CHAPTER 1: THE ROLE OF ACCOUNTING IN BUSINESS
1. The objective of most businesses is to maximize profits.
a. True
b. False
2. A limited liability company combines attributes of a partnership and a corporation.
a. True
b. False
3. A partnership is owned by two or more individuals.
a. True
b. False
4. Manufacturing businesses change basic inputs into products that are sold to individual
customers.
a. True
b. False
5. Merchandising businesses produce products rather than provide services to customers.
a. True
b. False
6. A corporation is a business that is legally separate and distinct from its owners.
a. True
b. False
7. The popularity of the sole proprietorship is due to the ease and low cost of organizing.
a. True
b. False
8. A primary disadvantage of corporations is that the financial resources available to them are
limited.
a. True
b. False
Chapter 1: The Role of Accounting in Business
9. The ownership of a proprietorship is divided into shares of stock owned by its stockholders.
a. True
b. False
10. All merchandising businesses are organized as corporations.
a. True
b. False
11. Stockholders of a corporation are its internal stakeholders.
a. True
b. False
12. John Deere is a leading manufacturer of agricultural machinery in the world producing
products that serve unique market needs. Therefore, John Deere is an example of a company
that uses a premium-price emphasis to attract customers.
a. True
b. False
13. A business stakeholder has an interest in the economic performance of a business.
a. True
b. False
14. Companies using a low-cost emphasis provide products and services that compete on features
other than price.
a. True
b. False
15. The basic type of stock issued to owners is called common stock.
a. True
b. False
16. Assets are acquired through investing activities when resources are purchased.
a. True
b. False
Chapter 1: The Role of Accounting in Business
17. Creditors have preference to assets behind stockholders if a business fails.
a. True
b. False
18. A liability is a legal obligation to repay the amount borrowed according to the terms of the
borrowing agreement.
a. True
b. False
19. Accounting is thought to be the “language of business” because business information is
communicated to stakeholders.
a. True
b. False
20. The branch of accounting related to the management’s financial decisions is known as
financial accounting.
a. True
b. False
21. The stockholders’ equity of a company should equal the sum of its total assets and total
liabilities.
a. True
b. False
22. The balance sheet represents the accounting equation.
a. True
b. False
23. What is the primary objective of most businesses?
a. To maximize profits
b. To pay dividends to stockholders
c. To provide a benefit to society
d. To manufacture a quality product
Chapter 1: The Role of Accounting in Business
24. Which of the following would not be an example of a merchandising business?
a. The Walt Disney Company
b. JCPenney
c. Amazon.com
d. Wal-Mart
25. Which of the items below is not a business organization form?
a. Venture entrepreneurship
b. Proprietorship
c. Partnership
d. Corporation
26. Which of the following types of business is popular for its ease and low cost of organizing?
a. Not-for-profit
b. Corporation
c. Partnership
d. Proprietorship
27. Which of the following is true about limited liability company?
a. It is taxed as a separate legal entity.
b. It combines attributes of a partnership and a corporation.
c. Its financial resources are limited to the individual owner’s resources.
d. Its formation process is complex.
28. Under a , a business designs products that possess unique attributes or characteristics for
which customers are willing to pay more.
a. premium-price emphasis
b. outreach emphasis
c. low-cost emphasis
d. customer emphasis
Chapter 1: The Role of Accounting in Business
29. Which of the following is not a characteristic of a corporation?
a. Corporations are organized as a separate legal taxable entity.
b. Ownership is divided into shares of stock.
c. Corporations experience an ease in obtaining large amounts of resources by issuing stock.
d. A corporation can elect to be taxed as a partnership.
30. A corporation is .
a. an entity that is organized according to state or federal statutes and in which ownership is
divided into shares of stock
b. an entity that is owned by an individual
c. an entity which has unlimited liability to creditors for the debts of the company
d. an entity which has limited access to capital
31. A low-cost emphasis strives to provide:
a. no-frills, standardized products and services.
b. products and services that provide unique market needs.
c. products and services that provide prestige and image for customers.
d. products and services that compete on features other than price.
32. Which of the following businesses use a premium-price emphasis?
a. Value City Furniture selling furniture at affordable prices
b. Tommy Hilfiger selling products that have a unique image
c. Wal-Mart reselling standardized products
d. Southwest Airlines providing standardized services
33. Motel 6, a company that helps customers find budget motels across the nation, is an example
of a business using which of the following?
a. Low-cost emphasis
b. Outreach emphasis
c. Customer emphasis
d. Premium-price emphasis
Chapter 1: The Role of Accounting in Business
34. Which of the following are business stakeholders?
a. Stockholders
b. Suppliers
c. Customers
d. All of these
35. is an example of internal stakeholders.
a. Managers
b. Creditors
c. Stockholders
d. Suppliers
36. Which of the following is not an example of a capital market stakeholder?
a. Banks
b. Owners
c. Suppliers
d. Stockholders
37. Capital market stakeholders have an interest in the company because:
a. they provide incentives for the company to market their products.
b. they are part of the Marketing Department that is responsible for promoting the products or
services to increase the business profits.
c. they help market their products to customers or find vendors to supply needed inputs.
d. they provide major financing for the business.
38. Who has the first preference to assets in case a business fails?
a. Stockholders
b. Long-term creditors
c. Customers
d. Employees
39. Governments have an interest in the economic performance of business because of:
a. tax collections.
b. community involvement from the business.
c. business incentives.
d. all of these.
Chapter 1: The Role of Accounting in Business
40. Managers are evaluated primarily on the business’s:
a. tax collections.
b. growth.
c. economic performance.
d. all of these.
41. When a business borrows money, it incurs a(n):
a. tax.
b. liability.
c. receivable.
d. additional equity.
42. When a product is sold, the cost of the product sold is often called:
a. cost of goods sold.
b. selling cost.
c. period cost.
d. retained cost.
43. A note payable requires payment of the amount borrowed plus:
a. interest.
b. tax.
c. overhead.
d. dividend.
44. Shares of ownership are evidenced by issuing:
a. shares payable.
b. commercial paper.
c. shares of stock.
d. notes payable.
45. The resources a business owns are called:
a. assets.
b. liabilities.
c. earnings.
d. stockholders’ equity.
Chapter 1: The Role of Accounting in Business
46. The purchase of factory equipment would be an example of which type of business activity?
a. Financing
b. Investing
c. Operating
d. All of these
47. Which of the following is an intangible asset?
a. Patent
b. Cash
c. Land
d. Equipment
48. Rights to payments from customers are:
a. liabilities.
b. prepaid expenses.
c. accounts receivable.
d. accounts payable.
49. Which of the following is considered an asset until consumed?
a. Accounts payable
b. Prepaid expense
c. Accounts receivable
d. Stockholders’ equity
50. is the increase in assets from selling products and services.
a. Revenue
b. Liabilities
c. Products
d. Stockholders’ Equity
51. Cash collected from sales during the normal course of business would be an example of which
type of business activity?
a. Operating
b. Investing
c. Financing
d. None of these
Chapter 1: The Role of Accounting in Business
52. Costs incurred in operating a business are also known as:
a. revenues.
b. expenses.
c. liabilities.
d. dividends.
53. Debts owed by a business are referred to as:
a. accounts receivable.
b. equities.
c. stockholders’ equity.
d. liabilities.
54. Cash investments made by the stockholders of the business are reported on the statement of
cash flows in the:
a. financing activities section.
b. investing activities section.
c. operating activities section.
d. supplemental statement.
55. Financing activities .
a. involve obtaining funds to operate a business
b. involve obtaining assets such as buildings and equipment
c. help to earn revenues and profits
d. help to make wise investments in other companies
56. Reporting the financial condition of a business at a point in time and the changes in the
financial condition of a business over a period of time are the two major objectives of:
a. tax accounting.
b. union contracts.
c. managerial accounting.
d. financial accounting.
Chapter 1: The Role of Accounting in Business
57. The role of accounting in business is best defined as:
a. an information system that provides reports to stakeholders about the economic activities
and condition of a business.
b. a method of forecasting the future profitability of a company.
c. the policies, procedures, and strategies used in a business.
d. transaction analysis.
58. A list of assets, liabilities, and owners’ equity as of a specific date is a(n):
a. income statement.
b. balance sheet.
c. statement of cash flows.
d. retained earnings statement.
59. Given the following list of accounts, calculate Total Assets:
Accounts Receivable
$10,000
Capital Stock
20,000
Cash
25,300
Equipment
16,800
Fees Earned
44,400
Miscellaneous Expense
17,800
Rent Expense
3,250
Retained Earnings
7,850
Salaries Expense
15,400
Wages Expense
15,000
a. $52,100
b. $55,300
c. $54,600
d. $40,050
60. Which of the following is an appropriate representation of the accounting equation?
a. Assets + Liabilities = Stockholders’ equity
b. Assets = Liabilities + Stockholders’ equity
c. Assets = Liabilities
d. Assets = Liabilities + Retained earnings
Chapter 1: The Role of Accounting in Business
61. Use the following information to determine Total Stockholders’ Equity:
Total Assets
$45,000
Total Liabilities
18,000
Total Stockholders’ Equity
x
Total Retained Earnings
5,000
a. $58,000
b. $27,000
c. $32,000
d. $40,000
62. A summary of the cash receipts and cash payments for a specific period of time is a(n):
a. income statement.
b. balance sheet.
c. statement of cash flows.
d. retained earnings statement.
63. The portion of a corporation’s net income retained in the business is called:
a. interest earnings.
b. dividends.
c. tax expense.
d. retained earnings.
64. The debt created by a business when it makes a purchase on account is referred to as an:
a. account payable.
b. account receivable.
c. asset.
d. expense payable.
65. If there was no beginning retained earnings, net income of $30,300, and ending retained
earnings of $8,000, how much were dividends?
a. $38,300
b. $22,300
c. $6,000
d. $8,000
Chapter 1: The Role of Accounting in Business
66. During 2015, Trinder Corporation had an increase in total assets of $80,000 and an increase in total
liabilities of $60,000. Assuming that capital stock increased by $8,000 and no dividends were paid,
calculate Trinder’s net income or net loss for 2015.
a. Net income of $12,000
b. Net income of $72,000
c. Net income of $28,000
d. Net loss of $20,000
67. The financial statement that presents a summary of the revenues and expenses of a business
for a specific period of time, such as a month or an year, is called a(n):
a. prior period statement.
b. statement of retained earnings.
c. income statement.
d. balance sheet.
68. Which of the following is the correct order for preparing financial statements?
a. Income statement, Statement of cash flows, Retained earnings statement, Balance sheet
b. Retained earnings statement, Income statement, Statement of cash flows, Balance sheet
c. Statement of cash flows, Retained earnings statement, Balance sheet, Income statement
d. Income statement, Retained earnings statement, Balance sheet, Statement of cash flows
69. A summary of the cash receipts and cash payments for a specific period of time is a(n):
a. income statement.
b. balance sheet.
c. statement of cash flows.
d. retained earnings statement.
Chapter 1: The Role of Accounting in Business
70. Tadeo, Inc. had the following account balances at September 30, 2015. What is Tadeo’s net
income for the month of September?
Accounts Payable
$ 5,800
Capital Stock
12,000
Cash
15,500
Equipment
14,300
Fees Earned
53,000
Miscellaneous Expense
16,800
Rent Expense
4,000
Retained Earnings
7,000
Wages Expense
17,850
a. $10,800
b. $14,350
c. $14,450
d. $27,500
71. Univeo, Inc. had revenues of $245,000, expenses of $180,000, and dividends of $45,000
during 2015. Which of the following statements is correct?
a. Net income for 2015 totaled $65,000.
b. Net income for 2015 totaled $20,000.
c. Total retained earnings increased by $65,000 during 2015.
d. Total retained earnings decreased by $20,000 during 2015.
72. A summary of changes in the earnings retained by the corporation for a specific period of time
is known as a(n):
a. income statement.
b. balance sheet.
c. statement of cash flows.
d. retained earnings statement.
73. Including all relevant data a reader needs to understand the financial condition and
performance of a business refers to which concept?
a. Adequate disclosure concept
b. Going concern concept
c. Objectivity concept
d. Business entity concept
Chapter 1: The Role of Accounting in Business
74. Heedy Company had the following account balances in 2015 and 2016, respectively.
Assuming dividends of $20,000 were paid in 2016, how much was net income?
2016
2015
Capital Stock
$ 42,000
$ 40,000
Retained Earnings
x
210,000
Total Stockholders’ Equity
$314,000
$250,000
a. $62,000
b. $82,000
c. $272,000
d. $252,000
75. The “rules” of accounting are called:
a. income tax regulations.
b. SEC regulations.
c. Internet rules.
d. Generally Accepted Accounting Principles.
76. Which of the following is true about the cost principle?
a. It limits the economic data recorded in an accounting system to data related to the activities
of that company.
b. It initially records assets in the accounting records at their purchase price.
c. It assumes that a company will continue in business indefinitely.
d. It reports the revenues earned by a company for a period with the expenses incurred in
generating the revenues.
77. Recording revenue when a sale is made most directly relates to which concept?
a. Going concern concept
b. Periodicity concept
c. Matching concept
d. Adequate disclosure concept