1) Which of the following best describes the purpose of an audit?

To prove the accuracy of an entity's financial statements.

To audit every transaction that an entity entered into.

To lend credibility to an entity's financial statements.

2)

Which of the following transactions affects both retained earnings and net income?

The issue of stock in exchange for cash.

The borrowing of money from a bank.

The payment of a cash dividend.

The recording of revenue for services provided.

3)

Which of the following are the components of stockholders' equity on the balance sheet?

Common stock and liabilities.

Retained earnings and dividends.

Common stock and retained earnings.

Common stock and assets.

4)

A company's retained earnings balance increased $50,000 last year; therefore, net income last year must have been $50,000.

True

False

5)

Which private sector body was given the primary responsibility to determine detailed auditing standards?

Public Company Accounting Oversight Board.

American Institute of Certified Public Accountants.

Financial Accounting Standards Board.

Securities & Exchange Commission.

6)

Which of the following is a disadvantage of a corporation when compared to a partnership?

The corporation must account for the transactions of the business as separate and apart from those of the owners.

The corporation and its stockholders are subject to double taxation.

The corporation is treated as a separate legal entity from the stockholders.

The stockholders have limited liability.

7)

Revenue is recognized within the income statement during the period in which cash is collected.

True

False

8)

Which of the following describes the operating activities section of a cash flow statement?

It provides the net increase or decrease in cash during the period.

It provides information pertaining to dividend payments to stockholders.

It provides information with respect to a company's ability to generate cash flows to pay for goods and services.

It provides information about how operations have been financed.

9)

Which of the following properly describes the impact on the financial statements when a company borrows $20,000 from a local bank?

Assets decrease $20,000.

Liabilities increase $20,000.

Net income increases $20,000.

Stockholders' equity increases $20,000.

10)

Which of the following items is reported as an expense on the income statement?

Dividends declared.

Accounts payable.

Cost of goods sold.

Dividends paid.

To establish that a corporation's stock is a sound investment.