Chapter 01 – Uses of Accounting Information and the Financial Statements
TRUE/FALSE
1. The processing stage of accounting is accomplished by the recording of data.
2. Two major goals of business are to achieve profitability and to achieve liquidity.
3. Profitability means having enough funds on hand to pay debts when they fall due.
4. Earned income is a measure of profitability.
5. Paying taxes to the government is an example of an operating activity.
6. Obtaining funds from a bank is an example of a financing activity.
7. Buying and selling goods and services are examples of financing activities.
8. The purchase of equipment is an example of a financing activity.
9. Management accounting focuses on internal decision making.
10. A major function of management is to provide the accountant with relevant and useful information.
11. Accounting ratios are never used as management performance measures.
12. Financial accounting information is used primarily by management.
13. The terms bookkeeping and accounting are not synonymous.
14. A company’s management information system is a subsystem of its accounting information system.
15. The modern definition of accounting focuses on how to do accounting rather than the role of
accounting in making economic decisions.
16. The unintentional preparation of misleading financial statements is referred to as fraudulent financial
reporting.
17. Fraudulent financial reporting can result from the misapplication of accounting principles.
18. Depending on the circumstances, criminal penalties could be imposed on those who prepare fraudulent
financial statements.
19. The Sarbanes-Oxley Act orders the Financial Accounting Standards Board (FASB) to hold Chief
Executive Officers (CEOs) and Chief Financial Officers (CFOs) responsible for the accuracy of their
company’s financial statements.
20. Responsibility for ethical financial reporting rests solely with management.
21. The primary external users of accounting information are investors and management.
22. Creditors are those who lend money to others or deliver goods and services before being paid.
23. The Federal Reserve Board is an example of a labor union.
24. The Securities and Exchange Commission (SEC) is an accounting information user with a direct
financial interest.
25. Taxing authorities are considered accounting information users with a direct financial interest.
26. Regulatory agencies are considered information users with an indirect financial interest.
27. Accountants consider the euro to be the common unit of measure for all business transactions.
28. Payment to a creditor is an example of a nonexchange business transaction.
29. For accounting purposes, a business and its owners are considered the same entity.
30. Knowledge of the exchange rate is necessary to apply the money measure concept in case of
international transactions.
31. For reporting purposes, the personal assets and debts of a business owner should not be combined with
the assets and debts of the business.
32. Exchange rates for currency change daily according to the supply and demand for each currency.
33. Sole proprietorships in the United States generate more revenue than partnerships and corporations put
together.
34. In general, any partner can obligate the partnership to another party.
35. A partnership is not dissolved when any partner leaves the business or dies.
36. A corporation is an economic unit that is legally separate from its owners.
37. Partnerships represent the largest number of businesses in the United States.
38. The liability of corporate stockholders is limited to the amount of their investment.
39. The audit committee appoints the board of directors, which in turn performs an independent audit of
the company’s records.
40. The articles of incorporation may be found in the corporate charter.
41. Authorized shares of stock refers to the number of shares authorized in the articles of incorporation..
42. Corporate governance is the oversight of a company’s management performance and ethics by its
board of directors.
43. The board of directors decides on major business policies of a corporation.
44. The number of authorized shares of stock may be less than the number of outstanding shares.
45. The management of a corporation is appointed by the board of directors.
46. Financial position may be assessed by referring to a balance sheet.
47. One way of stating the accounting equation is: Assets + Stockholders’ Equity = Liabilities.
48. The economic resources to which the owners have claim are represented by stockholders’ equity.
49. Land is an asset that is considered nonmonetary in nature.
50. Net income is another term for revenues.
51. Stockholder’s equity is another term for retained earnings.
52. Contributed capital appears in the stockholders’ equity section of a corporate balance sheet.
53. Revenues have the effect of increasing retained earnings.
54. The retained earnings figure is typically divided into par value and additional paid-in capital.
55. If a corporation has suffered only net losses since its inception, the Retained Earnings account will
have a positive balance.
56. Net assets equals assets plus liabilities.
57. Stockholders’ equity equals contributed capital minus retained earnings.
58. Par value is the minimum amount that can be reported as contributed capital.
59. An increase in revenue will result in an increase in stockholders’ equity.
60. The statement of retained earnings discloses the dividends declared during the period.
61. The heading for a balance sheet might include the line “For the Year Ended December 31, 2013.”
62. The income statement is also known as the statement of financial position.
63. The income statement discloses significant events related to the operating, investing, and financing
activities of a business.
64. The accounting fees earned by an accounting firm would appear on its balance sheet.
65. A proper heading for the income statement could include “As of December 31, 2013.”
66. The title “wages payable” would appear on the income statement.
67. The declaration of a dividend will increase net income.
68. The title “land” will appear as an expense on the income statement.
69. Dividends are an example of a revenue.
70. The statement of retained earnings relates the income statement to the balance sheet by showing how
the Retained Earnings account changed during the accounting period.
71. The purchase of equipment for cash would be disclosed on the statement of cash flows.
72. Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures
necessary to define accepted accounting practice at a particular time.
73. The Financial Accounting Standards Board (FASB) is the primary and most important determinant of
generally accepted accounting principles.
74. Companies whose securities are sold to the general public must adhere to standards established by the
Securities and Exchange Commission (SEC).
75. The Internal Revenue Service is an agency of the federal government that has the legal power to set
and enforce accounting practices for companies.
76. Independence is the avoidance of all relationships that impair or appear to impair the objectivity of the
accountant.
77. All public accountants but not management accountants are required to adhere to a code of
professional conduct.
78. Objectivity means carrying out one’s professional responsibilities with competence and diligence.
79. Objectivity means carrying out one’s professional responsibilities honestly and impartially.
80. The Public Company Accounting Oversight Board (PCAOB) was created to determine the standards
that auditors must follow.
MULTIPLE CHOICE
1. Which of the following is the most appropriate and modern definition of accounting?
a.
Electronic collection, organization, and communication of vast amounts of information
b.
The interconnected network of subsystems necessary to operate a business
c.
A means of recording transactions and keeping records
d.
The measurement, processing, and communication of financial information about an
identifiable economic entity
2. The correct order of the three stages of accounting is
a.
communication, processing, and measurement.
b.
measurement, communication, and processing.
c.
processing, measurement, and communication.
d.
none of these are correct.
3. Reporting to decision makers occurs at which state of the accounting process?
a.
Business activities
b.
Communication
c.
Processing
d.
Measurement
4. The measurement stage of accounting is accomplished by
a.
recording data.
b.
reporting to decision makers.
c.
processing data.
d.
storing data.
5. The processing stage of accounting is accomplished by
a.
reporting to decision makers.
b.
recording transactions.
c.
controlling and evaluating data.
d.
storing and processing data into useful information
6. A company’s ability to earn enough income to attract and hold investment capital ultimately depends
on its
a.
budgeting.
b.
planning.
c.
liquidity.
d.
profitability.
7. The purchase of land is an example of a(n)
a.
investing activity.
b.
operating activity.
c.
capital activity.
d.
financing activity.
8. Which of the following is an example of an operating activity?
a.
Obtaining capital from stockholders
b.
Selling goods and services to customers
c.
Purchasing equipment
d.
Selling land
9. Which of the following is an example of an investing activity?
a.
Purchasing equipment
b.
Obtaining a bank loan
c.
Hiring employees
d.
Producing goods and services
10. Which of the following is an example of a financing activity?
a.
Employing workers
b.
Selling equipment
c.
Paying off a loan
d.
Purchasing land
11. The intentional preparation of misleading financial statements, known as fraudulent financial
reporting, can result from all of the following except
a.
the misapplication of accounting principles.
b.
the manipulation of inventory records.
c.
fictitious sales or orders.
d.
recording a revenue that has been earned but not yet received.
12. All of the following statements are false about the Sarbanes-Oxley Act except
a.
it does not apply to publicly traded companies.
b.
it shields chief executives from criminal penalties.
c.
it prevents the SEC from drawing up certain rules.
d.
its primary goal is to regulate financial reporting and the accounting profession.
13. The group of users of accounting information charged with achieving the goals of the business is its
a.
auditors.
b.
creditors.
c.
management.
d.
investors.
14. A primary user of accounting information with a direct financial interest in the business is a(n)
a.
regulatory agency.
b.
investor
c.
taxing authority.
d.
customer
15. Those who lend money or deliver goods and services before being paid are called
a.
investors.
b.
debtors.
c.
underwriters.
d.
creditors.
16. Which of the following groups uses accounting information primarily to help protect the public?
a.
Management
b.
Regulatory agencies
c.
Taxing authorities
d.
Economic planners
17. One user of accounting information with an indirect financial interest in a business is
a.
a creditor.
b.
a customer.
c.
management.
d.
an investor.
18. Companies listed on the stock exchanges are regulated by the
a.
Financial Accounting Standards Board.
b.
American Institute of Certified Public Accountants.
c.
Securities and Exchange Commission.
d.
Internal Revenue Service.
19. Which of the following is a regulatory agency of the U.S. government?
a.
IASB
b.
SEC
c.
FASB
d.
AICPA
20. Which of the following transactions does not involve an exchange of value?
a.
Payment of taxes
b.
Purchase of a building on credit
c.
Selling of merchandise
d.
Loss from fire
21. An accounting measurement is concerned with all except which of the following?
a.
Money measure
b.
Financial position
c.
Separate entity
d.
Business transaction
22. The separate entity concept requires that
a.
a business have its own set of financial records that are kept separate from its owner’s
financial records.
b.
transactions that involve an exchange of value be kept together with those that do not.
c.
tax records be kept separate from financial reporting records.
d.
a separate set of books be established for each segment of a business.
23. The topic of foreign exchange rates relates most closely to the concept of
a.
separate entity.
b.
money measure.
c.
nonexchange transactions.
d.
business transactions.
24. All of the following are considered nonexchange transactions except
a.
the daily accumulation of interest.
b.
the wear and tear on machinery.
c.
the repayment of a loan.
d.
losses from fire, flood, and theft.
25. Which of the following transactions involves an exchange of value?
a.
Accumulation of interest
b.
Sale of services
c.
Flood loss
d.
Wear and tear on equipment
26. Which of the following is legally a separate entity from its owner(s)?
a.
Sole proprietorship and corporation only
b.
Sole proprietorship and partnership only
c.
Corporation only
d.
Corporation and partnership only
27. Most business enterprises in the United States are
a.
government units.
b.
partnerships.
c.
sole proprietorships.
d.
corporations.
28. The corporate officers are responsible for
a.
arranging for major loans with banks.
b.
determining corporate policy.
c.
carrying out corporate policy.
d.
appointing the board of directors.
29. The board of directors of a corporation is responsible for all of the following except
a.
arranging for major bank loans.
b.
authorizing contracts.
c.
carrying out the daily operations of the business.
d.
declaring dividends.
30. The audit committee is responsible for all of the following except
a.
engaging the company’s independent auditors.
b.
assuring that reliable accounting records are kept.
c.
carrying out the daily operations of a company
d.
ascertaining that the company safeguards its resources.
31. Dividends of a corporation are declared by its
a.
board of directors.
b.
officers.
c.
stockholders.
d.
creditors.
32. Transfer of ownership will not affect the continuity of a
a.
corporation..
b.
sole proprietorship.
c.
partnership
d.
corporation or partnership.
33. Which of the following is not a satisfactory statement of the accounting equation?
a.
Assets = Liabilities + Stockholders’ Equity
b.
Assets – Stockholders’ Equity = Liabilities
c.
Assets = Liabilities – Stockholders’ Equity
d.
Assets – Liabilities = Stockholders’ Equity
34. The best definition of assets is the
a.
cash owned by the company.
b.
resources belonging to a company having future benefit to the company.
c.
collection of resources belonging to the company and the claims on these resources.
d.
owners’ investment in the business.
35. All of the following will affect retained earnings except
a.
expenses incurred.
b.
dividends declared and paid.
c.
revenues earned.
d.
investments by owners.
36. Which of the following assets could be described as nonphysical?
a.
Land
b.
Inventory
c.
Patents
d.
Equipment
37. Which of the following financial statements is concerned with the enterprise at a point in time?
a.
Statement of retained earnings
b.
Income statement
c.
Statement of cash flows
d.
Balance sheet
38. Which of the following financial ratios has not been shown to be most predictive of company
performance?
a.
Debt to equity ratio
b.
Inventory turnover
c.
Profit margin
d.
Cash flow yield
39. Which of the following items has no effect on stockholders’ equity?
a.
Land purchased
b.
Revenue
c.
Expense
d.
Dividends declared and paid
40. Which of the following accounts is not considered an asset?
a.
Cash
b.
Inventory
c.
Common stock
d.
Trademark
41. An example of a monetary asset is
a.
Accounts Receivable.
b.
Copyright.
c.
Equipment
d.
Inventory
42. Stockholders’ equity of a corporation would not show
a.
retained earnings.
b.
additional paid-in capital on stock issued.
c.
the par value of stock issued.
d.
revenues and expenses.
43. A liability would not include an obligation to
a.
transfer assets.
b.
hire an employee.
c.
pay cash.
d.
provide services.
44. The statement of cash flows would disclose the purchase of a building for cash
a.
nowhere on the statement.
b.
in the operating activities section.
c.
in the investing activities section.
d.
in the financing activities section.
45. Which of the following represents the proper order of financial statement preparation?
a.
Statement of cash flows, balance sheet, income statement, statement of retained earnings
b.
Statement of retained earnings, income statement, statement of cash flows, balance sheet
c.
Balance sheet, statement of cash flows, statement of retained earnings, income statement
d.
Income statement, statement of retained earnings, balance sheet, statement of cash flows
46. All of the following items would appear on the balance sheet except
a.
Dividends
b.
Accounts Payable
c.
Common Stock
d.
Inventory
47. The net income figure appears in all the following financial statements except the
a.
statement of cash flows.
b.
income statement.
c.
statement of retained earnings.
d.
balance sheet.
48. The statement of cash flows would disclose the payment of a dividend
a.
in the financing activities section.
b.
in the investing activities section.
c.
in the operating activities section.
d.
nowhere on the statement.
49. Use this information to answer the following question.
Here is the balance sheet for Marron Pickle Company, Inc.:
Marron Pickle Company, Inc.
Balance Sheet
December 31, 2013
Assets
Liabilities
Cash
Accounts payable
$32,000
Accounts receivable
Land
Stockholders’ Equity
Building
Common stock
$80,000
Equipment
Retained earnings
48,000
Total stockholders’ equity
128,000
Total assets
Total liabilities and stockholders’
equity
$160,000
If the equipment were sold for $26,000 cash, then the Retained Earnings account would
a.
increase by $74,000.
b.
increase by $26,000.
c.
decrease by $26,000.
d.
stay the same.
50. Use this information to answer the following question.
Here is the balance sheet for Marron Pickle Company, Inc.:
Marron Pickle Company, Inc.
Balance Sheet
December 31, 2013
Assets
Liabilities
Cash
$ 16,000
Accounts payable
$32,000
Accounts receivable
2,000
Land
28,000
Stockholders’ Equity
Building
88,000
Common stock
$80,000
Equipment
26,000
Retained earnings
48,000
Total stockholders’ equity
128,000
Total assets
$160,000
Total liabilities and stockholders’
equity
$160,000
If the balance in the Cash account were used to pay part of Accounts Payable, then total liabilities and
stockholders’ equity would
a.
decrease by $16,000.
b.
increase by $16,000.
c.
increase by $32,000.
d.
decrease by $32,000.
51. Use this information to answer the following question.
Here is the balance sheet for Marron Pickle Company, Inc.:
Marron Pickle Company, Inc.
Balance Sheet
December 31, 2013
Assets
Liabilities
Cash
Accounts payable
$32,000
Accounts receivable
Land
Stockholders’ Equity
Building
Common stock
$80,000
Equipment
Retained earnings
48,000
Total stockholders’ equity
128,000
Total assets
Total liabilities and stockholders’
equity
$160,000
If the balance in the Cash account were used to buy more equipment, then the total assets would
a.
remain unchanged.
b.
increase by $16,000.