Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo

Multiple Choice

1.

D

3.

A

5.

B

7.

D

9.

B

11.

D

13.

B

15.

C

17.

C

Questions

1.

Income statement shows the financial performance of a business for a period of time; statement of owner’s equity shows the change in net worth of a business for a period of time; balance sheet shows the financial position of a business on a specific date; statement of cash flows shows the cash inflows and outflows of the business for a period of time.

3.

Both revenues and gains represent inflows to the business, making it more valuable. Revenues relate to the primary purpose of the business, while gains represent incidental or peripheral activities. This is important to stakeholders because revenues represent ongoing or permanent activities, while gains represent infrequent or transient activities. Stakeholders should focus on permanent earnings and put peripheral or incidental earnings into the proper context.

5.

Equity is the net worth of the business. It can also be thought of as the net assets (assets minus liabilities) of the business. Activities that affect equity include revenues, expenses, gains, losses, and investment by and distributions to owners.

7.

Both tangible and intangible assets have value to the company and can be bought, sold, or impaired; tangible assets have physical substance, while intangible assets do not.

9.

Assets = Liabilities + Owner’s Equity. Answers will vary and should include a combination of revenues/gains (increases), expenses/losses (decreases), investments (increases), and distributions (decreases). It is important to understand the following transactions/exchanges will not change equity: an asset for an asset, liability for liability, asset acquisitions by incurring liabilities, and asset reductions to reduce liabilities.

11.

Revenues and investments increase equity, while expenses and distributions decrease equity.

Citation/Attribution

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
Citation information

© Jul 16, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.