An increase in owner’s equity resulting from the operations of the business is
a.
An expense
c.
Revenue
b.
A withdrawal
d.
None of the above
 

 33. 

If a business received $2000.00 from sales, this would
a.
Increase assets and increase owner’s equity
b.
Increase assets and decrease liabilities
c.
Increase liabilities and decrease owner’s equity
d.
Decrease assets and decrease owner’s equity
 

 34. 

A decrease in owner’s equity resulting from the operation of a business
a.
A withdrawal
c.
Revenue
b.
An expense
d.
Entries
 

 35. 

Assets taken out of the business for the owner’s personal use are
a.
Withdrawals
c.
Revenue
b.
Expenses
d.
Entries
 

 36. 

The asset most commonly withdrawn by business owners is
a.
Insurance
c.
Cash
b.
Supplies
d.
Contributions
 

 37. 

A cash payment for expenses would not include
a.
Rent
c.
Utilities
b.
Withdrawals
d.
Equipment Repair
 

 38. 

The accounts shown on the left side of the balance sheet include
a.
Rent
c.
Liabilities
b.
Advertising
d.
Prepaid Insurance
 

 39. 

Two transactions that decrease owner’s equity are
a.
Expenses and Withdrawals
c.
Withdrawals and Liabilities
b.
Expenses and Investments
d.
Liabilities and Expenses
 

 40. 

The total of the balances of the accounts on the left and right sides of the balance sheet should b
a.
be different
c.
equal owner’s equity
b.
be equal
d.
equal cash
 

Matching
 
 
a.
Transaction
f.
Revenue
b.
On Account
g.
Expense
c.
Asset
h.
Balance Sheet
d.
Liability
i.
Proprietorship
e.
Owner’s Equity
j.
Accounting Equation
 

 41. 

A business owned by one person.
 

 42. 

A business activity that changes assets, liabilities, or owner’s equity.
 

 43. 

Financial rights to the assets of a business.
 

 44. 

A financial statement that reports assets, liabilities, and owner’s equity on a specific date.
 

 45. 

When a business is allowed to buy supplies, but pay for them in the future.
 

 46. 

Anything of value that is owned.
 

 47. 

An equation showing the relationship among assets, liabilities, and owner’s equity.
 

 48. 

An amount owed by a business.
 

 49. 

An increase in owner’s equity resulting from the operation of a business.
 

 50. 

A decrease in owner’s equity resulting from the operation of a business.
 



 
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