1. You are the CEO of Fisher Corporation. You are very concerned with presenting the best financial picture possible to the owners of your company. Unfortunately, Fisher has a lawsuit pending at the end of the year, which could result in the company having to pay a large sum of money. On the bright side, Fisher also has business deal that might go through, which could result in the company making a large gain. The principle of conservatism would say that which of the following is true?
a. Fisher should not report the potential loss related to the lawsuit.
b. Fisher should report the possible gain from the business deal.
c. Fisher should report the potential liability it has related to the lawsuit.
d. Fisher should report the potential cash inflow it could receive from the business deal.
2. Henderson Inc. reports the following: assets of $500,000, liabilities of $350,000 and capital stock of $100,000. What is the balance in retained earnings?
3. Giles Corporation borrowed money from Midwest Bank during the year. Where would this event be reported on Giles’s statement of cash flows?
a. Operating activities
b. Investing activities
c. Financing activities
d. It would not be reported on the statement of cash flows.
4. You are considering investing in the stock of Mogul Corporation. On which of the following statements would you find information about what a company has to help it generate revenue in the future and what the company owes to others?
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
5. Which of the following is not a correct representation of the accounting equation?
a. Assets = Liabilities + Capital Stock + Retained Earnings
b. Assets – Liabilities = Owners’ Equity
c. Assets = Liabilities + Owners’ Equity
d. Assets + Liabilities = Owners’ Equity