1. c. Correct. The balance sheet shows the assets, liabilities, and owners’ equity (financial position) at a specific date, a point in time. See page 153.

2. a. Correct. The income statement shows the revenues and expenses (results of operations) for a period of time, such as a month or year. See page 153.

3. b. Correct. The relationship of one financial statement with another is called articulation. Thus it is said that the financial statements articulate with each other. See pages 153-155.

4. d. Correct. The order is logical because the net income from the income statement is used in the statement of retained earnings and the amount of retained earnings from the statement of retained earnings is used in the balance sheet. See pages 153-155.

5. c. Correct. Retained earnings are the sum of all the net incomes (or losses) less any amounts the owner has withdrawn from the business since it began. See pages 154 and 71.

6. b. Correct. Net income is determined in the income statement, is included in the statement of retained earnings to determine the amount of ending retained earnings, and is used as the starting point in the statement of cash flows—indirect method. See pages 153-155.

7. b. Correct. If one month’s insurance expense is $200 and $4,800 was the insurance premium paid, then the life of the policy must be 24 months (two years). $4,800/$200 = 24 months. See pages 157-160.

8. c. Correct. If the computer has $500 of depreciation monthly and has a life of 36 months, the original cost must have been $18,000 ($500 x 36 = $18,000). See pages 157-160.

9. d. Correct. If only $19,000 of the $20,000 sales for the accounting period were collected that means that the other $1,000 went to accounts receivable. Thus accounts receivable should have increased from $1,500 to $2,500 during the accounting period. See pages 157-160.

10. a. Correct. If wages expense for the accounting period exceeded the amount paid by $500, then the wages payable liability must increase by $500. See pages 157-160.

11. b. Correct. Assets must equal liabilities plus owner’s equity. In this case $33,000 plus $47,000 equal $80,000 total assets. Liabilities and owner’s equity given are $12,000 plus $30,000 which equal $42,000. Therefore, long-term liabilities have to be $38,000 ($80,000 less $42,000). See pages 157-160.

12. c. Correct. Although a., b., and d. might also be true in certain cases, only c. represents the true meaning of net income in every case. To find out if the other answers are true for a given company, other statements need to be reviewed besides the income statement. See pages 157-160.