Chapter 1 Poor decisions may result from improper use of information

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
1
Chapter 1--Accounting and Organizations
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2 Chapter 1
Matching
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Accounting and Organizations 3
TRUE/FALSE
1. Poor decisions may result from improper use of information.
2. Accounting information helps decision makers determine where they are, where they have been and
where they are going.
3. Kroger supermarket is an example of a service organization.
4. The price of goods and services in a market is a basis for measuring value.
5. Profit is the difference between the price a seller receives for goods and the total cost to the seller of
all resources consumed in producing and selling those goods.
6. An effective business is one that provides goods/services at low costs relative to their selling prices.
7. The owners of a corporation are known as stockholders or shareholders.
8. Limited liability means that stockholders are personally liable for the debts of a corporation.
9. Contracts are legal agreements for the exchange of resources and services.
4 Chapter 1
10. Accounting information helps managers assess employee performance.
11. The accounting information system is a subsystem of the management information system.
12. Information prepared by managerial accountants must be done according to generally accepted
accounting principles (GAAP).
13. Financial accounting is the process of preparing, reporting, and interpreting accounting information
for use by internal decision makers.
14. The reliability of accounting information depends on the ethical behavior of those who prepare,
report, and audit such information.
15. An audit of a company’s accounting records is conducted by the company’s accounting staff.
Accounting and Organizations 5
MULTIPLE CHOICE
1. Which of the following best describes accounting?
a.
accounting is an information system for measuring and reporting on the transformation
process
b.
accounting is the creation of value through providing goods and services
c.
accounting is the efficient and effective use of resources
d.
accounting is the reporting of profits by an organization
2. Accounting provides information to help in making decisions about organizations. Which of the
following statements concerning accounting information is FALSE? It helps decision makers
determine
a.
where they are
b.
where they should be
c.
where they have been
d.
where they are going
3. The primary purpose of accounting is to
a.
help people make decisions about economic activities
b.
provide information that management can use to convince stockholders that management
deserves high salaries
c.
provide employment to persons who have a knack for dealing with numbers
d.
minimize the amount of profit that a firm has earned
4. Accounting provides information that is helpful to decision makers because
a.
it is a set of interrelated activities that work together to achieve a goal
b.
they learn how to record transactions
c.
it provides information about economic results that can be expected to occur
d.
it is a collection of documents and records
5. The primary purpose of accounting is to
a.
audit the financial information of businesses
b.
certify the accuracy of records
c.
facilitate decision making by the stakeholders
d.
provide for internal control over financial transactions
6 Chapter 1
6. The purpose of accounting is to
a.
make sure people are following the rules
b.
provide information to prepare tax returns
c.
help people make decisions about economic activities
d.
provide stockholders with information about a corporation's net income
7. Which of the following activities is (are) related to the primary purpose of accounting?
A department manager A business owner is reviewing
is reviewing the sales the projected expenses for
to customers last month the coming year
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
8. Risk can best be described as
a.
the reporting of profit
b.
the measurement of accounting information
c.
uncertainty about an outcome
d.
the recording of costs
9. All of the following would be an example of stakeholder except
a.
the government
b.
an employee
c.
a stockbroker
d.
a shareholder
10. A common purpose of all organizations is
a.
providing employment
b.
transforming resources
c.
to sell products
d.
paying taxes to various levels of government
Accounting and Organizations 7
11. Which one of the following well-known national companies is PRIMARILY a merchandising firm?
a.
General Motors
b.
First National Bank
c.
Wal-mart
d.
United Airlines
12. Organizations that sell consumer goods that are produced by other companies are
a.
merchandising
b.
manufacturing
c.
service
d.
non-profit
13. Which of the following is PRIMARILY a service organization?
Law General
Firm Motors
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
14. Which of the following is an example of a merchandising company?
a.
a hardware store
b.
an automobile manufacturer
c.
a petroleum refinery
d.
a bank
15. An organization can best be described as
a.
a corporation
b.
employees and managers
c.
a group of people who work together to develop, produce and distribute goods and services
d.
one that makes a profit
8 Chapter 1
16. The difference between the price a seller receives for its product and its costs of producing and
selling its product is
a.
investment
b.
profit
c.
surplus
d.
dividends
17. Which of the following is the best description of profit?
a.
the amount of cash received from selling a product
b.
the amount left over after the cost of doing business is subtracted from the sales to
customers
c.
the amount of revenue earned from providing a service
d.
the amount of cash left after paying employees and utilities
18. You are inspecting the profit statement of a company. It reports profit of $60,000. From this
information, you can conclude that
a.
the owners have a rather small investment in the firm
b.
the company is a merchandising firm
c.
there have been financing and investing activities during the period but no operating
activities
d.
the value of resources received from sales exceeds the value of resources consumed
19. Roger Company reports the following abbreviated profit statement at year-end:
Resources received from sales
$65,250
Resources consumed
51,500
Profit
$13,750
What is the amount of value created by the company during the year?
Value Created
a.
-0-
b.
$13,750
c.
$51,500
d.
$65.250
Accounting and Organizations 9
20. Owners invest in businesses with a primary desire to
a.
obtain money for other purposes
b.
provide goods and services demanded by society
c.
receive a return on their investments from profits earned by the business
d.
sell more goods and services
21. Last summer, Regina operated a house cleaning service to earn money for college. To start the
business, she invested $700 of her savings which she used to rent equipment and buy supplies. At
the end of the summer, all the supplies had been consumed and the equipment had been returned.
Regina's income statement for the summer reported a profit of $5,000. If Regina withdraws $5,700
from the business, we can determine that Regina's "return on investment" and "return of investment"
were
Return on Investment Return of Investment
a.
$700 $5,000
b.
$4,300 $700
c.
$5,000 $700
d.
$5,000 cannot be determined
22. A business that is successful in providing goods and services demanded by customers is
a.
profitable
b.
risky
c.
efficient
d.
effective
23. A business that provides goods and services at low costs relative to their selling prices is
a.
risky
b.
efficient
c.
effective
d.
ineffective
10 Chapter 1
24. You have been left a substantial inheritance of many millions. Advisors have recommended that you
only invest in companies earning at least a 13% rate of return on sales. Two potential investments
have come to your attention and information for each company is shown below:
Average Sales Average Expenses
Ace Company $375,000 $305,000
Good Foods $50,000 $45,000
According to the investment criterion stated above, which of these two companies should you invest
in?
Ace Company Good Foods
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
25. Singer Company and Triton Company both sell used books. Singer Company buys books at an
average cost of $10 per book and sells them for $15 each. Triton Company buys books for $10 each
and sells them for $17 each. This year, Singer Company sold 3,500 books and Singer Company sold
1,000 books. Indicate which company was more effective and which company was more efficient.
More Effective More Efficient
a.
Triton Triton
b.
Triton Singer
c.
Singer Triton
d.
Singer Singer
26. Determine the profit earned by a business owner that engaged in the following transactions during
May:
1.
sold $8,000 of merchandise that had cost the company $5,500
2.
paid $600 rent for May
3.
used $300 of supplies during May
a.
$1,600
b.
$1,900
c.
$2,500
d.
$7,100
Accounting and Organizations 11
27. A corporation can:
a.
be a sole proprietorship
b.
not enter into contracts
c.
hold stockholders liable for its debts
d.
buy, own, or sell property
28. Which of the following types of business organizations has a legal identity separate from its
owners?
a.
partnerships
b.
associations
c.
proprietorships
d.
corporations
29. Mutual agency is a concept that applies to
The Partners The Shareholders
in a Partnership of a Corporation
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
30. The advantages of the corporate form of business organization include
a.
ready transferability of shares
b.
limited liability
c.
continuity of existence
d.
all of the above
31. Limited liability is a feature of what form(s) of business organization?
a.
corporation
b.
proprietorship
c.
partnership
d.
both a proprietorship and a partnership
12 Chapter 1
32. Which of the following is a disadvantage of the corporate form of business organization?
a.
moral hazard
b.
broad source of capital
c.
ready transferability of shares
d.
limited liability
33. Which of the following is NOT a characterization of the corporate form of business organization?
a.
access to large amounts of capital
b.
continuity of life
c.
unlimited liability
d.
ease in transferring ownership
34. Moral hazard is most likely to be a risk for the owners of
a.
proprietorships
b.
partnerships
c.
corporations
d.
both proprietorships and partnerships
35. Taxation of both business income as well as the dividends paid to owners is a characterization of
a.
proprietorships
b.
corporations
c.
agencies
d.
partnerships
36. Accounting information is useful to investors because it:
a.
can help evaluate risk
b.
determines if the managers are meeting their contract responsibilities
c.
helps assess the efficiency and effectiveness of businesses
d.
all of the above are correct
37. Contracts facilitate financial relationships between
Customers and Organizations
Organizations and Managers
a.
No Yes
b.
No No
c.
Yes Yes
d.
Yes No
Accounting and Organizations 13
38. The management of Echo Canyon Development Company recognizes that contracts are an integral
and necessary aspect of carrying on economic activities. It would be normal to find that Echo
Canyon had contracts with
Suppliers Investors
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
39. Contracts can be enforced between
A Person and Two
a Corporation Individuals
a.
No No
b.
No Yes
c.
Yes No
d.
Yes Yes
40. One of the purposes of any contract is to
a.
identify the rights and responsibilities of each party
b.
reduce wherever possible the amount of taxable income that results from the contract
c.
minimize the risk to one party while maximizing the return to the other party
d.
protect the persons signing it from further legal action by the other party
41. The terms "risk" and "return" are related in that
a.
risky investments always generate low returns
b.
as risk goes up, higher returns are expected
c.
they generally rise and fall somewhat inversely
d.
smaller investments usually incur smaller risk but generate higher returns
42. What do the concepts of "risk" and "return" have in common?
a.
they both relate only to debt financing
b.
they both relate only to equity financing
c.
they can both be affected by changes in market conditions
d.
by definition, they are equal in any investment
14 Chapter 1
43. Which of the following statements about risk and return is TRUE?
a.
the return on a riskier investment will always exceed the return on a less risky investment so
as to compensate the investor for the higher risk incurred
b.
a basic function of accounting information is to assist investors in predicting risk and return
c.
obtaining resources from creditors is generally less risky for an organization than is
obtaining resources from owners
d.
investments made by creditors are usually riskier to the investor than those made by owners
44. Which of the following statements about risk and return is TRUE?
a.
the return on a riskier investment will always exceed the return on a less risky investment so
as to compensate the investor for the higher risk incurred
b.
it is generally more risky to contract with suppliers than with customers
c.
obtaining resources from creditors is generally less risky for an organization than is
obtaining resources from owners
d.
investments made by owners are usually riskier to the investor than those made by creditors
45. Ostrich Company and Magnolia, Inc., report the profitability data below. Each firm had the same
amount of resources invested during the five years shown.
2011 2010 2009 2008 2007
Magnolia’s profits $4,050 ($1,875) $3,750 ($1,500) $3,000
Ostrich's profits $1,525 $1,450 $1,775 $1,500 $1,250
Which company demonstrated the highest amount of risk and which firm earned the highest return?
a.
Highest Risk: Ostrich; Highest Return: Ostrich
b.
Highest Risk: Ostrich; Highest Return: Magnolia
c.
Highest Risk: Magnolia; Highest Return: Ostrich
d.
Highest Risk: Magnolia; Highest Return: Magnolia
Accounting and Organizations 15
46. Profitability data for two firms are given below. Each firm had the same amount of resources
invested during the five years shown. Parentheses are used to show losses.
2007 2008 2009 2010 2011
Firm B's profits $150 $190 $200 $210 $210
Firm A's profits $400 ($200) $500 ($250) $540
Which firm demonstrated the highest amount of risk and which firm earned the highest return?
a.
Highest Risk: A; Highest Return: A
b.
Highest Risk: A; Highest Return: B
c.
Highest Risk: B; Highest Return: A
d.
Highest Risk: B; Highest Return: B
47. Accounting information is used to assess the risk of
Selling to Buying from
Specific Customers Specific Suppliers
a.
Yes Yes
b.
No Yes
c.
Yes No
d.
No No
48. The amount of risk and return experienced by an organization are influenced by
Management's
financing, investing Competition
and operating decisions and regulation
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
49. Accounting information is used
By customers By suppliers
to evaluate to evaluate
their suppliers their customers
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
16 Chapter 1
50. Which of the following provide resources to an organization in exchange for future returns?
Owners Creditors
a.
No Yes
b.
No No
c.
Yes Yes
d.
Yes No
51. Information contained in external financial reports can be useful to a firm's
Creditors Employees
a.
No No
b.
No Yes
c.
Yes No
d.
Yes Yes
52. Which of the following is a TRUE statement concerning large publicly-held corporations that must
have their financial statements audited each year?
a.
an audit involves an examination of the financial statements but not an examination of the
accounting information system
b.
financial accounting information is audited but managerial accounting information is not
c.
these audits are usually conducted by the firm's own employee-accountants since they have
the most knowledge of the firm's operations
d.
the audit tends to increase investor risk
53. The primary purpose of an audit is to
a.
discover if theft or fraud is occurring in the company
b.
evaluate whether financial statements used by external decision makers, are fairly presented
c.
demonstrate that the level of profits reported to the IRS is the same as that reported to
creditors and owners
d.
assure that the information used by managers in making financing, investing, and operating
decisions is absolutely accurate
Accounting and Organizations 17
54. Match the type of accounting information to the term that best describes it.
Information prepared for Information prepared for
external decision makers internal decision makers
a.
financial accounting financial accounting
b.
financial accounting managerial accounting
c.
managerial accounting financial accounting
d.
managerial accounting managerial accounting
55. Match the type of accounting information to the term that best describes it.
Information prepared Information prepared
for a department manager’s use for a creditor’s use
a.
managerial accounting financial accounting
b.
managerial accounting managerial accounting
c.
financial accounting financial accounting
d.
financial accounting managerial accounting
56. Which of the following categories of accounting information are examined by the SEC to assure that
it conforms to GAAP and SEC requirements?
Financial Managerial
Accounting Information Accounting Information
a.
Yes Yes
b.
Yes No
c.
No No
d.
No Yes
57. Accounting information
a.
is helpful for financing decisions but not for marketing decisions
b.
is useful for business firms but not needed for not-for-profit entities
c.
must follow generally accepted accounting principles when provided to management
d.
is useful for all organizations
58. Financial accounting is the process of
a.
preparing and reporting accounting information for external decision makers
b.
preparing and reporting accounting information for internal decision makers
c.
developing generally accepted accounting principles
d.
auditing financial statements
18 Chapter 1
59. Which of the following is related to financial accounting, rather than managerial accounting?
a.
the development of internal information systems
b.
access by management to detailed internal financial reports
c.
preparing financial information according to generally accepted accounting principles
d.
cost accounting and cost management
60. Managerial accounting is
a.
the process of preparing and reporting accounting information for external decision makers
b.
the process of preparing and reporting accounting information for an organization’s internal
decision makers
c.
the process of developing generally accepted accounting principles
d.
the process of auditing financial statements
61. Managerial accounting is concerned with
a.
the data needs of stockholders and creditors
b.
providing information to internal decision makers
c.
meeting the requirements of generally accepted accounting principles
d.
recording the resources consumed by an organization
62. Managerial accounting is primarily concerned with providing information to
a.
owners and creditors of the firm
b.
decision makers inside the firm
c.
government agencies
d.
the public
63. Managerial accounting
a.
must follow generally accepted accounting principles
b.
is just another term for financial accounting
c.
deals primarily with the needs of parties external to the firm such as investors and creditors
d.
is information used by a company’s managers to make decisions
Accounting and Organizations 19
64. The basic difference between managerial and financial accounting is that
a.
the financial accounting system relies on accounting information whereas managerial
accounting does not
b.
financial accounting relies on information gathered from sources outside the business
whereas managerial accounting relies on internally generated information
c.
financial accounting is concerned with providing information to outsiders, whereas
managerial accounting is concerned with providing information to managers for their use in
directing the activities of the organization
d.
managerial accounting information is useful to not-for-profit organizations, but financial
accounting information is not
65. Which one of the following statements about generally accepted accounting principles (GAAP) is
TRUE?
a.
GAAP are developed by the federal government and must be followed by all companies
b.
GAAP are designed to help ensure the reliability of accounting information
c.
an audit is designed to determine whether GAAP were followed in the preparation of
information used by managers for decision making
d.
GAAP are special reporting rules that must be followed when preparing financial reports for
government agencies such as the IRS
66. Which one of the following statements is TRUE regarding generally accepted accounting principles
(GAAP)?
a.
GAAP increase the comparability of financial information
b.
GAAP apply to information prepared for a firm's managers
c.
the primary purpose of GAAP is to show the highest amount of profit possible for a given
year
d.
GAAP are developed by the U.S. Congress and signed into law by the President
67. The best protection currently available to the public to assure that financial statements present a fair
representation of the company is to have
a.
the president of the company sign a sworn statement that the financial statements are a fair
representation of the company
b.
the financial statements examined by the General Accounting Office of the United States
c.
the financial statements reviewed by the Board of Directors
d.
an audit performed by an independent CPA
20 Chapter 1
68. Most large companies are required to have the financial statements audited by a CPA. An audit is
conducted
By the To lend
company’s own credibility to the
internal accountants financial statements
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
69. The term GAAP stands for
a.
general auditing and accounting processes
b.
generally accepted auditing procedures
c.
generally accepted accounting principles
d.
general accounting associates program
70. The standards developed by professional accounting organizations to identify appropriate
accounting and reporting standards are
a.
generally accepted accounting principles
b.
generally authorized accounting procedures
c.
government authorized accounting procedures
d.
generally accepted auditing practices
71. Ethical behavior is important to business organizations because:
a.
it encourages managers to act in their own best interest
b.
the accuracy of accounting data can depend on managers’ ethical behavior
c.
understating profits is good for businesses
d.
managers should be punished for mistakes they make
72. Unethical behavior of managers could result in:
a.
a decline in investor confidence
b.
theft of company assets
c.
decreased productivity
d.
all of the above items

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