Chapter 01 – Uses of Accounting Information and the Financial Statements
TRUE/FALSE
1. The intentional preparation of misleading financial statements is referred to as fraudulent financial
reporting.
2. Fraudulent financial reporting can result from the misapplication of accounting principles.
3. Criminal penalties cannot be imposed on those who prepare fraudulent financial statements.
4. The Sarbanes-Oxley Act orders the FASB to hold chief executives and CFOs responsible for the
accuracy of their company’s financial statements.
5. Responsibility for ethical financial reporting rests solely with the accountant.
6. Earned income is a measure of profitability.
7. Obtaining funds from a bank is an example of an investing activity.
8. Paying taxes to the government is an example of an operating activity.
9. Management accounting focuses on external decision making.
10. The processing stage of accounting is accomplished by the recording of data.
11. The terms bookkeeping and accounting are synonymous.
12. A company’s management information system is a subsystem of its accounting information system.
13. The modern definition of accounting focuses on the role of accounting in making economic decisions
rather than on how to do accounting.
14. Two major goals of business are to achieve profitability and to achieve liquidity.
15. Liquidity means having enough funds on hand to pay debts when they fall due.
16. Financial accounting information is used primarily by management.
17. Accounting ratios are useful as management performance measures.
18. The purchase of equipment is an example of a financing activity.
19. Buying and selling goods and services are examples of operating activities.
20. A major function of management is to provide the accountant with relevant and useful information.
21. The Federal Reserve Board is an example of an economic planner.
22. The primary external users of accounting information are investors and creditors.
23. The Securities and Exchange Commission is an accounting information user with a direct financial
interest.
24. Taxing authorities are considered accounting information users with an indirect financial interest.
25. Creditors are those who lend money to others or deliver goods and services before being paid.
26. Regulatory agencies are considered information users with an indirect financial interest.
27. Accountants consider money the common unit of measure for all business transactions.
28. Payment to a creditor is an example of a nonexchange business transaction.
29. For accounting purposes, a business and its owners are considered separate entities.
30. Knowledge of the exchange rate is necessary to apply the money measure concept in case of
international transactions.
31. For reporting purposes, the personal assets and debts of a business owner should be combined with the
assets and debts of the business.
32. Exchange rates for currency change daily according to the supply and demand for each currency.
33. Partnerships in the United States generate more revenue than sole proprietorships and corporations put
together.
34. A corporation is an economic unit that is legally separate from its owners.
35. Corporations represent the largest number of businesses in the United States.
36. The liability of corporate stockholders is limited to the amount of their investment.
37. The board of directors appoints the audit committee, which in turn performs an independent audit of
the company’s records.
38. The articles of incorporation may be found in the corporate charter.
39. Authorized shares of stock refer to the number of shares currently held by the stockholders.
40. Corporate governance is the oversight of a company’s management performance and ethics by its
board of directors.
41. The board of directors carries out the day–to-day operations of a corporation.
42. The number of authorized shares of stock may be less than the number of outstanding shares.
43. The management of a corporation is responsible for electing the board of directors.
44. In general, any partner can obligate the partnership to another party.
45. A partnership is dissolved when any partner leaves the business or dies.
46. Financial position may be assessed by referring to a balance sheet.
47. Creditors’ equities is another term for liabilities.
48. One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.
49. The economic resources to which the owners have claim are represented by stockholders’ equity.
50. Equipment is an asset that is considered nonmonetary in nature.
51. Net income is another term for revenues.
52. Cash is another term for retained earnings.
53. Contributed capital appears in the stockholders’ equity section of a corporate balance sheet.
54. Revenues have the effect of increasing contributed capital.
55. Dividends are an example of an expense.
56. The retained earnings figure is typically divided into par value and additional paid-in capital.
57. If a corporation has suffered only net losses since its inception, the Retained Earnings account will
have a negative balance.
58. Net assets equal assets plus liabilities.
59. Stockholders’ equity equals contributed capital plus retained earnings.
60. Par value is the minimum amount that can be reported as retained earnings.
61. The statement of retained earnings discloses the dividends declared during the period.
62. The heading for a balance sheet might include the line “As of December 31, 20xx.”
63. The income statement is also known as the statement of financial position.
64. The statement of cash flows discloses significant events related to the operating, investing, and
financing activities of a business.
65. The statement of retained earnings relates the income statement to the balance sheet by showing how
the Retained Earnings account changed during the accounting period.
66. The purchase of land for cash would be disclosed on the statement of cash flows.
67. The accounting fees earned by an accounting firm would appear on its balance sheet.
68. A proper heading for the income statement could include “For the Year Ended December 31, 20xx.”
69. The title “wages payable” would appear on the income statement.
70. An increase in revenue will result in an increase in stockholders’ equity.
71. The declaration of a dividend will reduce net income.
72. The title “supplies” will appear as an expense on the income statement.
73. Generally accepted accounting principles encompass the conventions, rules, and procedures necessary
to define accepted accounting practice at a particular time.
74. The International Accounting Standards Board is the primary and most important determinant of
generally accepted accounting principles.
75. Companies whose securities are sold to the general public must adhere to standards established by the
Securities and Exchange Commission.
76. The Internal Revenue Service is responsible for issuing accounting standards for state and local
governments.
77. Independence is the avoidance of all relationships that impair or appear to impair the objectivity of the
accountant.
78. Both public accountants and management accountants are required to adhere to a code of professional
conduct.
79. Objectivity means carrying out one’s professional responsibilities with competence and diligence.
80. Due care means carrying out one’s professional responsibilities honestly and impartially.
81. The Public Company Accounting Oversight Board (PCOAB) was created to determine the standards
that auditors must follow.
MULTIPLE CHOICE
1. The intentional preparation of misleading financial statements, known as fraudulent financial
reporting, can result from all of the following except
a.
the misapplication of accounting principles.
b.
the manipulation of inventory records.
c.
fictitious sales or orders.
d.
recording a revenue that has been earned but not yet received.
2. All of the following statements are true about the Sarbanes-Oxley Act except
a.
it applies to publicly traded companies.
b.
it shields chief executives from criminal penalties.
c.
it orders the SEC to draw up certain rules.
d.
its primary goal is to regulate financial reporting and the accounting profession.
3. The purchase of land is an example of a(n)
a.
investing activity.
b.
operating activity.
c.
capital activity.
d.
financing activity.
4. The correct order of the three stages of accounting is
a.
communication, processing, and measurement.
b.
measurement, communication, and processing.
c.
processing, measurement, and communication.
d.
measurement, processing, and communication.
5. Which of the following is an example of an operating activity?
a.
Obtaining capital from stockholders
b.
Selling goods and services to customers
c.
Purchasing equipment
d.
Selling land
6. Which of the following is an example of an investing activity?
a.
Purchasing a building
b.
Obtaining a bank loan
c.
Paying taxes to the government
d.
Producing goods and services
7. Which of the following is an example of a financing activity?
a.
Employing workers
b.
Selling equipment
c.
Paying off a loan
d.
Purchasing land
8. The communication stage of accounting is accomplished by
a.
storing data.
b.
reporting to decision makers.
c.
processing data.
d.
recording data.
9. Which of the following is the most appropriate and modern definition of accounting?
a.
Electronic collection, organization, and communication of vast amounts of information
b.
The interconnected network of subsystems necessary to operate a business
c.
A means of recording transactions and keeping records
d.
The measurement, processing, and communication of financial information about an
identifiable economic entity
10. The measurement stage of accounting is accomplished by
a.
recording data.
b.
reporting to decision makers.
c.
processing data.
d.
storing data.
11. The processing stage of accounting is accomplished by
a.
reporting to decision makers.
b.
recording transactions.
c.
controlling and evaluating data.
d.
bookkeeping, computers, and information systems.
12. A company’s ability to attract and hold investment capital ultimately depends on its
a.
budgeting.
b.
planning.
c.
liquidity.
d.
profitability.
13. The group of users of accounting information charged with achieving the goals of the business is its
a.
auditors.
b.
creditors.
c.
management.
d.
investors.
14. A primary user of accounting information with a direct financial interest in the business is a
a.
regulatory agency.
b.
creditor.
c.
taxing authority.
d.
labor union.
15. Which of the following groups uses accounting information primarily to help protect the public?
a.
Management
b.
Regulatory agencies
c.
Taxing authorities
d.
Economic planners
16. One user of accounting information with an indirect financial interest in a business is
a.
a creditor.
b.
a financial adviser.
c.
management.
d.
an investor.
17. Companies listed on the stock exchanges must file financial statements with the
a.
Financial Accounting Standards Board.
b.
American Institute of Certified Public Accountants.
c.
Securities and Exchange Commission.
d.
Internal Revenue Service.
18. Which of the following is an agency of the U.S. government?
a.
IASB
b.
SEC
c.
FASB
d.
AICPA
19. Those who lend money or deliver goods and services before being paid are called
a.
investors.
b.
debtors.
c.
underwriters.
d.
creditors.
20. Which of the following transactions does not involve an exchange of value?
a.
Payment of a debt
b.
Purchase of a building on credit
c.
Borrowing money
d.
Loss from theft
21. An accounting measurement is concerned with all except which of the following?
a.
Money measure
b.
Financial position
c.
Separate entity
d.
Business transaction
22. The separate entity concept requires that
a.
the personal assets and liabilities of an owner not be shown on the business’s financial
statements.
b.
transactions that involve an exchange of value be kept separate from those that do not.
c.
tax records be kept separate from financial reporting records.
d.
a separate set of books be established for each segment of a business.
23. The topic of foreign exchange rates relates most closely to the concept of
a.
separate entity.
b.
money measure.
c.
nonexchange transactions.
d.
business transactions.
24. All of the following are considered nonexchange transactions except
a.
the day-by-day accumulation of interest.
b.
the wear and tear on machinery.
c.
the sale of goods and services.
d.
losses from fire, flood, and theft.
25. Which of the following transactions involves an exchange of value?
a.
Accumulation of interest
b.
Sale of services
c.
Flood loss
d.
Wear and tear on equipment
26. Which of the following is legally a separate entity from its owner(s)?
a.
Sole proprietorship only
b.
Sole proprietorship and partnership only
c.
Corporation only
d.
Partnership only
27. Most business enterprises in the United States are
a.
government units.
b.
partnerships.
c.
sole proprietorships.
d.
corporations.
28. Which of the following is considered by accountants to be a separate entity from its owner(s)?
a.
Partnership only
b.
Sole proprietorship only
c.
Corporation only
d.
Sole proprietorship, partnership, and corporation
29. Dividends of a corporation are declared by its
a.
board of directors.
b.
officers.
c.
stockholders.
d.
creditors.
30. The corporate officers are responsible for
a.
arranging for major loans with banks.
b.
determining corporate policy.
c.
carrying out corporate policy.
d.
appointing the board of directors.
31. The board of directors of a corporation is responsible for all of the following except
a.
arranging for major bank loans.
b.
authorizing contracts.
c.
carrying out the daily operations of the business.
d.
declaring dividends.
32. The audit committee is responsible for all of the following except
a.
engaging the company’s independent auditors.
b.
assuring that reliable accounting records are kept.
c.
auditing the company’s financial statements.
d.
ascertaining that the company safeguards its resources.
33. Transfer of ownership will not affect the continuity of a
a.
corporation..
b.
sole proprietorship.
c.
partnership
d.
corporation or partnership.
34. Which of the following is not a satisfactory statement of the accounting equation?
a.
Assets = Liabilities + Stockholders’ Equity
b.
Assets – Stockholders’ Equity = Liabilities
c.
Assets = Liabilities – Stockholders’ Equity
d.
Assets – Liabilities = Stockholders’ Equity
35. The best definition of assets is the
a.
cash owned by the company.
b.
resources belonging to a company having future benefit to the company.
c.
collection of resources belonging to the company and the claims on these resources.
d.
owners’ investment in the business.
36. Which of the following items has no effect on stockholders’ equity?
a.
Land purchased
b.
Revenue
c.
Expense
d.
Dividend declared and paid
37. Which of the following accounts is not considered an asset?
a.
Accounts Receivable
b.
Inventory
c.
Retained Earnings
d.
Trademark
38. An example of a monetary asset is
a.
Accounts Receivable.
b.
Copyright.
c.
Retained Earnings.
d.
Land.
39. Stockholders’ equity of a corporation would not show
a.
retained earnings.
b.
additional paid-in capital on stock issued.
c.
the par value of stock issued.
d.
revenues and expenses.
40. All of the following will affect retained earnings except
a.
expenses incurred.
b.
dividends declared and paid.
c.
revenues earned.
d.
investments by owners.
41. A liability would not include an obligation to
a.
transfer assets.
b.
hire an employee.
c.
pay cash.
d.
provide services.
42. Which of the following assets could be described as nonphysical?
a.
Buildings
b.
Cash
c.
Patents
d.
Equipment
43. Which of the following financial statements is concerned with the enterprise at a point in time?
a.
Statement of retained earnings
b.
Income statement
c.
Statement of cash flows
d.
Balance sheet
44. Flores Realty Corporation had the following balance sheet accounts and balances:
Accounts Payable
$6,000
Common Stock
?
Accounts Receivable
1,000
Equipment
$7,000
Building
?
Land
7,000
Cash
3,000
Retained Earnings
2,000
If the balance of the Common Stock account were $29,500, what would be the balance of the Building
account?
a.
$14,500
b.
$35,500
c.
$31,500
d.
$19,500
45. Flores Realty Corporation had the following balance sheet accounts and balances:
Accounts Payable
$6,000
Common Stock
?
Accounts Receivable
1,000
Equipment
$7,000
Building
?
Land
7,000
Cash
3,000
Retained Earnings
2,000
If the balance of the Building account were $26,500, what would be the total of liabilities and
stockholders’ equity?
a.
$26,500
b.
$44,500
c.
$41,500
d.
$36,500
46. Flores Realty Corporation had the following balance sheet accounts and balances:
Accounts Payable
$6,000
Common Stock
?
Accounts Receivable
1,000
Equipment
$7,000
Building
?
Land
7,000
Cash
3,000
Retained Earnings
2,000
If the balance of the Building account were $15,000 and if the equipment were sold for $7,000, what
would be the total of stockholders’ equity?
a.
$27,000
b.
$16,000
c.
$15,000
d.
$33,000