Chapter 14 1 The process of informing interested groups outside the firm

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Chapter 14: Understanding Accounting Issues

1. What is bookkeeping?

a. The same as accounting

b. The recording of accounting transactions

c. The financial statements of a company

d. A system for measuring business performance

e. Internal procedures that alert managers to problems

Difficulty: 1 Page-Reference: 429

Question ID: 14-1-01 Skill: Knowledge

Objective: 14.1

2. The process of informing interested groups outside the firm about the financial condition of the firm

is known as

a. budgeting.

b. financial accounting.

c. managerial accounting.

d. generally accepted accounting principles.

e. auditing.

Difficulty: 1 Page-Reference: 429

Question ID: 14-1-02 Skill: Knowledge

Objective: 14.1

3. ____________ is the comprehensive information system for collecting, analyzing, and

communicating financial information, while _____________ is the recording of financial transactions.

a. Financial accounting; managerial accounting

b. Managerial accounting; financial accounting

c. Bookkeeping; accounting

d. Accounting; bookkeeping

e. Controlling; accounting

Difficulty: 2 Page-Reference: 429

Question ID: 14-1-03 Skill: Knowledge

Objective: 14.1

4. _____ is a comprehensive system for collecting, analyzing, and communicating financial

information.

a. Bookkeeping

b. Accounting

c. Controlling

d. Auditing

e. Forensic accounting

Difficulty: 1 Page-Reference: 429

Question ID: 14-1-04 Skill: Knowledge

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

5. Janice is a bookkeeper. Her primary function would be to

a. generate financial statements.

b. measure business performance.

c. record accounting transactions.

d. complete the same tasks as accountants do.

e. determine the value of the firm to investors.

Difficulty: 1 Page-Reference: 429

Question ID: 14-1-05 Skill: Comprehension

Objective: 14.1

6. What is the primary purpose of accounting?

a. To determine when to sell the company

b. To determine the most effective plan to avoid a hostile takeover

c. To determine the value of the company before it is sold

d. To summarize the results of business transactions so that the resulting reports can be used in the

decision-making process

e. To provide information for tax authorities

Difficulty: 1 Page-Reference: 430

Question ID: 14-1-06 Skill: Knowledge

Objective: 14.1

7. Government agencies would be most interested in the output of ___________ accountants, while

company salespeople would be most interested in the output of ______________ accountants.

a. public; private

b. private; public

c. managerial; financial

d. financial; managerial

e. financial; financial

Difficulty: 2 Page-Reference: 431

Question ID: 14-1-07 Skill: Knowledge

Objective: 14.1

8. The field of accounting that serves internal users of a company’s financial information is

a. financial accounting.

b. auditing.

c. public accounting.

d. bookkeeping.

e. managerial accounting.

Difficulty: 1 Page-Reference: 431

Question ID: 14-1-08 Skill: Knowledge

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

9. A lawn-care company that started five years ago now has 15 employees. Now it needs to decide

how to ensure that its finances are managed because the company is growing. The owner is thinking

about hiring a controller to ensure good financial management. If the following facts are known, which one

would not strengthen the argument for hiring a controller?

a. The company must continuously monitor its cash flow.

b. The company needs to decide how to market its products so it can reach the largest number of

potential customers.

c. The owner wants to have any excess funds invested in high-growth opportunities.

d. The company needs to map out financial goals.

e. The company needs to identify good sources of funding.

Difficulty: 1 Page-Reference: 430

Question ID: 14-1-09 Skill: Analysis

Objective: 14.1

10. Laura is preparing annual income statements and balance sheets for her company. The field of

accounting in which she is engaged is

a. auditing.

b. bookkeeping.

c. financial accounting.

d. public accounting.

e. managerial accounting.

Difficulty: 1 Page-Reference: 431

Question ID: 14-1-10 Skill: Comprehension

Objective: 14.1

11. David is preparing a statement of estimated profits and losses for a new product that has just

been introduced by his company. The field of accounting that David is working in is

a. managerial accounting.

b. auditing.

c. public accounting.

d. financial accounting.

e. bookkeeping.

Difficulty: 1 Page-Reference: 431

Question ID: 14-1-11 Skill: Comprehension

Objective: 14.1

12. David is an accountant who calls attention to problems and helps managers carry out the

planning, decision making, and controlling functions. David is involved in ______ accounting.

a. budgeting

b. financial

c. auditing

d. managerial

e. generally accepted accounting principles

Difficulty: 1 Page-Reference: 431

Question ID: 14-1-12 Skill: Comprehension

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

13. Managerial accounting is

a. the field of accounting that serves internal users of a company’s financial information.

b. the rules and procedures governing the content and form of financial reports.

c. the field of accounting concerned with external users of a company’s financial information.

d. a systematic examination of a company’s accounting system to determine whether its financial

reports fairly represent its operations.

e. a bookkeeping system that balances the accounting equation by recording the dual effects of every

financial transaction.

Difficulty: 2 Page-Reference: 431

Question ID: 14-1-13 Skill: Comprehension

Objective: 14.1

14. ________ provides cost information for engineers making product or process improvements.

a. Government accounting

b. Minor accounting

c. Stock market accounting

d. Managerial accounting

e. Financial accounting

Difficulty: 2 Page-Reference: 431

Question ID: 14-1-14 Skill: Knowledge

Objective: 14.1

15. LJD is a CA firm. What three services does it likely provide?

a. Ratio analysis, journal preparation, and ledger preparation

b. Tax services, budget preparation, and ratio analysis

c. Audit services, ratio analysis and tax collection

d. Tax services, audit services, and management services

e. Owners’ equity analysis, journal and ledger preparation, and tax collection

Difficulty: 2 Page-Reference: 431

Question ID: 14-1-15 Skill: Comprehension

Objective: 14.1

16. An examination of a company’s accounting system to determine whether its financial reports fairly

present its operations is

a. public accounting.

b. bookkeeping.

c. managerial accounting.

d. financial accounting.

e. auditing.

Difficulty: 1 Page-Reference: 433

Question ID: 14-1-16 Skill: Knowledge

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

17. Rose is reviewing a company’s accounting system, checking the ledgers and journals, and

tracking some transactions to see how they were handled. Rose is engaged in

a. financial accounting.

b. managerial accounting.

c. auditing.

d. public accounting.

e. bookkeeping.

Difficulty: 1 Page-Reference: 433

Question ID: 14-1-17 Skill: Comprehension

Objective: 14.1

18. Arthur’s primary responsibility as an auditor is

a. publishing the audit report results in The Financial Post.

b. preparing budgets for the forthcoming year.

c. ensuring the firm’s accounting practices adhere to generally accepted accounting principles.

d. collecting taxes.

e. determining that the company actually has the inventory that it says it has.

Difficulty: 1 Page-Reference: 434

Question ID: 14-1-18 Skill: Comprehension

Objective: 14.1

19. Which of the following is correct with respect to generally accepted accounting principles?

a. Public and private businesses can no longer use generally accepted accounting principles.

b. They are used in many foreign countries but not in Canada.

c. Public companies in Canada have moved away from using generally accepted accounting

principles and have adopted International Financial Reporting Standards (IFRS).

d. Private companies must use the new International Financial Reporting Standards (IFRS).

e. None of these statements in correct.

Difficulty: 1 Page-Reference: 434

Question ID: 14-1-19 Skill: Comprehension

Objective: 14.1

20. David is a salaried accountant who has been hired by Lexar Corp. to carry out its day-to-day

financial activities. David is a(n)

a. public accountant.

b. auditor.

c. controller.

d. private accountant.

e. advisor.

Difficulty: 1 Page-Reference: 435

Question ID: 14-1-20 Skill: Comprehension

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

21. Forensic accountants are sometimes used to

a. ensure the accounting system adheres to GAAP.

b. track down hidden funds in business firms.

c. ensure auditors follow auditing standards.

d. ensure businesses remain profitable.

e. all of these.

Difficulty: 2 Page-Reference: 433

Question ID: 14-1-21 Skill: Knowledge

Objective: 14.1

22. Tom is in charge of the entire accounting system at Lane Electronics. His job title is most likely

a. budget analyst.

b. controller.

c. top accounting manager.

d. chief accountant.

e. chief bookkeeper.

Difficulty: 1 Page-Reference: 430

Question ID: 14-1-22 Skill: Comprehension

Objective: 14.1

23. Which of the following is true regarding CAs, CGAs, and CMAs?

a. Formerly, CGAs were not allowed to audit the financial statements of publicly held companies,

but now they have the right to audit such companies in most provinces.

b. There are more CMAs than there are CAs or CGAs.

c. CGAs place more emphasis on strategic management than either CAs or CMAs.

d. CGAs are not allowed to work in CA firms.

e. The federal government feels that accounting designations no longer have any significance.

Difficulty: 3 Page-Reference: 432

Question ID: 14-1-23 Skill: Comprehension

Objective: 14.1

24. Jeremy identifies problems and helps managers carry out planning, decision making, and

controlling functions. Jeremy works in the field of

a. managerial accounting.

b. generally accepted accounting principles.

c. financial accounting.

d. budgeting.

e. auditing.

Difficulty: 1 Page-Reference: 431

Question ID: 14-1-24 Skill: Comprehension

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

25. Al Rosen works as a private investigator of white-collar crimes. He is

a. a GAAP accountant.

b. a financial scanner.

c. a whistleblower.

d. an auditor.

e. a forensic accountant.

Difficulty: 2 Page-Reference: 433

Question ID: 14-1-25 Skill: Comprehension

Objective: 14.1

26. Which of the following is correct with regard to private accountants?

a. They are hired by business firms who do not want to use the services of CAs or CGAs.

b. They are employed by business firms in areas such as marketing research, law, and production

technology.

c. They are becoming less common as CAs, CGAs, and CMAs become more prominent and skilled.

d. They are almost exclusively found at the head office of business firms.

e. They are hired to deal with the day-to–day accounting needs of companies.

Difficulty: 2 Page-Reference: 435

Question ID: 14-1-26 Skill: Comprehension

Objective: 14.1

27. Janice is a private accountant. The first thing she must do when working through the accounting

cycle is to

a. record transactions in a journal.

b. do a trial balance.

c. analyze transaction documents.

d. analyze the financial statements using ratio analysis.

e. transfer entries from the journal to the ledger.

Difficulty: 2 Page-Reference: 435

Question ID: 14-1-27 Skill: Application

Objective: 14.1

28. Barry is a private accountant who is working through the accounting cycle. He has already

analyzed transaction documents. His next step is to

a. record transactions in a journal.

b. do a trial balance.

c. prepare financial statements.

d. analyze the financial statements using ratio analysis.

e. transfer entries from the journal to the ledger.

Difficulty: 2 Page-Reference: 435

Question ID: 14-1-28 Skill: Application

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

29. Sheena is a private accountant who is working through the accounting cycle. She has completed

transferring entries from the journal to a ledger. Her next step is to

a. record transactions in a journal.

b. do a trial balance.

c. prepare financial statements.

d. analyze the financial statements using ratio analysis.

e. transfer entries from the journal to the ledger.

Difficulty: 2 Page-Reference: 435

Question ID: 14-1-29 Skill: Application

Objective: 14.1

30. The accounting equation is

a. owners’ equity – assets = liabilities.

b. owners’ equity – liabilities = assets.

c. assets + liabilities = owners’ equity.

d. assets + owners’ equity = liabilities.

e. assets = liabilities + owners’ equity.

Difficulty: 1 Page-Reference: 435

Question ID: 14-1-30 Skill: Knowledge

Objective: 14.2

31. A(n) ________ is any economic resource expected to benefit a firm or the individual who owns it.

a. owners’ equity

b. asset

c. debit

d. liability

e. credit

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-31 Skill: Knowledge

Objective: 14.2

32. A(n) ________ is a debt owed by a firm to an outside organization or individual.

a. liability

b. owners’ equity

c. debit

d. asset

e. credit

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-32 Skill: Knowledge

Objective: 14.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

33. ________ is the amount of money owners would theoretically receive if they sold all of a firm’s

assets and paid all of its liabilities.

a. Gross revenue

b. Total assets

c. Earnings per share

d. Net revenue

e. Owners’ equity

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-33 Skill: Knowledge

Objective: 14.2

34. What is the formula for determining owners‘ equity?

a. Assets minus liablities

b. Assets plus liabilities

c. Assets minus goodwill

d. Current assets minus current liabilities

e. There is no formula for computing owners’ equity

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-34 Skill: Knowledge

Objective: 14.2

35. Owners‘ equity consists of two sources of capital. They are

a. The amount that the owners originally invested and profits earned by and reinvested in the

company.

b. Bank loans and money received from factoring accounts receivable.

c. Bank loans and proceeds from the sale of shares of stock.

d. Trade credit and bank loans.

e. Dividends received by investors and bank loans.

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-35 Skill: Knowledge

Objective: 14.2

36. Max Corp. has total assets of $100 million and total liabilities of $30 million. Last year it earned a

profit of $3 million. What is owners’ equity at Max Corp.?

a. $3 million

b. $100 million

c. $103 million

d. $73 million

e. $70 million

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-36 Skill: Application

Objective: 14.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

37. Which of the following would be classified as an asset?

a. Goodwill

b. Accounts receivable

c. Land

d. Inventory

e. All of these

Difficulty: 1 Page-Reference: 436, 438

Question ID: 14-1-37 Skill: Knowledge

Objective: 14.2

38. An asset is

a. the amount of money originally invested in a business by its owners.

b. the amount of money that owners would receive if they sold all of a firm’s assets

and paid all of its liabilities.

c. the profits earned by and reinvested in the company.

d. any economic resource expected to benefit a firm or an individual who owns it.

e. a debt owed by a firm to an outside organization or individual.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-38 Skill: Knowledge

Objective: 14.2

39. A liability is

a. the amount of money originally invested in a business by its owners.

b. any economic resource expected to benefit a firm or an individual who owns it.

c. the profits earned by and reinvested in the company.

d. the amount of money that owners would receive if they sold all of a firm’s assets and paid all of its

debts.

e. a debt owed by a firm to an outside organization or individual.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-39 Skill: Knowledge

Objective: 14.2

40. Under which condition is owners’ equity positive?

a. Assets are greater than liabilities.

b. Assets and liabilities are equal.

c. Net profit is greater than 10 percent of sales.

d. Liabilities are greater than assets.

e. Debits exceed credits.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-40 Skill: Comprehension

Objective: 14.2

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

41. According to the accounting equation, if assets equal $4000 and liabilities equal $1500, then

owner’s equity would equal

a. $5500.

b. $2500.

c. $3500.

d. $8000.

e. It is not possible to tell with the information given.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-41 Skill: Application

Objective: 14.2

42. Jerry‘s Harley-Davidson Specialty Shop owes money to Johnson’s Bookkeeping Services. This

money is a(n) ________ to Jerry’s business.

a. liability

b. debit

c. owners’ equity

d. asset

e. credit

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-42 Skill: Comprehension

Objective: 14.2

43. Which of the following is correct with respect to the issue of owners’ equity?

a. Owners’ equity is meaningful for investors, but not for lenders.

b. If a company’s assets exceed its liabilities, owners‘ equity will be negative.

c. Owners’ equity consists of two sources of capital: the amount the owners originally invested and the

amount of government loans the company has received.

d. Even if a company operates profitably, its liabilities may increase faster than its assets.

e. The basic accounting equation can be rewritten as follows: owners’ equity equals assets minus

liabilities.

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-43 Skill: Comprehension

Objective: 14.2

44. Financial statements fall into three broad categories, which are

a. debits, credits, and loans.

b. income statements, balance sheets, and statements of cash flows.

c. assets, liabilities, and owners’ equity.

d. cash, marketable securities, and goodwill.

e. budgets, income statements, and profit-and–loss statements.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-44 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

45. To record the dual effects of financial transactions, accountants use

a. automated calculators.

b. liabilities and equities.

c. debits and debts.

d. double-entry accounting.

e. all of these.

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-45 Skill: Knowledge

Objective: 14.3

46. Peter, a private accountant, enters every transaction in a journal to reflect its impact on both

assets and on liabilities and owners’ equity. He is using

a. a double-entry accounting system.

b. a balance sheet.

c. a financial ratio.

d. an income statement.

e. a financial statement.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-46 Skill: Comprehension

Objective: 14.3

47. The financial statement that summarizes a firm’s assets, liabilities, and owners’ equity is the

a. income statement.

b. statement of cash flows.

c. balance sheet.

d. manufacturing statement.

e. statement of retained earnings.

Difficulty: 1 Page-Reference: 436

Question ID: 14-1-47 Skill: Knowledge

Objective: 14.3

48. A balance sheet would not be able to help a manager answer which question?

a. Is it a good time to try to grow the business?

b. Can the company survive if a period of low revenues happens?

c. Does the company have an excessive number of employees?

d. Is the company able to take on more debt?

e. What is the total value of all of the company’s assets?

Difficulty: 1 Page-Reference: 436-437

Question ID: 14-1-48 Skill: Comprehension

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

49. If the following facts were known, which one would strengthen the argument that a company will

be able to meet its current financial obligations?

a. The level of accounts payable is high.

b. Liabilities exceed assets.

c. The company currently has a negative cash flow.

d. The company needs to increase the number of customers it serves.

e. Assets exceed liabilities.

Difficulty: 1 Page-Reference: 436-437

Question ID: 14-1-49 Skill: Analysis

Objective: 14.3

50. What are the three types of assets that will normally be found on a balance sheet?

a. Local, national, and international

b. Positive, negative, and neutral

c. Land, buildings, and equipment

d. Current, fixed, and intangible

e. Short-term, long-term, and medium-term

Difficulty: 2 Page-Reference: 437

Question ID: 14-1-50 Skill: Knowledge

Objective: 14.3

51. A current asset is

a. an expense, such as rent, that is paid before the upcoming period in which it is due.

b. a nonphysical asset, such as a patent or trademark, that has economic value in the form of an

expected benefit.

c. an amount due from a customer who has purchased goods on credit.

d. an asset with long-term use or value, such as land, buildings, and equipment.

e. an asset that can or will be converted to cash within the following year.

Difficulty: 2 Page-Reference: 437

Question ID: 14-1-51 Skill: Comprehension

Objective: 14.3

52. ________ are purchased as short-term investments and are only slightly less liquid than cash.

a. Prepaid expenses

b. Patents

c. Accounts receivable

d. Marketable securities

e. Futures

Difficulty: 2 Page-Reference: 437

Question ID: 14-1-52 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

53. Stephen is looking at a financial statement that shows detailed information about the accounting

equation factors. He is looking at the company’s

a. T-accounts.

b. income statement.

c. balance sheet.

d. statement of cash flows.

e. profit-and-loss statement.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-53 Skill: Comprehension

Objective: 14.3

54. What does the balance sheet show?

a. It shows the share price of the firm during the last year and how much fluctuation there has been

in the share price.

b. It shows short- and long-term liquidity ratios, profitability ratios, and activity ratios.

c. It shows a firm’s financial condition on a particular date in terms of its assets, liabilities, and owners’

equity.

d. It shows investors how much profit the firm made during the last year.

e. It shows a firm’s sources and uses of cash.

Difficulty: 2 Page-Reference: 436

Question ID: 14-1-54 Skill: Comprehension

Objective: 14.3

55. ________ are amounts due from customers who have purchased goods on credit.

a. Accounts owed

b. Accounts receivable

c. Accounts forwarded

d. Accounts payable

e. Account balances

Difficulty: 1 Page-Reference: 437

Question ID: 14-1-55 Skill: Knowledge

Objective: 14.3

56. ________ are debts that must be paid within one year.

a. Long-term liabilities

b. Liabilities

c. Intermediate liabilities

d. Current liabilities

e. Short-term liabilities

Difficulty: 1 Page-Reference: 438

Question ID: 14-1-56 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

57. Which of the following is an intangible asset?

a. An inventory level of 1000 copies of a book

b. The copyright for a textbook

c. A printing press used in the publication of a book

d. A $1000 Canada Savings Bond

e. The building in which a book was printed

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-57 Skill: Comprehension

Objective: 14.3

58. Meredith recently bought a business, but she paid more for the business than the total of its

current and fixed assets. What did she pay extra for?

a. Land the company owns

b. Equipment in the company’s factory

c. Goodwill

d. The franchise fee

e. Accounts receivable that are on the company’s books

Difficulty: 1 Page-Reference: 438

Question ID: 14-1-58 Skill: Comprehension

Objective: 14.3

59. Accounts receivable represents

a. an asset with long-term use or value, such as land, buildings, and equipment.

b. an amount due from a customer who has purchased goods on credit.

c. an expense, such as rent, that is paid before the upcoming period in which it is due.

d. a nonphysical asset, such as a patent or trademark, that has economic value in the form of

expected benefit.

e. an asset that can or will be converted to cash within the following year.

Difficulty: 2 Page-Reference: 437

Question ID: 14-1-59 Skill: Comprehension

Objective: 14.3

60. A prepaid expense is

a. an expense, such as rent, that is paid before the upcoming period in which it is due.

b. a nonphysical asset, such as a patent or trademark, that has economic value in the form of

expected benefit.

c. an amount due from a customer who has purchased goods on credit.

d. an asset that can or will be converted to cash within the following year.

e. an asset with long-term use or value, such as land, buildings, and equipment.

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-60 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

61. A fixed asset is

a. an amount due from a customer who has purchased goods on credit.

b. an asset with long-term use or value, such as land, buildings, and equipment.

c. an expense, such as rent, that is paid before the upcoming period in which it is due.

d. an asset that can or will be converted to cash within the following year.

e. a nonphysical asset, such as a patent or trademark, that has economic value in the form of an

expected benefit.

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-61 Skill: Knowledge

Objective: 14.3

62. As buildings and equipment wear out or become obsolete, their value decreases. To reflect

decreasing value, accountants use

a. prepaid expenses.

b. licensing.

c. subtracting methods.

d. depreciation.

e. all of these.

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-62 Skill: Comprehension

Objective: 14.3

63. A long-term liability is

a. additional money, above proceeds from a sale of shares, paid directly to a firm by its owners.

b. a debt that must be paid within the year.

c. the amount paid for an existing business above the value of its other assets.

d. the process of distributing the cost of an asset over its useful life.

e. a debt that is not due for at least one year.

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-63 Skill: Knowledge

Objective: 14.3

64. Paid-in capital is

a. a debt that must be paid within the year.

b. the process of distributing the cost of an asset over its useful life.

c. the amount paid for an existing business above the value of its other assets.

d. a debt that is not due for at least one year.

e. additional money, above proceeds from a sale of shares, paid directly to a firm by its owners.

Difficulty: 2 Page-Reference: 439

Question ID: 14-1-64 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

65. If a firm has $1 000 000 in retained earnings, what does this mean?

a. That the firm paid out $1 000 000 this year in dividends.

b. That the company is owed $1 000 000 by its creditors but has not yet collected the money.

c. That the firm has $1 000 000 in the bank.

d. That the company’s net profits less its dividend payments equals $1 000 000.

e. That the company has saved $1 000 000 during the period since the last balance sheet was made

up.

Difficulty: 2 Page-Reference: 439

Question ID: 14-1-65 Skill: Comprehension

Objective: 14.3

66. Gem Corp. has $100 million in assets and $50 million in liabilities. Last year the company earned

$10 million in net profit and paid out $5 million in dividends to shareholders. What are the retained

earnings for the company?

a. $50 million

b. $5 million

c. $45 million

d. $90 million

e. $95 million

Difficulty: 2 Page-Reference: 439

Question ID: 14-1-66 Skill: Application

Objective: 14.3

67. Prahbat is looking at a financial statement produced by Iron Corp. The statement lists the

company’s annual revenues, its expenses, and its profit. Prahbat is looking at a(n)

a. cash flow statement.

b. revenue-expense statement.

c. balance sheet.

d. budget.

e. income statement.

Difficulty: 1 Page-Reference: 439

Question ID: 14-1-67 Skill: Comprehension

Objective: 14.3

68. The basic formula used for the income statement is

a. profit plus revenues equals expenses.

b. revenue minus expenses equals profit.

c. expenses plus profit equals revenue.

d. expenses plus revenues equals profit.

e. revenue minus profits equals expenses.

Difficulty: 1 Page-Reference: 439

Question ID: 14-1-68 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

69. Which of the following formulas is used to calculate the cost of goods sold during the period?

a. Beginning inventory plus purchases minus ending inventory

b. Ending inventory minus beginning inventory plus purchases

c. Purchases minus beginning inventory plus ending inventory

d. Beginning inventory plus ending inventory minus purchases

e. Ending inventory plus beginning inventory divided by two

Difficulty: 3 Page-Reference: 440

Question ID: 14-1-69 Skill: Knowledge

Objective: 14.3

70. The total cost of obtaining materials for making products sold by a firm during the year is

a. cost of goods sold.

b. operating expense.

c. merchandise inventory.

d. net merchandise inventory.

e. administrative expense.

Difficulty: 1 Page-Reference: 440

Question ID: 14-1-70 Skill: Knowledge

Objective: 14.3

71. Jerry wants to calculate gross profit. Which formula should he use?

a. Operating expenses minus income taxes

b. Sales revenue minus income taxes

c. Sales revenue minus operating expenses

d. Sales revenue minus cost of goods sold

e. Sales revenue plus operating expenses.

Difficulty: 3 Page-Reference: 441

Question ID: 14-1-71 Skill: Application

Objective: 14.3

72. Mahar wants to calculate net income. Which formula should he use?

a. Gross profit minus total operating expenses minus income taxes

b. Gross profit minus income taxes

c. Revenues minus operating expenses

d. Gross profit minus administrative expenses minus income taxes

e. Gross profit minus operating expenses

Difficulty: 3 Page-Reference: 441

Question ID: 14-1-72 Skill: Application

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

73. At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating

expenses are $3 million, and income taxes are $1 million. What is the company’s gross profit?

a. $6 million

b. $17 million

c. $16 million

d. $2 million

e. None of these

Difficulty: 3 Page-Reference: 441

Question ID: 14-1-73 Skill: Application

Objective: 14.3

74. At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating

expenses are $3 million, and income taxes are $1 million. What is the company’s net income?

a. $6 million

b. $17 million

c. $16 million

d. $2 million

e. None of these

Difficulty: 3 Page-Reference: 441

Question ID: 14-1-74 Skill: Application

Objective: 14.3

75. At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating

expenses are $3 million, and income taxes are $1 million. What is the company’s operating income?

a. $6 million

b. $17 million

c. $3 million

d. $2 million

e. None of these

Difficulty: 3 Page-Reference: 441

Question ID: 14-1-75 Skill: Application

Objective: 14.3

76. If the following facts were known, which one would strengthen the argument that a company is

profitable?

a. The company’s sales revenue is low relative to its cost of goods sold.

b. The company’s cost of goods sold is low relative to its sales revenue.

c. The number of customers has remained stable for some time.

d. The company has had the same owners over its lifetime.

e. The company’s selling expenses are high compared to its administrative expenses.

Difficulty: 3 Page-Reference: 440-441

Question ID: 14-1-76 Skill: Analysis

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

77. One manager (Adam) says that the income statement should be strong this year because the

company has achieved a high level of sales revenue. Another manager (Eve) says that even with strong

sales revenue, the income statement might not look particularly good. What is Adam assuming?

a. That high revenues equate to a healthy income statement

b. That various factors besides sales revenue must be taken into account to calculate the income

statement

c. That sales revenue next year will likely be as good as this year’s

d. That operating expenses have been relatively high this year

e. That gross profit is much lower than gross sales

Difficulty: 3 Page-Reference: 440

Question ID: 14-1-77 Skill: Analysis

Objective: 14.3

78. One manager (Adam) says that the income statement should be strong this year because the

company has achieved a high level of sales revenue. Another manager (Eve) says that even with strong

sales revenue, the income statement might not look particularly good. What is Eve assuming?

a. That revenues this year were not as high as last year’s

b. That revenues are not as high as Adam thinks they are

c. That selling expenses exceeded administrative expenses this year

d. That many other factors must be taken into account to arrive at an income statement

e. That income taxes will be high this year

Difficulty: 3 Page-Reference: 439-441

Question ID: 14-1-78 Skill: Analysis

Objective: 14.3

79. One manager (Adam) says that the income statement should be strong this year because the

company has achieved a high level of sales revenue. Another manager (Eve) says that even with strong

sales revenue, the income statement might not look particularly good. If the following facts were known,

which one would strengthen Adam’s argument?

a. Total operating expenses were high this year.

b. Rent expenses were 30 percent higher than last year.

c. Compared to gross sales, the cost of goods sold was low.

d. The company is smaller than its competitors.

e. The company has valuable fixed assets.

Difficulty: 3 Page-Reference: 439-441

Question ID: 14-1-79 Skill: Analysis

Objective: 14.3

80. One manager (Adam) says that the income statement should be strong this year because the

company has achieved a high level of sales revenue. Another manager (Eve) says that even with strong

sales revenue, the income statement might not look particularly good. If the following facts were known,

which one would strengthen Eve’s argument?

a. Gross sales were higher than last year.

b. In the current year, total operating expenses were high.

c. There is only one part-time accountant at the company.

d. There were relatively few sales returns this year.

e. Outsourcing helped the company reduce administrative salaries by 25 percent.

Difficulty: 3 Page-Reference: 439-441

Question ID: 14-1-80 Skill: Analysis