CHAPTER 1: ACCOUNTING AS A FORM OF COMMUNICATION
1. United Airlines is an example of a
a. producer
b. supplier
c. retailer
d. service provider
2. All of the following are examples of retailers except:
a. Sports Authority
b. Boeing
c. Home Depot
d. Best Buy
3. 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. Wholesaler, manufacturer, and retailer
4. 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.
5. 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 assets received from the sale of products or services.
c. Revenues represent assets used or consumed in the sale of products or services.
d. Revenues represent the dollar amount of bonds sold to the public.
6. 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
Chapter 1: Accounting as a Form of Communication
7. 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.
8. The inflow of assets resulting from the sale of products and services is called a(n)
a. asset
b. liability
c. revenue
d. expense
9. The costs of doing business through the sale of goods and services are called
a. Net income
b. Expenses
c. Revenues
d. Dividends
10. 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.
11. Which one of the following business decisions will least likely require financial information?
a. The Gulf Coast Bank is reviewing the loan application from Tuo’s Restaurant.
b. Tuo’s Restaurant is attempting to sell its stock to the public.
c. The labor union representing Flaggler’s Fitness Spa employees is negotiating a pay raise as part of a new labor
agreement.
d. Tuo’s Restaurant management is deciding whether to wash its catering vans today or tomorrow.
12. 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
Chapter 1: Accounting as a Form of Communication
13. 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
14. Which one of the following is not an external user of financial information?
a. Company management
b. Internal Revenue Service
c. Creditors
d. Stockholders
15. Barton Building Company is ready to sell its bonds. Which one of the following financial questions is most relevant
to the issue of the bonds and that investors will most likely want answered before they purchase the bonds?
a. How many product lines did Barton Building Company have last year?
b. What will be Barton Building Company’s cost to start operations in another city?
c. How much debt does Barton Building Company already have?
d. Will Barton Building Company pay dividends?
16. What is the name of the branch of accounting concerned with providing managers and administrators with
information to facilitate the planning and control of business operations?
a. Management accounting
b. Auditing
c. Financial accounting
d. Bookkeeping
17. Which of the following invests funds into a business and is considered an owner?
a. Stockholders
b. Creditors
c. Bankers
d. Lenders
Chapter 1: Accounting as a Form of Communication
18. Which one of the following is not one of the three activities included in the definition of accounting?
a. Communicating
b. Identifying
c. Measuring
d. Operating
19. Which one of the following is not an external user of financial statements?
a. Suppliers
b. Creditors
c. Investors
d. The company’s controller
20. Which one of the following is least likely to be a user of financial information of a grocery store?
a. The manager of the grocery store.
b. The supplier of milk to the grocery store.
c. A stockbroker looking for a possible investment.
d. A customer at the grocery store.
21. Which one of the following groups is considered an internal user of financial statements?
a. A bank reviewing a loan application from a corporation.
b. The labor union representing employees of a company that is involved in labor negotiations
c. The financial analysts for a brokerage firm who are preparing recommendations for the firm’s brokers on
companies in a certain industry,
d. Factory managers that supervise production line workers.
22. Which of the following is an organization that lends funds to a business entity and expects repayment of the funds?
a. A partner
b. A stockholder
c. An owner
d. A creditor
Chapter 1: Accounting as a Form of Communication
23. You are a potential stockholder and are concerned that a particular company you are ready to invest in might have
too much debt. Which financial statement would provide you information needed in order to evaluate your
concern?
a. Balance sheet
b. Income statement
c. Statement of retained earnings
d. Statement of public accounting
24. Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders?
a. Balance Sheet
b. Statement of Retained Earnings
c. Income Statement
d. Statement of Public Accounting
25. Which financial statement would you refer to in order to determine whether a company owed funds to creditors?
a. Balance Sheet
b. Statement of Retained Earnings
c. Income Statement
d. Statement of Public Accounting
26. Which one of the following is an economic obligation for a business entity?
a. Salaries paid to employees for services rendered
b. Amounts owed to creditors
c. Materials used in manufacturing products
d. Payment of rent for the next year
27. Which one of the following is a correct expression of the accounting equation?
a. Assets + Liabilities = Owners’ Equity
b. Assets = Liabilities – Owners’ Equity
c. Assets + Owners’ Equity = Liabilities
d. Assets = Liabilities + Owners’ Equity
Chapter 1: Accounting as a Form of Communication
28. How is the balance sheet linked to the other financial statements?
a. The amount of retained earnings reported on the balance sheet is equal to net income.
b. Retained earnings is added to total assets and reported on the balance sheet.
c. Net income increases retained earnings on the statement of retained earnings, which ultimately increases
retained earnings on the balance sheet.
d. There is no link between the balance sheet and other statements, as each contains different accounts and
provides different information.
29. Which of the following is the correct date format for the financial statement heading?
a. Balance sheet for the year ended June 30, 2015
b. Income statement at December 31, 2015
c. Balance sheet at December 31, 2015
d. Statement of retained earnings at December 31, 2015
30. Which of the following best describes the term “retained earnings”?
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 on the assets of the business.
c. The future economic resources of a business entity.
d. The cumulative profits earned by the business less any dividends distributed.
31. Which one of the following items is correct concerning the time element of financial statements?
a. The balance sheet covers a period of time.
b. The statement of retained earnings explains changes during a particular period.
c. An income statement lists amounts at a specific point in time.
d. Both the income statement and the balance sheet cover a period of time.
32. Which one of the following items appears on a balance sheet?
a. Accounts payable
b. Sales revenue
c. Utilities expense
d. Cost of goods sold
Chapter 1: Accounting as a Form of Communication
33. Which one of the following financial statements reports an entity’s financial position at a specific date?
a. Balance sheet
b. Statement of retained earnings
c. Income statement
d. Both the income statement and the balance sheet
34. Which one of the following correctly represents one of the basic financial statement models?
a. Assets – Liabilities = Net Income
b. Assets + Liabilities = Owners’ Equity
c. Revenues + Expenses = Net Income
d. Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
35. Which of the following statements is true?
a. Profits distributed to the creditors are called dividends.
b. The balance sheet shows the assets, liabilities, and profits of a company.
c. Dividends are an expense, and are reported on the income statement as a deduction from net income.
d. The income statement reports the revenues and expenses of a company.
36. Which of the following terms best describes a distribution of the net income of a business to its owners?
a. Revenue
b. Dividends
c. Earnings
d. Monetary unit
37. Which statement summarizes the income earned and the dividends paid?
a. Statement of cash flows
b. Statement of retained earnings
c. Balance sheet
d. Income statement
Chapter 1: Accounting as a Form of Communication
38. Sun City Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
$ 25,000
Accounts receivable
$ 70,000
Property, plant, and equipment
70,000
Long-term debt
40,000
Capital stock
100,000
Accounts payable
20,000
Retained earnings
?
Inventory
35,000
What amount should Sun City report on its balance sheet for total assets?
a. $100,000
b. $95,000
c. $165,000
d. $200,000
39. Lawton Corporation’s end–of-year balance sheet consisted of the following amounts:
Cash
$ 25,000
Accounts receivable
$ 58,000
Property, plant, and equipment
69,000
Long-term debt
40,000
Capital stock
100,000
Accounts payable
20,000
Retained earnings
?
Inventory
43,000
What amount should Lawton report on its balance sheet for total assets?
a. $100,000
b. $161,000
c. $194,000
d. $195,000
40. Harbor City Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
$ 15,000
Accounts receivable
$ 50,000
Property, plant, and equipment
70,000
Long-term debt
40,000
Capital stock
100,000
Accounts payable
20,000
Retained earnings
?
Inventory
35,000
What is Harbor City’s retained earnings balance at the end of the current year?
a. $10,000
b. $110,000
c. $160,000
d. $170,000
Chapter 1: Accounting as a Form of Communication
41. Lakeland Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
$ 25,000
Accounts receivable
$ 46,000
Property, plant, and equipment
69,000
Long-term debt
41,000
Capital stock
97,000
Accounts payable
22,000
Retained earnings
?
Inventory
33,000
What is Lakeland’s retained earnings balance at the end of the current year?
a. $13,000
b. $34,000
c. $76,000
d. $173,000
42. Brock Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
$ 25,000
Accounts receivable
$ 46,000
Property, plant & equipment
69,000
Long-term debt
41,000
Capital stock
100,000
Accounts payable
24,000
Retained earnings
?
Inventory
33,000
What is Brock’s total liabilities balance at the end of the current year?
a. $8,000
b. $65,000
c. $108,000
d. $173,000
43. Front Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
$ 25,000
Accounts receivable
$ 46,000
Property, plant & equipment
69,000
Long-term debt
41,000
Capital stock
107,000
Accounts payable
22,000
Retained earnings
?
Inventory
33,000
What is Front’s owners’ equity balance at the end of the current year?
a. $3,000
b. $110,000
c. $63,000
d. $173,000
Chapter 1: Accounting as a Form of Communication
44. Wei Company reported the following items on its financial statements for the year ending December 31, 2015:
Sales
$ 560,000
Cost of goods sold
$400,000
Salary expense
40,000
Interest expense
30,000
Dividends
20,000
Income tax expense
25,000
The income statement for Wei will report net income for the current year in the amount of
a. $ 45,000
b. $ 65,000
c. $ 85,000
d. $ 465,000
45. Marcos Company reported the following items on its financial statements for the year ending December 31, 2015:
Sales
$ 560,000
Cost of goods sold
$400,000
Salary expense
40,000
Interest expense
30,000
Dividends
20,000
Income tax expense
25,000
How much will be reported as retained earnings on Marcos’ balance sheet at December 31, 2015, if this is the
first year of operations?
a. $ 45,000
b. $ 65,000
c. $ 85,000
d. Not enough information is provided.
46. Morton Corporation reported the following information for the year ended December 31, 2015:
Net income
$10,000
Dividends
6,000
Retained earnings at December 31, 2015
25,000
What was the balance of Morton’s’ retained earnings at January 1, 2015?
a. $21,000
b. $29,000
c. $31,000
d. $35,000
Chapter 1: Accounting as a Form of Communication
47. Lewis Corporation reported the following information for the year ended December 31, 2015:
Net income
$ 10,000
Dividends
6,000
Retained earnings at December 31, 2015
25,000
What was the economic effect of the payment of Lewis’ dividends?
a. The dividend reduced net income for 2015.
b. The dividend should be equal to net income if the company’s accounting equation is in balance.
c. The dividends reduce total retained earnings for the year.
d. The dividends must be paid whenever Lewis Corp. reports net income.
48. Volt Corp. reported the following information for the year ended December 31, 2015:
Revenues
$ 50,000
Expenses
20,000
Retained earnings at December 31, 2014
100,000
Retained earnings at December 31, 2015
105,000
How much was paid out in dividends by Volt in 2015?
a. $ 20,000
b. $ 25,000
c. $ 30,000
d. $ 50,000
49. Mobile Power Corp. reported the following information for the year ended December 31, 2015.
Revenue
$ 40,000
Expenses
23,000
Dividends
10,000
Retained earnings at December 31, 2015
175,000
What was the retained earnings balance for Mobile Power at December 31, 2014?
a. $ 165,000
b. $ 168,000
c. $ 182,000
d. $ 192,000
Chapter 1: Accounting as a Form of Communication
50. Native Mike’s Consultants had the following balance sheet amounts at the beginning of the year:
Total assets $400,000
Total owner’s equity 150,000
During the year, total assets increased by $100,000 and total liabilities increased by $40,000. The company also
paid $30,000 in dividends. No other transactions occurred except revenues and expenses. How much is net income
for the year?
a. $30,000
b. $60,000
c. $70,000
d. $90,000
51. On January 1, 2015, A-Best Company‘s balance in retained earnings was $70,000. At the end of the year,
December 31, 2015, the balance in retained earnings was $94,000. During 2015, the company earned net income
of $40,000. How much were dividends?
a. $16,000
b. $24,000
c. $40,000
d. $64,000
52. On January 1, 2015, Flaggler Company’s balance in retained earnings was $70,000. During 2015, the company
earned net income of $43,000 and paid $15,000 in dividends. Calculate the retained earnings balance at December
31, 2015.
a. $42,000
b. $90,000
c. $98,000
d. $113,000
53. The following information is provided by the Centos Corporation:
Beginning retained earnings
$50,000
Ending retained earnings
70,000
Dividends declared and paid
10,000
Revenue
50,000
What is the net income for Centos Corp.?
a. $10,000
b. $20,000
c. $30,000
d. Unable to tell from the information provided.
Chapter 1: Accounting as a Form of Communication
54. The following information is provided by the Ferrara Corporation:
Beginning retained earnings
$50,000
Ending retained earnings
70,000
Dividends declared and paid
10,000
Revenue
50,000
Calculate Ferrara Corporation’s expenses.
a. $20,000
b. $30,000
c. $40,000
d. Cannot tell from the information provided.
55. If a company has $152,000 of revenues, declares and pays $55,000 in dividends, and has net income of $89,000,
how much were expenses for the year?
a. $ 8,000
b. $ 63,000
c. $144,000
d. Unable to determine the amount due to incomplete information.
56. Surge Company reports the following information at December 31, 2015:
Revenue
$150,000
Cash
30,000
Accounts payable
40,000
Dividends
10,000
Expenses
85,000
What is Surge Company’s net income?
a. $ 15,000
b. $ 45,000
c. $ 55,000
d. $ 65,000
Chapter 1: Accounting as a Form of Communication
57. Cerrato Company has assets of $350,000, liabilities of $130,000, and retained earnings of $180,000. How much is
total owners’ equity?
a. $ 40,000
b. $ 170,000
c. $ 220,000
d. $ 350,000
58. Gyro’s Shop reported a net loss of $15,000 and total expenses of $80,000. How much are total revenues?
a. $ 15,000
b. $ 65,000
c. $ 95,000
d. The answer cannot be determined from the information given.
59. Marcos Inc. had net income for 2014 of $40,000. It declared and paid a $3,500 cash dividend in 2014. If the
company’s retained earnings for the end of the year was $38,200, what was the company’s retained earnings
balance at the beginning of 2014?
a. $81,700
b. $74,700
c. $5,300
d. $1,700
60. Global Inc. had net income for 2015 of $24,000. It declared and paid a $13,000 cash dividend in 2015. If the
company’s retained earnings for the end of the year was $39,600, what was the company’s retained earnings
balance at the beginning of 2015?
a. $28,600
b. $50,600
c. $76,600
d. $2,600
Chapter 1: Accounting as a Form of Communication
61. At December 31, 2015, the accounting records of Wyndam Corporation contain the following:
Accounts payable
$ 16,000
Accounts receivable
$ 40,000
Land
240,000
Cash
?
Capital stock
?
Equipment
120,000
Building
180,000
Notes payable
190,000
Retained earnings
160,000
If capital stock is $260,000, what is the December 31, 2015 cash balance?
a. $46,000
b. $506,000
c. $94,000
d. $86,000
62. At December 31, 2015, the accounting records of Farmer Corporation contain the following:
Accounts payable
$ 16,000
Accounts receivable
$ 40,000
Land
240,000
Cash
?
Capital stock
?
Equipment
120,000
Building
180,000
Notes payable
190,000
Retained earnings
160,000
If Cash is $26,000, what is the December 31, 2015 capital stock balance?
a. $272,000
b. $240,000
c. $220,000
d. $400,000
63. Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee’s
total assets increased by $80,000 and its total liabilities increased by $57,000 during the year, what is the amount of
Sawaddee’s owners’ equity at the end of the year?
a. $197,000
b. $543,000
c. $243,000
d. $220,000
Chapter 1: Accounting as a Form of Communication
64. Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee
total liabilities increased by $31,000 and its owners’ equity decreased by $53,000 during the year, what was the
amount of its total assets at the end of the year?
a. $472,000
b. $242,000
c. $198,000
d. $428,000
65. The natural progression in items from one statement to another and preparation of financial statements is best
represented by the following order:
a. Balance sheet and statement of cash flows > statement of retained earnings > income statement
b. Balance sheet and statement of cash flows > income statement > statement of retained earnings.
c. Statement of retained earnings > income statement > balance sheet and statement of cash flows
d. Income statement > statement of retained earnings > balance sheet and statement of cash flows
66. All of the following are different expressions for net income except:
a. Profits
b. Excess of revenues over expenses
c. Capital
d. Earnings
67. Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee’s
total assets doubled to $900,000 and its owners’ equity remained the same during the year, what was the amount
of its total liabilities at the end of the year?
a. $670,000
b. $680,000
c. $440,000
d. $900,000
68. The statement of retained earnings accomplishes which of the following?
a. It summarizes income earned and dividends paid over a single period of the business.
b. It accumulates all revenues for the year.
c. It summarizes the balance sheet accounts.
d. It summarizes the capital stock accounts over the life of the business.
Chapter 1: Accounting as a Form of Communication
69. Which concept is the reason the dollar is used in the preparation of financial statements?
a. Going concern
b. Legal entity
c. Monetary unit
d. Time Period
70. Which one of the following is an assumption made in the preparation of financial statements?
a. Financial statements are prepared for a specific entity that is distinct from the entity owners.
b. Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit
c. Preparation of financial statements for a specific time period assumes that the balance sheet covers a period of
time.
d. Market values are always assumed to be irrelevant when preparing financial statements.
71. Why is the time period assumption required?
a. Inflation exists.
b. External users of financial statements want statements that accurately reflect net income or earnings for a
specific time period.
c. The dollar is the monetary unit in the United States.
d. The federal government requires it.
72. Which one of the following statements is true concerning assets?
a. They are recorded at market value and then adjusted for inflation.
b. They are recorded at market value for financial reporting purposes as historical cost may be arbitrary.
c. Accountants use the term historical cost to refer to the original cost of an asset.
d. Assets are measured using the time–period approach.
73. Macon Enterprises purchased land for $2,000,000 in 2001. In 2015, an independent appraiser assessed the value at
$3,400,000. What amount should appear on the financial statements in 2015 with respect to the land?
a. $2,000,000
b. $1,400,000
c. $3,400,000
d. Whatever amount the company believes is the best indicator of the true value of the land
Chapter 1: Accounting as a Form of Communication
74. Which of the following is a five-member body that has the authority from Congress to set standards for conducting
audits?
a. FASB
b. SEC
c. PCAOB
d. AICPA
75. Which the following organizations is primarily responsible for establishing GAAP today?
a. Financial Accounting Standards Board (FASB)
b. Securities and Exchange Commission (SEC)
c. Internal Revenue Service (IRS)
d. Federal Government
76. Which of the following organizations is responsible for setting auditing standards followed by public accounting
firms in conducting independent audits of financial statements?
a. Financial Accounting Standards Board (FASB)
b. Securities and Exchange Commission (SEC)
c. Public Company Accounting Oversight Board (PCAOB)
d. International Accounting Standards Board (IASB)
77. Which organization, in addition to the Financial Accounting Standards Board (FASB), occasionally issues
authoritative rules for financial statements?
a. The Accounting Profession
b. International Accounting Standards Board (IASB)
c. Securities and Exchange Commission (SEC)
d. Internal Revenue Service (IRS)
78. The Securities and Exchange Commission (SEC) is concerned with
a. All companies in the United States regardless of size.
b. Companies that issue securities to the general public.
c. Accounting reports issued by government entities.
d. All domestic and international companies that issue accounting reports.
Chapter 1: Accounting as a Form of Communication
79. To which of the following entities must a company report if it sells its stock on the organized stock market?
a. American Institute of Certified Public Accountants (AICPA)
b. American Accounting Association (AAA)
c. International Accounting Standards Board (IASB)
d. Securities and Exchange Commission (SEC)
80. The reliability of the information in a company’s financial statements is the responsibility of which of the following?
a. The Securities and Exchange Commission (SEC)
b. The Certified Public Accountant in charge of the audit of the company’s financial statements
c. The company’s management
d. The stockholders of the company
81. In order for accounting information to be useful in making informed decisions, it must be
a. relevant
b. reliable
c. both relevant and reliable
d. nether relevant nor reliable
82. The second step in the ethical decision-making model is to
a. List alternatives and evaluate the impact of each on those affected
b. Select the best alternative
c. Recognize an ethical dilemma
d. Analyze the key elements in the situation
83. All of the following are important provisions of the Sarbanes-Oxley Act except:
a. The establishment of a new Public Company Accounting Oversight Board.
b. The requirement to prepare both FASB and IASB financial statements.
c. A requirement that the external auditors report directly to the company’s audit committee.
d. A clause to prohibit public accounting firms that audit a company from providing any other services that could
impair their ability to act independently in the course of their audit.
Chapter 1: Accounting as a Form of Communication
84. When selecting between the best alternatives regarding an ethical dilemma in accounting all of the following should
be considered except:
a. which alternative provides the most relevant information.
b. which alternative provides the most accurate information.
c. which alternative provides the most neutral information.
d. which alternative provides the most profitable information.
85. Under Armour is an example of a service provider.
a. True
b. False
86. A grocery store is an example of a wholesaler.
a. True
b. False
87. The Internal Revenue Service (IRS) recognizes the separate existence of a proprietorship from its owner.
a. True
b. False
88. 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
89. Business entities and non-business entities are both organized to earn a profit.
a. True
b. False
90. Someone to whom a company has a debt is known as an investor.
a. True
b. False