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111 Test Bank for Financial Accounting 9th Edition
by Harrison Mutiple Choice Questions - Page 1
When preparing accounting information, understand that:
1.

A) the auditors are primarily responsible for preparing the information.

2.

B) the cost of disclosure should not exceed the expected benefits to the
users.

3.

C) accounting information can be produced quickly and inexpensively.

4.

D) all information must be disclosed for a complete understanding of the
underlying economic facts.

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) historical cost principle.

2.

B) objectivity principle.

3.

C) reliability principle.

4.

D) stable dollar principle.

The type of accounting that makes projections to determine if a
company should build a new store is:
1.

A) financial accounting.

2.

B) business accounting.

3.

C) managerial accounting.

4.

D) projection accounting.

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.

Regarding financial statement elements:
1.

A) assets must provide immediate benefits to the company.

2.

B) stockholders' equity represents the "outsider claims" to the assets.

3.

C) merchandise inventory and dividends are assets of a company.

4.

D) revenues are inflows of resources that increase retained earnings.

Another way to state the accounting equation is:
1.

A) Assets = Liabilities + Paid-in Capital - Common Stock

2.

B) Assets = Liabilities + Retained Earnings

3.

C) Assets = Liabilities + Paid-in Capital + Retained Earnings

4.

D) Assets = Liabilities - Paid-in Capital - Dividends

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.

Owners of an LLC are called:
1.

A) partners.

2.

B) sole proprietors.

3.

C) members.

4.

D) stockholders.


The CEO of ABC Company owns a vacation home in Hawaii. ABC
owns a factory in Detroit where they are headquartered. Which of
these properties is considered an asset(s) of the business?
1.

A) Only the vacation home in Hawaii

2.

B) Only the factory in Detroit

3.

C) Both the vacation home in Hawaii and the factory in Detroit

4.

D) Neither the vacation home in Hawaii nor the factory in Detroit

Decision makers who use accounting include:
1.

A) the SEC

2.

B) investors.

3.

C) managers.

4.

D) all of the above.

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 important fact to remember when studying GAAP and IFRS is:
1.

A) if the U.S. adopts IFRS, the accounting information being taught currently
will all be outdated.

2.

B) there is no difference in way information is arranged on the balance sheet
and income statement if IFRS is adopted.

3.

C) newly issued U.S. accounting standards have conformed U.S. practices to
IFRS.

4.

D) there is no terminology difference between GAAP and IFRS.


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.

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) international accounting financial standards.

An entity that must pay its own income taxes is:
1.

A) proprietorship.

2.

B) partnership.

3.

C) limited-liability company.

4.

D) corporation.

The stable-monetary-unit assumption:
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.

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.

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) the outflow of resources that decrease common stock.

When dealing with the elements of the financial statements, it is
important to consider that:
1.

A) the current portion of long-term debt is the amount due within the next year
and must be disclosed separately.

2.

B) fixed assets are short-term assets the company plans on selling in the near
future.

3.

C) cost of goods sold is a component of paid-in capital.

4.

D) retained earnings is a long-term liability account.

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.

________ means that the accounting information for a company
must be prepared in such a way as to be capable of being
compared with information from other companies in the same


period and consistent with similar information for that company in
previous periods.
1.

A) Verifiability

2.

B) Timeliness

3.

C) Understandability

4.

D) Comparability

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.

Shareholders of a corporation:
1.

A) receive one vote for each share of stock they own.

2.

B) have unlimited liability.

3.

C) have mutual agency.

4.

D) receive dividends from the corporation without having to pay tax on the
distribution.

A construction company paid $80,000 cash for equipment used in
the business. At the time of purchase, the equipment had a list price
of $90,000. When the balance sheet was prepared, the value of the
equipment was $83,000. At what amount should the equipment be
recorded in the records of the company?
1.

A) $80,000

2.

B) $83,000

3.

C) $85,000


4.

D) $90,000

If a company prepares its financial statements three years after the
end of their accounting period, they have violated the qualitative
characteristic of :
1.

A) understandability.

2.

B) timeliness.

3.

C) verifiability.

4.

D) full disclosure.

Which of the following is a correct statement about GAAP and
IFRS?
1.

A) IFRS prefers valuing assets at historical cost while GAAP prefers using fair
value.

2.

B) IFRS is more "rules-based" than GAAP.

3.

C) The FASB and the IASB are working towards convergence of standards.

4.

D) The SEC will require all companies to use IFRS beginning in 2013.

Which of the following is a true statement about the characteristics
of partnerships?
1.

A) In a limited-liability partnership, a wayward partner can create a large
liability for the other partners.

2.

B) General partners have mutual agency and limited liability.

3.

C) Income and loss of the partnership "flows through" to the partners.

4.

D) The partnership agreement must be in writing.

In 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.

Which type of business organization transacts the most business
and is the largest in terms of assets, income, and number of
employees?
1.

A) Proprietorship.

2.

B) Partnership.

3.

C) Limited-liability company.

4.

D) Corporation.

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.

The assets of a company:
1.

A) must equal the liabilities of the company.

2.

B) include property, plant, and equipment and common stock.

3.

4.

C) represent economic resources that are expected to produce a future
benefit.
D) include merchandise inventory and accounts payable.

Accounting:
1.
2.

3.

A) measures business activities.
B) processes data into reports and communicates the data to decision
makers.
C) is often called the language of business.


4.

D) is all of the above.

Historical cost:
1.
2.

A) is determined for each asset on a yearly basis.
B) is equal to the amount of cash paid less the dollar value of all non-cash
consideration given in the exchange.

3.

C) is a verifiable measure that is relatively free from bias.

4.

D) is the amount that the business could sell the asset for.

The ________ is elected by the stockholders and is responsible for
setting policy and appointing officers.
1.

A) board of directors

2.

B) chief executive officer (CEO)

3.

C) chief financial officer (CFO)

4.

D) advisory council

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 fair market value.

3.

C) historical cost.

4.

D) recorded value.

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.

All of the following are true statements about the entity assumption
EXCEPT for:
1.

A) the entity assumption draws a sharp boundary around each entity.

2.

B) the transactions of the business cannot be mingled with the transactions of
the owner.

3.

C) the entity assumption ensures that the business will continue indefinitely.

4.

D) under the entity assumption, the entity is any organization that stands apart
as a separate economic unit

An important fact to consider when determining how to organize a
business is that:
1.

A) members of an LLC have unlimited liability and are taxed like members of
a partnership.

2.

B) for accounting purposes, a proprietorship is a distinct entity.

3.

C) the records of a partnership can include the partner's personal finances.

4.

D) the proprietor and the proprietorship are separate legal entities.

Verifiability means that the information:
1.

A) is timely.

2.

B) is understandable.

3.

C) must be capable of being checked for accuracy.

4.

D) is material and relevant.

111 Free Test Bank for Financial Accounting 9th Edition
by Harrison Mutiple Choice Questions - Page 2
Refer to Exhibit 1.3. Net income for ABC Company for the year
was:

1.

A) $83,000.

2.

B) $91,000.


3.

C) $115,000.

4.

D) $176,000.

Which of the following would appear on the balance sheet?
1.

A) Assets and operating cash flows

2.

B) Dividends and liabilities

3.

C) Assets and liabilities

4.

D) Owners' equity and revenues

At the end of the current accounting period, account balances were
as follows: Cash, $15,000; Accounts Receivable, $20,000;
Common Stock, $8,000; Retained Earnings, $14,000. Liabilities for
the period were:
1.

A) $13,000.

2.

B) $20,000.

3.

C) $27,000.

4.

D) $32,000.

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

A) a net profit.

2.

B) a net loss.

3.

C) a dividend.

4.

D) retained earnings.

When a company is determining their year end:
1.

A) it must be December 31 if they are a retail store.

2.

B) a calendar year can end at the end of any month.

3.

C) they may want to adopt a fiscal year that ends at the low point of their
operations.


4.

D) a fiscal year end ends on December 31.

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 statement(s) summarizes the revenues, gains, expenses,
and losses of an entity?
1.

A) Balance sheet

2.

B) Statement of cash flows and income statement

3.

C) Statement of retained earnings and statement of operations

4.

D) Income statement

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.

On the income statement:
1.

A) the top line is net income.

2.

B) all expenses must have the word "expenses" in their title.

3.

C) gains and liabilities are reported.

4.

D) amounts can be reported in millions of dollars to reduce clutter.


On January 1, 2010, total assets for Liftoff Technologies were
$125,000; on December 31, 2010, total assets were $145,000. On
January 1, 2010, total liabilities were $110,000; on December 31,
2010, total liabilities were $115,000. What is the amount of the
change and the direction of the change in Liftoff Technologies'
stockholders' equity for 2010?
1.

A) Decrease of $15,000.

2.

B) Increase of $15,000.

3.

C) Increase of $30,000.

4.

D) Decrease of $30,000.

Net income is computed as:
1.

A) revenues - expenses - dividends.

2.

B) revenues + expenses.

3.

C) revenues - expenses.

4.

D) revenues - expenses + dividends.

Refer to Exhibit 1.3. Total assets for ABC Company at the end of
the year were:
1.

A) $74,000.

2.

B) $99,000.

3.

C) $141,000.

4.

D) $149,000.

Which financial statement is dated at the moment in time when the
accounting period ends?
1.

A) Balance sheet

2.

B) Income statement

3.

C) Statement of retained earnings and income statement


4.

D) Statement of cash flows

Common stock:
1.

A) is issued to shareholders as evidence of their ownership.

2.

B) is only issued by large, international companies.

3.

C) is the basic component of retained earnings.

4.

D) represents the amount the company owes its shareholders.

Which of the following increases retained earnings?
1.

A) Net loss.

2.

B) Net income.

3.

C) Expenses.

4.

D) Dividends.

When analyzing a company's income statement, a fact to
remember is that:
1.

A) cost of sales is another term for gross profit.

2.

B) cost of goods sold is the major expense of merchandising entities.

3.

4.

C) companies are not allowed to offset items such as interest income and
interest expense against each other.
D) net sales is equal to sales revenue less cost of goods sold.

If an investor wants to know how much cash the company
generated and spent during the year, the main financial statement
they should look at is the:
1.

A) balance sheet.

2.

B) statement of retained earnings.

3.

C) income statement.

4.

D) statement of cash flows.


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.

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.

Proprietorships and partnerships:
1.

A) have the same equity accounts as a corporation.

2.

B) identify paid-in capital and common stock separately.

3.

C) use a single heading for their equity account called Capital.

4.

D) do not have equity accounts.

Receivables are classified as:
1.

A) increases in earnings.

2.

B) decreases in earnings.

3.

C) liabilities.

4.

D) assets.

Cost of goods sold:
1.

A) is considered a selling expense.

2.

B) is the direct cost of the product to the company.


3.

C) is classified as revenue on the income statement.

4.

D) is the same as gross profit.

Expenses of a business include:
1.

A) sales and cash equivalents.

2.

B) common stock and rent.

3.

C) cost of goods sold and salaries.

4.

D) retained earnings and utilities.

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.

Dividends:
1.

A) are paid by a business to shareholders as compensation for services.

2.

B) 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.

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.

When preparing a company's income statement:
1.

2.
3.

4.

A) commonly controlled corporations cannot combine all of their revenues and
expenses and report them as one total.
B) the statement is prepared as of a specific date.
C) the term "other" generally notes that the amount is not sufficiently material
to label it separately.
D) expenses are listed before revenues.

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.

Refer to Exhibit 1.3. Total liabilities for ABC Company at the end of
the year were:
1.

A) $12,000.

2.

B) $17,000.

3.

C) $33,000.

4.

D) $45,000.

Revenues were $210,000, expenses were $140,000, and cash
dividends were $45,000. What was the net income and the change
in retained earnings for the period?
1.

A) Net income was $70,000; the change in retained earnings was $70,000.

2.

B) Net income was $25,000; the change in retained earnings was $45,000.

3.

C) Net income was $70,000; the change in retained earnings was $25,000.


4.

D) Net income was $45,000; the change in retained earnings was $45,000.

An entity's equity consists of two accounts, Amy Jones, Capital, and
Mindy Lenz, Capital. This indicates the entity is a:
1.

A) proprietorship.

2.

B) corporation.

3.

C) not-for-profit.

4.

D) partnership.

On the income statement:
1.

A) selling, general and administrative expenses are the costs of operations
that are not directly related to merchandise purchases and occupancy.

2.

B) income tax expense will not be found on the income statement since

corporations do not pay taxes.

3.

C) net income is another term for income from continuing operations.

4.

D) selling, general and administrative expenses are shown before gross profit.

Net income:
1.

A) is calculated by subtracting total expenses and total dividends from total
revenues.

2.

B) occurs when total revenues are less than total expenses.

3.

C) is often referred to as the "bottom line" on an income statement.

4.

D) decreases total stockholders' equity.

The income statement:
1.

A) is not dated.

2.

B) must cover only a month in time.

3.

C) covers a defined period of time.

4.

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


All of the following will appear on the income statement EXCEPT
for:
1.

A) assets.

2.

B) expenses.

3.

C) gains.

4.

D) revenues.

The correct data flow from one financial statement to the next is:
1.

A) statement of retained earnings, income statement, balance sheet,
statement of cash flows.

2.

B) balance sheet, statement of retained earnings, income statement,
statement of cash flows.

3.

C) statement of retained earnings, income statement, statement of cash flows,
balance sheet.

4.

D) income statement, statement of retained earnings, balance sheet,
statement of cash flows.

111 Free Test Bank for Financial Accounting 9th Edition
by Harrison Mutiple Choice Questions - Page 3
A company sells travel mugs online for $9. They purchase the mugs
for $3 and charge the customers $1 for shipping and handling. Cost
of goods sold per mug is:

1.

A) $0.

2.

B) $1.

3.

C) $3.

4.

D) $9.

When classifying assets on the balance sheet:
1.

A) accounts receivable are reported at their net amount.


2.

B) accounts receivable are amounts a company expects to collect from a
party who has signed a promissory note to the company.

3.

C) prepaid expenses are considered long-term assets.

4.

D) money-market accounts are prepaid expenses.

With the statement of cash flows:
1.

A) cash payments are considered positive amounts.

2.

B) each category of cash flows either increases or decreases cash.

3.

C) operating activities must increase the company's cash balance.

4.

D) the beginning cash balance is reconciled to the ending balance of retained
earnings.

Notes payable (due in 60 days) would appear on the balance sheet
as a:
1.

A) current liability.

2.

B) current asset.

3.

C) long-term asset.

4.

D) long-term liability.

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 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.

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 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.

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.

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

A) Statement of retained earnings, statement of cash flows, and balance
sheet

2.

B) Statement of retained earnings and statement of cash flows

3.

C) Statement of retained earnings and income statement


4.

D) Statement of retained earnings and balance sheet

The ________ factor recognizes that while certain actions might be
both economically profitable and legal, they still may not be right.
1.

A) economic

2.

B) legal

3.

C) profitability

4.

D) ethical

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.

Regarding dividends:
1.

A) dividends must be paid on a yearly basis.

2.

B) the CEO of the corporation determines if a dividend will be paid.

3.

C) companies in a growth mode will pay large dividends to their shareholders.

4.

D) a corporation must have enough accumulated retained earnings and cash
to pay dividends.

On the statement of retained earnings:
1.

A) there will be a positive balance in retained earnings if historically expenses

have exceeded revenues.

2.

B) a deficit will result in retained earnings if historically, expenses have
exceeded revenues.

3.

C) any dividends paid during the year will increase retained earnings.


4.

D) a deficit in retained earnings indicates the company has no cash.

Which is the correct order for items to appear on the income
statement?
1.

A) Revenues, income from operations, gross profit

2.

B) Income before income taxes, operating expenses, gross profit

3.

C) Revenues, net income, operating expenses

4.

D) Gross profit, income from operations, net income

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?

When a company is purchasing long-term assets, this is a sign of
growth. This information can be obtained by examining:
1.

A) the equity section of the balance sheet.

2.

B) the revenues section of the income statement.

3.

C) the investing cash flows section of the statement of cash flows.

4.

D) the net income section of the statement of retained earnings.

Continuing negative cash flow from which of the following activities
can lead to bankruptcy?
1.

A) Equity activities

2.

B) Operating activities

3.

C) Financing activities

4.

D) Investing activities


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.

Under what category would cash collected from customers appear
on the statement of cash flows?
1.

A) As an operating activity

2.

B) As a financing activity

3.

C) As an investing activity

4.

D) As both an investing and financing activity

The most liquid of current assets, in order, are:
1.

A) accounts receivable, inventory, cash and cash equivalents.

2.

B) cash and cash equivalents, accounts receivable, marketable securities.

3.

C) cash and cash equivalents, marketable securities, accounts receivable.

4.

D) marketable securities, cash and cash equivalents, accounts receivable.

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.

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

A company's balance sheet:
1.

A) is dated for a period of time.

2.

B) has three main categories of assets.

3.

C) has two main categories of liabilities.

4.

D) lists liabilities before assets.

Generally, three factors influence business and accounting
decisions:
1.

A) operating, investing, and financing activities.

2.

B) assets, liabilities, and equity.

3.

C) economic, legal, and ethical.

4.

D) revenues, expenses, and dividends.

Liabilities are divided into two categories:
1.

A) current and payable.

2.

B) current and future.

3.

C) accounts payable and long-term.

4.

D) current and long-term.

Which of the following would be considered a financing activity that
decreases cash?
1.

A) The company pays a long-term loan.

2.

B) The company sells common stock.

3.

C) The company purchases a building.