5) List three private groups that work with the Financial Accounting Standards Board (FASB).
6) The guidelines for accounting information are called Generally Accepted Accounting Principles
(GAAP).
7) To be useful, accounting must be relevant and have faithful representation.
8) The primary objective of financial reporting is to ensure that all investment decisions are risk free.
9) The primary objective of financial reporting is to provide information useful for making investment
and lending decisions.
10) GAAP refers to guidelines for accounting information in the United States. The acronym GAAP in
this statement refers to ________.
A) Globally Accepted Accounting Policies
B) Government Approved Accounting Principles
C) Generally Accredited Accounting Policies
D) Generally Accepted Accounting Principles
11) Regarding generally accepted accounting principles (GAAP), which of the following statements is
incorrect?
A) GAAP rests on a conceptual framework that identifies the objectives, characteristics, elements, and
implementation of financial statements.
B) The primary objective of financial reporting is to provide information useful for making investment
and lending decisions.
C) Relevant information is complete, neutral, and free from error.
D) GAAP is currently formulated by the Financial Accounting Standards Board.
12) Which of the follow statements regarding the primary objective of financial reporting is correct?
A) The primary objective of financial reporting is to provide information useful for the acquisition of
long-term assets.
B) Information that is faithfully represented is complete, neutral, and free from error.
C) Relevant information ensures that users of the information will make the correct decisions.
D) To be useful, information must follow the Generally Accepted Accounting Principles which are
created and governed by the Securities and Exchange Commission.
13) What are Generally Accepted Accounting Principles (GAAP)? Which entity is currently responsible
for determining GAAP?
14) What is the primary objective of financial reporting?
15) As per the economic entity assumption, an organization and its owners should be seen as the same
entity.
16) An economic entity is an organization that stands apart as a separate economic entity.
17) An entity refers to one business which includes its owners.
18) In a sole proprietorship, the owner is personally liable for the debts of the business.
19) The most that the owner of a sole proprietorship can lose, as a result of business debts or lawsuits, is
the amount he/she has invested in the business.
20) Members of a limited-liability company (LLC) are not personally liable for the debts of the business.
21) A business can be organized as a sole proprietorship, partnership, corporation, or limited-liability
company (LLC).
22) In a limited-liability company (LLC), the members are personally liable for the debts of the business.
23) A corporation’s board of directors is elected by the chairperson of the company.
24) A corporation’s chief executive officer appoints the members of the board of directors.
25) The creation of a corporation begins when its incorporators obtain a charter from the state.
26) Mutual agency of the owners is not present in a corporation as it is in a partnership.
27) Regarding a business organized as a partnership, which of the following is an incorrect statement?
A) Partners pay tax on their share of the partnership earnings.
B) Partners are personally liable for the debts of the business.
C) A partnership‘s life is not dependent on a specific individual’s ownership.
D) Mutual agency is present in a partnership.
28) Which of the following is a major reason why corporate ownership is popular in the United States?
A) Stockholders have limited liability for the debts of the corporation.
B) Most corporations are small- or medium-sized.
C) The life of a corporation is limited by the death of the owner.
D) A corporation is usually managed by the owners.
29) Which of the following is a characteristic of a corporation?
A) Corporations are separate taxable entities.
B) Lenders of a corporation do not have the right to claim the corporation’s assets to satisfy their
obligations.
C) Corporations are subjected to less governmental regulation than other forms of businesses.
D) Each stockholder has the authority to commit the corporation to a binding contract through his/her
actions.
30) Which of the following actions determines when a corporation comes into existence?
A) The charter is obtained from the federal government.
B) The incorporators pay fees, sign the charter, and file required documents with the state.
C) The first share of stock is issued.
D) The corporate bylaws are written.
31) Regarding the separation of corporate ownership and management, which of the following is a true
statement?
A) The corporate officers elect the board of directors.
B) The corporation runs better with day-to-day input from stockholders.
C) Stockholders are required to manage the business.
D) Stockholders own the business, but a board of directors appoints corporate officers to manage the
business.
32) Corporations pay their own income tax on corporate income. Stockholders pay personal income tax
on the dividends received from corporations. This is an example of ________.
A) double taxation
B) continuous life
C) mutual agency
D) a limited liability company
33) Which of the following statements is true of the corporate form of business?
A) The board of directors sets policy for the corporation and appoints the officers.
B) Changes in the ownership of stock have a negative effect on the continuity of the corporation.
C) Any stockholder may commit the corporation to a contract.
D) It is easy for stockholders to lodge an effective protest against management.
34) Which of the following statements is true of a sole proprietorship?
A) A sole proprietorship joins two or more individuals as co-owners.
B) The sole proprietor is personally liable for the liabilities of the business.
C) A sole proprietorship is taxed separately from the owner.
D) A sole proprietorship has to pay business income taxes.
35) Which of the following is a characteristic of a limited-liability company (LLC)?
A) An LLC’s life is terminated at any member’s choice or death.
B) Each member of an LLC is liable only for his or her own actions.
C) An LLC must have more than five members.
D) The earnings of an LLC are subject to double taxation.
36) Jason Ford has been the sole owner of a bicycle sales and repair shop for several years. Which of the
following business types would limit Jason’s personal liability exposure to the entity’s debts?
A) partnership
B) limited-liability company
C) sole proprietorship
D) Any of the above.
37) Marcus 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?
A) A limited-liability company
B) A partnership
C) A corporation
D) A sole proprietorship
38) In a limited-liability company, the ________.
A) members are personally liable to pay the company‘s debts
B) business terminates at the death of a member
C) members are liable for each other‘s actions
D) members pay income tax on their share of earnings
39) The earnings of a sole proprietorship are ________.
A) combined with the personal income of the proprietor
B) not combined with the proprietor’s personal income
C) subject to double taxation
D) handled similarly to that of a corporation
40) Which of the following statements is true of a corporation?
A) Corporations pay the same variety of taxes as partnerships.
B) Although a corporation is a separate legal entity, it cannot be sued.
C) Any stockholder of a corporation can commit the corporation to a binding contract.
D) The owners of a corporation are called stockholders.
41) The ultimate control of the corporation rests with the ________.
A) board of directors
B) stockholders
C) chairperson of Board of Directors
D) chief operating officer