978-0134125053 Chapter 1 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 1 Business, Accounting, and You

1.1 Understand the nature of business and the role of accounting in business

1) By taking accounting classes, the student is learning the “language of business.”

Question Type: Concept

2) To manage a business effectively, an owner or manager would benefit greatly from having

some knowledge of accounting.

Question Type: Application

3) Businesses primarily exist to generate sales.

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4) The value of an item is determined by taking the revenue from a sale and deducting the cost of

the sale.

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5) Society is considered to be a stakeholder in a business.

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6) Accounting information is used to help managers and decision makers understand risk.

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7) What do we call the result obtained when revenue is less than cost?

A) Loss

B) Profit

C) Value

D) Risk

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8) Which of the following is NOT part of the accounting process as it relates to information?

A) Measuring

B) Recognizing

C) Understanding

D) Reporting

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9) According to the textbook, in order for an organization to be called a business it must:

A) exchange a product with a customer.

B) make money.

C) be a corporation.

D) provide a service.

Question Type: Concept

10) Which of the following impacts the value of an item to its owner?

A) When the owner expects to receive something in exchange for the item

B) How certain the owner is about what and when they will receive something in exchange for

the item

C) What the owner expects to receive in exchange for the item

D) All of the above

Question Type: Concept

11) When revenue exceeds cost, it is referred to as:

A) loss.

B) profit.

C) value.

D) risk.

Question Type: Concept

12) Which of the following would NOT be considered a stakeholder in a business?

A) An employee

B) A supplier

C) A regulator

D) All of the above are stakeholders

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13) All of the following would be considered a stakeholder in a business except

A) Customers

B) Lenders

C) Competitors

D) Society

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14) The primary goal of any business is to

A) generate revenue.

B) sell products for a profit.

C) create value for its owners.

D) avoid too much debt.

Answer: C

Diff: 2

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1.2 Know how a business operates

1) Amounts owed to the business’ owners as a result of an initial investment are called liabilities.

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2) Net income and profit are the same thing.

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3) The only way for business to get money is to borrow it.

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4) Business owners expect to be compensated for both time and risk.

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5) Business owners are paid interest on the money they have invested in the business.

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6) Liabilities are defined as:

A) earnings retained in the business.

B) amounts owed to lenders or creditors.

C) stockholders‘ claims to assets.

D) future economic benefits of a company.

Question Type: Concept

7) Assets are defined as:

A) earnings retained in the business.

B) amounts owed to others.

C) stockholders‘ claims to assets.

D) economic resources of a company.

Question Type: Concept

8) Which of the following does NOT describe Stockholders‘ Equity?

A) Profits retained in the business

B) Money lent to a business

C) The owners’ claim on the assets of a company

D) Money invested in a business by its owners

Question Type: Concept

9) Which of the following is NOT an asset?

A) Net income

B) Inventory

C) Buildings

D) Cash

Question Type: Concept

10) Net income is defined as:

A) revenue plus expenses.

B) revenue less assets.

C) expenses less revenue.

D) revenue less expenses.

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11) The expense of using borrowed money for a period of time, is referred to as:

A) net income.

B) revenue.

C) liability.

D) interest.

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12) What do we call amounts of money borrowed from lenders?

A) Asset

B) Liability

C) Expense

D) Revenue

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13) Stockholder‘s Equity represents:

A) an initial investment of cash by the owners.

B) a fair distribution of wealth in the firm.

C) retention of profits by a firm.

D) all of the above.

E) A and C only.

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14) The cost of money is above all else a function of

A) interest rates.

B) risk.

C) exchange rates.

D) rate of return.

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1.3 Know the different types and forms of businesses

1) All businesses are operated to generate a profit.

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2) A business may be either a for-profit business or a not-for-profit business.

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3) A business with one owner is called a sole proprietorship and it must be a service business.

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4) Lowe’s and Home Depot would be examples of corporate merchandising businesses.

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5) Dental offices and law firms are service businesses.

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6) Shareholders must pay income tax on the dividends they have received from a corporation.

Question Type: Application

7) A limited liability company (LLC) is a legal entity like a corporation, but the income is taxed

like a sole proprietorship or partnership.

Question Type: Application

8) A tax preparation business is primarily a:

A) merchandising operation.

B) service operation.

C) not-for-profit operation.

D) manufacturing operation.

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9) Which of the following types of organization would primarily sell goods?

A) Merchandising business

B) Service business

C) Manufacturing business

D) Both Merchandising and Manufacturing businesses sell goods.

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10) Which of the following types of organizations would produce goods?

A) Merchandising business

B) Service business

C) Manufacturing business

D) Both merchandising and manufacturing businesses produce goods.

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11) Which of the following is a disadvantage of the corporate form of business?

A) Ease of raising capital

B) Double taxation

C) Limited resources

D) Limited liability

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12) Which of the following is an advantage of a sole proprietorship?

A) Ease of formation

B) Limited liability of owner

C) Ease of raising capital

D) Unlimited life

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13) Which type of organization has stockholders?

A) Partnerships

B) Sole proprietorships

C) Corporations

D) Limited liability companies

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14) Which of the following business forms is similar to a corporation in regard to owner

liability?

A) All businesses are the same with regard to owner liability.

B) Limited liability company

C) Sole proprietorship

D) Partnership

Question Type: Concept

15) Which of the following do NOT pay taxes on the business income through their individual

owners?

A) S-corporation

B) Sole proprietorship

C) Partnership

D) Corporation

Question Type: Concept

16) One of the newer forms of business is a:

A) corporation.

B) sole proprietorship.

C) partnership.

D) limited liability company.

Question Type: Concept

17) Lowe’s would primarily be considered a:

A) manufacturing business.

B) merchandising business.

C) service business.

D) not-for-profit business.

Question Type: Application

18) Which would NOT be an example of a for-profit business?

A) Toys ‘R Us

B) Red Robin

C) Petsmart

D) Red Cross

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19) Which type of organization is NOT considered a not-for-profit?

A) Charities

B) Churches

C) Chinese restaurant

D) All of the above are not-for-profits.

Question Type: Application

20) A hybrid business entity with characteristics of both a corporation and a partnership is called:

A) S-Corporation.

B) P-Corporation.

C) LLC.

D) CP.

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21) Syd‘s Coffee sells bagged coffee to grocery stores for resale—what type of business is this?

A) Service business

B) Wholesale business

C) Retail business

D) None of the above

Question Type: Application

22) Elle Wolfe is the owner of Sassycat Groomers, a pet grooming facility. She reports the

business income on her personal tax return. What type and legal form of business would Sassycat

be considered?

A) Retail & Sole proprietorship

B) Service & Corporation

C) Merchandising & Partnership

D) Service & Sole proprietorship

Question Type: Application

23) Macy’s and Kohls are examples of:

A) merchandising – specifically wholesale businesses.

B) manufacturing businesses.

C) merchandising – specifically retail businesses.

D) service and manufacturing businesses.

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24) Illusions, Inc. produces high-end mirrors, which are sold in specialty boutiques throughout

the country. What type and legal form of business is Illusions, Inc. ?

A) Manufacturing & Corporation

B) Merchandising & Corporation

C) Retail & Sole proprietorship

D) Service & Sole proprietorship

Question Type: Application

1.4 Know the key accounting principles and concepts

1) Accounting is important because the process “keeps score” of the financial aspects of a

business.

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2) The main role of accounting is to compile reports to determine the profit made by a company

over a period of time.

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3) Generally Accepted Accounting Principles (GAAP) are the rules and guidelines governing

accounting.

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4) Due to the globalization of business, U.S. companies are no longer required to follow GAAP.

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5) The business entity concept requires that the owner’s personal assets be separated from

business assets.

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6) Financial information that is verifiable violates the principle of objectivity.

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