Chapter 1
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Page 1
True / False
1. An auto repair company is not an example of a manufacturer.
a. True
b. False
2. A department store is an example of a manufacturer.
a. True
b. False
3. Under Armour is an example of a service provider.
a. True
b. False
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Page 2
4. A grocery store is an example of a wholesaler.
a. True
b. False
5. A partnership is a business owned by two or more individuals.
a. True
b. False
6. Business entities and non-business entities are both organized to earn a profit.
a. True
b. False
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Page 3
7. The Internal Revenue Service (IRS) recognizes the separate existence of a proprietorship from its owner.
a. True
b. False
8. A partnership is a business owned by two individuals; if three or more individuals organize a business, it must be
established as a corporation.
a. True
b. False
9. Since there is a lack of a profit motive in nonbusiness entities, they do not need information provided by an accounting
system.
a. True
b. False
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Page 4
10. Someone to whom a company has a debt is known as a creditor.
a. True
b. False
11. Assets can be tangible or intangible in nature.
a. True
b. False
12. An asset is a future economic benefit to a business.
a. True
b. False
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Page 5
13. An expense is an inflow of assets resulting from the sale of goods and services.
a. True
b. False
14. Capital stock indicates the owners’ contributions to a corporation.
a. True
b. False
15. Management accounting is the branch of accounting concerned with communication with internal management.
a. True
b. False
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Page 6
16. External users of accounting information include present and potential stockholders, bankers and other creditors, and
management.
a. True
b. False
17. Bondholders are external users of a company’s accounting information.
a. True
b. False
18. The purpose of financial reporting is to provide economic information to external decision makers only.
a. True
b. False
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Page 7
19. The income statement is a statement that summarizes revenues and expenses for a period.
a. True
b. False
20. The amount of earnings distributed to stockholders can be found in the income statement.
a. True
b. False
21. The balance sheet is linked to the retained earnings statement by the ending retained earnings balance.
a. True
b. False
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Page 8
22. A balance sheet provides information during a period of time, while the other basic financial statements provide
information on activities that occur over a point in time.
a. True
b. False
23. When an entity’s revenues exceed its expenses for a period of time, the entity will report net income.
a. True
b. False
24. Owners’ equity is the residual interest that remains after deducting liabilities from assets.
a. True
b. False
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Page 9
25. Stockholders’ equity is owners’ equity in a corporation.
a. True
b. False
26. The income statement is sometimes called the statement of financial position.
a. True
b. False
27. Profits from operating activities distributed to business owners are called dividends.
a. True
b. False
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Page 10
28. If a company prepares a statement of retained earnings, net income plus dividends are added to beginning retained
earnings on this statement.
a. True
b. False
29. The time period assumption assumes a company prepares financial statements every month.
a. True
b. False
30. Because market values are subjective, many assets are carried on the balance sheet at their acquisition cost.
a. True
b. False
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Page 11
31. The term used to refer to an asset’s original cost is “fair market value.”
a. True
b. False
32. The going concern assumption infers that a company will continue to operate until a known date.
a. True
b. False
33. A company in the process of liquidation meets the requirements under the going concern assumption.
a. True
b. False
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Page 12
34. GAAP stands for Generally Accepted Accounting Procedures.
a. True
b. False
35. The International Accounting Standards Board (IASB) was created in order to develop worldwide accounting
standards that must be used for all financial statements prepared regardless of country.
a. True
b. False
36. The primary objective of external auditors is to provide assurance to stockholders and other users that the statements
are fairly presented.
a. True
b. False
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Page 13
37. The IASB is a branch of the FASB.
a. True
b. False
38. The Financial Accounting Standards Board defined the objectives of financial reporting.
a. True
b. False
39. Information must be timely to be relevant.
a. True
b. False
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Page 14
40. According to the accounting profession, the purpose of financial reporting is to provide information about a company
that investors, lenders, and other creditors can use when deciding whether to provide resources to the entity.
a. True
b. False
41. Cross Country Busline is an example of a
a. producer.
b. supplier.
c. retailer.
d. service company.
42. All of the following are examples of manufacturers except
a. Whirlpool.
b. Boeing.
c. Amazon.com.
d. Ford.
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Page 15
43. United Airlines is an example of
a. producer.
b. supplier.
c. retailer.
d. service company.
44. All of the following are examples of retailers except
a. Sports Authority.
b. Boeing.
c. Home Depot.
d. Best Buy.
45. The three forms of business entities are
a. government, cooperatives, and philanthropic organizations.
b. financing, investing, and operating.
c. sole proprietorships, partnerships, and corporations.
d. wholesalers, manufacturers, and retailers.
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Page 16
46. Which of the following statements would be true if you own stock in a company?
a. You are an owner of the retained earnings and capital stock of the company.
b. You have a claim to the assets of the business.
c. You have the right to receive interest on an annual basis.
d. You have the right to a portion of the company’s revenues each accounting period.
47. Which of the following statements is true regarding a bond?
a. A bond is a certificate that acts as evidence of ownership in a corporation.
b. A bond is a certificate that represents a corporation’s promise to repay a certain amount of money and interest in
the future.
c. If you buy a bond from a company, you are borrowing money from the company.
d. Bondholders receive dividends semiannually.
48. Which of the following statements best describes the term “revenues”?
a. Revenues represent an outflow of assets resulting from the sale of goods or services.
b. Revenues represent the dollar amount of bonds sold to the public.
c. Revenues represent assets used or consumed in the sale of products or services.
d. Revenues represent assets received from the sale of products or services.
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Page 17
49. Which one of the following events involves a liability for a business?
a. Loans to be repaid to banks
b. Inventories purchased for cash
c. Amounts invested by the owners
d. Stock sold to the general public
50. Which of the following best describes the term “expenses”?
a. The amount of total profits earned by a business since it began operations
b. The amount of interest or claim that the owners have in the business
c. The future economic resources of a business entity
d. The outflow of assets resulting from the sale of goods and services
51. The outflow of assets resulting from the sale of products and services is called a(n)
a. asset.
b. liability.
c. revenue.
d. expense.
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Page 18
52. The costs of doing business through the sale of goods and services are called
a. net income.
b. expenses.
c. revenues.
d. dividends.
53. The inflow of assets resulting from the sale of products and services is called a(n)
a. asset.
b. liability.
c. revenue.
d. expense.
54. Which of the following is an organization that lends funds to a business entity and expects repayment of the funds?
a. A creditor
b. A stockholder
c. An owner
d. A partner
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Page 19
55. Which of the following best describes the term “assets”?
a. The amount of total profits earned by a business since it began operations
b. The amount of interest or claim that the owners have in the business
c. The economic resources of a business entity
d. The cumulative profits earned by a business less any dividends distributed
56. All of the following are the types of activities that businesses engage in except
a. financing activities.
b. investing activities.
c. operating activities.
d. organizational activities.
57. Which one of the following business decisions will most likely require financial information?
a. The National Bank is reviewing the loan application from Petra’s Restaurant.
b. Petra’s Restaurant is attempting to sell its stock to the public.
c. The labor union representing Winn’s Fitness Spa employees is negotiating a pay raise as part of a new labor
agreement.
d. All of these choices
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Page 20
58. Which of the following would be internal users of accounting information?
a. Customers and vendors
b. Employees and managers
c. Government and banks
d. Employees and customers
59. Which of the following would be classified as external users of financial statements?
a. Stockholders and management of the company
b. The controller of the company and a company’s stockholders
c. The company’s marketing managers
d. The creditors and stockholders of the company
60. Which one of the following is not an external user of financial information?
a. IRS
b. Company management
c. Creditors
d. Stockholders