1) Net income equals ________.
A) the gross profit on a sale
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
2) Gross profit equals ________.
A) sales minus cost of goods sold
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
3) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100,
and interest expense of $25. Net income was ________.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
4) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100,
and interest expense of $25. Gross profit was ________.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
5) Generally accepted accounting principles (GAAP) ________.
A) are a set of rules that a U.S. company must follow when preparing its financial statements
B) are accounting rules determined by the IRS
C) are accounting rules required by the U.S. government for all businesses to follow
D) are issued by the International Accounting Standards Board
6) The set of rules that a U.S. company must follow when preparing its financial statements is
called ________.
A) AICPA
B) FASB
C) GAAP
D) SOX
7) The set of rules that a U.S. company must follow when preparing its financial statements is
called ________.
A) generally accepted accounting principles
B) internal revenue code
C) internal control procedures
D) internally accepted accounting principles
8) Which of the following statements is TRUE?
A) The IASB is the current standards setting body for the U.S. accounting profession.
B) The FASB determines U.S. generally accepted accounting principles.
C) Applying IFRS will require much less judgment and interpretation than following U.S.
GAAP.
D) The IRS determines generally accepted accounting principles.
9) U.S. generally accepted accounting principles (GAAP) are determined by the ________.
A) IFRS
B) IASB
C) FASB
D) U.S. Congress
10) It requires more judgment to use ________ than to use ________.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
11) ________ have more detailed rules than ________.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
12) ________ are more concept-based than ________.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
13) ________ is more rule-based than ________.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
14) The SEC has ________.
A) ordered all U.S. companies to begin using IFRS immediately
B) ruled that U.S. companies may never use IFRS for financial reporting
C) established a time table for the convergence of U.S. GAAP and IFRS
D) established an International Accounting Standards Board to create international accounting
rules
15) The IRS developed GAAP, or generally accepted accounting principles, for the accounting
profession.
16) The FASB, or Financial Accounting Standards Board, is currently the standards-setting body
for rules that U.S. publicly-held companies must use in preparing financial statements.
17) GAAP, or generally accepted accounting principles, are the rules for preparing financial
statements followed by the accounting profession in the United States.
18) Revenue minus expenses equals net income.
19) Revenue minus expenses equals gross profit.
20) The Financial Accounting Standards Board sets international financial reporting standards
(IFRS).
21) IFRS and U.S. GAAP are the same in all respects.
22) IFRS have fewer detailed rules than U.S. GAAP.
23) What is profit?
24) What is the purpose of generally accepted accounting principles (GAAP)?
25) What are IFRS? How do they compare and contrast with U.S. GAAP?
Learning Objective 2-2
1) A financial statement provides information that ________.
A) is specific to a business enterprise
B) is industry-wide information
C) is economy-wide information
D) includes the owner’s personal financial records
2) Characteristics of useful information include ________.
A) rationality and reliability
B) comparability and consistency
C) materiality and conservatism
D) comprehensive and complete
3) Relevant information ________.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
4) Comparable information ________.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
5) Reliable information ________.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
6) Consistent information ________.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
7) Assets are recorded at their original cost to the company at the time of purchase. This is the
________ principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition
8) Expenses are reported on the income statement when the related revenue is recognized. This is
the ________ principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition
9) Ace Electronics bought a new factory for $5,000,000. The factory was originally offered for
sale for $5,200,000, but Ace successfully negotiated a lower price. Acme, Inc. was also trying to
buy the factory and offered to pay $4,900,000. Ace should record the factory on its books at
________.
A) $5,200,000
B) $5,000,000
C) $4,500,000
D) $4,900,000
10) For June, Team Shirts had a beginning balance in its Retained earnings account of $500. Net
income for the month was $875. Team Shirts paid dividends of $200. The ending balance in
Retained earnings was ________.
A) $675
B) $1,575
C) $1,175
D) $1,375
11) Accounts receivable represents ________.
A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) revenue
D) shareholders’ equity
12) Accounts payable represents ________.
A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) expenses
D) shareholders’ equity
13) The monetary-unit assumption refers to ________.
A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement
amounts
D) the way revenues and expenses are recognized
14) The historical-cost principle refers to ________.
A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) using monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized
15) The going-concern assumption refers to ________.
A) measuring the financial statement items at their cost at the time of the transaction
B) an assumption is made that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement
amounts
D) the way revenues and expenses are recognized
16) The accounting rule which requires that only the business transactions of Team Shirts be
shown on the balance sheet is the ________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
17) The accounting rule which assumes that Team Shirts is continuing in business for an
indefinite period of time is the ________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
18) Which of the following is an example of using the materiality concept?
A) recording significant purchases as assets even though technically they are considered
expenses
B) recording insignificant purchases as expenses even though technically they are considered
assets
C) not recording insignificant purchases at all
D) recording insignificant liabilities as assets
19) All of Team Shirts’ financial statements are presented in U.S. dollars. The accounting rule
that applies is the ________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
20) The revenue reported on the Team Shirts’ income statement has been earned during the
accounting period. The accounting rule that applies is the ________.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle
21) Supplies expense on the Team Shirts’ income statement represents only supplies that were
used to earn revenue during the accounting period. The accounting rule that applies is the
________.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle
22) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost
$100,000, was worth $120,000. How should Twisted Pretzel show this information on its
financial statements prepared under U.S. GAAP?
A) Report a gain of $20,000 on its income statement.
B) Report land at $100,000 on its income statement.
C) Report land at $120,000 on its income statement.
D) Continue showing the land at its cost of $100,000.
23) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost
$100,000, was worth $120,000. Under IFRS, Twisted Pretzel would be allowed to: show the land
on its financial statements as ________.
A) an expense of $100,000 on the income statement
B) an expense of $120,000 on the balance sheet
C) an asset of $120,000 on the income statement
D) an asset of $120,000 on the balance sheet
24) For information to be useful, it must be relevant and reliable.
25) The owner of a sole proprietorship should not include personal financial records as part of
the financial records and statements of the business.
26) The separate-entity concept means that a company and its owners should keep separate
records.
27) Two characteristics of useful information are comparability and consistency.
28) Comparability means that companies should use the same accounting rules from period to
period.
29) Reliable information can be verified.
30) If a company spends $25 on copy paper, the amount is not material compared with the total
office supplies budget of $250,000.
31) Information that is relevant is both timely and useful in predicting the future.
32) State the most applicable accounting rule for each of the following situations. An accounting
rule can be a principle, assumption, constraint, or information characteristic.
1. All purchases and expenses are recorded at the amount paid.
2. South Seas records items imported from Tahiti in U.S. dollars.
3. The owner intends to run South Seas for an indefinite period of time.
4. Jem’s Jewelers sold a $5,000 diamond engagement ring on account and recorded it as a sale.
5. Inventory purchased last month and sold this month was deducted as a cost on this month’s
income statement.
33) State the most applicable accounting rule for each of the following situations. Each rule can
be used more than once. An accounting rule can be a principle, assumption, constraint, or
information characteristic.
1. Maids-R-Us recorded using supplies in the same period the supplies were used instead of
expensing them in the period when they were purchased.
2. Clean Sweep cleaned an office building in October and was paid in November. Revenue was
reported in October.
3. Team Shirts sends a set of financial statements prepared in accordance with GAAP to First
Bank every month.
4. Mary Ellis, owner of Clean Sweep, has a bank account for her business separate from her
personal bank account.
5. Jem’s Jewelers purchased a three-month insurance policy on its diamond inventory. The cost
of the policy was recorded as an asset. Later one-third of the asset was expensed each month
over the three-month policy.
34) State the most applicable accounting rule for each of the following situations. An accounting
rule can be a principle, assumption, constraint, or information characteristic.
1. A $15 wastebasket was expensed when purchased even though it will be used for more than
one year.
2. The owner of the business paid for private school tuition and did not list the amount on the
books of his business.
3. Team Shirts prepares financial statements in the same manner each year.
4. South Sea’s financial statements are prepared within the first week after the close of each
accounting period.
5. An external auditor found receipts documenting the purchase of a computerized information
system for Team Shirts.
35) Busy Beaver, Inc. purchased land ten years ago for $30,000. At December 31, 2012, similar
land has been appraised at $50,000. Answer the following questions:
1. At what amount should land be reported on the balance sheet under U.S. GAAP?
2. Which basis is more reliable, historical cost, $30,000, or fair market value, $50,000?
3. Which basis is more relevant, historical cost, $30,000, or fair market value, $50,000?
4. How might the land be reported using IFRS?
36) Explain the objectives of financial reporting.
37) Discuss the qualities of accounting information.
38) Match each of the following terms with the appropriate definition. Each term should be used
only once.
a. Generally Accepted Accounting Principles (GAAP)
b. Financial Accounting Standards Board (FASB)
c. Separate-entity assumption
d. Time-period assumption
e. Usefulness
f. Relevant
g. Consistency
h. Materiality
i. Accounts payable
j. On account
_____ 1. Amounts that a company owes its vendors
_____ 2. The significance of an amount or item on the financial statements
_____ 3. The rules set by the SEC and FASB for preparing financial statements
_____ 4. The most important characteristic of accounting information and the objective of
financial reporting
_____ 5. A qualitative characteristic of accounting information that requires that information be
fresh and allows users to evaluate a firm’s past performance to predict where a firm is going
_____ 6. Term used to signify either buying or selling on credit
_____ 7. A qualitative characteristic of accounting information that requires that firms use the
same accounting rules from period to period
_____ 8. The current standards setting body for the U.S. accounting profession
_____ 9. The assumption that the life of the company can be separated into accounting periods of
equal length
_____ 10. The requirement that a company and its owners keep separate financial records
39) From the list of concepts, principles, and assumptions, choose the letter which best matches
each item below. Use each term only once.
a. Accrual accounting
g. Materiality
b. Consistency
h. Monetary-unit assumption
c. Comparability
i. Relevance
d. Going-concern assumption
j. Reliability
e. Historical-cost principle
k. Revenue-recognition principle
f. Matching principle
l. Separate-entity assumption
1. Items purchased for less than $25 are expensed even
though they will last longer than a year.
2. Land is valued on the balance sheet at the amount paid
for it even though it is worth more.
3. Revenues are recorded when the goods are delivered
even if the cash was not collected.
4. Supplies are expensed in the period they are used to help
generate revenue.
5. Cost of goods sold is presented in dollars, not units, on
the income statement.
6. The same methods of measuring items on the financials
should be used from period to period.
7. Assumes companies are going to stay in business
indefinitely.
8. The owner’s personal expenses should not be included in
the company’s records.
9. Accounting information is provided in a timely fashion
so that the information is still useful.
10. Revenues are recorded when earned and expenses are
recorded when incurred regardless of when the related cash
changes hands.
11. The items on the financial statements should be
accurate and truthful.
12. Comparing financial statements of different companies
is more meaningful when the statements are prepared in
accordance with GAAP.
40) Match the accounting principle or assumption that is most applicable to each of the
following. Each term should be used only once.
a. monetary-unit assumption
b. historical-cost principle
c. going-concern assumption
d. revenue-recognition principle
e. matching principle
_____ 1. Team Shirts reports assets valued at the original transaction price.
_____ 2. The expenses incurred by Team Shirts in March were subtracted from March revenues
to calculate the profit for March.
_____ 3. Team Shirts reports the amounts on its financial statements in dollars.
_____ 4. Team Shirts reports amounts earned even though cash has not yet been collected.
_____ 5. Tom has plans to run Team Shirts indefinitely.
Learning Objective 2-3
1) Team Shirts purchased six months’ worth of insurance for $900. The insurance would initially
be recorded as ________.
A) an account receivable
B) an account payable
C) prepaid insurance
D) insurance expense
2) Team Shirts has $200 in its Prepaid insurance account on June 30. This amount is for
insurance for July and August. It represents a ________.
A) current asset
B) long-term asset
C) current liability
D) long-term liability
3) On May 31, Team Shirts pays a $600 dividend to its shareholders. The dividend ________.
A) increases assets by $600
B) reduces retained earnings by $600
C) is classified as dividend expense of $600
D) increases net income by $600
4) On July 1, Team Shirts paid $600 for three months’ worth of advertising beginning on July 1.
What is the balance in the Prepaid advertising account at July 31?
A) $0
B) $200
C) $400
D) $600
5) On July 1, Team Shirts paid $600 for three months’ worth of advertising beginning on July 1.
What is the balance in the Prepaid advertising account at August 31?
A) $0
B) $200
C) $400
D) $600
6) On July 1, Team Shirts paid $600 for three months’ worth of advertising beginning on July 1.
What is Advertising expense for the MONTH ended August 31?
A) $0
B) $200
C) $400
D) $600
7) Team Shirts sold $125 worth of T-shirts to a customer on credit. This transaction includes
________.
A) an account receivable
B) an account payable
C) a prepaid sale
D) T-shirt expense
8) On January 1, Team Shirts paid $600 for three months’ worth of advertising beginning on
February 1. What should the balance be in the Prepaid advertising account on April 1?
A) $0
B) $100
C) $200
D) $300
9) Adjusting the books is done ________.
A) every time a sale is made
B) every time an asset is purchased
C) as expenses are used up
D) at the end of every accounting period
10) The first financial statement to be prepared at the end of each accounting period is the
________.
A) balance sheet
B) income statement
C) statement of changes in shareholders’ equity
D) statement of cash flows
11) The economic resources of a company resulting from past transactions are called ________.
A) assets
B) revenues
C) retained earnings
D) contributed capital
12) Liabilities are ________.
A) amounts that the business owes
B) amounts that the business owns
C) Shareholder claims on the assets of the business
D) matched with revenues to calculate income
13) Financial statements may be prepared ________.
A) weekly
B) monthly
C) quarterly
D) All of these are correct.
14) During its first year of business, Mega, Inc. earned revenues of $400,000, of which it
collected only $310,000 in cash. Which of the following statements is CORRECT?
A) The income statement will show Cash collected from customers of $310,000.
B) The balance sheet will show Accounts receivable of $310,000.
C) The income statement will show Revenues of $310,000.
D) The income statement will show Revenues of $400,000.