Test bank financial accounting fundamentals 6th 6e ch01

Chapter 01
Accounting in Business
True / False Questions
1. Accounting is an information and measurement system that identifies, records, and
communicates relevant, reliable, and comparable information about an organization's
business activities.
True

False

2. Bookkeeping is the recording of transactions and events and is only part of
accounting.
True

False

3. An accounting information system communicates data to help users make better
decisions.
True

False

4. Financial accounting is the area of accounting that provides internal reports to assist
the decision making needs of internal users.
True

False

5. Internal operating activities include research and development, distribution, and
human resources.
True

False

6. The primary objective of managerial accounting is to provide general purpose
financial statements to help external users analyze and interpret an organization's
activities.
True

False

7. External auditors examine financial statements to verify that they are prepared
according to generally accepted accounting principles.
True

False

8. External users include lenders, shareholders, customers, and regulators.
True

False

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9. Regulators often have legal authority over certain activities of organizations.
True

False

10. Internal users include lenders, shareholders, brokers and managers.
True

False

11. Opportunities in accounting include auditing, consulting, market research, and tax
planning.
True

False

12. Identifying the proper ethical path is usually easy.
True

False

13. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether it
has adopted a code of ethics for its senior financial officers and the contents of that
code.
True

False

14. The fraud triangle asserts that the three factors that must exist for a person to
commit fraud are opportunity, pressure, and rationalization.
True

False

15. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both
accounting oversight and stringent internal controls.
True

False

16. A partnership is a business owned by two or more people.
True

False

17. Owners of a corporation are called shareholders or stockholders.
True

False

18. In the partnership form of business, the owners are called stockholders.
True

False

19. The balance sheet shows a company's net income or loss due to earnings activities
over a period of time.
True

False

20. The Financial Accounting Standards Board is the governmental agency that sets both
broad and specific accounting principles.
True

False

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21. The business entity principle means that accounting information reflects a
presumption that the business will continue operating instead of being closed or
sold.
True

False

22. Generally accepted accounting principles are the basic assumptions, concepts, and
guidelines for preparing financial statements.
True

False

23. The business entity assumption means that a business is accounted for separately
from other business entities, including its owner or owners.
True

False

24. As a general rule, revenues should not be recognized in the accounting records when
earned, but rather when cash is received.
True

False

25. Specific accounting principles are basic assumptions, concepts, and guidelines for
preparing financial statements and arise out of long-used accounting practice.
True

False

26. General accounting principles arise from long-used accounting practices.
True

False

27. A sole proprietorship is a business owned by one or more persons.
True

False

28. Unlimited liability and separate taxation of the business are advantages of a sole
proprietorship.
True

False

29. Understanding generally accepted accounting principles is not necessary to
effectively use and interpret financial statements.
True

False

30. The International Accounting Standards board (IASB) has the authority to impose its
standards on companies around the world.
True

False

31. Objectivity means that financial information is supported by independent, unbiased
evidence.
True

False

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32. The idea that a business will continue to operate instead of being closed or sold
underlies the going-concern assumption.
True

False

33. According to the cost principle, it is necessary for managers to report an
approximation of an asset's market value upon purchase.
True

False

34. The monetary unit assumption means that all companies doing business in the
United States must express transactions and events in U.S. dollars.
True

False

35. The International Accounting Standards Board (IASB) is the government group that
establishes reporting requirements for companies that issue stock to the public.
True

False

36. A limited liability company offers the limited liability of a partnership or proprietorship
and the tax treatment of a corporation.
True

False

37. The Securities and Exchange Commission (SEC) is a government agency that has
legal authority to establish GAAP.
True

False

38. The three common forms of business ownership include sole proprietorship,
partnership, and non-profit.
True

False

39. The three major types of business activities are operating, financing, and investing.
True

False

40. Planning involves defining an organization's ideas, goals, and actions.
True

False

41. Strategic management is the process of determining the right mix of operating
activities for the type of organization, its plans, and its market.
True

False

42. Investing activities are the means an organization uses to pay for resources like land,
buildings, and equipment to carry out its plans.
True

False

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43. Investing activities are the acquiring and disposing of resources that an organization
uses to acquire and sell its products or services.
True

False

44. Owner financing refers to resources contributed by creditors or lenders.
True

False

45. Revenues are increases in equity from a company's sales of products and services to
customers.
True

False

46. A net loss occurs when revenues exceed expenses.
True

False

47. Net income occurs when revenues exceed expenses.
True

False

48. Liabilities are the owner's claim on assets.
True

False

49. Assets are the resources a company owns or controls that are expected to yield

future benefits.
True

False

50. Dividends are expenses.
True

False

51. The accounting equation can be restated as: Assets - Equity = Liabilities.
True

False

52. The accounting equation implies that: Assets + Liabilities = Equity.
True

False

53. Common stock is an increase in equity from a company's earnings activities.
True

False

54. Every business transaction leaves the accounting equation in balance.
True

False

55. An external transaction is an exchange within an entity that may or may not affect
the accounting equation.
True

False

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56. From an accounting perspective, an event is a happening that affects the accounting
equation, but cannot be measured.
True

False

57. Stockholders' equity is increased when cash is received from customers in payment
of previously recorded accounts receivable.
True

False

58. A stockholder's investment in a business normally creates an asset (cash), a liability
(note payable), and stockholders' equity (investment.)
True

False

59. Return on assets is often stated in ratio form as the amount of average total assets

divided by income.
True

False

60. Return on assets is also known as return on investment.
True

False

61. Return on assets is useful to decision makers for evaluating management, analyzing
and forecasting profits, and in planning activities.
True

False

62. Arrow's net income of $117 million and average assets of $1,400 million results in a
return on assets of 8.36%.
True

False

63. Return on assets reflects a company's ability to generate profit through productive
use of its assets.
True

False

64. Risk is the uncertainty about the return we will earn.
True

False

65. Generally the lower the risk, the higher the return that can be expected.
True

False

66. U.S. Government Treasury bonds provide low return and low risk to investors.
True

False

67. The four basic financial statements include the balance sheet, income statement,
statement of retained earnings, and statement of cash flows.
True

False

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68. An income statement reports on investing and financing activities.
True

False

69. A balance sheet covers activities over a period of time such as a month or year.

True

False

70. The income statement describes revenues earned and expenses incurred over a
specified period of time due to earnings activities.
True

False

71. The statement of cash flows shows the net effect of revenues and expenses for a
reporting period.
True

False

72. The income statement shows the financial position of a business on a specific date.
True

False

73. The first section of the income statement reports cash flows from operating
activities.
True

False

74. The balance sheet is based on the accounting equation.
True

False

75. Investing activities involve the buying and selling of assets such as land and
equipment that are held for long-term use in the business.
True

False

76. Operating activities include long-term borrowing and repaying cash from lenders, and
cash investments or dividends to stockholders.
True

False

77. The purchase of supplies appears on the statement of cash flows as an investing
activity because it involves the purchase of assets.
True

False

78. The income statement reports on operating activities at a point in time.
True

False

79. The statement of cash flows identifies cash flows separated into operating, investing,
and financing activities over a period of time.
True

False

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80. Ending retained earnings on the statement of retained earnings is calculated by
adding stockholder investments and net losses and subtracting net income and
dividends.
True

False

Multiple Choice Questions
81. Accounting is an information and measurement system that does all of the following
except:

A. Identifies business
activities.
B. Records business
activities.
C. Communicates business
activities.
D. Eliminates the need for interpreting
financial data.
E. Helps people make better
decisions.
82. Technology:

A. Has replaced

accounting.
B. Has not improved the clerical accuracy of
accounting.
C. Reduces the time, effort and cost of
recordkeeping.
D. In accounting has replaced the need for decision
makers.
E. In accounting is only available to large
corporations.

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83. The primary objective of financial accounting is to:

A. Serve the decision-making needs of internal
users.
B. Provide accounting information that serves
external users.
C. Monitor and control company
activities.
D. Provide information on both the costs and benefits of looking after products
and services.
E. Know what, when, and how much product to
produce.
84. The area of accounting aimed at serving the decision making needs of internal users
is:

A. Financial
accounting.
B. Managerial
accounting.
C. External
auditing.
D. SEC
reporting.
E. Bookkeepin
g.
85. External users of accounting information include all of the following except:

A. Shareholder
s.
B. Customer
s.
C. Purchasing
managers.
D. Government
regulators.
E. Creditor
s.

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86. All of the following regarding a Certified Public Accountant are true except:

A. Must meet education and experience
requirements.
B. Must pass an
examination.
C. Must exhibit ethical
character.
D. May also be a Certified Management
Accountant.
E. Cannot hold any certificate other than
a CPA.
87. Ethical behavior requires that:

A. Auditors' pay not depend on the success of the client's
business.
B. Auditors invest in businesses they
audit.
C. Analysts report information favorable to their
companies.
D. Managers use accounting information to benefit
themselves.
E. Auditors' pay depends on the success of the client's
business.
88. The conceptual framework that the Financial Accounting Standards Board (FASB) and
the International Accounting Standards Board (IASB) are attempting to converge and
enhance includes the following broad areas to guide standard setting except:

A. Objectiv
es
B. Qualitative
characteristics

C. Uniformi
ty
D. Element
s
E. Recognition and
measurement

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89. All of the following are true regarding ethics except:

A. Ethics are beliefs that separate right from
wrong.
B. Ethics rules are often set for
CPAs.
C. Ethics do not affect the operations or outcome of a
company.
D. Are critical in
accounting.
E. Ethics can be difficult to
apply.
90. The accounting concept that requires financial statement information to be supported
by independent, unbiased evidence is:

A. Business entity
assumption.
B. Revenue recognition

principle.
C. Going-concern
assumption.
D. Time-period
assumption.
E. Objectivity
principle.
91. A corporation is:

A. A business legally separate from its
owners.
B. Controlled by the
FASB.
C. Not responsible for its own acts and own
debts.
D. The same as a limited liability
partnership.
E. Not subject to double
taxation.

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92. The independent group that is attempting to harmonize accounting practices of
different countries is the:

A. AICPA.
B. IASB

.
C. CAP.
D. SEC.
E. FASB.
93. The private-sector group that currently has the authority to establish generally
accepted accounting principles in the United States is the:

A. APB
.
B. FASB.
C. AAA
.
D. AICPA.
E. SEC.
94. The accounting concept that requires every business to be accounted for separately
from other business entities, including its owner or owners is known as the:

A. Time-period
assumption.
B. Business entity
assumption.
C. Going-concern
assumption.
D. Revenue recognition
principle.
E. Cost
principle.

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95. The rule that requires financial statements to reflect the assumption that the
business will continue operating instead of being closed or sold, unless evidence
shows that it will not continue, is the:

A. Going-concern
assumption.
B. Business entity
assumption.
C. Objectivity
principle.
D. Cost
Principle.
E. Monetary unit
assumption.
96. If a company is considering the purchase of a parcel of land that was acquired by the
seller for $85,000, is offered for sale at $150,000, is assessed for tax purposes at
$95,000, is recognized by the purchaser as easily being worth $140,000, and is
purchased for $137,000, the land should be recorded in the purchaser's books at:

A. $95,00
0.
B. $137,00
0.
C. $138,50
0.
D. $140,00
0.

E. $150,00
0.
97. To include the personal assets and transactions of a business's stockholders in the
records and reports of the business would be in conflict with the:

A. Objectivity
principle.
B. Monetary unit
assumption.
C. Business entity
assumption.
D. Going-concern
assumption.
E. Revenue recognition
principle.

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98. The accounting principle that requires accounting information to be based on actual
cost and requires assets and services to be recorded initially at the cash or cashequivalent amount given in exchange, is the:

A. Accounting
equation.
B. Cost
principle.
C. Going-concern
assumption.

D. Realization
principle.
E. Business entity
assumption.
99. The rule that (1) requires revenue to be recognized at the time it is earned, (2) allows
the inflow of assets associated with revenue to be in a form other than cash, and (3)
measures the amount of revenue as the cash plus the cash equivalent value of any
noncash assets received from customers in exchange for goods or services, is called
the:

A. Going-concern
assumption.
B. Cost
principle.
C. Revenue recognition
principle.
D. Objectivity
principle.
E. Business entity
assumption.
100 The question of when revenue should be recognized on the income statement
.
according to GAAP is addressed by the:

A. Revenue recognition
principle.
B. Going-concern
assumption.
C. Objectivity
principle.

D. Business entity
assumption.
E. Cost
principle.

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101 The International Accounting Standards Board (IASB):
.
A. Hopes to create harmony among accounting practices of different countries to
improve comparability.
B. Is the government group that establishes reporting requirements for companies
that issue stock to the investing public.
C. Has the authority to impose its standards on companies around
the world.
D. Is the only source of generally accepted accounting principles
(GAAP).
E. Only applies to companies that are members of the
European Union.
102 The Superior Company acquired a building for $500,000. The building was appraised
.
at a value of $575,000. The seller had paid $300,000 for the building 6 years ago.
Which accounting principle would require Superior to record the building on its
records at $500,000?

A. Monetary unit
assumption.

B. Going-concern
assumption.
C. Cost
principle.
D. Business entity
assumption.
E. Revenue recognition
principle.
103 On December 15 of the current year, Conrad Accounting Services signed a $40,000
.
contract with a client to provide bookkeeping services to the client in the following
year. Which accounting principle would require Conrad Accounting Services to record
the bookkeeping revenue in the following year and not the year the cash was
received?

A. Monetary unit
assumption.
B. Going-concern
assumption.
C. Cost
principle.
D. Business entity
assumption.
E. Revenue recognition
principle.

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104 Marsha Bogswell is the owner of Bogswell Legal Services, Inc. Which accounting
.
principle requires Marsha to keep her personal financial information separate from
the financial information of Bogswell Legal Services, Inc.?

A. Monetary unit
assumption.
B. Going-concern
assumption.
C. Cost
principle.
D. Business entity
assumption.
E. Matching
principle.
105 A limited partnership:
.
A. Includes a general partner with unlimited
liability.
B. Is subject to double
taxation.
C. Has owners called
stockholders.
D. Is the same as a
corporation.
E. May only have two
partners.
106 A partnership:
.

A. Is also called a sole
proprietorship.
B. Has unlimited liability for its
partners.
C. Has to have a written agreement in order to
be legal.
D. Is a legal organization separate from its
owners.
E. Has owners called
shareholders.

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107 Which of the following accounting principles require that all goods and services
.
purchased be recorded at actual cost?

A. Going-concern
assumption.
B. Matching
principle.
C. Cost
principle.
D. Business entity
assumption.
E. Consideration
assumption.

108 Which of the following accounting principles prescribes that a company record its
.
expenses incurred to generate the revenue reported?

A. Going-concern
assumption.
B. Matching
principle.
C. Cost
principle.
D. Business entity
assumption.
E. Consideration
assumption.
109 Revenue is properly recognized:
.
A. When the customer makes an
order.
B. Only if the transaction creates an account
receivable.
C. At the end of the accounting
period.
D. Upon completion of the sale or when services have been performed and the
business obtains the right to collect the sales price.
E. When cash from a sale is
received.

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110 Which of the following purposes would financial statements serve for external users?
.
A. To find information about projected costs and revenues of proposed
products.
B. To assess employee performance and
compensation.
C. To assist in monitoring consumer needs and price
concerns.
D. To fulfill regulatory requirements for companies whose stock is sold to
the public.
E. To determine purchasing
needs.
111 In a business decision where there are ethical concerns, the preferred course of
.
action should be one that:

A. Is agreed upon by the most
managers.
B. Maximizes the company's
profits.
C. Results in maintaining operations at the
current level.
D. Costs the least to
implement.
E. Avoids casting doubt on the decision maker and
upholds trust.
112 If a company uses $1,300 of its cash to purchase supplies, the effect on the
.

accounting equation would be:

A. Assets increase $1,300 and liabilities decrease
$1,300.
B. One asset increases $1,300 and another asset decreases $1,300, causing
no effect.
C. Assets decrease $1,300 and equity decreases
$1,300.
D. Assets decrease $1,300 and equity increases
$1,300.
E. Assets increase $1,300 and liabilities increase
$1,300

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113 If a company receives $12,000 from the stockholders to establish a corporation, the
.
effect on the accounting equation would be:

A. Assets decrease $12,000 and equity decreases
$12,000.
B. Assets increase $12,000 and liabilities decrease
$12,000.
C. Assets increase $12,000 and liabilities increase
$12,000.
D. Liabilities increase $12,000 and equity decreases
$12,000.

E. Assets increase $12,000 and equity increases
$12,000.
114 If a company purchases equipment costing $4,500 on credit, the effect on the
.
accounting equation would be:

A. Assets increase $4,500 and liabilities decrease
$4,500.
B. Equity decreases $4,500 and liabilities increase
$4,500.
C. Liabilities decrease $4,500 and assets increase
$4,500.
D. Assets increase $4,500 and liabilities increase
$4,500.
E. Equity increases $4,500 and liabilities decrease
$4,500.
115 An example of a financing activity is:
.
A. Buying office
supplies.
B. Obtaining a long-term
loan.
C. Buying office
equipment.
D. Selling
inventory.
E. Buying
land.

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116 An example of an operating activity is:
.
A. Paying
wages.
B. Purchasing office
equipment.
C. Borrowing money from a
bank.
D. Selling
stock.
E. Paying off a
loan.
117 Operating activities:
.
A. Are the means organizations use to pay for resources like land, buildings and
equipment.
B. Involve using resources to research, develop, purchase, produce, distribute and
market products and services.
C. Involve acquiring and disposing of resources that a business uses to acquire and
sell its products or services.
D. Are also called asset
management.
E. Are also called strategic
management.
118 An example of an investing activity is:
.

A. Paying wages of
employees.
B. Dividends paid by the
company.
C. Purchase of
land.
D. Selling
inventory.
E. Contributions from
stockholders.

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119 Net Income:
.
A. Decreases
equity.
B. Represents the amount of assets stockholders put into a
business.
C. Equals assets minus
liabilities.
D. Is the excess of revenues over
expenses.
E. Represents stockholders' claims against
assets.
120 If equity is $300,000 and liabilities are $192,000, then assets equal:
.

A. $108,00
0.
B. $192,00
0.
C. $300,00
0.
D. $492,00
0.
E. $792,00
0.
121 If assets are $300,000 and liabilities are $192,000, then equity equals:
.
A. $108,00
0.
B. $192,00
0.
C. $300,00
0.
D. $492,00
0.
E. $792,00
0.

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122 Resources a company owns or controls that are expected to yield future benefits
.

are:

A. Assets
.
B. Revenue
s.
C. Liabilitie
s.
D. Stockholders'
Equity.
E. Expense
s.
123 Increases in equity from a company's sales of products or services are:
.
A. Assets
.
B. Revenue
s.
C. Liabilitie
s.
D. Stockholders'
Equity.
E. Expense
s.
124 The difference between a company's assets and its liabilities, or net assets is:
.
A. Net
income.
B. Expens
e.

C. Equity
.
D. Revenu
e.
E. Net
loss.

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125 Creditors' claims on the assets of a company are called:
.
A. Net
losses.
B. Expense
s.
C. Revenue
s.
D. Equity
.
E. Liabilitie
s.
126 Decreases in equity that represent costs of providing products or services to
.
customers, used to earn revenues are called:

A. Liabilitie
s.

B. Equity
.
C. Dividend
s.
D. Expense
s.
E. Common
Stock.
127 The description of the relation between a company's assets, liabilities, and equity,
.
which is expressed as Assets = Liabilities + Equity, is known as the:

A. Income statement
equation.
B. Accounting
equation.
C. Business
equation.
D. Return on equity
ratio.
E. Net
income.

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128 Revenues are:
.

A. The same as net
income.
B. The excess of expenses over
assets.
C. Resources owned or controlled by a
company.
D. The increase in equity from a company's sales of products and
services.
E. The costs of assets or services
used.
129 If assets are $99,000 and liabilities are $32,000, then equity equals:
.
A. $32,00
0.
B. $67,00
0.
C. $99,00
0.
D. $131,00
0.
E. $198,00
0.
130 Another name for equity is:
.
A. Net
income.
B. Expense
s.
C. Net
assets.

D. Revenu
e.
E. Net
loss.

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131 When expenses exceed revenues, the resulting change in equity is:
.
A. Net
assets.
B. Negative
equity.
C. Net
loss.
D. Net
income.
E. A
liability.
132 A resource that the stockholder receives from the company is called a(n):
.
A. Liabilit
y.
B. Dividen
d.
C. Expens
e.

D. Common
stock.
E. Investme
nt.
133 Distributions of cash or other resources by a business to its stockholders are called:
.
A. Dividend
s.
B. Expense
s.
C. Assets
.
D. Retained
earnings.
E. Net
Income.

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