Chapter 1: Accounting as a Form of Communication
181. The following accounting principles and assumptions are included in the conceptual framework of accounting:
Economic entity
Going concern
Cost principle
Monetary unit
Time period
For each situation in A through C below, identify which assumption or principle applies by selecting from the list pro
why that assumption or principle applies.
A) Global Corp. has divisions in several countries around the world. Each of these countries has a currency different
from the U.S.dollar. Global Corp. is a U.S. company and must include the financial data of its worldwide
divisions in its financial stat
B) Steve and Mike operate a security business as a partnership. They are considering the advantages of changing
over to the corporate form of business.
C) Island Pasta is a locally owned and operated fast-food business. The owners have decided to expand into nearby
cities. Expansion will require more capital, but management does not expect it will stay in business for more than
a year or so regardless if it expands or not.
182. What is meant by generally accepted accounting principles?
Chapter 1: Accounting as a Form of Communication
183. Discuss the four steps in the ethical decision model used by accountants. Expand the discussion to include questions
that you would ask to analyze the key elements in the situation.
184. From an ethical standpoint, if various alternatives are available to report a transaction, what are some of the
questions an accountant should ask about the alternatives?
185. Develop an ethical dilemma scenario that an accountant may face and give examples of key elements (listed
below) that should be considered when analyzing the decision:
1. Those who may benefit or be harmed
2. What potential benefits or harm could result from the situation
3. The rights or claims violated
4. The specific interests in conflict
5. The responsibilities and obligations
Chapter 1: Accounting as a Form of Communication
Match the following business forms with their characteristics below.
a. Sole proprietorship
b. Partnership
c. Corporation
186. Must file articles of incorporation with the state
187. Easy to raise large sums of money
188. Single owner
189. Need an agreement about contributions to the business
190. Usually owned and operated by the same person
191. Owned by two or more individuals
192. Control most private resources in the U.S.
193. A share of stock acts as evidence of ownership
Chapter 1: Accounting as a Form of Communication
Provided below is a list of important users of accounting information. Below the list are descriptions of
a major need of each of the various users. Fill in the blank with the one user group that is most likely
to have the need described to the right of the blank. Some user groups may be used more than once or
not at all.
a. Stockholder
b. Company management
c. Supplier
d. Banker
e. Internal Revenue Service
f. Securities and Exchange Commission
g. Labor union
194. The prospects for future dividend payments.
195. The financial status of a company issuing securities to the public for the first time.
196. The profitability of the company based upon the Internal Revenue Code.
197. The profitability of each division of the company.
198. The exact amount of profit on each product of the company.
199. The company’s profitability since the last work force contract was signed.
Chapter 1: Accounting as a Form of Communication
For each statement provided, choose the letter of the appropriate term from the list that each
statement best describes. Some terms may be used more than once, while others are not used at all.
a. Capital stock
b. Asset
c. Owners’ equity
d. Time period
e. Dividends
f. Economic entity concept
g. Expense
h. Retained earnings
i. Cost principle
j. Creditor
k. Liability
l. Revenue
m. Going concern
n. Monetary unit
o. Corporation
200. The portion of owner’s equity that represents the net income less any dividends paid over the life of the entity.
201. The owners’ claims on the assets of an entity.
202. A distribution of the net income of a business to its owners.
203. The sale of goods or the performance of services.
204. A category on the balance sheet to indicate the owners’ direct investment in a corporation.
205. The cost of doing business that results from the process of generating revenues.
206. A future benefit.
207. An artificial segment on the calendar used as a basis for preparing financial statements.
208. The assumption that an entity is not in the process of liquidation and that it will continue indefinitely.
Chapter 1: Accounting as a Form of Communication
209. The principle or rule that specifies the amount recorded for an asset upon acquisition.
210. An entity that lends a company money with the expectation of repayment.
211. Claims of the creditors against the assets of a company.
Several items from the financial statements of Standard Tires are listed below. Use the following
answer choices to identify the type of account for each item listed. Place your answers in the space
provided.
a. Assets
b. Liabilities
c. Revenues
d. Expenses
e. Owners’ equity
212. Property, plant, and equipment
213. Sale of tires
214. Accounts payable
215. Interest income
216. Selling expenses
217. Accounts receivable
218. Capital stock
219. Long-term debt
Chapter 1: Accounting as a Form of Communication
220. Cash
221. Retained earnings
222. Inventories
Three organizations important to accounting are listed below. Select the organization that most closely
achieves the role described.
a. American Institute of Certified Public Accountants (AICPA)
b. Financial Accounting Standards Board (FASB)
c. Securities and Exchange Commission (SEC)
223. Issues financial accounting concepts that are used as a guide to accounting standard setting.
224. Has the ultimate authority to set accounting standards, but has allowed the profession to do so.
225. Prepares and grades the Uniform CPA Examination.
226. An agency of the federal government.
227. Is a professional organization of certified public accountants.
228. Primarily responsible for setting accounting standards today.
229. Requires that publicly traded companies file annual and quarterly financial statements on a timely basis.
Chapter 1: Accounting as a Form of Communication
230. Since there is a lack of a profit motive in nonbusiness entities, they do not need information provided
by an accounting system.
a. True
b. False
231. Drew Mellow, owner of Mellow’s Melodies, also owns a personal residence that costs $400,000. The market
value of his residence is $600,000. During preparation of the financial statements for Mellow’s Melodies, the
accounting concept most relevant to the presentation of Drew’s home is:
a. monetary unit.
b. a going concern entity.
c. the economic entity concept.
d. the time period assumption.
232. Which of the following statements is true regarding a bond?
a. A bond is a certificate that acts as evidence of ownership in a corporation.
b. A bond is a certificate that represents a corporation’s promise to repay a certain amount of money and
interest in the future.
c. If you buy a bond from a company, you are borrowing money from the company.
d. Bondholders receive dividends semiannually.
233. All of the following are the types of activities that businesses engage in except:
a. financing activities.
b. investing activities.
c. operating activities.
d. organizational activities.
Chapter 1: Accounting as a Form of Communication
234. Which of the following represents the proper order of the financial decision framework?
a. Analyze the information, formulate the question, gather information from financial statements,
monitor your decision, make the decision.
b. Formulate the question, Analyze the information, gather information from financial statements,
monitor your decision, make the decision.
c. Formulate the question, Gather information from financial statements, Analyze the information,
Make the decision, Monitor your decision
d. Analyze the information, monitor your decision, make the decision, formulate the question, gather
information from financial statements.
235. Which one of the following items does not accurately describe stockholders’ equity?
a. Stockholders‘ equity is created when a company issues stock to an investor.
b. Total stockholders‘ equity should be equal to Assets in an publicly held entity.
c. Stockholders’ equity represents amounts contributed by the owners to the company.
d. As owners of shares in a corporation, stockholders have claims on the assets of a business
when it is profitable.
236. Sawyer Corporation purchased land in 2009 for $490,000. In 2015, it purchased a nearly identical parcel of
land for $660,000. In its 2015 balance sheet, Sawyer valued these two parcels of land at a combined value
of $1,320,000. By reporting the land in this manner, Sawyer Corporation has violated which of the following?
a. Going concern assumption
b. Cost principle
c. Monetary unit measure
d. Time Period assumption
237. Which one of the following best describes the external auditor’s report?
a. The external auditor’s report is an opinion.
b. The external auditor’s report is a statement of fact.
c. The external auditor’s report must comply with both FASB and IASB standards.
d. The firms that provide external audit reports are restricted to 20 partners, based on authoritative standards
issued by the PCAOB.
Chapter 1: Accounting as a Form of Communication
238. For each of the following, explain a transaction that will have the following stated effects on the accounting
equation elements.
A) Increase one asset, decrease one asset, and increase a liability.
B) Increase an asset and increase stockholders’ equity.
C) Decrease an asset and decrease a liability.
D) Increase an asset and increase a liability.
E) Increase one asset and decrease another asset.
Chapter 1: Accounting as a Form of Communication
239. Calvin Corp. was organized on January 1 to operate a taxi service. For each of the following business activities,
please indicate whether it is a financing (F), investing (I) or operating (O) activity.
A. Issued shares of stock to each of the five owners.
B. Purchased five automobiles to use as taxis.
C. Paid the first month’s rent for a garage.
D. Obtained a loan from the bank.
E. Received cash from a customer for a 10-mile taxi ride.
F. Paid the drivers wages for the first week.
G. Purchased a fueling station to install at the garage (includes a 500 gallon tank).
H. Declared and paid cash dividends to the owners after the first month‘s operations.
I. Paid cash to repair the brakes on one of the taxis.
J Bought land for a future taxi office.
240. What is the primary objective of financial reporting?
a. To help investors make credit decisions.
b. To help management assess cash flows.
c. To protect users from fraudulent financial information.
d. To provide useful information for decision making
241. “Claims to economic resources” are known as:
a. assets and liabilities.
b. liabilities and stockholders’ equity.
c. owners’ equity and stockholders’ equity.
d. retained earnings and revenues.
Chapter 1: Accounting as a Form of Communication
242. Which of the following is not an objective of financial reporting?
a. To reflect prospective cash receipts to investors and creditors.
b. To reflect prospective cash flows to an enterprise.
c. To reflect resources and claim to resources.
d. To reflect current stock prices and information concerning stock markets.
243. Which of the following statements is true concerning external users of financial information?
a. External users need detailed records of the business to make informed decisions.
b. External users are primarily responsible for the preparation of financial statements.
c. External users rely on the financial statements to help make informed decisions.
d. External users rely on management to tell them whether the company is a good investment
244. Relevant information can be quantitative or qualitative. In deciding whether to go to college part-time or full-time,
which of the following is a qualitative factor for a student?
a. The cost of tuition
b. The opportunity to make friends
c. The price of football tickets
d. “Good Student” discounts on auto insurance rates.
245. The preparation of financial statements requires that the information be understandable:
a. only to CPAs.
b. to those willing to spend the time to understand it.
c. only to those who take an accounting course.
d. only to financial analysts and brokers.
246. Cook, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan.
The company is very profitable and appears to have a sound financial position. Based on a report presented on
prime-time television last night, you are aware that Cook is a defendant in several lawsuits related to its defective
tires that cause vehicles to overturn. The information presented on television is an example of financial information
that is:
a. Relevant.
b. Consistent.
c. Predictable.
d. Comparable.
Chapter 1: Accounting as a Form of Communication
247. If an investor can use accounting information for two different companies to evaluate the types and amounts of
expenses, the information is said to have the quality of:
a. Comparability.
b. Consistency.
c. Neutrality.
d. Understandability.
248. Button Transportation purchases many pieces of office furniture with an individual cost below $200 each. Button
chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant,
and equipment on its balance sheet. The company‘s accountant and independent CPA agree that no accounting
principle has been violated. What accounting justification allows Button to expense the furniture?
a. Conservatism
b. Matching
c. Materiality
d. Verifiability
249. Madden Company applies the consistency convention. What does this mean?
a. Madden Co. uses the same names for all its expenses as its competitors.
b. Madden Co. has selected certain accounting principles that can never be changed.
c. Madden Co. applies the same accounting principles each accounting period.
d. Madden Co. applies the same accounting principles as it competitors.
250. Information that is material means that an error or alternative method of handling a transaction:
a. would possibly affect the judgment of someone relying on the financial statements.
b. would not affect the decisions of users.
c. might cause a company to understate its earnings for the accounting period.
d. could increase the profitability of a company.
251. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are
about equally likely, the amount least likely to overstate assets and income is selected. Which of the following
qualities is characterized by this action?
a. Comparability
b. Conservatism
c. Materiality
d. Neutrality
Chapter 1: Accounting as a Form of Communication
252. The qualitative characteristics of accounting data include:
a. assets reported on the balance sheet.
b. all accounting information.
c. cash flows.
d. reliability.
253. Which of the following is a noncurrent asset?
a. Inventories
b. Office supplies
c. Land
d. Accounts receivable
254. Which of the following is a current asset?
a. Land
b. Buildings
c. Store fixtures
d. Prepaid insurance
255. Which of the following include only current assets?
a. Accounts receivable, cash, inventory, office supplies
b. Cash, accounts payable, inventory, office supplies
c. Cash, land, accounts receivable, inventory
d. Accounts receivable, cash, furniture, office supplies
256. To determine the source of a company’s assets, on which financial statement will you look?
a. Balance sheet only
b. Income statement only
c. Both the balance sheet and the income statement
d. Both the income statement and the statement of retained earnings
Chapter 1: Accounting as a Form of Communication
Moss Company
Moss Company has provided the following information from its accounting records for the current year:
Cash
$55,000
Accounts receivable
$45,000
Inventory
65,000
Land
75,000
Accounts payable
50,000
Notes payable (due 2020)
150,000
Retained earnings
?
Capital stock
20,000
257. Read the information for Moss Corporation. What are Moss’ current assets?
a. $ 100,000
b. $ 165,000
c. $ 210,000
d. $ 240,000
258. Read the information for Moss Company. What are Moss’ current liabilities?
a. $ 50,000
b. $ 125,000
c. $ 200,000
d. $ 230,000
259. Which one of the following items is reported as a current asset on a classified balance sheet?
a. Inventory
b. Accounts payable
c. Land
d. Common stock
Chapter 1: Accounting as a Form of Communication
260. The following information is given for Sego Company:
Cash
$50,000
$45,000
Land
75,000
40,000
Plant & Equipment
150,000
60,000
What are the company’s current assets?
a. $220,000
b. $155,000
c. $130,000
d. $ 95,000
261. Which of the following accounts are normally reported as current liabilities on a classified balance sheet?
a. Accounts payable and bonds payable
b. Interest payable and mortgage payable
c. Income taxes payable and salaries payable
d. Capital stock and accounts payable
262. Which one of the following is not a major category for long-term assets?
a. Intangibles
b. Property, plant, and equipment
c. Receivables
d. Goodwill
263. Which of the following would not be considered to be an intangible asset?
a. Franchises
b. Copyrights
c. Investments
d. Goodwill
264. Which of the following statements is true concerning intangible assets?
a. Intangible assets have no economic substance.
b. Intangible assets lack physical existence.
c. Intangible assets are listed in the stockholders’ equity section of the balance sheet.
d. Intangible assets appear in the current assets section of the balance sheet.
Chapter 1: Accounting as a Form of Communication
265. How are assets which are expected to be realized in cash, sold, or consumed within the normal operating cycle of
a business or within one year (if the operating cycle is shorter than one year) reported on a classified balance
sheet?
a. Property, plant, and equipment
b. Current assets
c. Intangible assets
d. Current liabilities
266. Which of the following terms characterizes the time period between the investment of cash in merchandise and the
collection of cash from the sale of that merchandise?
a. Operating cycle
b. Natural business year
c. Accounting period
d. Fiscal period
267. Which set of items below are current assets?
a. Accounts receivable, net income, inventory, and dividends
b. Cash, accounts receivable, capital stock, and sales
c. Net income, cash, office supplies, and inventory
d. Cash, accounts receivable, inventory, and office supplies
268. One significant difference between a classified and a non-classified balance sheet is the distinction between which
of the following items?
a. Assets and liabilities
b. Current and noncurrent items
c. Liabilities and owners’ equity
d. Resources invested by the owners and amounts borrowed from creditors
269. For several years, Flame Corporation has had a current ratio that was consistent with other companies in its
industry. For the most recent year, Flame’s current ratio was significantly higher than that for the industry. What is
the best possible explanation for this situation?
a. The other companies in the industry were not as profitable.
b. Flame’s liquidity has improved or is not leveraging financial resources effectively.
c. Flame has less property, plant and equipment than other companies.
d. Flame has too much debt.
Chapter 1: Accounting as a Form of Communication
Guinther & Sons, Inc.
Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for
Guinther & Sons includes the following items:
Cash
$29,000
Accounts receivable
$39,000
Inventory
79,000
Prepaid insurance
3,000
Land
90,000
Accounts payable
21,000
Taxes payable
29,000
Capital stock
50,000
Retained earnings
97,000
Long-term notes payable
43,000
270. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons.
a. $ 100,000
b. $ 147,000
c. $ 150,000
d. $ 249,000
271. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons.
a. 2.58 to 1
b. 2.75 to 1
c. 3.00 to 1
d. 2.00 to 1
272. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4
to 1. What does this comparison tell you about its liquidity?
a. It is more liquid than its competitors
b. It has more long-term assets than its competitors
c. Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid.
d. Guinther & Sons, Inc. is more profitable than its competitors.
Chapter 1: Accounting as a Form of Communication
273. Lamar Company has total current assets of $122,000 and total current liabilities of $57,000. What is the amount of
working capital for Lamar Company?
a. $ 57,000
b. $ 65,000
c. $ 122,000
d. $ 179,000
274. What is the correct method for calculating working capital?
a. Total Assets minus Total Liabilities
b. Current Assets minus Total Liabilities
c. Current Assets minus Current Liabilities
d. Current Assets plus Current Liabilities
275. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long–term liabilities of $3,000. Oreo
wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing
its current ratio to decline below 2.0 to 1?
a. $ 4,000
b. $ 8,000
c. $ 10,000
d. $ 12,000
276. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the
company‘s short–run liquidity, which one of the following measures should be used?
a. The current ratio
b. An analysis of the company’s long-term debt
c. An analysis of the return on stockholders’ equity
d. An analysis of retained earnings
277. Which financial statement reports information helpful in assessing working capital?
a. Income statement
b. Balance sheet
c. Statement of retained earnings
d. Statement of cash flows
Chapter 1: Accounting as a Form of Communication
278. Use Rizwi Corporation’s list of accounts at December 31, 2015 to answer the following question.
Rizwi Corporation
List of Accounts at December 31, 2015
Cash
$30,000
Accumulated depreciation
$ 12,000
Merchandise inventory
21,000
Notes payable—Due 12/31/2022
120,000
Land
40,000
Accounts payable
14,000
Buildings
80,000
Equipment
33,000
Accounts receivable
25,000
Notes Payable—Due 07/01/2016
24,000
What is Rizwi Corp.’s current ratio?
a. 0.48 to 1
b. 2.00 to 1
c. 2.55 to 1
d. 2.86 to 1
279. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital?
a. $ 6,000
b. $ 24,000
c. $ 27,000
d. $ 45,000
280. For which of the following is the current ratio most useful?
a. In evaluating a company’s liquidity.
b. In evaluating a company’s solvency.
c. In evaluating a company’s profitability.
d. In evaluating a company’s leverage.
281. Which of the following events will cause a company’s current ratio to decrease?
a. The sale of inventory for cash.
b. The sale of inventory for credit (accounts receivable).
c. Issuing stock for cash.
d. Paying off long-term debt with cash.