Answer these financial accounting multiple-choice questions about net income, owner’s equity, and cash account balances: (1) Mofoo’s Computer Repair Shop revenues $500,000, expenses $300,000, drawings $50,000, what is net income? A) $100,000 B) $150,000 C) $200,000 D) $250,000 (2) Black Keys Company beginning owner’s equity $280,000, revenues $375,000, expenses $285,000, drawings $20,000, what is ending owner’s equity? A) $280,000 B) $340,000 C) $370,000 D) $400,000 (3) Cash account total debits $1,200 and total credits $800, what balance? A) $800 credit B) $1,200 debit C) $400 debit D) $400 credit (4) Alligator Industries beginning owner’s equity $150,000, net loss $30,000, drawings $15,000, what is ending owner’s equity? A) $105,000 B) $120,000 C) $135,000 D) $165,000

What you are being tested on

These questions use the basic accounting relationships for profit and for owner’s equity. The trick is to separate (a) net income, which is just revenues minus expenses, from (b) changes in owner’s equity, which also includes owner drawings.

(1) Compute net income (drawings do not affect net income)

Net income is: $$\text{Net income} = \text{Revenues} - \text{Expenses}$$ So, $$\text{Net income} = 500{,}000 - 300{,}000 = 200{,}000$$ Drawings of $50,000 reduce owner’s equity, not net income. So the correct choice is C) $200,000.

(2) Update ending owner’s equity (beginning + net income - drawings)

First find net income: $$\text{Net income} = 375{,}000 - 285{,}000 = 90{,}000$$ Then update owner’s equity: $$\text{Ending equity} = 280{,}000 + 90{,}000 - 20{,}000 = 350{,}000$$ So the correct computed ending owner’s equity is $350,000, which means none of the answer choices (A-D) is correct.

(3) Determine the cash account balance from total debits and credits

For an asset like Cash, debits increase and credits decrease. The ending balance equals total debits minus total credits: $$\text{Cash balance} = 1{,}200 - 800 = 400$$ Because debits are larger, it is a $400 debit balance**, so the correct choice is **C) $400 debit balance.

(4) Apply net loss and drawings to owner’s equity

A net loss decreases equity, and drawings also decrease equity: $$\text{Ending equity} = 150{,}000 - 30{,}000 - 15{,}000 = 105{,}000$$ So the correct choice is A) $105,000.

Quick check summary

• (1) $200,000 (C)
• (2) $350,000 (not listed)
• (3) $400 debit (C)
• (4) $105,000 (A)