Accounting basics questions

Question 1

Which of the following statements is correct?

a. The income statement provides a snapshot at one moment in time
b. The cash flow statement provides a snapshot at one moment in time
c. The cash flow statement shows the cash flows for the entire accounting period
d. The balance sheet shows the earnings for the entire accounting period

Question 2

What is the fundamental accounting equation?

a. Assets = liabilities
b. Increases in equity must equal increases in cash
c. Equity = liabilities + assets
d. Liabilities + equity = assets

Question 3

The income statement measures changes in:

a. Cash
b. Retained earnings
c. The number of clients a company has
d. None of the above

Question 4

Overleaf is the balance sheet of Chelsea at the beginning of the month. During the month
Chelsea has entered into the following transactions:
• Bought inventory for 340 and paid in cash
• Took out a bank loan amounting to 2,000. It is to be repaid in 5 years’ time
• Bought some equipment for 1,260 cash
• Received cash of 290 from customers and paid suppliers 225 in cash
• Paid taxes of 68.4

Show how these transactions would be recorded in the grid provided. When you have
recorded each transaction, redraft the new balance sheet.

Balance sheet Year 1 Redrafted BS

Cash 552.0
Accounts receivable 480.0
Inventories 504.0
Total current assets 1,536.0
Net PP&E 3,000.0
Total assets 4,536.0

Accounts payable 432.0

Taxes payable 74.4
Total current 506.4
liabilities
Long-term debt 0.0
Total liabilities 506.4

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Shareholders’ equity 4,029.6
Total liabilities and 4,536.0
equity

Transaction Recording of transaction

Bought inventory for 340 and
paid in cash
Took out a bank loan
amounting to 2,000. It is to be
repaid in 5 years’ time
Bought some equipment for
1,260 cash
Received cash of 290 from
customers and paid suppliers
225 in cash
Paid taxes of 68.4

Question 5

Chelsea also had the following transactions which you should record in the grid provided and
then redraft the balance sheet accordingly.
• Inventory which cost 326 was sold for 780 on credit
• Marketing expenses of 265 were paid for in cash
• Interest on the bank loan for the period was 30 paid for in cash
• Wages and salaries (paid in cash) amounted to 90
• Tax expense for the period (still unpaid) was 20

Transaction Recording of transaction

Inventory which cost 326 was
sold for 780 on credit
Marketing expenses of 265
were paid for in cash
Interest on the bank loan for
the period was 30 paid for in
cash
Wages and salaries (paid in
cash) amounted to 90
Tax expense for the period
(still unpaid) was 20

Of the shareholders’ equity given in the balance sheet, 1,000 is for capital and the remainder
is retained earnings.

Question 6

Using the information in the previous 2 questions, build the income statement for the period.
Make sure that your answer reconciles to the earnings number in the balance sheet. Use the
following template to help with your answer.

Chelsea’s income statement for the period

Sales
Operating costs

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Operating profit
Interest expense
Profit before tax
Tax expense
Net income / profit after tax

Beginning retained earnings

Net income for the period
Ending retained earnings

Question 7

Using the information in questions 4 and 5, build the cash flow statement. Make sure that
your answer reconciles to the cash number in the balance sheet. Use the following template
to help with your answer.

Chelsea’s cash flow statement for the period

Cash received from customers
Cash paid to suppliers
Cash paid to employees
Cash paid to bank for interest
Cash paid for taxes

Equipment purchased

Loan taken out

Net cash flow

Beginning cash
Net cash flow
Ending cash

Question 8

James Peterson set up a business selling carpets and made the following transactions in the
period. Show how each of these transactions will affect assets, liabilities and equity. Also,
build the income statement and balance sheet. Prior to setting up the business, there were
zero assets, liabilities and equity. Use the templates below to produce your answer.

Transaction Recording of transaction

He invested 100,000 in the equity
of the new company
He rented a shop for 10,000 per
year
He purchased 50,000 of carpet
inventory at the start of the year
with cash

He took out a bank loan of 50,000

at the beginning of the

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year
The bank charged interest at 5%
per year on the bank loan
He spent 12,000 on equipment for
the shop in cash
James made 200,000 in cash
sales costing 40,000
James paid utility bills of 5,000 in
cash
James paid himself a salary of
50,000 in cash
Assume no depreciation
The tax rate is 30% of profits
before tax

Carpet Cavern: Income statement

Sales
Cost of goods sold
Gross profit
Selling, general and
administrative
Operating profit
Interest expense
Profit before tax
Tax expense
Net income / profit after tax

Carpet Cavern: Balance sheet

Cash
Inventory
PP&E
Total assets

Debt
Common stock
Retained earnings
Total liabilities and equity

Question 9

Show how each of the transactions listed below affects assets, liabilities and equity, then
produce the resulting income statement and balance sheet. Use the opening balance sheet
and the templates provided below to prepare your answer.

Transaction Recording of transaction

Ben and Jerry bought milk for
150,000 on credit
Ben and Jerry bought a new
machine for 80,000 in
cash

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During the year they paid their
management 49,000
in cash
The bank charged 12% on
their debt during the year.
They paid in cash
During the year, Ben and Jerry
generated 200,890 in revenue.
10,000 was on credit and the
rest was in cash
Ben and Jerry’s sales cost
them 130,000
Ben and Jerry’s other
administrative costs were
10,890 paid in cash
Ben and Jerry paid dividends
of 1,000 in cash
Assume they recorded and
paid 3,851 of tax during
the year
Assume all the other accounts
stay the same

Ben and Jerry’s income statement

Revenues
Cost of goods sold
Gross profit
SG&A
Operating profit
Interest expense
Profit before tax
Tax expense
Net income / profit after tax

Ben and Jerry’s beginning balance sheet

Assets
Cash & equivalents 35,406
Accounts receivable 12,514
Inventory 12,616
Other current assets 7,527
Total current assets 68,063

Net PP&E 59,600

Investments 1,000
Other non-current assets 2,411
Total assets 131,074

Liabilities & equity

Accounts payable 16,592
Other current liabilities 448

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Total current liabilities 17,040

Long term debt 31,977

Other long-term liabilities 3,526
Total liabilities 52,543

Paid in capital 48,761

Retained earnings 29,770
Total equity 78,531
Total liabilities & equity 131,074

Ben and Jerry’s ending balance sheet

Assets
Cash & equivalents
Accounts receivable
Inventory
Other current assets
Total current assets

Net PP&E
Investments
Other non-current assets
Total assets

Liabilities & equity

Accounts payable
Other current liabilities
Total current liabilities

Long term debt

Other long-term liabilities
Total liabilities

Paid in capital
Retained earnings
Total equity
Total liabilities & equity