Chapter 1 – Introduction to Accounting and Business
LEARNING OBJECTIVES:
71. Select the type of business that is most likely to obtain large amounts of resources by issuing stock.
a.
partnership
b.
corporation
c.
proprietorship
d.
government entity
LEARNING OBJECTIVES:
72. Which of the following is not a characteristic of a corporation?
a.
b.
c.
d.
LEARNING OBJECTIVES:
73. Within the United States, the dominant body in the primary development of accounting principles is the
a.
American Institute of Certified Public Accountants (AICPA)
b.
American Accounting Association (AAA)
c.
Financial Accounting Standards Board (FASB)
d.
Institute of Management Accountants (IMA)
Chapter 1 – Introduction to Accounting and Business
74. The business entity assumption means that
a.
the owner is part of the business entity
b.
an entity is organized according to state or federal statutes
c.
an entity is organized according to the rules set by the FASB
d.
the entity is an individual economic unit for which data are recorded, analyzed, and reported
75. For accounting purposes, the business entity should be considered separate from its owners if the entity is
a.
a corporation
b.
a proprietorship
c.
a partnership
d.
any of these
76. The measurement principle requires that
a.
business transactions be consistent with the objectives of the entity
b.
the Financial Accounting Standards Board be fair and unbiased in its deliberations over new accounting
standards
c.
accounting principles meet the objectives of the Security and Exchange Commission
d.
amounts recorded in the financial statements be based on independently verifiable evidence
Chapter 1 – Introduction to Accounting and Business
77. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal
Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be
recorded on the accounting records of which of the following entities?
a.
Crystal Cleaning and the American Red Cross
b.
Karen Meyer’s personal records and the American Red Cross
c.
Karen Meyer’s personal records and Crystal Cleaning
d.
Karen Meyer’s personal records, Crystal Cleaning, and the American Red Cross
78. Which one of the following is the authoritative body in the United States having the primary responsibility for
developing accounting principles?
a.
FASB
b.
IRS
c.
SEC
d.
AICPA
79. Which of the following items relates to separating the reporting of business and personal economic transactions?
a.
cost principle
b.
monetary unit assumption
c.
business entity assumption
d.
measurement principle
Chapter 1 – Introduction to Accounting and Business
80. Donner Company is selling a piece of land adjacent to its 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 principle, at what amount should the land be recorded in the accounting records of Focus Company?
a.
$177,000
b.
$212,000
c.
$220,000
d.
$232,000
81. Many countries outside the United States use financial accounting standards issued by the
a.
AICPA
b.
SEC
c.
IASB
d.
FASB
82. The monetary unit assumption
a.
is only used in the financial statements of manufacturing companies
b.
is not important when applying the cost principle
c.
requires that different units be used for assets and liabilities
d.
requires that economic data be reported in yen in Japan or dollars in the United States
Chapter 1 – Introduction to Accounting and Business
83. Which of the following is not true of accounting principles?
a.
Financial accountants follow generally accepted accounting principles (GAAP).
b.
Following GAAP allows accounting information users to compare one company to another.
c.
A new accounting principle can be adopted with stockholders’ approval.
d.
The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting
principles.
84. The initials GAAP stand for
a.
General Accounting Procedures
b.
Generally Accepted Plans
c.
Generally Accepted Accounting Principles
d.
Generally Accepted Accounting Practices
85. Assets are
a.
always lower than liabilities
b.
equal to liabilities less stockholders’ equity
c.
the same as expenses because they are acquired with cash
d.
financed by the stockholders and/or creditors
Chapter 1 – Introduction to Accounting and Business
86. Debts owed by a business are referred to as
a.
accounts receivables
b.
expenses
c.
stockholders’ equity
d.
liabilities
87. The accounting equation may be expressed as
a.
Assets = Equities − Liabilities
b.
Assets + Liabilities = Stockholders’ Equity
c.
Assets = Revenues − Liabilities
d.
Assets − Liabilities = Stockholders’ Equity
88. The assets and liabilities of a company are $128,000 and $84,000, respectively. Stockholders’ equity should equal
a.
$212,000
b.
$44,000
c.
$128,000
d.
$84,000
Chapter 1 – Introduction to Accounting and Business
89. 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 a
a.
$106,000 increase
b.
$14,000 increase
c.
$14,000 decrease
d.
$106,000 decrease
90. Which of the following is not a business transaction?
a.
make a sales offer
b.
sell goods for cash
c.
receive cash for services to be rendered later
d.
pay for supplies
91. 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
a.
increase an asset, decrease another asset
b.
decrease an asset, decrease a liability
c.
increase an asset, increase a liability
d.
increase an asset, increase stockholders’ equity
Chapter 1 – Introduction to Accounting and Business
92. Earning revenue
a.
increases assets, increases stockholders’ equity
b.
increases assets, decreases stockholders’ equity
c.
increases one asset, decreases another asset
d.
decreases assets, increases liabilities
93. The monetary value charged to customers for the performance of services sold is called a(n)
a.
asset
b.
net income
c.
capital
d.
revenue
94. Goods purchased on account for future use in the business, such as supplies, are called
a.
prepaid liabilities
b.
revenues
c.
prepaid expenses
d.
liabilities
Chapter 1 – Introduction to Accounting and Business
95. The asset created by a business when it makes a sale on account is termed
a.
accounts payable
b.
prepaid expense
c.
interest revenue
d.
accounts receivable
96. The debt created by a business when it makes a purchase on account is referred to as an
a.
account payable
b.
account receivable
c.
asset
d.
expense payable
97. 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
a.
a $17,000 increase
b.
an $88,000 decrease
c.
a $159,000 increase
d.
a $159,000 decrease
Chapter 1 – Introduction to Accounting and Business
98. Cash dividends
a.
increase expenses
b.
decrease expenses
c.
increase cash
d.
decrease stockholders’ equity
99. How does paying a liability in cash affect the accounting equation?
a.
assets increase; liabilities decrease
b.
assets increase; liabilities increase
c.
assets decrease; liabilities decrease
d.
liabilities decrease; stockholders’ equity increases
100. How does receiving a bill to be paid next month for services received affect the accounting equation?
a.
assets decrease; stockholders’ equity decreases
b.
assets increase; liabilities increase
c.
liabilities increase; stockholders’ equity increases
d.
liabilities increase; stockholders’ equity decreases
Chapter 1 – Introduction to Accounting and Business
101. How does the payment of rent for equipment affect the accounting equation?
a.
assets increase; assets decrease
b.
assets decrease; stockholders’ equity decreases
c.
assets decrease; liabilities increase
d.
assets increase; stockholders’ equity increases
102. Land, originally purchased for $30,000, is sold for $62,000 in cash. What is the effect of the sale on the accounting
equation?
a.
assets increase by $62,000; stockholders’ equity increases by $62,000
b.
assets increase by $32,000; stockholders’ equity increases by $32,000
c.
assets increase by $62,000; liabilities decrease by $30,000; stockholders’ equity increases by $32,000
d.
assets increase by $30,000; no change in liabilities; stockholders’ equity increases by $62,000
Change in stockholders’ equity = +$32,000
103. Which of the following accounts is a liability?
a.
Accounts Payable
b.
Accounts Receivable
c.
Wages Expense
d.
Service Revenue
Chapter 1 – Introduction to Accounting and Business
104. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and
liabilities of $300,000. During Year 2, stockholders invested an additional $73,000 and received $33,000 in dividends
from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were
$995,000 and liabilities were $270,000?
a.
$45,000
b.
$50,000
c.
$106,000
d.
$370,000
105. Which of the following asset accounts is increased when a receivable is collected?
a.
Accounts Receivable
b.
Supplies
c.
Accounts Payable
d.
Cash
106. Transactions affecting stockholders’ equity include
a.
capital contributions and payment of liabilities
b.
capital contributions, stockholder dividends, earning of revenues, and incurrence of expenses
c.
capital contributions, earning of revenues, incurrence of expenses, and collection of accounts receivable
d.
stockholder dividends, earning of revenues, incurrence of expenses, and purchase of supplies on account
Chapter 1 – Introduction to Accounting and Business
107. Computer Corporation is starting its computer programming business and has sold stock of $15,000. Identify how
the accounting equation will be affected.
a.
increase in assets (Cash) and increase in liabilities (Accounts Payable)
b.
increase in assets (Cash) and increase in Stockholders’ Equity
c.
increase in assets (Accounts Receivable) and decrease in liabilities (Accounts Payable)
d.
increase in assets (Cash) and increase in assets (Accounts Receivable)
108. Ramos Repair Company is paying a cash dividend. How does this transaction affect Ramos Repair Company’s
accounting equation?
a.
increase in assets (Accounts Receivable) and decrease in assets (Cash)
b.
decrease in assets (Cash) and decrease in stockholders’ equity (Dividends)
c.
decrease in assets (Cash) and decrease in liabilities (Accounts Payable)
d.
increase in assets (Cash) and decrease in stockholders’ equity (Dividends)
Chapter 1 – Introduction to Accounting and Business
109. Which of the following is not a business transaction?
a.
Erin, the CEO, buys $15,000 in stock, placing the money in a bank account in the name of Bob’s Lawn
Service.
b.
Erin provided services to customers, earning fees of $600.
c.
Erin purchased hedge trimmers for Bob‘s Lawn Service, agreeing to pay the supplier next month.
d.
Erin pays her monthly personal credit card bill.
110. Which of the following is a business transaction?
a.
purchase supplies on account
b.
plan advertising for upcoming sale
c.
give employees a raise beginning next month
d.
submit estimate for construction project
111. 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)
a.
prior period statement
b.
retained earnings statement
c.
income statement
d.
balance sheet
Chapter 1 – Introduction to Accounting and Business
112. Which of the following financial statements reports information as of a specific date?
a.
income statement
b.
retained earnings statement
c.
statement of cash flows
d.
balance sheet
113. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared
last. The retained earnings statement (RES), 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?
a.
I, RES, B
b.
B, I, RES
c.
RES, I, B
d.
B, RES, I
114. Liabilities are reported on the
a.
income statement
b.
retained earnings statement
c.
statement of cash flows
d.
balance sheet
Chapter 1 – Introduction to Accounting and Business
115. Cash investments made by the owner in the business are reported on the statement of cash flows in the
a.
financing activities section
b.
investing activities section
c.
operating activities section
d.
supplemental statement
116. The ending balance of the retained earnings account appears in
a.
both the retained earnings statement and the income statement
b.
only the retained earnings statement
c.
both the retained earnings statement and the balance sheet
d.
both the retained earnings statement and the statement of cash flows
117. A financial statement user would determine if a company was profitable or not during a specific period of time by
reviewing the
a.
income statement
b.
balance sheet
c.
statement of cash flows
d.
statement of retained earnings
Chapter 1 – Introduction to Accounting and Business
118. If a shareholder wanted to know how money flowed into and out of the company, which financial statement would
the shareholder use?
a.
income statement
b.
statement of cash flows
c.
balance sheet
d.
statement of retained earnings
119. The assets section of the balance sheet normally presents assets in
a.
alphabetical order
b.
the order of largest to smallest dollar amounts
c.
the order in which they will be converted into cash or used in operations
d.
the order of smallest to largest dollar amounts
120. All of the following statements regarding the ratio of liabilities to stockholders’ equity are true except
a.
a ratio of 1 indicates that liabilities equal stockholders’ equity
b.
sole proprietorships can use this ratio but substitute total owner’s equity for total stockholders’ equity
c.
the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors
d.
the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors
Chapter 1 – Introduction to Accounting and Business
121. 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.
Bloom’s: Remembering
LEARNING OBJECTIVES:
122. Companies like Enron, HealthSouth, and Xerox Corporation have been caught in the midst of ethical lapses that led
to fines, firings, and criminal and/or civil prosecution. List and briefly describe two factors that are responsible for what
went wrong in these companies.
Bloom’s: Understanding
LEARNING OBJECTIVES:
BUSPROG: Ethics
123. List the five steps in the process by which accounting provides information to users.
Chapter 1 – Introduction to Accounting and Business
LEARNING OBJECTIVES:
124. Identify each of the following as either internal or external users of accounting information.
A.
Payroll manager
B.
Bank
C.
President’s secretary
D.
Internal Revenue Service
E.
Raw material vendors
F.
Social Security Administration
G.
Health insurance provider
H.
Managerial accountant
A.
Internal
B.
External
C.
Internal
D.
External
E.
External
F.
External
G.
External
H.
Internal
LEARNING OBJECTIVES:
125. For each of the following companies, identify whether they are a service, merchandising, or manufacturing business.
A.
Kohl’s
B.
Time Warner Cable
C.
General Motors
D.
Regal Cinemas
E.
Applebee’s
F.
Sony
G.
Best Buy
H.
Banana Republic
I.
H&R Block
Chapter 1 – Introduction to Accounting and Business
LEARNING OBJECTIVES:
126. What is the major difference between the objective of financial accounting and the objective of managerial
accounting?
Bloom’s: Remembering
LEARNING OBJECTIVES:
127. Give the major disadvantage of disregarding the cost principle and constantly revaluing assets based on appraisals
and opinions.
Bloom’s: Remembering
LEARNING OBJECTIVES:
128. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15,
Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax
purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what
value should the land be recorded in Carpet Barn Company’s records?