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109 Test Bank for Financial Accounting 8th Edition
Multiple Choice Questions-Page 1
Accountants follow guidelines for professional measurement and
disclosure of financial information called:
1.

A. IASB.

2.

B. GAAP.

3.

C. FASB.

4.

D. SEC.

For which form of business ownership are the owners of a business
legally distinct from the business?
1.

A. Corporation

2.

B. Partnership

3.

C. Proprietorship

4.

D. All of the above

The owners’ equity of any business is its:
1.

A. revenues minus expenses.

2.

B. assets minus liabilities.

3.

C. assets plus liabilities.

4.

D. paid-in capital plus assets.

The principle stating that assets acquired by the business should be
recorded at their actual cost on the date of purchase is the:
1.

A. cost principle.

2.

B. objectivity principle.

3.

C. reliability principle.


4.

D. stable dollar principle.

What type of accounting provides information for decision makers
outside the entity?
1.

A. Bookkeeping

2.

B. Managerial accounting.

3.

C. Internal auditing.

4.

D. Financial accounting.

All of the following are forms of business organizations EXCEPT for
the:
1.

A. proprietorship.

2.

B. limited liability partnership.

3.

C. limited proprietorship.

4.

D. limited liability company.

The Financial Accounting Standards Board is responsible for
establishing:
1.

A. the code of professional conduct for accountants.

2.

B. the Securities and Exchange Commission.

3.

C. generally accepted accounting principles.

4.

D. the American Institute of Certified Public Accountants.

The accounting assumption that states that the business, rather
than its owners, is the reporting unit is the:
1.

A. entity assumption.

2.

B. going concern assumption.

3.

C. stable-monetary-unit assumption.

4.

D. historical cost assumption.


Which of the following best describes a liability? Liabilities are:
1.

A. a form of paid-in capital.

2.

B. future economic benefits to which a company is entitled.

3.

C. debts payable to outsiders called creditors.

4.

D. economic obligations to owners to be paid at some future date by the
corporation.

Advantages of a corporation include:
1.

A. a single owner.

2.

B. the double taxation of distributed profits.

3.

C. limited liability of the stockholders.

4.

D. mutual agency.

An Oklahoma City business paid $15,000 cash for equipment used
in the business. At the time of purchase, the equipment had a list
price of $20,000. When the balance sheet was prepared, the value
of the equipment was $22,000. What is the relevant measure of the
value of the equipment?
1.

A. Historical cost, $15,000

2.

B. Fair market cost, $20,000

3.

C. Current market cost, $22,000

4.

D. $15,000 on the day of purchase, $22,000 on balance sheet date

Accounting information is subject to the constraints of:
1.

A. comparability and consistency.

2.

B. comparability and verifiability.

3.

C. materiality and cost.

4.

D. relevance and faithful representation.


The two main components of stockholders’ equity are:
1.

A. retained earnings and paid-in capital.

2.

B. assets and liabilities.

3.

C. paid-in capital and assets.

4.

D. net income and retained earnings.

The amount that stockholders have invested in a corporation is
called:
1.

A. retained earnings.

2.

B. investment.

3.

C. revenue.

4.

D. paid-in capital.

International financial reporting standards are set by the:
1.

A. IASB.

2.

B. GAAP.

3.

C. FASB.

4.

D. SEC.

A partnership:
1.

A. is a taxpaying entity.

2.

B. is not a distinct entity, separate from its owners for accounting purposes.

3.

C. has mutual agency.

4.

D. has limited liability for the partners.

When information is important enough to the informed user, so that,
if it was omitted or erroneous, it would make a difference in the
user’s decision, it is:
1.

A. comparable.


2.

B. material

3.

C. timely.

4.

D. understandable.

The accounting equation can be stated as:
1.

A. Assets + Stockholders’ Equity = Liabilities.

2.

B. Assets –Liabilities = Stockholders’ Equity.

3.

C. Assets = Liabilities - Stockholders’ Equity.

4.

D. Assets – Stockholders’ Equity + Liabilities = Zero.

Characteristics of a sole proprietor include:
1.

A. multiple owners.

2.

B. limited personal liability for all business debts.

3.

C. a distinct entity, separate from its owner for accounting purposes.

4.

D. formation under state law.

Financial statements are:
1.

A. standard documents issued by outside consultants who are hired to
analyze key operations of the business in financial terms.

2.

B. the business documents that companies use to report the results of their
financial activities to various user groups.

3.

C. reports created by management that states it is responsible for the acts of
the corporation.

4.

D. the mechanical part of accounting.

Who ultimately controls a corporation?
1.

A. Board of Directors

2.

B. The Chief Executive Officer (CEO.

3.

C. The stockholders


4.

D. The President

The relevant measure of the value of the assets of a company that
is going out of business is the:
1.

A. book value.

2.

B. current market value.

3.

C. historical cost.

4.

D. recorded value.

Management accounting:
1.

A. includes information such as budgets and forecasts.

2.

B. is used to make strategic decisions for the entity.

3.

C. must be relevant to decision makers within the entity.

4.

D. is all of the above.

Accounting:
1.
2.

A. measures business activities.
B. processes data into reports and communicates the data to decision
makers.

3.

C. is often called the language of business.

4.

D. is all of the above.

All of the following are characteristics of useful accounting
information EXCEPT:
1.

A. comparability.

2.

B. timeliness

3.

C. informative.

4.

D. verifiability.

Examples of liabilities include:


1.

A. accounts payable and accounts receivable.

2.

B. accounts payable and land.

3.

C. investments and owners’ equity.

4.

D. accounts payable and long-term debt.

Owners of an LLC are called:
1.

A. partners.

2.

B. sole proprietors.

3.

C. members.

4.

D. stockholders.

The two types of accounting are:
1.

A. profit and nonprofit.

2.

B. financial and managerial.

3.

C. internal and external.

4.

D. bookkeeping and decision-oriented.

Which of the following is NOT an asset?
1.

A. Inventory

2.

B. Accounts payable

3.

C. Accounts receivable

4.

D. Cash

The CEO of a business owns a residence in Flagstaff. The
company the CEO works for owns a factory in Chandler. Which of
these properties is considered an asset(s. of the business?
1.

A. The Flagstaff residence only

2.

B. The Chandler factory only


3.

C. Both the Flagstaff and Chandler properties

4.

D. Neither the Flagstaff nor Chandler properties

The economic resources of a business that are expected to
produce a benefit in the future are:
1.

A. liabilities.

2.

B. assets.

3.

C. owners’ equity.

4.

D. expenses.

The FASB:
1.

A. is working towards a convergence of standards with the IASB.

2.

B. will not accept IASB rules.

3.

C. does not want US companies to adopt IFRS standards.

4.

D. feels that the global use of IFRS will significantly increase costs of doing
global business.

An entity that is organized according to state law and in which
ownership units are called stock is a:
1.

A. proprietorship.

2.

B. corporation.

3.

C. partnership.

4.

D. limited liability company.

The owners’ interest in the assets of a corporation is known as:
1.

A. common stock.

2.

B. stockholders’ equity.

3.

C. long-term assets.

4.

D. operating expenses.


The stable-monetary-unit assumption of accounting:
1.

A. ensures that accounting records and statements are based on the most
reliable data available.

2.

B. holds that the entity will remain in operation for the foreseeable future.

3.

C. maintains that each organization or section of an organization stands apart
from other organizations and individuals.

4.

D. enables accountants to ignore the effect of inflation in the accounting

records.

The acronym GAAP stands for:
1.

A. generally acceptable authorized pronouncements.

2.

B. government authorized accountant principles.

3.

C. generally accepted accounting principles.

4.

D. government audited accounting pronouncements.

An office building is appraised for $250,000 and offered for sale at
$260,000. The buyer pays $245,000 for the building. The building
should be recorded on the books of the buyer at:
1.

A. $250,000.

2.

B. $260,000.

3.

C. $245,000.

4.

D. some other amount.

For accounting purposes, the business entity should be considered
separate from its owners if the business is organized as a:
1.

A. proprietorship.

2.

B. corporation.

3.

C. partnership.

4.

D. any of the above.


The continuity (going-concern. assumption of accounting:
1.

A. enables accountants to ignore the effect of inflation in the accounting
records.

2.

B. holds that the entity will remain in operation long enough to use its existing
assets.

3.

C. maintains that each organization, or section of an organization, stands
apart from other organizations and individuals.

4.

D. ensures that accounting records and statements are based on the most
reliable data available.

To be useful, accounting information must have the fundamental
qualitative characteristics of:
1.

A. comparability and relevance.

2.

B. relevance and faithful representation.

3.

C. materiality and understandability.

4.

D. faithful representation and timeliness.

109 Free Test Bank for Financial Accounting 8th Edition
by Harrison Multiple Choice Questions-Page 2
The balance sheet is also known as the:
1.

A. statement of profit and loss.

2.

B. operating statement.

3.

C. assets statement.

4.

D. statement of financial position.

Which of the following must be added to beginning Retained
Earnings to compute ending Retained Earnings?
1.

A. Net income

2.

B. Expenses


3.

C. Dividends

4.

D. All of the above

Cash dividends:
1.

A. decrease revenue on the income statement.

2.

B. decrease retained earnings on the statement of retained earnings.

3.

C. increase expenses on the income statement.

4.

D. decrease operating activities on the statement of cash flows.

A potential investor interested in evaluating a company’s financial
earning performance for the current period would probably examine
which of the following financial statements?
1.

A. Balance Sheet only

2.

B. Income Statement only

3.

C. Statement of Cash Flows and Income Statement

4.

D. Statement of Retained Earnings and Balance Sheet

Which of the following financial statements shows the net increase
or decrease in cash during the period?
1.

A. Balance Sheet only

2.

B. Statement of Operations

3.

C. Statement of Retained Earnings and Balance Sheet

4.

D. Statement of Cash Flows

Revenues are:
1.

A. decreases in assets resulting from delivering goods or services to
customers.

2.

B. increases in liabilities resulting from delivering goods or services to
customers.


3.

C. increases in retained earnings resulting from delivering goods or services
to customers.

4.

D. decreases in retained earnings resulting from delivering goods or services
to customers.

Retained earnings is increased by:
1.

A. net income.

2.

B. net loss.

3.

C. dividends.

4.

D. expenses.

The major types of transactions that affect retained earnings are:
1.

A. paid-in capital and common stock.

2.

B. assets and liabilities.

3.

C. revenues, expenses, and dividends.

4.

D. revenues and liabilities.

Net income is computed as:
1.

A. revenues – expenses – dividends.

2.

B. revenues + expenses.

3.

C. revenues – expenses.

4.

D. revenues – expenses + dividends.

The portion of net income that the company has kept over a period
of years is called:
1.

A. common stock.

2.

B. retained earnings.

3.

C. revenue.

4.

D. gross profit.


A corporation’s paid-in capital includes:
1.

A. revenues and expenses.

2.

B. assets and liabilities.

3.

C. common stock.

4.

D. net income.

Gains and losses appear on which of the financial statements listed
below?
1.

A. Balance Sheet

2.

B. Income Statement

3.

C. Statement of Cash Flows

4.

D. Statement of Retained Earnings

Common stock appears on:
1.

A. the Balance Sheet.

2.

B. the Income Statement.

3.

C. the Statement of Cash Flows and the Statement of Retained Earnings.

4.

D. none of the above.

At the beginning of the period, assets were $490,000 and
stockholders’ equity was $240,000. During the year, assets
increased by $60,000, liabilities increased by $40,000, and
stockholders’ equity increased by $20,000. Beginning liabilities
must have been:
1.

A. $230,000.

2.

B. $250,000.

3.

C. $280,000.

4.

D. $300,000.


Stockholders’ equity for Commerce Corporation on January 1, 2010
and December 31, 2010 were $60,000 and $75,000, respectively.
Assets on January 1, 2010 and December 31, 2010 were $115,000
and $105,000, respectively. Liabilities on January 1, 2010 were
$55,000. What is the amount of liabilities on December 31, 2010?
1.

A. $40,000

2.

B. $15,000

3.

C. $30,000

4.

D. The amount is indeterminable from the given information.

When total expenses exceed total revenues, the result is a:
1.

A. net profit.

2.

B. net loss.

3.

C. dividend.

4.

D. net earnings.

An investor wishing to assess a company’s overall financial position
at the end of the period would probably examine the:
1.

A. Statement of Cash Flows and the Income Statement.

2.

B. Income Statement only

3.

C. Balance Sheet.

4.

D. Statement of Retained Earnings.

An example of a selling, general, and administrative expense is:
1.

A. cost of goods sold.

2.

B. sales.

3.

C. sales commissions paid to employees.

4.

D. interest expense.


Dividends appear on:
1.

A. the Statement of Retained Earnings.

2.

B. both the Statement of Retained Earnings and the Income Statement.

3.

C. the Income Statement.

4.

D. the Balance Sheet.

A retail store sells t-shirts for $85 and purchases them for $60. The
store’s cost of goods sold would be:
1.

A. $25.

2.

B. $85.

3.

C. $60.

4.

D. none of the above.

Assets appear on:
1.

A. the Balance Sheet.

2.

B. the Income Statement.

3.

C. the Statement of Retained Earnings.

4.

D. both the Balance Sheet and the Statement of Retained Earnings.

The statement that reports revenues and expenses for the period is
the:
1.

A. Statement of Retained Earnings.

2.

B. Balance Sheet.

3.

C. Statement of Cash Flows.

4.

D. Income Statement.

If assets increase $210,000 during a given period and liabilities
increase $65,000 during the same period, stockholders’ equity
must:


1.

A. increase $145,000.

2.

B. decrease $275,000.

3.

C. decrease $145,000.

4.

D. increase $275,000.

Net income is:
1.
2.

3.
4.

A. added to assets on the balance sheet.
B. deducted from beginning retained earnings on the retained earnings
statement.
C. added to beginning retained earnings on the retained earnings statement.
D. deducted from ending retained earnings on the retained earnings
statement.

Which statement(s. summarizes the revenues and expenses of an
entity?
1.

A. Balance Sheet only

2.

B. Statement of Cash Flows and Income Statement

3.

C. Statement of Retained Earnings and Statement of Operations

4.

D. Income Statement

Payables are classified as:
1.

A. increases in earnings.

2.

B. decreases in earnings.

3.

C. liabilities.

4.

D. assets.

A company sells its product for $100. The cost of the product to the
company is $60. Selling expenses are $15. Cost of goods sold is:

1.

A. $100.


2.

B. $60.

3.

C. $40.

4.

D. $75.

The income statement:
1.
2.

A. is not dated.
B. may cover a period of time or only one day in time, like a snapshot
photograph.

3.

C. covers a defined period of time.

4.

D. reports the results of operations since the inception of the business.

The ending balance in Retained Earnings appears on the:
1.

A. Balance Sheet only.

2.

B. Balance Sheet and Statement of Retained Earnings.

3.

C. Statement of Retained Earnings only.

4.

D. Income Statement and Statement of Cash Flows.

The heading John Smith, Capital, indicates the owners’ equity of a:
1.

A. proprietorship.

2.

B. corporation.

3.

C. not-for-profit.

4.

D. regulatory body.

Receivables are classified as:
1.

A. increases in earnings.

2.

B. decreases in earnings.

3.

C. liabilities.

4.

D. assets.


A net loss occurs when:
1.

A. not enough cash exists.

2.

B. total revenues exceed total expenses.

3.

C. total expenses exceed total revenues.

4.

D. total revenues and dividends exceed total expenses.

A company’s gross profit for the period is reported on the:
1.

A. Balance Sheet.

2.

B. Income Statement.

3.

C. Statement of Cash Flows.

4.

D. Statement of Retained Earnings.

Cost of goods sold appears on the:

1.

A. Statement of Retained Earnings as an addition to beginning retained
earnings.

2.

B. Income Statement as a deduction from sales.

3.

C. Balance Sheet as a deduction from sales.

4.

D. Income Statement as a deduction from gross profit.

Expenses are:
1.

A. increases in liabilities resulting from purchasing assets.

2.

B. increases in assets resulting from operations.

3.

C. increases in retained earnings resulting from operations.

4.

D. decreases in retained earnings resulting from operations.

At the end of the current accounting period, account balances were
as follows: Cash, $180,000; Accounts Receivable, $75,000;
Common Stock, $20,000; Retained Earnings, $65,000. Liabilities for
the period were:


1.

A. $ 70,000.

2.

B. $170,000.

3.

C. $190,000.

4.

D. $210,000.

The sum of "outsider claims" plus "insider claims" equals:
1.

A. net income.

2.

B. total liabilities.

3.

C. total assets.

4.

D. total stockholders’ equity.

The income statement presents a summary of the:
1.

A. cash inflows and outflows of an entity.

2.

B. assets and liabilities of an entity.

3.

C. revenues and expenses of an entity for a specific time period.

4.

D. changes that occurred in the stockholders’ equity of an entity.

Which financial statement provides a "snapshot photo" of one
moment in time for the whole entity?
1.

A. Balance Sheet only

2.

B. Income Statement only

3.

C. Statement of Retained Earnings and Income Statement

4.

D. Statement of Cash Flows only

Dividends:
1.

A. are expenses.

2.

B. always affect net income.


3.

C. are distributions to stockholders of assets (usually cash. generated by net
income.

4.

D. are distributions to stockholders of assets (usually cash. generated by a
favorable balance in retained earnings.

109 Free Test Bank for Financial Accounting 8th Edition
by Harrison Multiple Choice Questions-Page 3
The main source of cash from its main business comes from:
1.

A. current assets on the balance sheet.

2.

B. operating activities on the statement of cash flows.

3.

C. financing activities on the statement of cash flows.

4.

D. investing activities on the statement of cash flows.

Retained earnings appears on which of the following financial
statements?
1.

A. Statement of Retained Earnings, Statement of Cash Flows, and Balance
Sheet, but not the Income Statement

2.

B. Statement of Retained Earnings, Statement of Cash Flows, and Income
Statement, but not the Balance Sheet

3.

C. Statement of Retained Earnings and Statement of Cash Flows, but not the
Income Statement or Balance Sheet

4.

D. Statement of Retained Earnings and Balance Sheet, but not the Income
Statement or Statement of Cash Flows

Where would cash received from the sale of stock appear on the
statement of cash flows?
1.

A. In the operating activity section

2.

B. In the non-cash financing activity section

3.

C. In the investing activity section

4.

D. In the financing activity section


Income taxes owed to the federal government would be classified
as a(n.:
1.

A. expense on the Income Statement.

2.

B. financing activity on the Statement of Cash Flows.

3.

C. current asset on the Balance Sheet.

4.

D. current liability on the Balance Sheet.

Accumulated depreciation is normally associated with which asset
on the Balance Sheet?
1.

A. Inventory

2.

B. Accounts receivable

3.

C. Land

4.

D. Property, plant and equipment

The amount of net income shown on the income statement also
appears on the:
1.

A. balance sheet and operations statement.

2.

B. statement of assets.

3.

C. statement of financial position.

4.

D. statement of retained earnings.

What is the proper order for the categories of the statement of cash
flows?
1.

A. Financing activities, investing activities, and operating activities

2.

B. Operating activities, investing activities, and financing activities

3.

C. Operating activities, financing activities, and investing activities

4.

D. Investing activities, financing activities, and operating activities

Which of the following is a component of stockholders’ equity?


1.

A. Retained earnings

2.

B. Notes payable

3.

C. Cash

4.

D. Fixed assets

Notes payable (due in 60 days. would appear as a:
1.

A. current liability on the Balance Sheet.

2.

B. current asset on the Balance Sheet.

3.

C. long-term asset on the Balance Sheet.

4.

D. long-term liability on the Balance Sheet.

In relation to the cash flow statement, purchases and sales of longterm assets are examples of:
1.

A. investing activities.

2.

B. accrual activities.

3.

C. financing activities.

4.

D. operating activities.

Assets are generally classified as:
1.

A. producing assets and consumable assets.

2.

B. current assets and producing assets.

3.

C. current assets and long-term assets.

4.

D. long-term assets and consumable assets.

Which financial statement must be prepared before the others?
1.

A. Statement of Cash Flows

2.

B. Income Statement

3.

C. Balance Sheet


4.

D. Statement of Retained Earnings

Notes receivable due in 60 days would be classified as a:
1.

A. current liability on the Balance Sheet.

2.

B. current asset on the Balance Sheet.

3.

C. long-term asset on the Balance Sheet.

4.

D. long-term liability on the Balance Sheet.

Which of the following questions should be asked in making an
ethical analysis?
1.

A. Which option results in treating others as I would want to be treated?

2.

B. Which options are the most honest, open, and truthful?

3.

4.

C. Which options create the greatest good for the greatest number of
stakeholders?
D. All of the above questions should be considered.

The decision framework for making ethical judgments does NOT
consider the following question?
1.

A. What is the issue?

2.

B. What are the alternatives?

3.

C. What alternative maximizes profit?

4.

D. Who are the stakeholders?

Current assets are assets expected to be converted to cash, sold,
or consumed within the next:
1.

A. 12 months or within the business’s normal operating cycle if longer than a
year.

2.

B. 12 months or within the business’s normal operating cycle if less than a
year.

3.

C. 6 months.


4.

D. 24 months.

How would the issuance of stock for cash be classified on the
Statement of Cash Flows?
1.

A. As an investing activity

2.

B. As a financing activity

3.

C. As an operating activity

4.

D. As a current asset on the balance sheet

An investor who wished to answer the question, "Can the company
sell its products?" should investigate the:
1.

A. operating activities section of the cash flow statement.

2.

B. current and projected inventory levels.

3.

C. sales revenue trends and projected sales.

4.

D. net income for the current period and projected net income for the next
period.

The income statement is prepared to determine:
1.

A. the change in cash due to results of operations.

2.

B. the change in retained earnings due to the results of operations.

3.

C. the change in assets and liabilities due to the results of operations.

4.

D. all of the above.

The Statement of Cash Flows is divided into which three
categories?
1.

A. Operating, investing, and financing activities

2.

B. Planning, executing, and evaluating activities

3.

C. Increasing, decreasing, and non-cash activities

4.

D. Developing, producing, and marketing activities


Equipment would appear on the:
1.

A. Balance Sheet with the long-term assets.

2.

B. Income Statement with the revenues.

3.

C. Income Statement with the operating expenses.

4.

D. Balance Sheet with the current assets.

The balance sheet reports information about:
1.

A. revenues, expenses, and equity.

2.

B. liabilities, equity, and expenses.

3.

C. assets, revenues, and liabilities.

4.

D. assets, liabilities, and owners’ equity.

Stockholders’ equity decreases as a result of:
1.

A. owner investments.

2.

B. a net loss during the period.

3.

C. a net income during the period.

4.

D. both A and C.

Accounts receivable would appear on the:
1.

A. Balance Sheet with the current liabilities.

2.

B. Balance Sheet with the current assets.

3.

C. Income Statement with the revenues.

4.

D. Statement of Retained Earnings with the net income.

An investor who wished to answer the question, "Can the company
pay its current liabilities?" should investigate:
1.

A. the financing activities section of the cash flow statement.

2.

B. the current assets and current liabilities on the balance sheet.