Accounting, 9e (Horngren)
Chapter 1 Accounting and the Business Environment
Learning Objective 1-1
1) Accounting is the information system that measures business activity, processes the data into reports, and
communicates the results to decision makers.
2) Accounting is “the language of business.”
3) A debt that a business owes to an outside party is called:
A) an asset.
B) a liability.
C) stockholders’ equity.
D) revenue.
4) There are relatively few types of revenue. Which of the following in NOT a type of revenue?
A) Common Stock
B) Service
C) Interest
D) Sales
5) A promise received from a business’s customers to pay for goods and services that they received from the
business is called a(n):
A) account receivable.
B) account payable.
C) revenue.
D) expense.
6) Which of the following statements BEST describes managerial accounting?
A) Managerial accounting focuses on information for internal decision making.
B) Managerial accounting focuses on outside investors and lenders.
C) Managerial accounting provides information for the public.
D) Managerial accounting provides information for taxing authorities.
7) By definition, which of the following represents the owners of a corporation?
A) Customers
B) Creditors
C) Stockholders
D) Employees
8) Which of the following statements BEST defines financial statements?
A) Financial statements are the information systems that record and measure business transactions.
B) Financial statements are the verbal statements made to business news organizations by chief financial officers.
C) Financial statements are documents that report on a business in monetary terms, providing information to help
people make informed business decisions.
D) Financial statements are plans and forecasts for future time periods.
9) Items such as buildings and land are:
A) liabilities.
B) equity.
C) assets.
D) revenues.
Learning Objective 1-2
1) Managerial accounting focuses on information for decision makers outside of the business, such as creditors and
taxing authorities.
2) Business owners use accounting information to set goals, evaluate progress toward those goals, and take
corrective action when needed.
3) Outside investors would ordinarily use financial accounting information to decide whether or not to invest in a
business.
4) An investor is someone who loans money to a business.
5) A creditor is a party that has an ownership interest in a business.
6) Different users of financial statements (investors, creditors, tax authorities, etc.) all focus on the same parts of the
financial statements for the information they need.
7) Many organizations have contributed to the establishment of generally accepted accounting principles. Which of
the following organizations has the PRIMARY responsibility for formulating accounting standards?
A) FASB
B) CMA
C) AICPA
D) SEC
8) Which of the following is a licensed accountant who serves the general public rather than an accountant who
serves one particular company?
A) CPA
B) CMA
C) SEC
D) FASB
9) 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 information must possess to be useful?
A) Reliability
B) Creativity
C) Relevance
D) Comparability
10) Accountants often refer to GAAP. What do the letters GAAP represent in accounting?
A) Globally accepted and accurate policies
B) Global accommodation accounting principles
C) Generally accredited accounting policies
D) Generally accepted accounting principles
11) Which of the following are most likely to be users of managerial accounting information?
A) Potential investors
B) Creditors
C) Customers
D) Company managers
12) Which of the following are likely to be users of financial accounting information?
A) Taxing authorities
B) Creditors
C) Potential investors
D) All of the above
Learning Objective 1-3
1) The AICPA’s Code of Professional Conduct for Accountants provides guidance to CPAs in the performance of
their work.
2) GAAP refer to the set of accounting rules for international accounting.
3) IFRS accounting rules apply to all U.S. corporations.
4) A U.S. publicly traded company does not come under SEC regulations as long as it follows the rules of GAAP.
5) IFRS are the international accounting rules that U.S. companies must follow for their international operations.
6) IFRS (international accounting rules) are much more specific than GAAP and allow for far less professional
judgment.
7) The PCAOB is a watchdog agency that monitors the work of small, privately owned businesses.
8) Independent accountants that audit public companies come under the regulatory supervision of the PCAOB.
9) Accounting standards are formulated by the:
A) SEC.
B) AICPA.
C) FASB.
D) IRS.
10) The Sarbanes-Oxley Act (“SOX”) made it a criminal offense to:
A) steal shareholders’ money.
B) default on loans from creditors.
C) declare bankruptcy.
D) falsify financial information.
11) Which of the following organizations requires publicly owned companies to be audited by independent
accountants (CPAs)?
A) SEC
B) PCAOB
C) FASB
D) AICPA
12) Which of the following organizations or groups issue an opinion on whether a company’s financial statements
are a fair representation of the company’s financial situation?
A) SEC
B) Board of Directors
C) Shareholders
D) Independent Accountants (CPAs)
1) A not-for-profit organization has owners just like other forms of business.
2) Board members of a not-for-profit organization have fiduciary responsibilities which constitute legal obligations
to manage the organization in a trust-worthy manner.
3) There are four major forms of business organizations.
4) Similar to partnerships, in a limited-liability company (LLC), the members are personally liable for the debts and
obligations of the business.
5) The largest businesses are usually organized as:
A) corporations.
B) partnerships.
C) proprietorships.
D) LLCs.
6) Businesses can be organized in a variety of forms. The types of businesses commonly found in the U.S. include
all of the following EXCEPT:
A) corporations.
B) state government-run companies.
C) partnerships.
D) proprietorships.
7) A corporation possesses all but one of the following characteristics. Which of the following is NOT a
characteristic of a corporation?
A) If a corporation cannot pay its debts, lenders can take the owners’ personal assets to satisfy the obligations.
B) A corporation is a distinct entity in the eyes of the law.
C) Corporation ownership is divided into shares of stock.
D) A corporation is owned by shareholders or stockholders.
8) 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?
A) Corporate shareholders 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 an owner.
D) A corporation is usually managed by the owners.
9) Which of the following is NOT a characteristic of a traditional partnership?
A) A partnership is owned by shareholders or stockholders.
B) If a partnership cannot pay its debts, lenders can take the owners’ personal assets to satisfy the obligations.
C) A partnership joins two or more individuals as co-owners.
D) Each partner has the authority to commit the entire partnership to a binding contract.
10) Which of the following is TRUE for a proprietorship?
A) A proprietorship joins two or more individuals as co-owners.
B) The proprietor is not personally liable for the debts of the proprietorship.
C) A proprietorship has a single owner.
D) A proprietorship has an indefinite life.
11) Which of the following is a characteristic of a limited liability partnership (LLP)?
A) A limited liability partnership issues shares of stock to shareholders.
B) Each partner is liable only for the actions under his or her control.
C) A limited liability partnership is owned by a single investor.
D) The limited liability partners are subject to “double taxation.”
12) 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?
A) Partnership
B) Limited liability company
C) Proprietorship
D) Not-for-profit
13) Dylan Chase is a partner 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?
A) Limited liability partnership
B) Traditional partnership
C) Not-for-profit
D) Proprietorship
14) 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 be best suited to help the company raise the necessary capital to begin
production?
A) Corporation
B) Proprietorship
C) Partnership
D) Limited liability partnership
15) 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?
A) Limited liability company
B) Partnership
C) Corporation
D) Proprietorship
Learning Objective 1-5
1) A proprietor has unlimited liability for the debts and obligations of the proprietorship.
2) The most that a proprietor can lose, as a result of business debts or lawsuits, is limited to the amount he/she has
invested in the proprietorship itself.
3) A proprietor may have to pay self-employment tax in addition to income tax.
4) In an LLC, the business, not the owners, is responsible for the corporation’s debts.
5) A proprietorship is created by:
A) electing a board of directors.
B) obtaining a state charter.
C) issuing shares of stock.
D) one individual deciding to start a business.
6) In an LLC, who is responsible for the company’s debts?
A) The company itself
B) The partners
C) The individual investors
D) The proprietor
7) Regarding accounting information and records, a proprietorship is an entity entirely separate from its:
A) stockholders.
B) vendors.
C) customers.
D) proprietor.
8) From a legal perspective, a proprietorship is:
A) an entity separate from its proprietor.
B) authorized under state charter.
C) not a distinct entity from its proprietor.
D) subject to regulation by the SEC.
9) The financial examination of a company’s financial records is called a(n):
A) audit.
B) criminal investigation.
C) financial analysis.
D) appraisal.
10) If a proprietorship cannot pay its debts, the creditors may make claims against the:
A) assets of the proprietorship only.
B) assets of the proprietor.
C) state government.
D) employees of the business.
11) The taxable income of a proprietorship is:
A) combined with the personal income of the proprietor on a single return.
B) reported on a separate return from the proprietor’s personal income.
C) not taxable.
D) handled similarly to that of a corporation.
12) A relatively low amount of government regulation is a key advantage of a:
A) partnership.
B) not-for-profit.
C) corporation.
D) proprietorship.
13) One beneficial characteristic of a proprietorship is:
A) that the owner also manages the business.
B) the owner appoints a board of directors to manage the business.
C) the owner’s interest is separate from the manager’s interest.
D) the owner does not need to be involved in the day–to-day operations of the business.
Learning Objective 1-6
1) Many liabilities have the word “receivable” in their titles.
2) The faithful representation principle requires that information is complete, neutral and free from material error.
3) Which of the following concepts (or principles) would dictate that a person with three different businesses keep
three different checking accounts?
A) Cost principle
B) Faithful representation principle
C) Going-concern concept
D) Entity concept
4) Which of the following concepts (or principles) would most likely require that data be complete, neutral, and free
from error?
A) Cost principle
B) Faithful representation principle
C) Entity concept
D) Going-concern concept
5) Which of the following concepts (or principles) addresses the ability of partners to commit other partners and the
business to a contract?
A) Going-concern concept
B) Cost principle
C) Mutual agency
D) Objectivity principle
6) Counting the actual physical inventory of a company and comparing it to accounting records would be an
example of the:
A) faithful representation principle.
B) entity concept.
C) going-concern concept.
D) stable monetary unit concept.
7) An American business records transactions using the U.S. dollar and disregards fluctuation in the buying power
of the dollar over time. This represents the:
A) entity concept.
B) going-concern concept.
C) faithful representation principle.
D) stable monetary unit principle.
8) Which of the following concepts (or principles) would require that an item be recorded at the amount actually
paid rather than at the estimated market value?
A) Going-concern concept
B) Entity concept
C) Cost principle
D) Stable monetary unit concept
9) Which of the following concepts (or principles) require an assumption that the entity will remain in operation for
the foreseeable future?
A) Entity concept
B) Faithful representation principle
C) Going-concern concept
D) Cost principle
10) Bill Rogers has three different businesses. He has only one bank account for transactions relating to all of his
various businesses. Which of the following concepts or principles of accounting is Bill violating?
A) Faithful representation principle
B) Entity concept
C) Cost principle
D) Going-concern concept
11) Lindsey Smith decided to start her own CPA practice as a professional corporation, Smith CPA PC. Her
corporation purchased an office building for $35, 000 which her real estate agent said was worth
$50,000 in the current market. 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?
A) Cost principle
B) Entity concept
C) Stable monetary unit concept
D) Going-concern concept
12) 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 is now reported at $75,000.
Which of the following concepts or principles of accounting is being violated?
A) Going–concern concept
B) Stable monetary unit concept
C) Entity concept
D) None of the above
13) 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?
A) Going-concern concept
B) Faithful representation principle
C) Entity concept
D) Stable monetary unit concept
Learning Objective 1-7
1) Which of the following is the CORRECT accounting equation?
A) Assets + Liabilities = Owners’ equity
B) Assets = Liabilities + Owners’ equity
C) Assets + Revenue = Owners’ equity
D) Assets + Revenue = Liabilities + Expenses
2) Owner’s equity is $150,000 and total liabilities are $90,000. Total assets would be:
A) $300,000.
B) $180,000.
C) $60,000.
D) $240,000.
3) The owners’ claims to the assets of the business are called:
A) revenues.
B) liabilities.
C) owners’ equity.
D) expenses.
4) A $5,000 account payable is paid by the business. How is the accounting equation affected?
A) Assets decrease $5,000; owner’s equity increases $5,000.
B) Assets decrease $5,000; liabilities decrease $5,000.
C) Assets increase $5,000; owner’s equity decreases $5,000.
D) Assets increase $5,000; liabilities increase $5,000.
5) Assets are $150,000 and total liabilities are $90,000. Total owners’ equity will be:
A) $180,000.
B) $300,000.
C) $240,000.
D) $60,000.
6) Assets are $270,000 and owner’s equity is $90,000. Liabilities will be:
A) $60,000.
B) $360,000.
C) $270,000.
D) $180,000.
7) A business performs services for its customers. Payment is expected to be received next month. How does the
performance of services affect the accounting equation?
A) Liabilities increase; owner’s equity decreases.
B) Assets increase; owner’s equity increases.
C) Assets decrease; owner’s equity decreases.
D) Assets increase; owner‘s equity decreases.
8) A business receives a bill for services rendered from one of its suppliers. The business will pay the supplier next
month. When the business receives the bill from its supplier, how does this affect the accounting equation?
A) Assets decrease; owner‘s equity decreases.
B) Liabilities increase; owner’s equity decreases.
C) Assets increase; liabilities increase.
D) Liabilities increase; owner’s equity increases.