This document contains a series of multiple choice and true/false accounting questions covering topics like liquidity, profitability, owners' equity, balance sheets, net present value calculations, accounting equations, and the effects of business transactions. It also includes exercises to draw sample balance sheets and income statements reflecting various starting balances and business transactions for a company called X Co. over 8 actions or periods.

1. Question 1: Choose the correct answer
1. Liquidity may be defined as:
a. The ability to increase the value of retained earnings
b. The ability to pay the debts of the company as they fall due.
c. Being able to buy everything the company requires for cash.
d. Purchasing everything the company requires on credit.
2. Profitability may be defined as:
a. The ability to pay the debts of the company as they fall due.
b. The ability to increase the value of retained earnings.
c. Distributing dividends
d. Having excess cash
3. Owner's equity in a business may increase by:
a. Payments of cash to owners
b. Losses from unprofitable operation of the business
c. Earnings from profitable operation of the business.
d. Borrowing from a commercial bank.
4. A balance sheet is designed to show:
a. How much a business is worth?
b. The profitability of the business during the current year.
c. The assets, liabilities, and owners' equity in the business at the particular date.
d. The cost of replacing the assets and of paying off the liabilities at December 31.
5. Below are two potential investment alternatives:
Initial capital investment 180,000
Estimated useful life 3 years
Estimated annual cash inflow each year 80,000
Desired rate of return 10%
Assume straight-line depreciation in all computations, and ignore income taxes.
The net-present value in this investment is _____.
a. 18,948
b. (123,652)
c. 75,000
d. 186,518
Question 2: True or False
1. The gross profit rate is gross profit expressed as a percentage of net sales.

2. 2. ROE - return on equity - is measured by dividing net income by average number of
shares outstanding.
3. Working capital is the excess of current assets over current liabilities.
4. From a creditor's point of view, the lower the debt ratio, the safer the creditors’
position.
5. The inventory turnover rate indicates how quickly inventory sells.
Question 3: Complete
1. The basic accounting equation is Assets = Liabilities + __________
Question 4: Put circle on the correct answer
For each of the transactions in items 1 through 8, indicate the two (or more) effects on the
accounting equation of the business or company.
1. The owner invests personal cash in the business.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
2. The owner withdraws cash from the business for personal use.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
3. The company receives cash from a bank loan.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect

3. 4. The company repays the bank that had lent money to the company.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
5. The company purchases equipment with its cash.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
6. The owner contributes his/her personal truck to the business.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
7. The company purchases a significant amount of supplies on credit.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect
8. The company purchases land by paying half in cash and signing a note payable for the
other half.
Assets Liabilities Owner's (or Stockholders') Equity
Increase Increase Increase
Decrease Decrease Decrease
No Effect No Effect No Effect

4. 9. Which of the following will cause owner's equity to increase?
Expenses Owner Draws Revenue
10. The accounting equation should remain in balance because every transaction affects how
many accounts?
Only One Only Two Two or More
Question 5: Draw balance sheet and income statement
For each action for X co. below you should draw up a balance sheet and income statement that
reflect the following actions (transactions)
Action 1
X co. started business with 200,000 (common stock).
Action 2
X co. took a 5-year bond of 500,000 (coupon rate 10% - paid end of the year).
Action 3
X co. bought plant and equipment 200,000 cash.
Action 4
X co. bought goods in inventory for 150,000 (2/3 in cash)
Action 5
X co. sold the entire inventory goods for 300,000 (50% cash).
Action 6
X co. paid 50% in cash of the salaries (total salaries 50,000)
Action 7
X co. has paid 30,000 to the insurance co. in advance (prepaid expenses)
Action 8
X co. has a balance of accrued expenses of 10,000
Please note the following:
-Depreciation of the plant and equipment is 10% per year
-Taxes are 25% per year (paid next year)
Wish you best of luck