Financial Accounting, 3e (Kemp/Waybright)
Chapter 1 Business, Accounting, and You
1.1 Questions
1) By taking accounting classes, the student is learning the “language of business.”
2) To manage a business effectively, an owner or manager would benefit greatly from having
some knowledge of accounting.
3) Businesses primarily exist to generate sales.
4) The value of an item does NOT depend on when it is expected to be received.
5) Society is considered to be a stakeholder in a business.
6) Accounting information is used to help managers and decision makers understand risk.
7) What do we call the result obtained when revenue is less than cost?
A) Loss
B) Profit
C) Value
D) Risk
8) Which of the following is NOT part of the accounting process as it relates to information?
A) Measuring
B) Recognizing
C) Understanding
D) Reporting
9) According to the textbook, in order for an organization to be called a business it must:
A) exchange a product with a customer.
B) make money.
C) be a corporation.
D) provide a service.
10) Which of the following impacts the value of an item to its owner?
A) When the owner expects to receive something in exchange for the item
B) How certain the owner is about what and when they will receive something in exchange for
the item
C) What the owner expects to receive in exchange for the item
D) All of the above
11) When revenue exceeds cost, it is referred to as:
A) loss.
B) profit.
C) value.
D) risk.
12) Which of the following would NOT be considered a stakeholder in a business?
A) An employee
B) A supplier
C) A regulator
D) All of the above are stakeholders
1.2 Questions
1) Amounts owed to the business’ owners as a result of an initial investment are called liabilities.
2) Net income and profit are the same thing.
3) The only way for business to get money is to borrow it.
4) Business owners expect to be compensated for both time and risk.
5) Business owners are paid interest on the money they have invested in the business.
6) Liabilities are defined as:
A) earnings retained in the business.
B) amounts owed to lenders.
C) stockholders’ claims to assets.
D) future economic benefits of a company.
7) Assets are defined as:
A) earnings retained in the business.
B) amounts owed to others.
C) stockholders’ claims to assets.
D) economic resources of a company.
8) Which of the following does NOT describe Stockholders’ Equity?
A) Profits retained in the business
B) Money lent to a business
C) The owners’ claim on the assets of a company
D) Money invested in a business by its owners
9) Which of the following is NOT an asset?
A) Net income
B) Inventory
C) Buildings
D) Cash
10) Net income is defined as:
A) revenue plus expenses.
B) revenue less assets.
C) expenses less revenue.
D) revenue less expenses.
11) The expense of using borrowed money for a period of time, is referred to as:
A) net income.
B) revenue.
C) liability.
D) interest.
12) What do we call amounts of money borrowed from lenders?
A) Asset
B) Liability
C) Expense
D) Revenue
13) Owner’s Equity represents:
A) an initial investment of cash by the owners.
B) a fair distribution of wealth in the firm.
C) retention of profits by a firm.
D) all of the above.
E) A and C only.
1.3 Questions
1) All businesses are operated to generate a profit.
2) A business may be either a for-profit business or a not-for-profit business.
3) A business with one owner is called a sole proprietorship and it must be a service business.
4) Wal-Mart and Target would be examples of corporate merchandising businesses.
5) Law and accounting firms are service businesses.
6) Shareholders must pay income tax on the dividends they have received from a corporation.
7) A limited liability company (LLC) is a legal entity like a corporation, but the income is taxed
like a sole proprietorship or partnership.
8) A tax preparation business is primarily a:
A) merchandising operation.
B) service operation.
C) not-for-profit operation.
D) manufacturing operation.
9) Which of the following types of organization would primarily sell goods?
A) Merchandising business
B) Service business
C) Manufacturing business
D) Both Merchandising and Manufacturing businesses sell goods.
10) Which of the following types of organizations would produce goods?
A) Merchandising business
B) Service business
C) Both merchandising and manufacturing businesses produce goods.
D) Manufacturing business
11) Which of the following is a disadvantage of the corporate form of business?
A) Ease of raising capital
B) Double taxation
C) Limited resources
D) Limited liability
12) Which of the following is an advantage of a sole proprietorship?
A) Ease of formation
B) Limited liability of owner
C) Ease of raising capital
D) Unlimited life
13) Which type of organization has stockholders?
A) Partnerships
B) Sole proprietorships
C) Corporations
D) Limited liability companies
14) Which of the following business forms is similar to a corporation in regard to owner
liability?
A) All businesses are the same with regard to owner liability.
B) Limited liability company
C) Sole proprietorship
D) Partnership
15) Which of the following do NOT pay taxes on the business income through their individual
owners?
A) S-corporation
B) Sole proprietorship
C) Partnership
D) Corporation
16) One of the newer forms of business is a:
A) corporation.
B) sole proprietorship.
C) partnership.
D) limited liability company.
17) Home Depot would primarily be considered a:
A) manufacturing business.
B) merchandising business.
C) service business.
D) not-for-profit business.
18) Which type of business organization is owned by its stockholders?
A) Corporation
B) Partnership
C) Limited liability company
D) Sole proprietorship
19) Which of the following has double taxation of earnings?
A) Limited liability company
B) Proprietorship
C) Corporation
D) Partnership
20) Which would NOT be an example of a for-profit business?
A) Toys ‘R Us
B) Red Robin
C) Petsmart
D) Red Cross
21) Which type of organization is NOT considered a not-for-profit?
A) Charities
B) Churches
C) Chinese restaurant
D) All of the above are not-for-profits.
22) A hybrid business entity with characteristics of both a corporation and a partnership is called:
A) S-Corporation.
B) P-Corporation.
C) LLC.
D) CP.
23) Caesar’s Coffee sells bagged coffee to grocery stores for resale—what type of business is
this?
A) Service business
B) Wholesale business
C) Retail business
D) None of the above
1.4 Questions
1) Accounting is important because the process “keeps score” of the financial aspects of a
business.
2) The main role of accounting is to compile reports to determine the profit made by a company
over a period of time.
3) Generally Accepted Accounting Principles (GAAP) are the rules and guidelines governing
accounting.
4) The Financial Accounting Standards Board (FASB) established the standards for managerial
accounting.
5) The business entity concept requires that the owner’s personal assets be separated from
business assets.
6) Financial information that is verifiable violates the principle of objectivity.
7) Market value and historical cost (value) are the same concept.
8) Alicia owns a sporting goods store. In her accounting records, she included her personal
computer and all of her personal sporting gear. Alicia is violating what principle of accounting?
A) Going concern
B) Cost
C) Reliability
D) Business entity
9) Jesse lists his building at current replacement value, rather than the price he paid for the
building. What principle is Jesse violating?
A) Going concern
B) Cost
C) Reliability
D) Business entity
10) Sasha owns a bakery. In her accounting records, she includes her car—which is solely used
for personal purposes. Which principle is Sasha violating?
A) Personal property
B) Cost
C) Reliability
D) Business entity
11) Jenesse owns the Garden Inn. In her accounting records, she lists the buildings at their
current market value. Which principle is Jenesse violating?
A) Reliability
B) Cost
C) Business entity
D) None of the above
12) Go Fresh delivery recorded their delivery van at its current replacement value, rather than the
price paid for the van. What principle did they violate?
A) Cost
B) Objectivity
C) Reliability
D) Going concern
13) The owner of Good Dog Daycare wrote a company check to pay her personal credit card bill.
What accounting principle did she violate?
A) Cost
B) Reliability
C) Business entity
D) No principle is violated—the bank account belongs to her, so it’s okay to write checks.
14) FASB is made up of how many members?
A) 3
B) 5
C) 7
D) 9
15) GAAP is the acronym for generally accepted ________ principles.
A) auditing
B) accounting
C) averaging
D) associated
16) Accountants who ignore the effect of inflation on prices may be violating which accounting
principle?
A) Going concern
B) Business entity
C) Reliability
D) Something other than what is listed
17) In the financial accounting records, most assets should be reported at:
A) current replacement cost.
B) current market value.
C) historical cost.
D) inflation-adjusted cost.
18) The accounting principle that best defines a business is:
A) business entity.
B) cost.
C) reliability.
D) going concern.
19) The ________ issues pronouncements that are guidelines for accounting practice.
A) GAAP
B) SEC
C) FASB
D) IRS
20) The guidelines that describe the rules of accounting are called:
A) GAAS.
B) GAAP.
C) FASB.
D) SEC.
21) When an owner combines their personal assets with the assets of their business, what concept
or principle of accounting is being violated?
A) Going concern
B) Objectivity
C) Business entity
D) Cost
22) Taking an inventory of goods on hand would be representative of what accounting concept
or principle?
A) Going concern
B) Objectivity
C) Business entity
D) Cost