Chapter 7 Objective Questions
True/False
Indicate whether the statement is true or false.
____
1. A balance sheet reports financial information over a specific period of time.
____
2. The financial condition of a business refers to its financial strength.
____
3. Reporting in the same fiscal period the revenue earned and the expenses incurred to earn that revenue is an
application of the accounting concept Matching Expenses with Revenue.
____
4. All financial statements have four-line headings.
____
5. Amounts from a work sheet's Trial Balance columns are used in preparing the revenue section of an income
statement.
____
6. Amounts from a work sheet's Income Statement Debit column are used in preparing the expense section of an
income statement.
____
7. The formula for calculating net income is total revenue minus total expenses equals net income.
____
8. The net income calculated for the income statement and the net income on the work sheet must be the same.
____
9. On an income statement, double lines are ruled across both amount columns to indicate that debits equal
credits.
____ 10. For a service business, the revenue reported on an income statement includes components for total expenses
and net income.
____ 11. The formula for calculating the total expenses component percentage is: total expenses divided by total sales
equals total expenses component percentage.
____ 12. Information needed to prepare the assets section of the balance sheet is obtained from the work sheet's
Account Title column and the Balance Sheet Credit column.
____ 13. Information needed to prepare the liabilities section of a balance sheet is obtained from the work sheet's
Account Title column and the Balance Sheet Credit column.
____ 14. The current capital to be reported on a balance sheet is calculated as: the capital account balance plus net
income equals current capital.
____ 15. On a balance sheet, double lines are ruled across both amount columns to indicate that debits equal credits.
____ 16. Component percentages on an income statement are calculated by dividing sales and total expenses by net
income.
____ 17. A component percentage is the percentage relationship between one financial statement item and the total that
includes that item.
____ 18. The Adequate Disclosure accounting concept is applied when financial statements contain all information
necessary to understand a business's financial condition.
____ 19. An income statement reports information over a period of time, indicating the financial progress of a business
in earning a net income or a net loss.
____ 20. The Matching Expenses with Revenue accounting concept is applied when the revenue earned and the
expenses incurred to earn that revenue are reported in the same fiscal period.
____ 21. Information needed to prepare an income statement comes from the Trial Balance columns and the Income
Statement columns of a work sheet.
____ 22. The income statement for a service business has five sections: heading, revenue, expenses, net income or loss,
and capital.
____ 23. The work sheet is used to assist in preparing the revenue, expenses, and net income sections of an income
statement.
____ 24. Only revenue accounts and expense accounts are used in preparing the income statement.
____ 25. The net income on an income statement is verified by checking the balance sheet.
____ 26. Single lines ruled across an amount column of an income statement indicate that amounts are to be added.
____ 27. An amount written in parentheses on a financial statement indicates an estimate.
____ 28. A balance sheet reports financial information on a specific date and includes the assets, liabilities, and owner's
equity.
____ 29. A balance sheet reports information about the elements of the accounting equation.
____ 30. Double lines are ruled across the balance sheet columns to show that the column totals have been verified as
correct.
____ 31. The position of the total asset line is determined after the equities section is prepared.
____ 32. All companies should have a total expenses component percentage that is not more than 80.0 percent.
____ 33. When a business has two different sources of revenue, a separate income statement should be prepared for
each kind of revenue.
____ 34. The owner's capital amount reported on a balance sheet is calculated as: capital account balance plus drawing
account balance less net income.
____ 35. The owner's equity section of a balance sheet may report different kinds of details about owner's equity,
depending on the need of the business.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 36. Assuring that financial statements contain all information necessary to understand a business's financial
condition is an application of the accounting concept ____.
a. Adequate Disclosure
c. Objective Evidence
b. Going Concern
d. Accounting Period Cycle
____ 37. Preparing financial statements at the end of each monthly fiscal period is an application of the accounting
concept ____.
a. Adequate Disclosure
c. Objective Evidence
b. Going Concern
d. Accounting Period Cycle
____ 38. An income statement reports a business's financial ____.
a. condition over a specific period of time
c. condition on a specific date
b. progress over a specific period of time
d. progress on a specific date
____ 39. A balance sheet reports a business's financial ____.
a. condition over a specific period of time
c. condition on a specific date
b. progress over a specific period of time
d. progress on a specific date
____ 40. The sections of an income statement are ____.
____ 41.
____ 42.
____ 43.
____ 44.
____ 45.
____ 46.
____ 47.
____ 48.
____ 49.
____ 50.
a. assets, liabilities, and owner's equity
b. heading, revenue, expenses, and net income or net loss
c. assets, liabilities, and net income or net loss
d. assets, revenue, and net income or net loss
The date on a monthly income statement prepared on July 31 is written as ____.
a. For Month Ended July 31, 20-c. 20--, July 31
b. July 31, 20-d. none of the above
Information needed to prepare an income statement's revenue section is obtained from a work sheet's Account
Title column and ____.
a. Income Statement Debit column
c. Balance Sheet Debit column
b. Income Statement Credit column
d. Balance Sheet Credit column
Information needed to prepare an income statement's expense section is obtained from a work sheet's Account
Title column and ____.
a. Income Statement Debit column
c. Balance Sheet Debit column
b. Income Statement Credit column
d. Balance Sheet Credit column
The amount of net income calculated on an income statement is correct if ____.
a. it is the same as net income shown on the work sheet
b. debits equal credits
c. it is the same as the balance sheet
d. none of the above
The percentage relationship between one financial statement item and the total that includes that item is ____.
a. an adjustment
c. a component percentage
b. an endorsement
d. none of the above
The formula for calculating the total expenses component percentage is ____.
a. total expenses divided by total sales equals total expenses component percentage
b. total sales divided by total expenses equals total expenses component percentage
c. total sales minus total expenses divided by net income equals total expenses component
percentage
d. none of the above
The formula for calculating the net income component percentage is ____.
a. net income divided by total sales equals net income component percentage
b. total sales divided by total expenses equals net income component percentage
c. total sales minus total expenses divided by net income equals total net income percentage
d. none of the above
Information needed to prepare a balance sheet assets section is obtained from a work sheet's Account Title
column and ____.
a. Income Statement Debit column
c. Balance Sheet Debit column
b. Income Statement Credit column
d. Balance Sheet Credit column
Information needed to prepare a balance sheet liabilities section is obtained from a work sheet's Account Title
column and ____.
a. Income Statement Debit column
c. Balance Sheet Debit column
b. Income Statement Credit column
d. Balance Sheet Credit column
When preparing a balance sheet, the amount of owner's capital is obtained from ____.
a. the general ledger
b. the income statement
c. the work sheet's Balance Sheet Credit column
d. none of the above
Chapter 7 Objective Questions
Answer Section
TRUE/FALSE
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MULTIPLE CHOICE
36. ANS: A
37. ANS: D
38. ANS: B
PTS: 1
PTS: 1
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C
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C
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