Practice Problems

Complete these practice problems. Check your answers after you finish.



Indicate whether each of the following statements is true or false.

  1. The three forms of business organizations are single proprietorship, partnership, and trust. 
  2. The three types of business activity are service, merchandising, and manufacturing.
  3. The income statement shows the profitability of the company and is dated as of a particular date, such as 2010 December 31.
  4. The statement of retained earnings shows both the net income for the period and the beginning and ending balances of retained earnings.
  5. The balance sheet contains the same major headings as appear in the accounting equation.


Select the best answer for each of the following questions.

  1. The ending balance in retained earnings is shown in the:
  1. Income statement.
  2. Statement of retained earnings.
  3. Balance sheet.
  4. Both (b) and (c).

  1. Which of the following is not a correct form of the accounting equation?
  1. Assets = Equities.
  2. Assets = Liabilities + Stockholders' equity.
  3. Assets – Liabilities = Stockholders' equity.
  4. Assets + Stockholders' equity = Liabilities.

  1. Which of the following is not one of the five underlying assumptions or concepts mentioned in the chapter?
  1. Exchange-price concept.
  2. Inflation accounting concept.
  3. Business entity concept.
  4. Going-concern concept.

  1. When the stockholders invest cash in the business, what is the effect?
  1. Liabilities increase and stockholders' equity increases.
  2. Both assets and liabilities increase.
  3. Both assets and stockholders' equity increase.
  4. None of the above.

  1. When services are performed on account, what is the effect?
  1. Both cash and retained earnings decrease.
  2. Both cash and retained earnings increase.
  3. Both accounts receivable and retained earnings increase.
  4. Accounts payable increases and retained earnings decreases.