1. Identify the activities and users associated with accounting. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. Generally accepted accounting principles are a common set of standards used by accountants. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owners and other economic entities.
3. State the accounting equation, and define its components. The basic accounting equation is:
Assets = Liabilities + Stockholders' Equity
Assets are resources owned by a business. Liabilities are creditorship claims on total assets. Stockholders' equity is the ownership claim on total assets.
The expanded accounting equation is:
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Common stock is affected when the company issues new shares of stock in exchange for cash. Revenues are increases in assets resulting from income-earning activities. Expenses are the costs of assets consumed or services used in the process of earning revenue. Dividends are payments the company makes to its stockholders.
4. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in stockholders' equity.
5. Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or net loss, for a specific period of time. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders' equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.
a6. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, governmental accounting, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.
TRUE-FALSE STATEMENTS
1. Owners of business firms are the only people who need accounting information.
Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2. Transactions that can be measured in dollars and cents are recorded in the financial information system.
Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3. The hiring of a new company president is an economic event recorded by the financial information system.
Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4. Management of a business enterprise is the major external user of information.
Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
5. Accounting communicates financial information about a business enterprise to both internal and external users.
Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
6. Accounting information is used only by external users with a financial interest in a business enterprise.
Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
7. Financial statements are the major means of communicating accounting information to interested parties.
Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
8. Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process.
Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
9. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
10. The study of accounting is not useful for a business career unless your career objective is to become an accountant.
Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
11. A working knowledge of accounting is not relevant to a lawyer or an architect.
Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
12. A partnership must have more than one owner.
Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
13. The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.
Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
14. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.
Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
15. Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information.
Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
16. The primary accounting standard-setting body in the United States is the International Accounting Standards Board.
Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
17. The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.
Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
18. The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies.
Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
19. The cost and fair value of an asset are the same at the time of acquisition and in all subsequent periods.
Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
20. Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners.
Ans: T LO2 BT: C Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
21. In order to possess future service potential, an asset must have physical substance.
Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
22. Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses.
Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
23. The basic accounting equation states that Assets = Liabilities.
Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
24. Accountants record both internal and external transactions.
Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
25. Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company.
Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
26. The purchase of store equipment for cash reduces assets and stockholders’ equity by an equal amount.
Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
27. The purchase of office equipment on credit increases total assets and total liabilities.
Ans: T LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
28. The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period.
Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
29. Net income for the period is determined by subtracting total expenses and drawings from total revenues.
Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
30. The income statement is sometimes referred to as the statement of operations.
Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
31. A balance sheet reports the assets and liabilities of a company for a specific period of time.
Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
32. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet.
Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a33. The study of accounting will be useful only if a student is interested in working for a profit-oriented business firm.
Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a34. Private accountants are accountants who are not employees of business enterprises.
Ans: F LO6 BT:K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a35. Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CPAs.
Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
36. Identifying is the process of keeping a chronological diary of events measured in dollars and cents.
Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
37. Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation.
Ans: F LO1 BT: K Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
38. Accountants do not have to worry about issues of ethics.
Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
39. At the time an asset is acquired, cost and fair value should be the same.
Ans: T LO2 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
40. The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
41. The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.
Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
42. External transactions involve economic events between the company and some other enterprise or party.
Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
43. In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss).
Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Answers to True-False Statements
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
1. | F | 8. | F | 15. | T | 22. | F | 29. | F | 36. | F | 43. | F |
2. | T | 9. | T | 16. | F | 23. | F | 30. | T | 37. | F | | |
3. | F | 10. | F | 17. | F | 24. | T | 31. | F | 38. | F | | |
4. | F | 11. | F | 18. | T | 25. | F | 32. | T | 39. | T | | |
5. | T | 12. | T | 19. | F | 26. | F | 33. | F | 40. | F | | |
6. | F | 13. | T | 20. | T | 27. | T | 34. | F | 41. | T | | |
7. | T | 14. | T | 21. | F | 28. | T | 35. | T | 42. | T | | |
MULTIPLE CHOICE QUESTIONS
44. Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
45. The starting point of the accounting process is
a. communicating information to users.
b. identifying economic events.
c. recording economic events.
d. None of these answers are correct.
Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
46. Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
47. Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction?
a. The appointment of a new CPA firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.
Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
48. Interpretation of reported information involves each of the following except
a. limitations of reported data.
b. meaning of reported data.
c. uses of reported data.
d. All of these choices are correct.
Ans: d LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
49. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording non-quantifiable economic events.
d. analyzing and interpreting financial reports.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
50. The accounting process is correctly sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
51. Which of the following techniques are not used by accountants to interpret and report financial information?
a. Graphs.
b. Special memos for each class of external users.
c. Charts.
d. Ratios.
Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
52. Accounting consists of three basic activities which are related to economic events of an organization. These include
a. identifying, recording, and communicating
b. identifying, calculating, and responding
c. classifying, numbering, and reporting
d. issuing, reporting, and classifying
Ans: a LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
53. All of the following statements are correct except
a. Good decision-making depends on good information.
b. A vital element in communicating economic events is the accountant's ability to analyze and interpret reported information.
c. The origins of accounting are generally attributed to Socrates, a classical Greek philosopher, who promoted accounting as a social contract.
d. The information that a user of financial information needs depends upon the kinds of decisions the user makes.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
54. Which of the following would not be considered an internal user of accounting data for the GHI Company?
a. President of the company.
b. Production manager.
c. Merchandise inventory clerk.
d. President of the employees' labor union.
Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
55. Which of the following would not be considered an external user of accounting data for the GHI Company?
a. Internal Revenue Service Agent.
b. Management.
c. Creditors.
d. Customers.
Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
56. Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company.
b. The controller of a company.
c. Creditors of a company.
d. Salesmen of the company.
Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
57. Which of the following is an external user of accounting information?
a. Labor unions.
b. Finance directors.
c. Company officers.
d. Managers.
Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
58. Which one of the following is not an external user of accounting information?
a. Regulatory agencies.
b. Customers.
c. Investors.
d. All of these are external users.
Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
59. Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the accounting process?
a. Identification.
b. Communication.
c. Recording.
d. Analysis.
Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
60. The origins of accounting are generally attributed to the work of
a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
61. Financial accounting provides economic and financial information for all of the following except
a. creditors.
b. investors.
c. managers.
d. other external users.
Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
62. The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.
Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
63. The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
64. Ethics are the standards of conduct by which one's actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. All of these answers are correct.
Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
65. All of the following are steps in analyzing ethics cases in financial reporting except
a. identify and analyze the principle elements in the situation.
b. contact law enforcement regarding any violations of corporate ethics codes
c. identify the alternatives and weigh the impact of each alternative on various stakeholders.
d. recognize an ethical situation and the ethical issues involved.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
66. In order to increase comparability, in recent years, the FASB and IASB have made efforts to reduce the differences between U.S.GAAP and IFRS through a process known as
a. convergence
b. monetary unit assumption
c. the cost principle
d. the fair value principle
Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
67. Martin Corporation purchased land in 2010 for $290,000. In 2018, it purchased a nearly identical parcel of land for $460,000. In its 2018 balance sheet, Martin valued these two parcels of land at a combined value of $920,000. By reporting the land in this manner, Martin Corp. has violated the
a. historical cost principle
b. convergence
c. economic entity assumption
d. monetary unit assumption
Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
68. Andre Dickinson, owner of Andre's Fine Wines, also owns a personal residence that costs $475,000. The market value of his residence is $625,000. During preparation of the financial statements for Andre's Fine Wines, the accounting concept most relevant to the presentation of Andre's home is
a. the economic entity assumption.
b. the fair value principle.
c. the monetary unit assumption.
d. convergence.
Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
69. Generally accepted accounting principles are
a. income tax regulations of the Internal Revenue Service.
b. standards that indicate how to report economic events.
c. theories that are based on physical laws of the universe.
d. principles that have been proven correct by academic researchers.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
70. The historical cost principle requires that when assets are acquired, they be recorded at
a. appraisal value.
b. cost.
c. market price.
d. book value.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
71. The cost of an asset and its fair value are
a. never the same.
b. the same when the asset is sold.
c. irrelevant when the asset is used by the business in its operations.
d. the same on the date of acquisition.
Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
72. The body of theory underlying accounting is not based on
a. physical laws of nature.
b. concepts.
c. principles.
d. definitions.
Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
73. The private sector organization involved in developing accounting principles is the
a. Feasible Accounting Standards Body.
b. Financial Accounting Studies Board.
c. Financial Accounting Standards Board.
d. Financial Auditors' Standards Body.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
74. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.
Ans: c LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
75. GAAP stands for
a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
76. Financial information that is capable of making a difference in a decision is
a. faithfully representative.
b. relevant.
c. convergent.
d. generally accepted.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
77. The Duce Company has five plants nationwide that cost a total of $100 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at
a. $100 million.
b. $600 million.
c. $400 million.
d. $500 million.
Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
78. The fair value principle is applied for
a. all assets.
b. current assets.
c. buildings.
d. investment securities.
Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
79. The proprietorship form of business organization
a. must have at least three owners in most states.
b. represents the largest number of businesses in the United States.
c. combines the records of the business with the personal records of the owner.
d. is characterized by a legal distinction between the business as an economic unit and the owner.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
80. The economic entity assumption requires that the activities
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of an entity be kept separate from the activities of its owner.
Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
81. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. terminates when one of its original stockholders dies.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
82. The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
83. Which of the following is not an advantage of the corporate form of business organization?
a. Limited liability of stockholders
b. Transferability of ownership
c. Unlimited personal liability for stockholders
d. Unlimited life
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
84. A small neighborhood barber shop that is operated by its owner would likely be organized as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
85. John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
86. Which of the following is true regarding the corporate form of business organization?
a. Corporations are the most prevalent form of business organization.
b. Corporate businesses are generally smaller in size than partnerships and proprietor-ships.
c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships.
d. Corporations are separate legal entities organized exclusively under federal law.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
87. A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the
a. stand alone concept.
b. monetary unit assumption.
c. corporate form of ownership.
d. economic entity assumption.
Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
88. Ted Leo is the proprietor (owner) of Ted's, a retailer of golf apparel. When recording the financial transactions of Ted's, Ted does not record an entry for a car he purchased for personal use. Ted took out a personal loan to pay for the car. What accounting concept guides Ted's behavior in this situation?
a. Pay back concept
b. Economic entity assumption
c. Cash basis concept
d. Monetary unit assumption
Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
89. A basic assumption of accounting assumes that the dollar is
a. unrelated to business transactions.
b. a poor measure of economic activities.
c. the common unit of measure for all business transactions.
d. useless in measuring an economic event.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
90. The assumption that the unit of measure remains sufficiently constant over time is part of the
a. economic entity assumption.
b. cost principle.
c. historical cost principle.
d. monetary unit assumption.
Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
91. Owners enjoy limited liability in a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
92. A problem with the monetary unit assumption is that
a. the dollar has not been stable over time.
b. the dollar has been stable over time.
c. the dollar is a common medium of exchange.
d. it is impossible to account for international transactions.
Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
93. The common characteristic possessed by all assets is
a. long life.
b. great monetary value.
c. tangible nature.
d. future economic benefit.
Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
94. Owner's equity is best depicted by the following:
a. Assets = Liabilities.
b. Liabilities + Assets.
c. Residual equity + Assets.
d. Assets – Liabilities.
Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
95. The basic accounting equation may be expressed as
a. Assets = Equities.
b. Assets – Liabilities = Stockholders' Equity.
c. Assets = Liabilities + Stockholders' Equity.
d. All of these answers are correct.
Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
96. Liabilities
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
97. Liabilities of a company would not include
a. notes payable.
b. accounts payable.
c. salaries and wages payable.
d. cash.
Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
98. Liabilities of a company are owed to
a. debtors.
b. benefactors.
c. creditors.
d. underwriters.
Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
99. Stockholders' equity can be described as
a. creditorship claim on total assets.
b. ownership claim on total assets.
c. benefactor's claim on total assets.
d. debtor claim on total assets.
Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
100. Stockholders' equity is often referred to as
a. residual equity.
b. leftovers.
c. spoils.
d. second equity.
Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
101. When assets are distributed to the owners of a corporation, these distributions are termed
a. depletions.
b. consumptions.
c. dividends.
d. a credit line.
Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
102. A dividend is
a. a distribution of the company's earnings to its stockholders.
b. equal to liabilities minus stockholders' equity.
c. equal to assets minus stockholders' equity.
d. equal to revenues less expenses
Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
103. Revenues would not result from
a. sale of merchandise.
b. issuance of common stock.
c. performance of services.
d. rental of property.
Ans: b LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
104. Sources of increases to stockholder's equity are
a. additional investments by owners.
b. purchases of merchandise.
c. dividends.
d. expenses.
Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
105. The basic accounting equation cannot be restated as
a. Assets – Liabilities = Stockholders' Equity.
b. Assets – Stockholders' Equity = Liabilities.
c. Stockholders' Equity + Liabilities = Assets.
d. Assets + Liabilities = Stockholders' Equity.
Ans: d LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
106. Stockholders' equity is decreased by all of the following except
a. sales of stock.
b. net losses.
c. expenses.
d. dividends.
Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
107. A net loss will result during a time period when
a. liabilities exceed assets.
b. dividends exceed investments.
c. expenses exceed revenues.
d. revenues exceed expenses.
Ans: c LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
108. If total liabilities increased by $30,000 and stockholders' equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: d LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $30,000 + $20,000 =$50,000
109. If total liabilities decreased by $30,000 and stockholders' equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $20,000 - $30,000 = ($10,000)
110. If total liabilities decreased by $50,000 and stockholders' equity increased by $30,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $80,000 decrease
b. $20,000 decrease
c. $20,000 increase
d. $80,000 increase
Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $30,000 - $50,000 = ($20,000)
111. If total liabilities decreased by $30,000 and stockholders' equity decreased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period?
a. $50,000 decrease
b. $10,000 decrease
c. $10,000 increase
d. $50,000 increase
Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: ($30,000) + ($20,000) = ($50,000)
112. If total liabilities increased by $25,000 during a period of time and stockholders' equity decreased by $9,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
a. $34,000 decrease.
b. $16,000 decrease.
c. $16,000 increase.
d. $34,000 increase.
Ans: c LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $25,000 - $9,000 =$16,000 increase
113. If total assets equal $345,000 and total stockholders' equity equal $140,000, then total liabilities must equal
a. $485,000.
b. $205,000.
c. $140,000.
d. There is not enough information given to determine this.
Ans: b LO3 BT: k Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $345,000 - $140,000 =$205,000
114. Which of the following will not cause a change in the stockholders' equity of a business?
a. An increase in prepaid expenses.
b. An increase in retained earnings.
c. The sale of common stock.
d. The declaration and payment of dividends.
Ans: a LO3 BT: k Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
115. The amount of stockholders' equity in a business is not affected by
a. The percentage of total assets held in cash.
b. Assets consumed in the process of earning revenues.
c. The profitability of the business.
d. The amount of dividends declared and paid to stockholders.
Ans: a LO3 BT: k Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
116. If the transaction causes an asset account to decrease, which of the following related effects may occur?
a. An increase of equal amount in the common stock account.
b. An increase in a liability account.
c. An increase of equal amount in another asset account.
d. An increase in the combined total of liabilities and stockholders' equity.
Ans: c LO3 BT: k Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
117. The accounting equation for Quattro Enterprises is as follows:
Assets Liabilities Stockholders' Equity
$120,000 = $60,000 + $60,000
If Quattro purchases office equipment on account for $25,000, the accounting equation will change to
Assets Liabilties Stockholders' Equity
a. $120,000 = $60,000 + $60,000
b. $145,000 = $60,000 + $85,000
c. $145,000 = $72,500 + $72,500
d. $145,000 = $85,000 + $60,000
Ans: d LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $120,000 + $25,000 =$145,000; $60,000 + $25,000 = $85,000
118. As of June 30, 2018, Actual Tigers Company has assets of $100,000 and stockholders' equity of $40,000. What are the liabilities for Actual Tigers Company as of June 30, 2018?
a. $40,000
b. $60,000
c. $100,000
d. $140,000
Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution: $100,000 - $40,000 =$60,000
119. Stockholders' equity is increased by
a. dividends.
b. revenues.
c. expenses.
d. liabilities.
Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
120. Stockholders' equity is decreased by
a. assets.
b. revenues.
c. expenses.
d. liabilities.
Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
