125 test bank for financial and managerial accounting 2nd edition

125 Test Bank for Financial and Managerial Accounting
2nd Edition

True - False Questions
The accounting equation only represents the relationship between assets and
liabilities.
1.

True

2.

False

By looking at a Statement of Retained Earnings, you can evaluate the effect
that paying dividends has on the ending balance in stockholders’ equity.
1.

True

2.

False

The AICPA's Code of Professional Conduct for Accountants provides guidance
to CPAs in the performance of their work.
1.

True

2.

False

In an LLC, the business, not the owners, are responsible for the corporation’s
debts.
1.

True

2.

False


Accounting is "the language of business."
1.

True

2.

False

Accounting is the information system that measures business activity,
processes the data into reports, and communicates the results to decisions
makers.
1.

True

2.

False

Generally accepted auditing standards are the rules that govern public
accounting information.
1.

True

2.

False

Managerial accounting focuses on information for decision makers outside the
company.
1.

True

2.

False

Business owners use accounting information to set goals, evaluate progress
toward those goals, and take corrective action when needed.
1.

True

2.

False


Most companies set standards of ethical conduct for their employees.
1.

True

2.

False

Many liabilities have the word "receivable" in their titles.
1.

True

2.

False

8A business owner starts a new business and invests $6,000. This transaction
results in an increase in the corporation’s liabilities.
1.

True

2.

False

Partnerships are the most common and numerous type of business
organization.
1.

True

2.

False

Outside investors often use accounting information to decide whether or not to
invest in a business.
1.

True

2.

False


Multiple Choice Questions - Page 1
There are more __________ than any other form of business organization.
1.

A) partnerships

2.

B) sole proprietorships

3.

C) corporations

4.

D) limited liability partnerships

Accounting is the information system that provides information to various
users. This process includes:
1.

A) compiling the data into reports.

2.

B) measuring business activity.

3.

C) communicating the results to decisions makers.

4.

D) all of the above.

Caleb Brown has been the sole owner of a bicycle sales and repair shop for
many years. Which of the following business types would best protect Caleb's
personal assets from product liability exposure?
1.

A) Partnership

2.

B) Limited liability company

3.

C) Proprietorship

4.

D) Limited liability partnership


A limited liability partnership possesses which of the following
characteristics?
1.

A) A limited liability partnership is an "artificial person" in the eyes of the law.

2.

B) If a limited liability partnership cannot pay its debts, lenders cannot take the owners'
personal assets to satisfy the obligations.

3.

C) A limited liability partnership joins two or more individuals as co-owners.

4.

D) All of the above are true.

Accounting information may be generated for a variety of purposes. The key
products of accounting are:
1.

A) financial statements.

2.

B) remittance advices.

3.

C) spreadsheets.

4.

D) work sheets.

Dylan Chase is a CPA and one of the tax partners in a CPA practice. One of
Dylan's partners sometimes takes a very aggressive position when auditing
clients. Which of the following business types would protect Dylan's personal

assets from malpractice liability for his partner’s aggressive auditing tactics?
1.

A) Limited liability partnership

2.

B) Partnership

3.

C) Limited liability company

4.

D) Proprietorship


Which of the following is a licensed accountant who serves the general public
rather than an accountant who serves one particular company?
1.

A) CPA

2.

B) CMA

3.

C) SEC

4.

D) FASB

The primary objective of financial reporting is to provide information useful for
making investment and lending decisions. To be useful, information must
possess certain characteristics. Which of the following is NOT one of the basic
characteristics that financial statements must possess to be useful?
1.

A) Reliability

2.

B) A stockholders’ equity section

3.

C) Relevance

4.

D) Comparability

Which of the following is most likely to be a user of information in a managerial
accounting setting?
1.

A) Potential investors

2.

B) Creditors

3.

C) Customers

4.

D) Department heads


A corporation possesses all but one of the following characteristics. Which of
the following is NOT a characteristic of a corporation?
1.

A) If a corporation cannot pay its debts, lenders can take the owners' personal assets to
satisfy the obligations.

2.

B) A corporation is an "artificial person" in the eyes of the law.

3.

C) Ownership is divided into individual shares.

4.

D) A corporation is owned by shareholders or stockholders.

Which financial statement is defined as reporting the inflows and outflows of
cash in a corporation?
1.

A) Income statement

2.

B) Statement of retained earnings

3.

C) Balance sheet

4.

D) Statement of cash flows

There are relatively few types of revenue. Which of the following in NOT a type
of revenue?
1.

A) Dividends paid to stockholders

2.

B) Service

3.

C) Interest

4.

D) Sales

Which of the following statements best describes managerial accounting?
1.

A) Managerial accounting focuses on information for internal decision making.


2.

B) Managerial accounting focuses on outside investors and lenders that are not part of
day-to-day management.

3.

C) Managerial accounting provides information for the public.

4.

D) None of these statements is true.

The principles called GAAP are established by the:

1.

A) SEC.

2.

B) AICPA.

3.

C) FASB.

4.

D) IRS.

In an LLC, who is responsible for the company’s debts?
1.

A) The company itself

2.

B) The partners

3.

C) The individual investors

4.

D) The proprietor

An obligation that a corporation owes to an outside person or agency is called
a(n):
1.

A) asset.

2.

B) liability.

3.

C) stockholders’ equity.

4.

D) revenue.


Businesses can be organized in a variety of forms. The types of business forms
found in the U.S. include all of the following EXCEPT:
1.

A) corporation.

2.

B) tax shelter.

3.

C) partnership.

4.

D) proprietorship.

The first step in incorporation is to:
1.

A) have the board of directors designate a president.

2.

B) agree to a set of bylaws.

3.

C) issue the first shares of stock.

4.

D) obtain a charter from the state.

Accountants often refer to GAAP. What do the letters GAAP represent in
accounting?
1.

A) Globally accepted and accurate policies

2.

B) Global accommodation accounting principles

3.

C) Generate accurate accounting policies

4.

D) Generally accepted accounting principles

By definition, which of the following represent the owners of a corporation?
1.

A) Customers

2.

B) Creditors


3.

C) Stockholders

4.

D) None of the above

Which of the following is likely to be a user of information in a financial
accounting setting?
1.

A) Taxing authorities

2.

B) Other businesses

3.

C) Potential investors

4.

D) All of the above

A partnership possesses which of the following characteristics?
1.

A) A partnership is owned by shareholders or stockholders.

2.

B) If a partnership cannot pay its debts, lenders cannot take the owners' personal assets
to satisfy the obligations.

3.

C) A partnership joins two or more individuals as co-owners.

4.

D) None of the above is a characteristic of a partnership.

Many organizations have contributed to the process of creating and/or using
generally accepted accounting principles. Which of the following organizations
has the primary responsibility for formulating accounting standards?
1.

A) FASB

2.

B) CMA

3.

C) AICPA

4.

D) SEC


Which of the following statements best defines accounting financial

statements?
1.

A) Financial statements are the information system that measures business activities.

2.

B) Financial statements are the verbal statements made to business news organizations
by chief financial officers.

3.

C) Financial statements are documents that report on a business in monetary terms,
providing information to help people make informed business decisions.

4.

D) Financial statements process information into reports.

Items such as buildings and land are:
1.

A) liabilities.

2.

B) equity.

3.

C) assets.

4.

D) part of equity or assets, depending upon the paperwork.

Organizing as a corporation separates management from the:
1.

A) proprietors.

2.

B) vendors.

3.

C) customers.

4.

D) stockholders.

A proprietorship possesses which of the following characteristics?
1.

A) A proprietorship joins two or more individuals as co-owners.


2.

B) If a proprietorship cannot pay its debts, lenders cannot take the owners' personal
assets to satisfy the obligations.

3.

C) A proprietorship has a single owner.

4.

D) None of the above is a characteristic of a proprietorship.

Phillip and Reed have developed a new technology for home computer
systems. However, they need to raise a large amount of capital to build the
production and support facilities to market their product successfully. Which of
the following business types would most likely attract enough investors to
provide the company with the necessary capital to begin production?
1.

A) Corporation

2.

B) Proprietorship

3.

C) Partnership

4.

D) Limited liability partnership

Corporate ownership is a very popular type of ownership in the United States.
Which of the following is a major reason that corporate ownership is popular?
1.

A) Corporate shareholders have limited liability for the debts of the corporation.

2.

B) Most corporations are small or medium-sized.

3.

C) The life of a corporation is limited by the death of an owner.

4.

D) A corporation is usually managed by the owners.

A promise to pay from customers for goods and services that they received
from a company represent:
1.

A) accounts receivable.


2.

B) accounts payable.

3.

C) revenues.

4.

D) expenses.

88 Free Test Bank for Financial and Managerial
Accounting 2nd Edition Charles Horngren Multiple Choice
Questions - Page 2
An individual asset is increased. Which of the following is possible?
1.

A) There is an equal decrease in another asset.

2.

B) There is an equal decrease in stockholders’ equity.

3.

C) There is an equal decrease in a liability account.

4.

D) None of these is possible.

Cash is collected from a customer who was previously put on account. How
does the collection of the cash affect the accounting equation?
1.

A) Assets increase; stockholders’ equity increases.

2.

B) Assets increase; liabilities increase.

3.

C) Assets increase; assets decrease.

4.

D) Assets decrease; stockholders’ equity decreases.


Lindsey Smith decided to start her own CPA practice as a professional
corporation, Smith CPA PC. Lindsey contributed a building to the corporation
in exchange for stock. She had purchased the office building for $35, 000 which
her real estate agent said could be sold for $50, 000 in the near future. The
corporation records the building as a $50,000 asset because Lindsey believes
that is the real value of the building. Which of the following concepts or
principles of accounting is being violated?
1.

A) Cost principle

2.

B) Entity concept

3.

C) Stable monetary unit concept

4.

D) Going-concern concept

Which of the following concepts (or principles) would dictate that a person with
three different businesses keep three different checking accounts?
1.

A) Cost principle

2.

B) Reliability concept

3.

C) Going-concern concept

4.

D) Entity concept

Which of the following concepts (or principles) would be most likely to require
that data be verifiable?
1.

A) Cost principle

2.

B) Reliability concept

3.

C) Entity concept


4.

D) Going-concern concept

Bill Rogers has three different businesses. He has only one bank account for
transactions relating to all his various businesses. Which of the following
concepts or principles of accounting is Bill violating?
1.

A) Reliability concept

2.

B) Entity concept

3.

C) Cost principle

4.

D) Going-concern concept

Assets are $150,000 and total liabilities are $90,000. Total stockholders’ equity
will be:
1.

A) $180,000.

2.

B) $300,000.

3.

C) $240,000.

4.

D) $ 60,000.

Assets are $270,000 and stockholders’ equity is $90,000. Liabilities will be:
1.

A) $ 60,000.

2.

B) $360,000.

3.

C) $270,000.

4.

D) $180,000.


Land is purchased with a $20,000 down payment and the execution of an
$80,000 promissory note. How does this purchase affect the accounting
equation?
1.

A) Assets increase $80, 000; liabilities decrease $20,000.

2.

B) Assets increase $20, 000; liabilities decrease $80,000.

3.

C) Assets increase $80, 000; stockholders’ equity increases $80,000.

4.

D) Assets increase $80, 000; liabilities increase $80,000.

A liability is paid with cash. How does paying this liability affect the accounting
equation?
1.

A) Assets decrease; liabilities decrease.

2.

B) Liabilities decrease; stockholders’ equity increases.

3.

C) Assets increase; liabilities increase.

4.

D) Assets increase; liabilities decrease.

The Ragun Cajun Bar and Grill, Inc. has been a popular restaurant in
Beaumont, Texas. With no insurance, a recent hurricane has left the business
with large losses due to a damaged building and lost business income. Which
of the following concepts or principles of accounting will be of the greatest
concern to Ragun Cajun's auditors?
1.

A) Going-concern concept

2.

B) Reliability concept

3.

C) Entity concept

4.

D) Stable monetary unit concept


An American business using the US dollar and a European Union country
business using the Euro represent which of the following concepts or
principles?
1.

A) Cash flow principle

2.

B) Transaction principle

3.

C) Objectivity principle

4.

D) Stable monetary unit principle

Counting the actual physical inventory of a company would be an example of
the:
1.

A) objectivity principle (verifiability).

2.

B) entity concept.

3.

C) going-concern concept.

4.

D) stable monetary unit concept.

Which of the following concepts (or principles) addresses the ability of
partners to commit other partners and the business to a contract?
1.

A) Going-concern concept

2.

B) Cost principle

3.

C) Mutual agency

4.

D) Objectivity principle


Land was originally purchased for $20,000. It is sold for $20,000 in cash. How
does the sale affect the accounting equation?
1.

A) Assets increase $20, 000; liabilities decrease $20, 000

2.

B) Assets increase $20, 000; liabilities increase $20, 000.

3.

C) Assets increase $20, 000; stockholders’ equity increases $20, 000.

4.

D) Assets increase $20, 000; assets decrease $20, 000.

Which of the following concepts (principles) would be most likely to require an
assumption that the entity will remain in operation for the foreseeable future?
1.

A) Entity concept

2.

B) Reliability concept

3.

C) Going-concern concept

4.

D) Cost principle

A bill is received for services rendered this month. It will be paid next month.
How does receiving this bill affect the accounting equation?
1.

A) Assets decrease; stockholders’ equity decreases.

2.

B) Liabilities increase; stockholders’ equity decreases.

3.

C) Assets increase; liabilities increase.

4.

D) Liabilities increase; stockholders’ equity increases.


Tate Corporation purchased a building for its grocery store for $30,000 in 1970.
Based on inflation estimates, the amount of this asset has been adjusted in the
accounting records. The building in now reported at $75,000. Which of the
following concepts or principles of accounting is being violated?
1.

A) Reliability concept

2.

B) Stable monetary unit concept

3.

C) Entity concept

4.

D) Going-concern concept

Services are performed. Payment is expected next month. How does this affect
the accounting equation?
1.

A) Liabilities increase; stockholders’ equity decreases.

2.

B) Assets increase; stockholders’ equity increases.

3.

C) Assets decrease; stockholders’ equity decreases.

4.

D) Assets increase; stockholders’ equity decreases.

A $5,000 account payable is paid. How is the accounting equation affected?
1.

A) Assets decrease $5,000; stockholders’ equity increases $5,000.

2.

B) Assets decrease $5,000; liabilities decrease $5,000.

3.

C) Assets increase $5,000; stockholders’ equity decreases $5,000.

4.

D) Assets increase $5,000; liabilities increase $5,000.

Which of the following concepts (principles) would be most likely to require
that an item be recorded at the amount actually paid?
1.

A) Going-concern concept

2.

B) Entity concept

3.

C) Cost principle

4.

D) Reliability concept

Which of the following is the correct accounting equation?
1.

A) Assets + Liabilities = Stockholders’ equity

2.

B) Assets = Liabilities + Stockholders’ equity

3.

C) Assets + Revenue = Stockholders’ equity

4.

D) Assets + Revenue = Liabilities + Expenses

A $5,000 account receivable is collected. How is the accounting equation
affected?
1.

A) Assets increase $5,000; liabilities decrease $5,000.

2.

B) Assets increase $5,000; assets decrease $5,000.

3.

C) Assets increase $5,000; liabilities increase $5,000.

4.

D) Assets increase $5,000; stockholders’ equity increases $5,000.

A corporation pays cash dividends. How does the payment of these dividends
affect the accounting equation?
1.

A) There is no effect on the assets, liabilities, or stockholders’ equity.

2.

B) Assets decrease; stockholders’ equity decreases.

3.

C) Assets increase; liabilities decrease.

4.

D) Assets decrease; stockholders’ equity increases.

Stockholders’ equity is $150,000 and total liabilities are $90,000. Total assets
would be:
1.

A) $300,000.

2.

B) $180,000.

3.

C) $ 60,000.

4.

D) $240,000.

A corporation has all of the following EXCEPT:
1.

A) a charter.

2.

B) a board of directors.

3.

C) unlimited liability.

4.

D) none of the above.

The owners’ claims to the assets of the business are called:
1.

A) revenues.

2.

B) liabilities.

3.

C) owners’ equity.

4.

D) none of the above.


Total liabilities increase by $7,000. How is the accounting equation affected?
1.

A) Assets have increased by $7,000, or stockholders’ equity has decreased by $7,000.

2.

B) Assets have decreased by $7,000.

3.

C) Assets and stockholders’ equity have each decreased by $3,500.

4.

D) Stockholders’ equity has increased by $7,000.

Equipment is sold for cash equal to the amount recorded on the books. How
does this sale affect the accounting equation?
1.

A) Assets increase; assets decrease.

2.

B) Assets increase; liabilities increase.

3.

C) Assets increase; liabilities decrease.

4.

D) Assets increase; stockholders’ equity increases.

88 Free Test Bank for Financial and Managerial
Accounting 2nd Edition Charles Horngren Multiple Choice
Questions - Page 3
Which of the following financial statements shows the changes in retained
earnings during a period of time?
1.

A) Income statement

2.

B) Statement of retained earnings

3.

C) Statement of cash flows

4.

D) Balance sheet

Net income is $29,000. Beginning retained earnings were $34,000. Ending
retained earnings are $55,000. What were cash dividends?
1.

A) $18,000

2.

B) $ 8,000

3.

C) $ 5,000

4.

D) $60,000

David has decided to open an auto-detailing business. He will pick up an
automobile from the client, take it to his parents' garage, detail it, and return it
to the client. If he does all of the work himself and takes no legal steps to form
a special organization, which type of business organization, in effect, has he
chosen?
1.

A) Limited liability company

2.

B) Partnership

3.

C) Corporation

4.

D) Proprietorship

The Statement of Retained Earnings shows the changes in retained earnings.
Which one of these statements is true?
1.

A) Increases in retained earnings come from owner investments.

2.

B) Decreases in retained earnings result from net losses.

3.

C) Increases in retained earnings result from net losses.

4.

D) Both A and B are true.

Financial statements are prepared after an entity's transactions are analyzed
and recorded. Which of the following reports is NOT one of the required
financial statements?
1.

A) Statement of cash flows

2.

B) Balance sheet

3.

C) Statement of dividends paid

4.

D) Income statement

The Income Statement presents a summary of an entity's revenues and
expenses for a period of time. Which of the following statements is true?
1.

A) There is net income when total revenues are greater than total expenses.

2.

B) There is a net loss when total expenses are greater than total revenue.

3.

C) There is a net loss when you increase retained earnings.

4.

D) Both A and B are true.

The financial statements should be prepared in what order?
1.

A) Income statement, Statement of retained earnings, Balance sheet

2.

B) Statement of retained earnings, Balance sheet, Income statement

3.

C) Balance sheet, Statement of retained earnings, Income statement

4.

D) Balance sheet, Income statement, Statement of retained earnings

Which of the following financial statements reports an increase or decrease in
net cash during the time period covered?
1.

A) Income statement

2.

B) Statement of retained earnings

3.

C) Statement of cash flows

4.

D) Balance sheet

The assets and liabilities of Matt Wesley Corporation are as follows: Cash,
$10,000; Accounts receivable, $8,200; Supplies, $1,050; Land, $25,000;
Accounts payable, $6,530. What is the amount of stockholders’ equity?
1.

A) $21,500

2.

B) $44,430

3.

C) $50,780

4.

D) $37,720

Which of the following financial statements reports cash receipts and cash
payments during a period of time?
1.

A) Statement of cash flows

2.

B) Balance sheet

3.

C) Income statement

4.

D) Statement of retained earnings

Which of the following financial statements reports expenses in decreasing
order of their amount, with the largest expense first?
1.

A) Statement of cash flows

2.

B) Income statement

3.

C) Statement of retained earnings