Chapter 1—Introduction to Accounting and Business Key
1. The main objective of a not-for-profit business is not to make a profit.
2. An example of an external user of accounting information is the federal government.
3. A corporation is a business that is legally separate and distinct from its owners.
4. About 90% of the businesses in the United States are organized as corporations.
5. The role of accounting is to provide many different users with financial information to make economic
decisions.
6. Proprietorships are owned by one owner and provide only services to their customers.
7. Only large companies such as Wal-Mart, JCP, General Motors, and the Bank of America can be organized as
corporations.
8. Accounting information users need reports about the economic activities and condition of businesses.
9. Senior executives cannot be criminally prosecuted for the wrong doings they commit on behalf of the
companies where they work.
10. The primary role of accounting is to determine the amount of taxes a business will be required to pay to
taxing entities.
11. An account receivable is typically classified as a revenue.
12. Managerial accounting information is used by external and internal users equally.
13. Financial accounting provides information to all users, while the main focus for managerial accounting is to
provide information to the management.
14. Proper ethical conduct implies that you only consider what’s in your best interest.
15. Some of the major fraudulent acts by senior executives started as what they considered to be small ethical
lapses which grew out of control.
16. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information.
17. A business is an organization in where basic resources or inputs, like materials and labor, are assembled and
processed to provide outputs in the form of goods or services to customers.
18. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility
for developing accounting principles.
19. The cost concept is the basis for entering the exchange price into the accounting records.
20. The unit of measurement concept requires that economic data be recorded in a common unit of
measurement.
21. If a building is appraised for $85,000, offered for sale at $90,000, and the buyer pays $80,000 cash for it, the
buyer would record the building at $85,000.
22. Generally accepted accounting principles regulate how and what financial information is reported by
businesses.
23. The accounting equation can be expressed as Assets – Liabilities = Owner’s Equity.
24. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of
owners.
25. The owner’s rights to the assets rank ahead of the creditors’ rights to the assets.
26. If the liabilities owed by a business total $300,000 and owners equity is equal to $300,000, then the assets
also total $300,000.
27. If total assets decreased by $30,000 during a specific period and owner’s equity decreased by $35,000
during the same period, the period’s change in total liabilities was an $65,000 increase.
28. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the
same period, the period’s change in total owner’s equity was a $200,000 increase.
29. If net income for a proprietorship was $50,000, the owner withdrew $20,000 in cash and the owner invested
$10,000 in cash, the capital of the owner increased by $40,000.
30. An account receivable is a claim against a customer arising from a sale on account.
31. Paying an account payable increases liabilities and decreases assets.
32. Receiving payments on an account receivable increases both equity and assets.
33. Cash withdrawals by owners decrease assets and increase equity.
34. Purchasing supplies on account increases liabilities and decreases equity.
35. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid.
36. Revenue is earned only when money is received.
37. Expenses are assets that are used up during the process of earning revenue.
38. The excess of revenue over the expenses incurred in earning the revenue is called capital.
39. The principal financial statements of a proprietorship are the income statement, statement of owner’s equity,
and the balance sheet.
40. An income statement is a summary of the revenues and expenses of a business as of a specific date.
41. A statement of owner’s equity reports the changes in the owner’s equity for a period of time.
42. The statement of cash flows consists of three sections: cash flows from operating activities, cash flows from
income activities, and cash flows from equity activities.
43. The financial statements of a proprietorship should include the owner’s personal assets and liabilities.
44. The balance sheet represents the accounting equation.
45. An example of a general-purpose financial statement would be a report about projected price increases
related to transportation costs.
46. No significant differences exist between the accounting standards issued by the FASB and the IASB.
47. The Sarbanes-Oxley Act prohibits CPAs from providing nonaudit investment banking services.
48. The main objective for all business is to maximize unrealized profits.
49. The basic difference between manufacturing and merchandising companies is the completion level of the
products they purchase for resale to customers.
50. Net income and net profit do not mean the same thing.
51. Profit is the difference between
52. Most businesses in the United States are
53. Which of the items below is not a business entity?
54. An entity that is organized according to state or federal statutes and in which ownership is divided into
shares of stock is a
55. Financial reports are used by
56. Which of the following best describes accounting?
57. Two common areas of accounting that respectively provide information to internal and external users are:
58. Which type of accountant typically practices as an individual or as a member of a public accounting firm?
59. All of the following are general-purpose financial statements except:
60. Which of the following is a manufacturing business?
61. Which of the following group of companies are all examples of a merchandising business?
62. Which of the following would not normally operate as a service business?
63. Select the type of business that is most likely to obtain large amounts of resources by issuing stock.
64. Which of the following is true in regards to a Limited Liability Company?
65. On April 25, Gregg Repair Service extended an offer of $115,000 for land that had been priced for sale at
$140,000. On May 3, Gregg Repair Service accepted the seller’s counteroffer of $125,000. On June 20, the land
was assessed at a value of $95,000 for property tax purposes. On August 4, Gregg Repair Service was offered
$150,000 for the land by a national retail chain. At what value should the land be recorded in Gregg Repair
Service’s records?
66. Which of the following groups are considered to be internal users of accounting information?
67. The following are examples of external users of accounting information except:
68. Due to various fraudulent business practices and accounting coverups in the early 2000’s, Congress enacted
the Sarbanes-Oxley Act of 2002. The Act was responsible for establishing a new oversight board for public
accountants called the
69. Which of the following is the best description of accounting’s role in business?
70. Managerial accountants would be responsible for providing the following information:
71. Which of the following is not a certification for accountants?
72. Which of the following isnot a characteristic of a corporation?
73. Which of the following is not a role of accounting in business?
74. Which of the following are guidelines for behaving ethically?
Identify the consequences of a decision and its effect on others.
Consider your obligations and responsibilities to those affected by the decision.
Identify your decision based on personal standards of honesty and fairness.
75. The Sarbanes-Oxley Act of 2002 prohibits employment of auditors by their clients for what period after
their last audit of the client?
76. The initials GAAP stand for
77. Within the United States, the dominant body in the primary development of accounting principles is the
78. The business entity concept means that
79. For accounting purposes, the business entity should be considered separate from its owners if the entity is
80. The objectivity concept requires that
81. Denzel Jones owns and operates Crystal Cleaning Company. Recently, Denzel withdrew $10,000 from
Crystal Cleaning, and he contributed $6,000, in his name, to Habitat for Humanity. The contribution of the
$6,000 should be recorded on the accounting records of which of the following entities?
82. Equipment with an estimated market value of $30,000 is offered for sale at $45,000. The equipment is
acquired for $15,000 in cash and a note payable of $20,000 due in 30 days. The amount used in the buyer’s
accounting records to record this acquisition is
83. Which one of the following is the authoritative body in the United States having the primary responsibility
for developing accounting principles?
D. AICPA
84. Which of the following concepts relates to separating the reporting of business and personal economic
transactions?
85. Donner Company is selling a piece of land adjacent to their business premises. An appraisal reported the
market value of the land to be $220,000. The Focus Company initially offered to buy the land for
$177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on
the same block sold for $232,000. Under the cost concept, at what amount should the land be recorded in the
accounting records of Focus Company?
86. Which of the following is not true of accounting principles?
87. Assets are
88. Debts owed by a business are referred to as
89. The accounting equation may be expressed as
90. Which of the following is not an asset?
91. The assets and liabilities of the company are $128,000 and $84,000, respectively. Owner’s equity should
equal
92. If total liabilities decreased by $46,000 during a period of time and owner’s equity increased by $60,000
during the same period, the amount and direction (increase or decrease) of the period’s change in total assets is
93. Which of the following is not a business transaction?
94. A business paid $7,000 to a creditor in payment of an amount owed. The effect of the transaction on the
accounting equation was to
95. Earning revenue
96. The monetary value charged to customers for the performance of services sold is called a(n)
97. Revenues are reported when
98. Expenses are recorded when
99. Goods purchased on account for future use in the business, such as supplies, are called
100. The asset created by a business when it makes a sale on account is termed
101. The debt created by a business when it makes a purchase on account is referred to as an
102. If total assets decreased by $88,000 during a period of time and owner’s equity increased by $71,000
during the same period, then the amount and direction (increase or decrease) of the period’s change in total
liabilities is
103. Owner’s withdrawals
104. How does paying a liability in cash affect the accounting equation?
105. How does receiving a bill to be paid next month for services received affect the accounting equation?
106. How does the purchase of equipment by signing a note affect the accounting equation?
107. Land, originally purchased for $30,000, is sold for $62,000 in cash. What is the effect of the sale on the
accounting equation?
108. Allen Marks is the sole owner and operator of Great Marks Company. As of the end of its accounting
period, December 31, 2013, Great Marks Company has assets of $940,000 and liabilities of $300,000. During
2014, Allen Marks invested an additional $73,000 and withdrew $33,000 from the business. What is the amount
of net income during 2014, assuming that as of December 31, 2014, assets were $995,000, and liabilities were
$270,000?
109. Transactions affecting owner’s equity include
110. Clifford Moore is starting his computer programming business and has deposited in initial investment of
$15,000 into the business cash account. Identify how the accounting equation will be affected.
111. Gomez Service Company paid their first installment on their Notes Payable in the amount of $2,000. How
will this transaction affect the accounting equation?
112. Ramon Ramos has withdrawn $750 from Ramos Repair Company’s cash account to deposit in his personal
account. How does this transaction affect Ramos Repair Company’s accounting equation?
113. Which of the following is not a business transaction?
114. 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 year, is called a(n)
115. Which of the following financial statements reports information as of a specific date?
116. Four financial statements are usually prepared for a business. The statement of cash flows is usually
prepared last. The statement of owner’s equity (OE), the balance sheet (B), and the income statement (I) are
prepared in a certain order to obtain information needed for the next statement. In what order are these three
statements prepared?
117. Liabilities are reported on the
118. Cash investments made by the owner to the business are reported on the statement of cash flows in the
119. The year-end balance of the owner’s capital account appears in
120. A financial statement user would determine if a company was profitable or not during a specific period of
time by reviewing
121. If the owner wanted to know how money flowed into and out of the company, what financial statement
would she use?
122. The asset section of the Balance Sheet normally presents assets in
123. Countries outside the U.S. use financial accounting standards issued by the:
124. All of the following statements regarding the ratio of liabilities to owner’s equity are true except:
125. The unit of measure concept:
126. Given the following data:
Dec. 31,2014 Dec. 31,2013
Total liabilities $128,250 $120,000
Total owner’s equity 95,000 80,000
Compute the ratio of liabilities to owner’s equity for each year. Round to two decimal places.
127. Discuss internal and external users of accounting information. What areas of accounting provide them
with information? Give an example of the type of report each type of user might use.
128. Companies like Enron, WorldCom, and Tyco International, Ltd. have been caught in the midst of ethical
lapses that led to fines, firings, and criminal and/or civil prosecution. List and briefly describe three factors that
are responsible for what went wrong in these companies.