Testbank

to accompany

Accounting:
Building Business Skills 4e
By
Shirley Carlon, Rosina Mladenovic
and Chrisann Palm

Prepared by

Jenny Waters
University of Queensland
Testbank to accompany Accounting: building business skills 4e

© John Wiley & Sons Australia, Ltd 2012

Chapter 1: Introduction to Accounting

Multiple-Choice Questions

1. The provision of accounting information within the business entity is referred

to as

Feedback: Learning objective 1.1 – Define accounting, describe the accounting process
and define the diverse roles of accountants. The provision of information within the
business entity is referred to as management accounting. (Pg 4)

a. financial accounting.
*b. management accounting.
c. commercial accounting.
d. public accounting.

2. The accounting process includes which steps

Feedback: Learning objective 1.1 – Define accounting, describe the accounting process
and define the diverse role of accountants. The four steps of the accounting process
are identifying, measuring, recording and communicating relevant transactions and
events. (Pg 5)

*a. identifying, measuring, recording and communicating.

b. identifying, recording, communicating and justifying.
c. measuring, adjusting, recording and communicating.
d. measuring, evaluating, recording and communicating.

3. The sole trader form of business organisation

Feedback: Learning objective 1.2 – Explain the characteristics of the main forms of
business organisation. Under the sole trader business structure the owner of the
business has no separate legal existence from the business. The owner of the business
is therefore personally liable for the debts of the business. (Pg 8)

a. must have at least two owners

b. combines business records with the personal records of the owner
*c. results in the owner having personal liability for the debts of the
business
d. is a separate legal entity

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 Chapter 1: Introduction to accounting

4. The majority of business in Australia is transacted by

Feedback: Learning objective 1.2 - Explain the characteristics of the main forms of
business organisation. The majority of business in Australia is transacted by
companies. (Pg 8)

a. sole traders.
b. partnerships.
c. government units.
*d. companies.

5. One advantage of the company form of business structure is that:

Feedback: Learning objective 1.2 - Explain the characteristics of the main forms of
business organisation. A company is a separate legal entity and has an indefinite life
that is independent of the shareholders. Shareholders of most companies have limited
liability for the debts of the company and if there is more than one director, the
decision making is usually a shared responsibility.

a. it has limited life.

b. the liability of the owners is unlimited.
*c. it provides the owners with shared control.
d. it makes higher profits.

6. A company has the following set of characteristics

Feedback: Learning objective 1.2 - Explain the characteristics of the main forms of
business organisation. There are initial costs associated with incorporation for a
company and then ongoing fees and regulations to comply with. If there is more than
one director, then the decision making is usually a shared responsibility. Shareholders
of most companies have limited liability for the debts of the company. (Pg 8)

a. provides owners with shared control, simple to establish.

b. simple to set up, owner retains control.
*c. complex to set up, provides owners with shared control.
d. provides owners with shared control, unlimited liability.

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Testbank to accompany Accounting: building business skills 4e

7. Which of the following statements is false?

Feedback: Learning objective 1.3 - Understand the Conceptual Framework and the
purpose of financial reporting. The objective of general purpose reporting forms the
foundation of the Conceptual Framework. If we know why we need to report then
who needs to report can be determined and then what and how the information is to be
reported follow. All the other statements are correct. (Pg 11)

*a. The definition of reporting entity forms the foundation of the

Conceptual Framework as all other elements flow from it.
b. A reporting entity must prepare general purpose financial reports that
comply with accounting standards.
c. Political or economic importance is a factor in determining whether an
entity is a reporting entity.
d. The objective of general purpose financial reports is to provide
information that is useful to existing and potential investors, creditors
and other external users.

8. The purpose of financial reports is to

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. The purpose of financial reports is to provide information for
decision making. (Pg 13)

*a. provide information for decision making.

b. report profit.
c. pay tax to the ATO.
d. report to the bank.

9. Who of the following would not be considered an internal user of accounting

data for the XYZ Company Ltd?

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Internal users of accounting information are managers who
plan, organise and control the business. (Pg 14)

a. the chief executive officer of the company.

b. a production manager.
c. the company’s sales manager.
*d. a share investor.

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 Chapter 1: Introduction to accounting

10. Which of the following user groups would use accounting information to
determine whether an advertising proposal will be cost effective?

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Evaluating an advertising proposal would occur internally
and would typically be undertaken in the marketing department. (Pg 14)

a. investors in shares.
*b. marketing managers.
c. creditors.
d. chief financial officer.

11. Which of the following user groups is an internal user of accounting

information for the XYZ Company Ltd?

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Managers are internal users of accounting information. (Pg
14)
a. auditors from the Australian Taxation Office.
*b. management of XYZ Company.
c. creditors of XYZ Company.
d. customers of XYZ Company.

12. Which of the following users would not be considered an internal user of
accounting data for a company?

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Creditors are an external resource provider. (Pg 14)

a. the chief executive officer of the company.

b. the financial director of the company.
*c. a creditor of the company.
d. a salesperson employed by the company.

13. Which of the following is not a principal type of business activity?

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. The three main types of business activities are operating,
investing and financing. Delivery is a function of operating activities. (Pg 15)

a. operating.
b. investing.
c. financing.
*d. delivering.

© John Wiley & Sons Australia, Ltd 2012 1.5

Testbank to accompany Accounting: building business skills 4e

14. Borrowing money is an example of a/an

Feedback: Learning objective 1.4 – Identify users of financial reports and describe
users’ information needs. Borrowing money is one of the two main sources of outside
funds for companies. The other is the issue of shares to investors. (Pg 16)

a. marketing activity.
*b. financing activity.
c. investing activity.
d. operating activity.

15. Buying assets required to operate a business is an example of a/an

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Investing activities involve purchasing resources an entity
needs in order to operate. (Pg 16)

a. advertising activity.
b. financing activity.
*c. investing activity.
d. operating activity.

16. The activity involved with employing the resources of the business to generate
revenues is

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Once a business has acquired resources it needs to employ
those resources to generate revenues from operating activities. (Pg 17)

a. accounting.
b. financing.
c. investing.
*d. operating.

17. Buying and selling products are examples of

Feedback: Learning objective 1.4 – Identify the users of financial reports and describe
users’ information needs. Buying and selling products are examples of operating
activities. (Pg 17)
*a. operating activities.
b. investing activities.
c. financing activities.
d. delivering activities.

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 Chapter 1: Introduction to accounting

18. The common characteristic possessed by all assets is

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. An asset is defined in the Conceptual Framework as a resource
controlled by the entity as a result of past events from which future economic benefits
are expected. (Pg 19)

a. long life.
b. great monetary value.
c. tangible nature.
*d. future economic benefit.

19. Dividends paid

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. Retained earnings refers to company profits that have been
accumulated and not distributed as dividends to shareholders. (Pg 21)

a. increase assets.
b. increase expenses.
c. decrease revenues.
*d. decrease retained earnings.

20. Resources owned by a business are referred to as

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. Assets are defined in the Conceptual Framework as a resource
controlled by the entity as a result of past events from which future economic benefits
are expected. (Pg 19)

a. equity.
b. liabilities.
*c. assets.
d. revenues.

21. The financial statement that summarises the changes in retained earnings for a
specific period of time is the

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. The statement of changes in equity reports profit for the period
and transactions with owners of the company such as share capital movements and
dividends. The statement of changes in equity explains the link between the income
statement and the statement of financial position. (Pg 21)

a. statement of financial position.

b. income statement.

© John Wiley & Sons Australia, Ltd 2012 1.7

Testbank to accompany Accounting: building business skills 4e

c. statement of cash flows.

*d. statement of changes in equity.

22. Retained earnings at the end of the period is equal to

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. Retained earnings refers to company profits that have been
accumulated and not distributed as dividends to shareholders. (Pg 21)

a. retained earnings at the beginning of the period plus profit minus

liabilities.
*b. retained earnings at the beginning of the period plus profit minus
dividends paid.
c. profit plus total assets.
d. assets plus liabilities.

23. A company’s policy toward dividend distributions and growth could best be
determined by examining the

Feedback: Learning objective 1.5 – Identify the elements of each of the four main
financial statements. Shareholders and other external users can see how much profit
has been distributed as dividends by reading the statement of changes in equity. (Pg
21)

a. statement of financial position.

b. income statement.
*c. statement of changes in equity.
d. statement of cash flows.

24. An income statement

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The purpose of the income statement is to report the success or
failure of the entity’s operations for a period of time. (Pg 19)

a. summarises changes in retained earnings for a specific period of

time.
b. reports the changes in assets, liabilities, and equity for a specific
period of time.
c. reports the assets, liabilities, and equity at a specific date.
*d. presents the revenues and expenses for a specific period of time.

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 Chapter 1: Introduction to accounting

25. If retained earnings increases from the beginning of the year to the end of the
year, then

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Profits increase equity and are accumulated into retained
earnings. Dividends reduce retained earnings. (Pg 21)

a. profit is less than dividends paid.

b. dividends paid are greater than profit.
c. additional investments are less than losses.
*d. profit is greater than dividends paid.

26. The statement of changes in equity does not show

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Total revenue is shown in the Income Statement. (Pg 21)

a. the beginning balance of retained earnings.

*b. total revenue.
c. the amount of dividends paid.
d. the ending balance of retained earnings.

27. Johnny’s Car Repairs had total assets of $60,000 and total liabilities of $40,000
at the beginning of the year. During the year the business recorded $100,000 in
revenues, $55,000 in expenses, and dividends of $10,000 were distributed.
Equity at the end of the year is

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Beginning equity was $20,000 ($60,000 - $40,000), profit for the
year is $45,000 ($100,000 - $55,000) therefore $20,000 + $45,000 - $10,000 =
$55,000. (Pg 21)

*a. $55,000.
b. $35,000.
c. $65,000.
d. $45,000.

© John Wiley & Sons Australia, Ltd 2012 1.9

Testbank to accompany Accounting: building business skills 4e

28. Johnny’s Car Repairs had total assets of $60,000 and total liabilities of $40,000
at the beginning of the year. During the year the business recorded $100,000 in
revenues, $55,000 in expenses, and dividends of $10,000 were distributed.
Profit reported by Johnny’s Car Repairs for the year was

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Profit is $45,000 ($100,000 - $55,000). (Pg 19)

a. $35,000
*b. $45,000
c. $20,000
d. $90,000

29. If total liabilities increased by $25,000 and equity increased by $5,000 during
a period of time, then total assets

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Assets = Liabilities + Equity therefore assets = $25,000 + $5,000.

a. decrease by $20,000.
b. increase by $20,000.
c. increase by $25,000.
*d. increase by $30,000.

30. If total liabilities decreased by $14,000 during a period of time and equity
increased by $6,000 during the same period, then the change in total assets is

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Assets = Liabilities + Equity therefore assets = - $14,000 +
$6,000 = -$8,000. (Pg 22)

a. an increase of $14,000.
b. an increase of $20,000.
*c. a decrease of $8,000.
d. an increase of $8,000.

31. The statement of financial position

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The statement of financial position reports assets and claims to
those assets at a specific point in time. (Pg 22)

a. summarises the changes in retained earnings for a specific period of

time.
b. reports changes in assets, liabilities, and equity over a period of time.
*c. reports assets, liabilities, and equity at a specific point in time.

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 Chapter 1: Introduction to accounting

d. presents revenues and expenses for a specific period of time.

32. Which of the following financial statements is concerned with a business at a
point in time?

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The Statement of financial position reports assets and claims to
those assets at a specific point in time. (Pg 22)

*a. statement of financial position.

b. income statement.
c. statement of changes in equity.
d. statement of cash flows .

33. Liabilities of a company are amounts or obligations owed to

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Claims of creditors are called liabilities. (Pg 19)

a. investors.
b. owners.
*c. creditors.
d. shareholders.

34. Equity can be described as claims of

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Claims of owners are called equity or shareholders’ equity. (Pg
22)
a. creditors on total assets.
*b. owners on total assets.
c. customers on total assets.
d. auditors on total assets.

35. Equity

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Equity of a company comprises two parts – share capital and
retained earnings. (Pg 22)

a. is always equal to cash on hand.

b. is equal to liabilities plus assets.
*c. includes retained earnings and issued shares.
d. is shown on the income statement.

© John Wiley & Sons Australia, Ltd 2012 1.11

Testbank to accompany Accounting: building business skills 4e

36. Retained earnings represents

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Retained earnings are the accumulated profits of the company
that have not been distributed as dividends to shareholders and is available for future
expansion. (Pg 22)

a. the shareholders’ claim on total assets.

b. the amount of cash held by the business.
c. the total of revenue for the period.
*d. the amount of profit held in the company for future use.

37. An annual report includes all of the following except

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. An annual report would not contain detailed information
regarding the salaries or clerical staff. This type of information is for internal decision
making only and is not available for external users. (Pg30)

a. chairman and directors’ reports.

b. notes to the financial statements.
c. an auditor’s report.
*d. detailed salary package of clerical staff.

38. The information needed to determine whether a company is using accounting

methods similar to those of its competitors would be found in the

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The notes to the financial statements include descriptions of the
accounting policies and methods used in preparing the statements. (Pg 31)

a. auditor’s report.
b. statement of financial position.
c. directors’ report.
*d. notes to the financial statements.

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 Chapter 1: Introduction to accounting

39. In the annual report, where would a financial statement reader find out if the
company’s financial statements give a true and fair view of its financial
position and operating results?

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. It is the auditor’s responsibility to state whether or not the
financial statements provide a true and fair view of the company’s financial position
and operating results. (Pg 34)

a. notes to the financial statements.

b. directors’ report.
c. statement of financial position.
*d. auditor’s report.

40. A company’s reviews of operations, dividend details and information about

important events after the date of the financial statements are all found in the

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Operational review and information relating to dividends, and
post balance day events is included in the directors’ report. (Pg 33)

a. auditor’s report.
*b. directors’ report.
c. notes to the financial statements.
d. income statement.

41. Categories usually found on the face of a classified statement of financial

position include

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The main sections in the statement of financial position are
assets, liabilities and equity. (Pg 22)

*a. assets, liabilities, equity.

b. revenues, expenses, profit.
c. cash receipts, cash payments.
d. retained earnings dividends.

42. Cash is usually classified as

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Cash is usually classified as a current asset. (Pg 25)

a. revenue.
b. an expense.
c. retained earnings.
*d. a current asset.

© John Wiley & Sons Australia, Ltd 2012 1.13

Testbank to accompany Accounting: building business skills 4e

43. Included among current liabilities on a classified statement of financial

position would be

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. Short term borrowings are debts that are due to be settled within
12 months and are included as current liabilities in a classified statement of financial
position. (Pg26)

a. cash.
b. property, plant and equipment.
c. deferred tax assets.
*d. short-term borrowings.

44. Which financial statement would indicate whether the company relies on debt
or equity to finance its assets?

Feedback: Learning objective 1.5 - Identify the elements of each of the four main
financial statements. The statement of financial position reports assets and claims to
those assets at a specific point in time. The claims to the assets are of two types:
creditors (debts) and equity (claims by the owner/s). (Pg 22)

a. statement of cash flows

b. statement of changes in equity
c. income statement
*d. statement of financial position

45. The Financial Reporting Council (FRC) is responsible to the government for

Feedback: Learning objective 1.6 – Describe the financial reporting environment. The
FRC is the body that advises the Commonwealth Government on the accounting
standard-setting and auditing standard-setting processes. (Pg 39)

*a. the broad oversight of the accounting standard-setting process.

b. urgent accounting issues.
c. development of a conceptual framework for financial reporting.
d. taxation issues for companies.

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 Chapter 1: Introduction to accounting

46. Accounting standards issues by the Australian Accounting Standards Board

(AASB) are consistent with those issued by the

Feedback: Learning objective 1.6 – Describe the financial reporting environment. The
accounting standards issued by the Australian Accounting Standards Board (AASB)
are substantially consistent with those issued by the International Accounting
Standards Board. (Pg 39)

a. Financial Reporting Council (FRC).

b. Australian Taxation Office.
c. Urgent Issues Group.
*d. International Accounting Standards Board.

47. Which of the following statements is false?

Feedback: Learning objective 1.6 – Describe the financial reporting environment.

Members of the FRC appoint members of the AASB. Members of the FRC are
appointed by the Commonwealth Treasurer and include key stakeholders from the
business community, the professional accounting bodies, governments and regulatory
agencies. All other statements are correct. (Pg 39)

a. GAAP in Australia is a combination of accounting standards and

interpretations as well as concepts and principles that have developed
over time.
b. The Australian Securities and Investments Commission monitors a
company’s compliance with accounting standards and the
Corporations Act.
*c. Members of the FRC are appointed by the Australian Accounting
Standards Board.
d. Listed public companies must comply with Australian Securities
Exchange listing rules which, for financial reporting purposes, focus
on disclosure of information.

48. The going concern assumption is inappropriate when

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The going
concern principle states that the business will remain in operation for the foreseeable
future. (Pg 42)

a. the business is just starting up.

*b. liquidation appears likely.
c. market values are higher than costs.
d. the business is organised as a sole trader.

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Testbank to accompany Accounting: building business skills 4e

49. The accounting principle which assumes that a business will remain in
operation for the foreseeable future is the

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The going
concern principle states that the business will remain in operation for the foreseeable
future. (Pg 42)

a. monetary principle.
b. accounting entity concept.
c. full disclosure principle.
*d. going concern principle.

50. The going concern principle assumes that the business

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The going
concern principle assumes the business will remain in operation for the foreseeable
future. (Pg 42)

a. will be liquidated in the near future.

b. will be purchased by another business.
c. is in a growth industry.
*d. will remain in operation for the foreseeable future.

51. The accounting entity concept states that each entity

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The
accounting entity concept states that every entity can be separately identified and
accounted for. (Pg 42)

*a. can be separately identified and accounted for.

b. cannot reasonably report all of its activities in financial statements.
c. cannot distinguish events of the business from its owners.
d. will remain in operation for the foreseeable future.

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 Chapter 1: Introduction to accounting

52. What are the qualitative characteristics that enhance the decision usefulness of
relevant information faithfully represented in financial statements?

Feedback: Learning objective 1.7 - Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. Information
is more relevant and reliability when it is comparable, verifiable and understandable.
Information must also be available to users before it ceases to be relevant.

a. Generally accepted accounting principles (GAAP).

b. Accounting entity concept and the cost principle.
c. Comparability, verifiability and understandability.
*d. Comparability, verifiability, understandability and timeliness.

53. The accounting period concept states that

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The
accounting period concept states the life of a business can be divided into artificial
periods and that useful reports covering those periods can be prepared. (Pg 42)

a. the business will remain in operation for the foreseeable future.

*b. the life of a business can be divided into artificial time periods.
c. every business entity can be separately identified and accounted for.
d. only those events that can be expressed in money may be included in
the accounting records.

54. The cost principle requires assets to be initially recorded at

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. The cost
principle states that all assets are initially recorded in the accounts at their purchase
price or cost. (Pg 43).

a. market value.
*b. the amount paid for them.
c. selling price.
d. liquidation value.

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Testbank to accompany Accounting: building business skills 4e

55. Accounting information is relevant if it

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. Accounting
information is considered to be relevant if it is capable of making a difference in a
business decision. (Pg 44)

*a. would influence a business decision.

b. makes no difference to a business decision.
c. is not material to a business decision.
d. is immaterial.

56. Comparability of financial information results when

Feedback: Learning objective 1.7 – Explain the accounting concepts, principles,

qualitative characteristics and constraints underlying financial statements. In
accounting, comparability is achieved when an entity uses the same or consistent
accounting principles each year and different entities use the same accounting
principles. (Pg 45)

a. different entities use different accounting principles.

*b. different entities use the same accounting principles.
c. that information can be depended upon to be relevant.
d. the financial reports are understandable.

57. Liquidity ratios measure

Feedback: Learning objective 1.8 – Calculate and interpret ratios for analysing an
entity’s profitability, liquidity and solvency. Liquidity ratios measure the short-term
ability of the entity to pay its obligations that are due within the next year or operating
cycle. (Pg 50)

*a. the ability of a company to pay its obligations that are due within the
next year or operating cycle.
b. the operating success of a company for a period of time.
c. the ability of a company to survive over a long time.
d. the extent to which a company’s assets are financed by debt.

58. The return on assets ratio is calculated by

Feedback: Learning objective 1.8 – Calculate and interpret ratios for analysing an
entity’s profitability, liquidity and solvency. Return on assets is calculated by dividing
profit by average assets. (Pg 48)

*a. dividing profit by average assets.

b. dividing profit by total assets at the end of a period.
c. dividing total assets at the end of a period by profit.
d. dividing average assets by profit.

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 Chapter 1: Introduction to accounting

59. Solvency measures the ability of a business to

Feedback: Learning objective 1.8 – Calculate and interpret ratios for analysing an
entity’s profitability, liquidity and solvency. Solvency is an entity’s ability to pay
interest as it becomes due and to repay the debt at maturity. (Pg 54)

*a. repay its long-term debts at maturity and interest as it becomes due.
b. meet its short-term obligations.
c. pay its obligations that will fall due within the operating cycle.
d. turn its inventory into cash.

60. A debt to total assets ratio of 80%

Feedback: Learning objective 1.8 – Calculate and interpret ratios for analysing an
entity’s profitability, liquidity and solvency. A high debt to total asset ratio is
undesirable to creditors as there is less chance of them receiving debt repayment from
shareholders’ funds if the company goes into liquidation. Generally, companies with
stable profits can support high levels of debt. (Pg 54)

a. means that 20% of investment in assets has been provided by lenders.

*b. is undesirable for creditors .
c. is desirable for creditors.
d. is likely to be supported by cyclical entities that have fluctuating
profits, such as many high-tech companies.

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Testbank to accompany Accounting: building business skills 4e

Exercises

Ex. 1

Indicate in the spaces provided whether each item would appear on the statement of
cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing
activity.

_____ a. Cash receipts from customers.

_____ b. Issuing shares for cash.
_____ c. Payment of cash dividends.
_____ d. Cash purchase of equipment.
_____ e. Cash payments to suppliers.
_____ f. Sale proceeds of old machine for cash

Solution 1 (5 min.)

O a. I d.
F b. O e.
F c. I f.

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 Chapter 1: Introduction to accounting

Ex. 2

Prepare an income statement, statement of changes in equity, and a statement of

financial position for the dental practice of Jerry Cole, from the items listed below for
the month of October 2012.

Equity (October 1) $15,000

Shares 30,000
Accounts payable 7,000
Equipment 30,000
Service revenue 25,000
Dividends paid 6,000
Dental supplies consumed 3,500
Cash 11,000
Water and light expense 700
Dental supplies on hand 2,800
Salaries expense 7,000
Accounts receivable 14,000
Rent expense 2,000

JERRY COLE DENTAL PRACTICE

Income Statement
for the month ended 31 October 2012
______________________________________________________________________________

Revenues $

Expenses $

Total expenses

Profit $

© John Wiley & Sons Australia, Ltd 2012 1.21

Testbank to accompany Accounting: building business skills 4e

Ex. 2 (cont)

JERRY COLE DENTAL PRACTICE

Statement of Changes in Owner’s Equity
for the month ended 31 October 2012
______________________________________________________________________________

Equity, 1 October $
Add:

Less:

Equity, 31 October $

JERRY COLE
Statement of Financial Position
at 31 October 2012
______________________________________________________________________________

Assets
Current assets

Non current assets $

Total assets
$

Liabilities and Equity

Liabilities
$

Equity
$

Total liabilities and equity $

© John Wiley & Sons Australia, Ltd 2012 1.22

 Chapter 1: Introduction to accounting

Solution 2 (15 min.)

JERRY COLE DENTAL PRACTICE

Income Statement
for the month ended 31 October 2012
_____________________________________________________________________________________
Revenues.......................................................................................................... $….
Service revenue .........................................................................................
25,000
Expenses........................................................................................................... $…
Salaries expense ........................................................................................ 7,000
Dental supplies consumed.......................................................................... 3,500
Rent expense ............................................................................................. 2,000
Water and light expense ............................................................................ 700
Total expenses ....................................................................................
13,200
Profit ............................................................................................................. 11,800

JERRY COLE DENTAL PRACTICE

Statement of Changes in Equity
for the month ended 31 October 2012
_____________________________________________________________________________________
Equity, 1 October ............................................................................................
15,000
Add: Profit .......................................................................................................
11,800
26,800
Less: Drawings.................................................................................................
6,000
Equity, 31 October ..........................................................................................
20,800

JERRY COLE DENTAL PRACTICE

Statement of Financial Position
at 31 October 2012
_____________________________________________________________________________________

Assets
Current assets
Cash .............................................................................................................
11,000
Accounts receivable .........................................................................................
14,000
Dental supplies ................................................................................................
2,800
Total current assets...........................................................................................
27,800
Non-current assets
Equipment .......................................................................................................
30,000

© John Wiley & Sons Australia, Ltd 2012 1.23

Testbank to accompany Accounting: building business skills 4e

Total assets .....................................................................................................

57,800

Liabilities and Equity

Liabilities
Accounts payable ......................................................................................
7,000
*Equity............................................................................................................
50,800

Total liabilities and equity .............................................................................

57,800

*Note: Jerry Cole, Dental Practice, is structured as a Sole Trader. Unlike a company the
liability for the debts of the business is unlimited for the sole trader. Therefore the equity of
the owner is reported as a single item – Owner’s equity and distributions to the owner are
called “drawings” not dividends.

Ex. 3

Use the following information to calculate for the year ended 31 December 2012 (a)
profit, (b) ending retained earnings, and (c) total assets.

Supplies (unused) $ 500 Revenues $15,000

Operating expenses 10,000 Cash 16,000
Accounts payable 11,000 Dividends paid 8,000
Accounts receivable 4,000 Accrued expenses payable 2,000
Share capital 10,000 Equipment 3,500
Retained earnings (beginning) 4,000

Solution 3 (5 min.)

(a) $5,000 (15,000-10,000=5,000)

(b) $1,000 (4,000+5,000-8,000=1,000)
(c) $24,000 (500+4,000+16,000+3,500-2,000=24,000)

© John Wiley & Sons Australia, Ltd 2012 1.24

 Chapter 1: Introduction to accounting

Ex. 4

Use the following accounts and information to prepare an income statement, a

statement of changes in equity, and a statement of financial position for Lazares
Services Ltd for the month ended 31 July 2012.

Accounts payable $ 3,100 Dividends paid $ 8,000

Accounts receivable 1,400 Insurance expense 2,200
Buildings 60,000 Supplies 400
Cash 15,600 Accrued expenses payable 3,300
Revenues 15,700 Rent expense 2,400
Share capital 52,000 Salaries expense 10,000
Retained earnings (beginning) 25,900

LAZARES SERVICES LTD

Income Statement
for the month ended 31July 2012
______________________________________________________________________________
Revenues
$

Expenses
$

Total expenses
Profit $
   

LAZARES SERVICES LTD

Statement of Changes in Equity
for the month ended 31 July 2012
______________________________________________________________________________

Retained Earnings, 1 July $

Add:

Less:

Retained Earnings, 31 July $

© John Wiley & Sons Australia, Ltd 2012 1.25

Testbank to accompany Accounting: building business skills 4e

Ex. 4 (cont.)

LAZARES SERVICES LTD

Statement of Financial Position
at 31 July 2012
______________________________________________________________________________
$
$
Assets

Current assets

Non-current assets

Total assets

Liabilities and Equity

Liabilities

Equity

Total liabilities and equity

© John Wiley & Sons Australia, Ltd 2012 1.26

 Chapter 1: Introduction to accounting

Solution 4 (15 min.)

LAZARES SERVICES LTD

Income Statement
for the month ended 31 July 2012
_____________________________________________________________________________________
Revenues
Service revenue .........................................................................................
$15,700
Expenses
Salaries expense ........................................................................................ $10,000
Rent expense ............................................................................................. 2,400
Insurance expense ..................................................................................... 2,200
Total expenses ....................................................................................
14,600
Profit ............................................................................................................. $ 1,100

LAZARES INDUSTRIES LTD

Statement of Changes in Equity
for the month ended 31 July 2012
_____________________________________________________________________________________
Retained Earnings, 1 July ...............................................................................
$25,900
Add: Profit .......................................................................................................
1,100
27,000
Less: Dividends paid........................................................................................
8,000
Retained Earnings, 31 July .............................................................................
$19,000

LAZARES INDUSTRIES LTD

Statement of Financial Position
31 July 2012
_____________________________________________________________________________________

Assets
Current assets
Cash ............................................................................................................. $ 15,600
Accounts receivable ......................................................................................... 1,400
Supplies ........................................................................................................... 400
17,400
Non-current assets
Building............................................................................................................
60,000
Total assets .....................................................................................................
$77,400

Liabilities and Equity

© John Wiley & Sons Australia, Ltd 2012 1.27

Testbank to accompany Accounting: building business skills 4e

Current liabilities
Accounts payable ............................................................................................. $ 3,100
Accrued expenses payable ............................................................................... 3,300
Total liabilities................................................................................................ $
6,400
Equity
Share capital............................................................................................... $52,000
Retained earnings....................................................................................... 19,000
71,000
Total liabilities and Equity ........................................................................
$77,400

© John Wiley & Sons Australia, Ltd 2012 1.28

 Chapter 1: Introduction to accounting

Ex. 5

Listed below in alphabetical order are statement of financial position items of Rowen
Ltd at 31 December 2012. Prepare a classified statement of financial position.

Accounts payable $ 8,000

Accounts receivable 16,000
Building 66,000
Cash 11,000
Share capital 80,000
Land 31,000
Office equipment 5,000
Retained profit 41,000

Solution 5 (5 min.)

ROWEN LTD
Statement of Financial Position
at 31 December 20120

ASSETS
Current assets
Cash $ 11,000
Accounts receivable 16,000
27,000
Non-current assets
Office equipment 5,000
Building 66,000
Land 31,000
102,000
Total assets $129,000

LIABILITIES
Current liabilities
Accounts payable $ 8,000

EQUITY
Share capital $80,000
Retained earnings 41,000
121,000
Total equity and liabilities $129 000

© John Wiley & Sons Australia, Ltd 2012 1.29

Testbank to accompany Accounting: building business skills 4e

Ex. 6

Indicate in the spaces provided whether each item would appear on the Income
Statement (IS), Statement of Financial Position (SFP), or Statement of Changes in
Equity (SCE):

a. ______ Service Revenue g. ______ Accounts Receivable

b. ______ Water and Light Expense h. ______ Share Capital

c. ______ Cash i. ______ Equipment

d. ______ Accounts Payable j. ______ Advertising Expense

e. ______ Office Supplies k. ______ Dividends paid

f. ______ Wage Expense l. ______ Income Tax Payable

Solution 6 (5 min.)

a. IS g. SFP
b. IS h. SFP
c. SFP i. SFP
d. SFP j. IS
e. SFP k. SCE
f. IS l. SFP

© John Wiley & Sons Australia, Ltd 2012 1.30

 Chapter 1: Introduction to accounting

Ex.7

The directors of Tomas Sanchez Ltd were reviewing the company business activities at
the end of the year (2012) and decided to prepare a Statement of Changes in Equity. At
the beginning of the year company assets were $500,000, liabilities were $150,000,
and share capital was $100,000. Profit for the year was $420,000. Dividends paid of
$220,000 were paid during the year.

Prepare a Statement of Changes in Equity for Tomas Sanchez Ltd

Solution 7 (5 min.)

TOMAS SANCHEZ LTD

Statement of Changes in Equity
for the year ended 31 December 2012

Retained earnings, 1 January 2012 ($500,000-$150,000-$100,000) $250,000

Add: Profit 420,000
670,000
Less: Dividends paid 220,000
Retained earnings, 31 December 2012 $450,000

© John Wiley & Sons Australia, Ltd 2012 1.31

Testbank to accompany Accounting: building business skills 4e

Ex. 8

At 1 September 2012, the Statement of Financial Position for Arnold's Restaurant Ltd
contained the following items:

Accounts Payable $ 3,800 Land $33,000

Accounts Receivable 1,600 Share capital ?
Building 68,000 Loan Payable 46,000
Cash 5,000 Supplies 4,600
Furniture 18,700 Retained earnings 43,200
The following transactions occurred during the next two days:
Shareholders invested an additional $22,000 cash in the business and accounts payable were
paid in full.

Instructions
Prepare a statement of financial position for Arnold’s Restaurant Ltd at 3 September 2012.

Solution 8 (10 min.)

ARNOLD'S RESTAURANT LTD

Statement of Financial Position
at 3 September 2012

ASSETS
Current Assets
Cash (a) $ 23,200
Accounts receivable 1,600
Supplies 4,600
29,400
Non-current assets
Furniture 18,700
Building 68,000
Land 33,000

119,700
Total assets $149,100

LIABILITIES
Non-current liability (b)
Loan payable $ 46,000

EQUITY
Share capital(c) $59,900
Retained earnings 43,200
103,100
Total liabilities and Equity $149,100

(a) Cash: ($5,000 + $22,000 - $3,800) = $23,200

(b) Non-current liability (Accounts Payable) ($3,800 - $3,800) = $0
(c) Share capital: Beginning balance = $37 900
Additional investment in shares = $22,000
Ending balance $59 900

© John Wiley & Sons Australia, Ltd 2012 1.32

 Chapter 1: Introduction to accounting

Ex. 9

From the following list of selected items taken from the records of Downing Clinic
Ltd, identify those that would appear on the Statement of Financial Position.

a. Share capital f. Accounts Payable

b. Patient Revenue g. Cash
c. Land h. Medical Supplies Expense
d. Wages Expense i. Medical Supplies
e. Loan Payable j. Water and Light Expense

Solution 9 (5 min.)

a, c, e, f, g, i

© John Wiley & Sons Australia, Ltd 2012 1.33

Testbank to accompany Accounting: building business skills 4e

Ex. 10

One item is omitted in each of the following summaries of Statement of Financial

Positions and Income Statements for three different companies, X Ltd, Y Ltd, and Z
Ltd.

Determine the amounts of the missing items, identifying each company by letter.

Company
X Ltd Y Ltd
Z Ltd
Beginning of the Year:
Assets $400,000 $150,000 $199,000
Liabilities 250,000 105,000 168,000
End of the Year:
Assets 450,000 195,000 195,000
Liabilities 280,000 95,000 169,000
During the Year:
Additional Investment by Shareholders ? 79,000 78,000

Dividends paid 70,000 83,000 ?

Revenue 195,000 ? 187,000

Expenses 155,000 113,000 185,000

Solution 10 (10 min.)

Company X Ltd ($50,000)

Beginning Equity ($400,000 - $250,000) $150,000
Additional investments (balancing figure) 50,000
Profit for year ($195,000 - $155,000) 40,000
240,000
Less Dividends paid 70,000
Ending Equity ($450,000 - $280,000) $170,000

Company Y Ltd ($172,000)

Beginning Equity ($150,000 - $105,000) $ 45,000
Additional investments 79,000
Profit for year (with revenue as the balancing figure) 59,000
[Revenues = $45,000+Revenues+$79,000-$113,000-$83,000=$100,000)
183,000
Less Dividends paid 83,000
Ending Equity ($195,000 - $95,000) $100,000

Company Z Ltd ($85,000)

Beginning Equity ($199,000 - $168,000) $ 31,000
Additional investments 78,000
Profit for year ($187,000 - $185,000) 2,000
111,000
Less Dividends paid (balancing figure) 85,000
Ending Equity ($195,000 - $169,000) $ 26,000

© John Wiley & Sons Australia, Ltd 2012 1.34

 Chapter 1: Introduction to accounting

Ex. 11

Determine the missing items.

Assets = Liabilities + Equity

$70,000 $52,000 (a)

(b) $28,000 $30,000
$84,000 (c) $50,000

Solution 11 (5 min.)

a. $18,000 b. $58,000 c. $34,000

© John Wiley & Sons Australia, Ltd 2012 1.35

Testbank to accompany Accounting: building business skills 4e

Ex. 12

Identify which of the following items appear in a statement of financial position.

a) Service revenue
b) Cash
c) Share capital
d) Accounts payable
e) Rent expense
f) Supplies
g) Land

Solution 12 (5 min.)

(b), (c), (d), (f), (g)

© John Wiley & Sons Australia, Ltd 2012 1.36

 Chapter 1: Introduction to accounting

Ex. 13

For the items listed below, fill in the appropriate code letter to indicate whether the
item is an asset, liability, or equity item.
Code
Asset A
Liability L
Equity E

_______ 1. Rent Expense _______ 6. Cash

_______ 2. Office Equipment _______ 7. Accounts Receivable

_______ 3. Accounts Payable _______ 8. Retained earnings

_______ 4. Share capital _______ 9. Service Revenue

_______ 5. Insurance Expense _______ 10. Loan Payable

Solution 13 (5 min.)

1. E 6. A
2. A 7. A
3. L 8. E
4. E 9. E
5. E 10. L

© John Wiley & Sons Australia, Ltd 2012 1.37

Testbank to accompany Accounting: building business skills 4e

Ex. 14

Classify each of these items as an asset (A), liability (L), or Equity (E).

_____ 1. Accounts receivable

_____ 2. Accounts payable
_____ 3. Share capital
_____ 4. Office Supplies
_____ 5. Retained earnings
_____ 6. Cash
_____ 7. Loan Payable
_____ 8. Equipment

Solution 14 (5 min.)

1. A
2. L
3. E
4. A
5. E
6. A
7. L
8. A

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 Chapter 1: Introduction to accounting

Ex. 15

At the beginning of the year, Wise Company Ltd had total assets of $700,000 and total
liabilities of $300,000. Answer the following questions viewing each situation as being
independent of the others.

(1) If total assets increased $225,000 during the year, and total liabilities decreased
$100,000, what is the amount of equity at the end of the year?
(2) During the year, total liabilities increased $315,000 and Equity decreased
$130,000. What is the amount of total assets at the end of the year?
(3) If total assets decreased $60,000 and Equity increased $180,000 during the year,
what is the amount of total liabilities at the end of the year?

Solution 15 (5 min.)

Total Assets Total Liabilities Equity

Beginning $700,000 $300,000 $400,000
Change 225,000 (100,000) $325,000
Ending $925,000 - $200,000 = $725,000 (1)

Total Assets Total Liabilities Equity

Beginning $700,000 $300,000 $400,000
Change $185,000 315,000 (130,000)
Ending $885,000 (2) = $615,000 + $270,000

Total Assets Total Liabilities Equity

Beginning $700,000 $300,000 $400,000
Change (60,000) ($240,000) 180,000
Ending $640,000 = $ 60,000 (3) + $580,000

© John Wiley & Sons Australia, Ltd 2012 1.39

Testbank to accompany Accounting: building business skills 4e

Ex. 16

Reinhart’s Carpet Cleaning Ltd has the following statement of financial position items:

Van Loan Payable

Accounts Payable Share Capital
Cash Retained earnings
Cleaning Supplies Equipment
Accounts Receivable

Identify which items are (1) Assets

(2) Liabilities
(3) Equity

Solution 16 (5 min.)

(1) Assets—
Van, Cash, Cleaning Supplies, Accounts Receivable, Equipment

(2) Liabilities—
Accounts Payable, Loan Payable

(3) Equity—
Share capital, Retained earnings

© John Wiley & Sons Australia, Ltd 2012 1.40

 Chapter 1: Introduction to accounting

Ex. 17

On 1 June 2012, Lewis Company Ltd prepared a Statement of Financial Position that
shows the following:

Assets (no cash) .......................................................................... $125,000

Liabilities .................................................................................... 75,000
Equity........................................................................................... 50,000

Shortly thereafter, all of the assets were sold for cash.

How would the statement of financial position appear immediately after the sale of the
assets for cash for each of the following cases?

Cash Received for Balances Immediately After Sale

the Assets Assets - Liabilities = Equity
Cash A $135,000 $________ $________ $________

Cash B 125,000 ________ ________ ________

Cash C 110,000 ________ ________ ________

Solution 17 (5 min.)

Cash Received for Balances Immediately After Sale

the Assets Assets - Liabilities = Equity
Cash A $135,000 $135,000 $75,000 $60,000
Cash B 125,000 125,000 75,000 50,000
Cash C 110,000 110,000 75,000 35,000

© John Wiley & Sons Australia, Ltd 2012 1.41

Testbank to accompany Accounting: building business skills 4e

Ex. 18

Compute the missing amount in each category of the accounting equation.

Assets Liabilities Equity

(a) $260,000 $ ? $ 98,000
(b) $178,000 $ 73,000 $ ?
(c) $ ? $202,000 $310,000

Solution 18 (3 min.)

(a) $162,000 ($260,000 - $98,000 = $162,000)

(b) $105,000 ($178,000 - $73,000 = $105,000)
(c) $512,000 ($202,000 + $310,000 = $512,000)

© John Wiley & Sons Australia, Ltd 2012 1.42

 Chapter 1: Introduction to accounting

Completion Statements

Presented below are the qualitative characteristics of information contained in general-

purpose financial reports.

a. relevance
b. reliability
c. comparability
d. understandability

Identify the qualitative characteristic that fits the statement below.

1._Information in general-purpose financial reports should be_____________ to

users who have the proficiency to comprehend the significant accounting
practices.

2._Financial report information is ______________ when different entities use the

same accounting principles.

3._Accounting information is _____________ if it would make a difference in a

business decision.

4. Information that can be depended on and without undue error is said to be

_________.

Solution to Completion Statements 1 (5 min)

1. d understandable
2. c comparable
3. a relevant
4. b reliable

© John Wiley & Sons Australia, Ltd 2012 1.43

Testbank to accompany Accounting: building business skills 4e

Completion Statements 2

1. A business organised as a separate legal entity owned by shareholders is a

___________.

2. Managers are _______________ of accounting information who plan, organise,

and control a business.

3. _________________ activities involve collecting the necessary funds to support

the business.

4. The ________________ reports the assets, liabilities, and equity of a business at

a specific date.

5. The claim of owners on the assets of a business is known as ________________.

6. The basic accounting equation is Assets = ____________ + _______________.

7. The primary purpose of a ________________ is to provide financial information

about the cash receipts and cash payments of a business.

8. The _________________ is prepared by an independent auditor stating the

auditor’s opinion as to the truth and fairness of the presentation of the financial
statements.

9. The _________________ principle states that assets should be recorded at their

cost.

10. If different entities use the same accounting principle, the financial reports of
those entities are _________________ .

Solution to Completion Statements 2 (10 min)

1. company 6. Liabilities, Equity

2. internal users 7. Statement of Cash Flows
3. financing 8. auditor's report
4. Statement of Financial Position 9. cost
5. equity 10. comparable

© John Wiley & Sons Australia, Ltd 2012 1.44

 Chapter 1: Introduction to accounting

Matching

Match the items below by entering the appropriate code letter in the space provided.

A. Internal users F. Australian Securities Exchange

B. Directors’ report G. Assets
C. Annual report H. Liabilities
D. Sole trader I. Expenses
E. Timeliness J. Retained earnings

_____ 1. Financial information is collected quickly so that it does not lose its
relevance.
_____ 2. Consumed assets or services.
_____ 3. Ownership is limited to one person.
_____ 4. Officers and others who manage the business.
_____ 5. Creditor claims against the assets of the business.
_____ 6. An organisation that produces listing rules that companies must comply
with.
_____ 7. A report prepared by directors that presents audited financial information.
_____ 8. A section of the annual report that presents management’s views.
_____ 9. Future economic benefits.
_____ 10. Accumulated profit that has not been distributed as dividends to owners.

Solution to Matching 1 (10 min)

1. E 6. F
2. I 7. C
3. D 8. B
4. A 9. G
5. H 10. J

© John Wiley & Sons Australia, Ltd 2012 1.45

Testbank to accompany Accounting: building business skills 4e

Matching 2

Presented below are the basic assumptions and principles underlying financial
statements.

a. Cost principle d. Going concern principle

b. Accounting entity concept e. Monetary principle
c. Full disclosure principle f. Accounting period concept

Identify the basic concept or principle that is described below.

_____ 1. The economic life of a business can be divided into artificial time periods.

_____ 2. The business will continue in operation long enough to carry out its existing
objectives.

_____ 3. Assets should be recorded at their cost.

_____ 4. Every entity can be separately identified and accounted for.

_____ 5. Circumstances and events that make a difference to financial statement

users should be disclosed.

_____ 6. Only transaction data that can be accurately expressed in terms of money
should be included in the accounting records.

Solution to Matching 2 (5 min)

1. f 4. b
2. d 5. c
3. a 6. e

© John Wiley & Sons Australia, Ltd 2012 1.46

 Chapter 1: Introduction to accounting

Short Essays

Essay 1

Explain the four steps in the accounting process.

Solution to short essays 1 (15 mins)

The accounting cycle consists of four steps. First, all relevant economic events (or
transactions) must be identified. Relevant economic benefits are those that affect the
assets and or liabilities of the business. Second, all transactions that have been
identified in the first step have to be quantified in monetary terms. The third step is
recording the transactions. This step must include analysing, recording, classifying
and summarising transactions. Finally once these three steps have been performed the
results can be communicated to users by preparing accounting reports, including an
income statement, statement of financial position, statement of cash flows and
statement of changes in equity.

© John Wiley & Sons Australia, Ltd 2012 1.47