1. Which of the following statements is correct? A. Assets on the balance sheet

Question

1. Which of the following statements is correct? A. Assets on the balance sheet include retained earnings. B. Retained earnings include contributed capital. C. The balance sheet equation states that assets equal contributed capital. D. A corporation's net income does not necessarily equal its cash flow from operatic 2. Which of the following arithmetic formulas is the expanded accounting equation? A. Assets + Revenues-Expenses = Liabilities + Owner, capital-Owner, withdraw B. Assets Liabilities+ Owner, capital - Owner, withdrawals+ Revenues- Expens C. Assets + Liabilities + Owner, capital Owner, withdrawals+ Revenues - Expen D. Assets + Liabilities Owner, capital - Owner, withdrawals+ Revenues - Expens

Explanation / Answer

Answers

The correct answer is Option ‘D’: A corporation’s Net Income does not necessarily equals its Cash flows from Operating activities.

This is because Net Income of corporation is calculated on the basis of accrual method of accounting where revenues and expenses are recorded when they are earned or incurred; While cash flow from operating activities is prepared on Cash basis, where only inflow and outflow of CASH is calculated.

Basic Accounting Equation is: ASSETS = LIABILITIES + EQUITY

If the above is expanded, it becomes:

Assets = Liabilities + (Capital + Net Income), or
Assets = Liabilities + [(Owner’s Capital – Owner’s Withdrawals) + (Revenues – Expenses)]

Hence, the correct answer is Option ‘B’

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