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. The role of accounting is to provide many different users with financial information to make economic
decisions.
3. A corporation is a business that is legally separate and distinct from its owners.
4. Senior executives cannot be criminally prosecuted for the wrong doings they commit on behalf of the
companies where they work.
5. The primary role of accounting is to determine the amount of taxes a business will be required to pay to
6. Managerial accounting information is used by external and internal users equally.
7. Financial accounting provides information to all users, while the main focus for managerial accounting is to
provide information to the management.
8. Proper ethical conduct implies that you only consider what’s in your best interest.
9. Some of the major fraudulent acts by senior executives started as what they considered to be small ethical
lapses which grew out of control.
10. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information.
11. Accounting information users need reports about the economic activities and condition of businesses.
12. An example of an external user of accounting information is the federal government.
13. An example of a general-purpose financial statement would be a report about projected price increases
related to transportation costs.
14. A business is an organization in which basic resources or inputs, like materials and labor, are assembled and
processed to provide outputs in the form of goods or services to customers.
15. The basic difference between manufacturing and merchandising companies is the completion level of the
products they purchase for resale to customers.
16. The main objective for all businesses is to maximize unrealized profits.
17. The Sarbanes-Oxley Act prohibits CPAs from providing nonaudit investment banking services.
18. About 90% of the businesses in the United States are organized as corporations.
19. Proprietorships are owned by two or more individuals and provide only services to their customers.
20. Only large companies such as Wal-Mart, JCP, General Motors, and the Bank of America can be organized
as corporations.
21. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility
for developing accounting principles.
22. The unit of measurement concept requires that economic data be recorded in a common unit of
measurement.
23. No significant differences exist between the accounting standards issued by the FASB and the IASB.
24. 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.
25. The cost concept is the basis for entering the exchange price into the accounting records.
26. Generally accepted accounting principles regulate how and what financial information is reported by
businesses.
27. If the liabilities owed by a business total $300,000 and stockholder’s equity is equal to $300,000, then the
assets also total $300,000.
28. The accounting equation can be expressed as Assets – Liabilities = Stockholders’ Equity.
29. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of
owners.
30. Owners’ rights to assets rank ahead of creditors’ rights to assets.
31. If total assets decreased by $30,000 during a specific period and stockholder’s equity decreased by $35,000
during the same period, the period’s change in total liabilities was an $65,000 increase.
32. 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 stockholder’s equity was a $200,000 increase.
33. An account receivable is typically classified as a revenue.
34. If a corporation had net income of $60,000 and $20,000 in cash dividends were declared and paid then the
retained earnings account would increase by $40,000.
35. An account receivable is a claim against a customer arising from a sale on account.
36. Paying an account payable increases liabilities and decreases assets.
37. Receiving payments on an account receivable increases both equity and assets.
38. Cash dividends paid to stockholders decrease assets and increase equity.
39. Purchasing supplies on account increases liabilities and decreases equity.
40. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid.
41. Revenue is earned only when money is received.
42. Expenses are assets that are used up during the process of earning revenue.
43. The excess of revenue over the expenses incurred in earning the revenue is called capital stock.
44. The principal financial statements for a corporation are the income statement, the retained earnings
statement, the balance sheet, and the budget.
45. An income statement is a summary of the revenues and expenses of a business as of a specific date.
46. A retained earnings statement reports all changes in cash for a period of time.
47. 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.
48. All financial statements are identified by the name of the business, the title of the statement, and the date or
period of time.
49. The balance sheet represents the accounting equation.
50. Net income and net profit do not mean the same thing.
51. Profit is the difference between
52. Who among the following uses financial reports?
53. Two common areas of accounting that respectively provide information to internal and external users are
54. Which type of accountant typically practices as an individual or as a member of a public accounting firm?
55. Which of the following is not a general-purpose financial statement?
56. Which of the following is a manufacturing business?
57. Which of the following group of companies are all examples of a merchandising business?
58. Which of the following would not normally operate as a service business?
59. Which of the following best describes accounting?
60. Which of the following groups are considered to be internal usersof accounting information?
61. The following are examples of external users of accounting information except
62. Which of the following is a body established by the Sarbanes-Oxley Act of 2002 for the accounting
professionals?
63. Which of the following is the best description of accounting’s role in business?
64. Managerial accountants would be responsible for providing which of the following?
65. Which of the following is not a certification for accountants?
66. Which of the following is not a role of accounting in business?
67. Which of the following are guidelines for behaving ethically?
I.
II.
III.
68. The Sarbanes-Oxley Act of 2002 prohibits employment of auditors by their clients for what period after
69. Which of the following isnot a characteristic of a corporation?
70. Countries outside the United States use financial accounting standards issued by the
71. Which of the items below is not a business entity?
72. An entity that is organized according to state or federal statutes and in which ownership is divided into
shares of stock is a
73. Select the type of business that is most likely to obtain large amounts of resources by issuing stock.
75. 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?
76. Most businesses in the United States are
77. The initials GAAP stand for
78. Within the United States, the dominant body in the primary development of accounting principles is the
79. The business entity concept means that
80. For accounting purposes, the business entity should be considered separate from its owners in which of the
following forms of business?
81. The objectivity concept requires that
82. Denzel Jones is the major stockholder of Crystal Cleaning Company. Recently, Denzel received $10,000 of
dividends from Crystal Cleaning. After receiving the dividends, he contributed $6,000, in his name, to Habitat
for Humanity. The contribution of $6,000 should be recorded on the accounting records of which of the
following entities?
83. 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
84. Which one of the following is the authoritative body in the United States having the primary responsibility
for developing accounting principles?
D. AICPA
85. Which of the following concepts relate to separating the reporting of business and personal economic
transactions?
86. Donner Company is selling a piece of land adjacent to their business. 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, what is the amount that will be used to record this transaction in the
accounting records?
87. The unit of measure concept
88. Which of the following is not true of accounting principles?
89. Assets are
90. Debts owed by a business are referred to as
91. The accounting equation may be expressed as
92. Which of the following is not an asset?
93. The assets and liabilities of the company are $128,000 and $84,000, respectively. Stockholders’ equity
should equal
94. If total liabilities decreased by $46,000 during a period of time and stockholders’ 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
95. Which of the following is not a business transaction?
96. 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
97. Earning revenue
98. The monetary value charged to customers for the performance of services or sales is called a(n)
99. Revenues are reported when
100. Expenses are recorded when
101. Goods purchased on account for future use in the business, such as supplies, are called
102. The asset created by a business when it makes a sale on account is termed
103. The debt created by a business when it makes a purchase on account is referred to as an
104. If total assets decreased by $88,000 during a period of time and stockholders’ 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
105. Declaring and paying cash dividends
106. How does paying a liability in cash affect the accounting equation?
107. How does receiving a bill to be paid next month for services received affect the accounting equation?
108. How does the purchase of equipment by signing a note affect the accounting equation?
109. Land, originally purchased for $30,000, is sold for $62,000 in cash. What is the effect of the sale on the
accounting equation?
110. Allen Marks is the sole stockholder of Great Marks Company. As at December 31, 2013, Great Marks
Company has assets of $940,000 and liabilities of $300,000. During 2014, Allen Marks purchased an
additional $73,000 of capital stock and received $33,000 in cash dividends from the business. What is the
amount of net income of Great Marks Company during 2014, assuming that as of December 31, 2014, assets
were $995,000, and liabilities were $270,000?
111. Transactions affecting stockholders’ equity include
112. Clifford Moore purchased $15,000 of Star Tech stock for cash. Star Tech would
113. Gomez Service Company paid its first installment on a note payable for an amount of $2,000. How will
this transaction affect the accounting equation?
114. Ramos Repair Company paid $750 in dividends to its stockholders. How does this transaction affect
Ramos Repair Company’s accounting equation?
115. Which of the following is not a business transaction?
116. 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)
117. Which of the following financial statements reports information as of a specific date?
118. Four financial statements are usually prepared for a business. The statement of cash flows is usually
prepared last. The retained earnings statement (RE), 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?
119. Liabilities are reported on the
120. Cash investments made by stockholders in exchange for capital stock in a business are reported on the
statement of cash flows in the
121. The year-end balance of the retained earnings account appears in
122. A financial statement user would determine if a company was profitable or not during a specific period of
time by reviewing
123. If stockholders wanted to know how money flowed into and out of the company, what financial statement
would they use?
124. The assets section of the balance sheet normally presents assets in
125. All of the following statements regarding the ratio of liabilities to stockholders’ equity are true except
126. Given the following data:
Dec. 31,2014
Dec. 31,2013
Total liabilities
$128,250
$120,000
Total stockholders’ equity
95,000
80,000
Compute the ratio of liabilities to stockholders’ 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.