Test Bank Fundamentals of Financial Accounting 6th Edition By Fred Phillips A+

$35.00
Test Bank Fundamentals of Financial Accounting 6th Edition By Fred Phillips A+

Test Bank Fundamentals of Financial Accounting 6th Edition By Fred Phillips A+

$35.00
Test Bank Fundamentals of Financial Accounting 6th Edition By Fred Phillips A+

1) Stockholders are owners of a corporation.

Answer: TRUE

Explanation: Stockholders are the owners of a corporation.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

2) All corporations acquire financing by issuing stock for sale on public stock exchanges.

Answer: FALSE

Explanation: Most corporations start out as private companies and will apply to become public companies ("go public") if they need a lot of financing. Financing can also be acquired by borrowing from banks.

Difficulty: 2 Medium

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

3) You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The company owes $10 million dollars to its creditors. As a result of the bankruptcy, you are responsible for paying $100,000 (or $10 million × 1%) of the amount owed to the creditors.

Answer: FALSE

Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts.

Difficulty: 2 Medium

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation


4) Cash paid for wages is an example of an operating activity on the statement of cash flows.

Answer: TRUE

Explanation: Cash flows from running the business, including cash paid for wages, are operating activities on the statement of cash flows.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

5) Borrowing money from a bank is a financing activity on the statement of cash flows.

Answer: TRUE

Explanation: On the statement of cash flows, borrowing and repaying bank loans are financing activities.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

6) The daily activities involved in running a business, such as buying supplies and paying salaries and wages, are classified as operating activities on the statement of cash flows.

Answer: TRUE

Explanation: Buying supplies and paying salaries and wages are normal operating costs on the statement of cash flows.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

7) Stockholders' equity is the difference between a company's assets and its liabilities.

Answer: TRUE

Explanation: Assets = Liabilities + Stockholders' Equity; therefore, Assets – Liabilities = Stockholders' Equity

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

8) A company owes $200,000 on a bank loan. It will be reported by the company as Accounts Payable.

Answer: FALSE

Explanation: Formal debt, evidenced by a written contract or note, is reported as Notes Payable.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

9) Amounts reported on financial statements are sometimes rounded to the nearest million.

Answer: TRUE

Explanation: Large businesses often round the numbers on their financial statements to the nearest thousand or million.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

10) Accounts Payable, Notes Payable, and Salaries and Wages Payable are examples of liabilities.

Answer: TRUE

Explanation: An account with the word "payable" in its title is a liability.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

11) Dividends are subtracted from revenues on the income statement.

Answer: FALSE

Explanation: The income statement reports revenues and expenses. Dividends are not expenses. Rather, dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors, and are presented on the statement of retained earnings.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

12) If a company reports net income on the income statement, then the statement of cash flows will report the same amount as cash flows from operating activities for the period.

Answer: FALSE

Explanation: Net income is not the same as cash flows from operating activities. Net income is not necessarily equal to cash because revenues are reported when earned and expenses when incurred regardless of when cash is received or paid.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

13) Revenue is reported on the income statement only if cash was received at the point of sale.

Answer: FALSE

Explanation: Revenues are reported on the income statement when goods or services are provided to customers. It's quite common for a business to provide goods or services to customers, but not collect cash from them until a later time period.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

14) Generally Accepted Accounting Principles (GAAP) require profitable companies to distribute some of their earnings to their stockholders.

Answer: FALSE

Explanation: There is no GAAP requirement that companies pay dividends. Dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

15) Common Stock is reported as an asset on the balance sheet.

Answer: FALSE

Explanation: Common Stock is a component of stockholders' equity.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

16) Investors are mainly interested in the profitability of a company.

Answer: TRUE

Explanation: Investors expect a return on their investment in the company, and as a result, investors look closely at the company's ability to generate profits.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-03 Explain how financial statements are used by decision makers.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

17) A stock that does not pay a dividend is an undesirable investment.

Answer: FALSE

Explanation: There are two sources of potential return on an investment in stock: the dividend and an increase in the stock price.

Difficulty: 3 Hard

Topic: Financial Statements

Learning Objective: 01-03 Explain how financial statements are used by decision makers.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

18) In order to be considered useful, information must have two fundamental characteristics: reliability and understandability.

Answer: FALSE

Explanation: In order to be judged useful, financial information must have two fundamental characteristics: relevance and faithful representation.

Difficulty: 1 Easy

Topic: Useful Financial Information

Learning Objective: 01-04 Describe factors that contribute to useful financial information.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

19) The Securities and Exchange Commission (SEC) is the government agency that has primary responsibility for setting accounting standards in the U.S.

Answer: FALSE

Explanation: Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. The Securities and Exchange Commission (SEC) is responsible for the functioning of stock markets.

Difficulty: 1 Easy

Topic: Useful Financial Information

Learning Objective: 01-04 Describe factors that contribute to useful financial information.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

20) The Sarbanes-Oxley Act (SOX) requires top management of companies to sign a report certifying that the financial statements are free of error.

Answer: FALSE

Explanation: SOX requires top managers of public companies to sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal controls to ensure accuracy in the accounting reports, and maintain an independent committee to oversee top management and ensure that they cooperate with auditors. SOX does not require a certification that states the financial statements are free from error.

Difficulty: 3 Hard

Topic: Useful Financial Information

Learning Objective: 01-04 Describe factors that contribute to useful financial information.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

21) Public corporations are businesses:

A) owned by two or more people, each of whom is personally liable for the debts of the business.

B) whose stock is bought and sold on a stock exchange.

C) whose stock is bought and sold privately.

D) where stock is not used as evidence of ownership.

Answer: B

Explanation: The owners of a company's stock (stockholders) can buy and sell stock privately or publicly on a stock exchange if the company has legally registered to do so. Most corporations start out as private companies and will apply to become public companies ("go public").

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

22) The owner(s) of a business are not taxed on the profits of the business if the business is a:

A) sole proprietorship.

B) partnership.

C) corporation.

D) public partnership.

Answer: C

Explanation: A corporation, not its owners, is legally responsible for its own taxes and debts. In sole proprietorships and partnerships, the owners are taxed on the profits of the business. A sole proprietorship is considered a part of the owner's life, with all profits becoming part of the taxable income of the owner. A partnership is similar to a sole proprietorship in this regard, except that the taxes are the responsibility of two or more owners instead of just one.

Difficulty: 2 Medium

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

23) Which of the following is typically considered a disadvantage of sole proprietorships?

A) Income taxes are paid by both the business and its owner.

B) The business is considered a separate legal entity from its owner.

C) Establishing the business usually requires legal assistance.

D) Owner is personally liable for all debts of the business.

Answer: D

Explanation: Sole proprietorships are easy to establish and the business is considered a part of the owner's life with all profits and losses becoming part of the taxable income of the owner. However, a sole proprietor is personally liable for all debts of the business.

Difficulty: 2 Medium

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Communication

Accessibility: Keyboard Navigation

24) With respect to the audience targeted for financial accounting reports, which of the parties below is not an external user?

A) Customers of the company issuing the reports

B) Creditors of the company issuing the reports

C) Managers of the company issuing the reports

D) Stockholders of the company issuing the reports

Answer: C

Explanation: External users of financial accounting reports include creditors, investors, directors, and government. Managers are considered internal users.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

25) Accounting systems:

A) are summarized in publicly published reports.

B) analyze, record, and summarize the activities affecting its financial condition and performance.

C) monitor business activities only in financial terms.

D) capture only the information that is needed by the owners of the company.

Answer: B

Explanation: Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization.

Difficulty: 2 Medium

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

26) People or organizations to whom a business owes money are considered:

A) owners of a business.

B) creditors of a business.

C) stockholders of a business.

D) customers of a business.

Answer: B

Explanation: Creditors include suppliers, banks, and anyone to whom money is owed.

Difficulty: 2 Medium

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

27) The owner is not responsible for the entity's taxes and debts if the entity is organized as a(n):

A) corporation

B) sole proprietorship.

C) unlimited liability corporation.

D) limited liability corporation.

Answer: A

Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts.

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

28) Which of the following is a characteristic of a partnership?

A) The profits, taxes, and legal liability are the responsibility of two or more owners.

B) It is a legal entity separate from its owners.

C) Its income is taxed twice—once on the partnership's income tax return and again on the partners' individual income tax returns.

D) It is the only organizational form appropriate for service businesses.

Answer: A

Explanation: A partnership is similar to a sole proprietorship, except that profits, taxes, and legal liability are the responsibility of two or more owners instead of just one.

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

29) Managerial accounting reports prepared for internal use are used by the company's:

A) suppliers.

B) bank.

C) employees.

D) stockholders.

Answer: C

Explanation: Managerial accounting reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

30) Directors of a corporation:

A) want to ensure they will be paid for the goods and services they deliver.

B) oversee managers to ensure their decisions are in the best interests of its stockholders.

C) assess the financial strength of a business and attempt to estimate its value.

D) are responsible for the functioning of stock markets and ensuring that taxes are correctly computed.

Answer: B

Explanation: Directors are elected to oversee a company's managers and ensure their decisions are in the best financial interest of stockholders.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

31) The main goal of an accounting system is to:

A) capture information about a business so that it can be reported to decision makers.

B) earn a profit for the company's stockholders.

C) prove that assets equal liabilities plus stockholders' equity.

D) provide initial financing for a new startup.

Answer: A

Explanation: Managerial accounting reports include detailed financial plans and continually updated reports about the operating performance of the company. These reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

32) Financing that individuals or institutions have provided to a corporation is:

A) always classified as a liability.

B) classified as a liability when provided by creditors and as stockholders' equity when provided by owners.

C) always classified as equity.

D) classified as a stockholders' equity when provided by creditors and a liability when provided by owners.

Answer: B

Explanation: Financing can be provided by creditors (classified as liabilities) or owners (classified as stockholders' equity).

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

33) An investor who is looking at a company's financial statements cannot determine whether the:

A) company's earnings are rising or falling.

B) company pays a dividend.

C) company has positive cash flow.

D) company's owners are financially sound.

Answer: D

Explanation: As set forth in the separate entity assumption, the financial reports of a business are assumed to include the results of only that business's activities. A company's financial statements do not contain information about the company's owners.

Difficulty: 3 Hard

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

34) A sole proprietorship is:

A) a separate legal and accounting entity from its owner(s).

B) owned and operated by one individual.

C) considered a public company.

D) can easily raise large amounts of capital for growth.

Answer: B

Explanation: A sole proprietorship is the form of business owned (and usually operated) by one individual.

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

35) Internal users of financial data include:

A) investors.

B) creditors.

C) management.

D) regulatory authorities.

Answer: C

Explanation: Internal users include managers, supervisors, etc. External users include creditors, investors, etc.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

36) Which of the following statements about financial accounting is correct?

A) Financial accounting reports are used primarily by employees to make business decisions related to production.

B) Financial accounting reports are used primarily by management to understand whether a product line should be discontinued.

C) Financial accounting reports are primarily prepared to provide information for external decision makers.

D) Financial accounting reports primarily contain detailed internal records of the company.

Answer: C

Explanation: Financial accounting reports, called financial statements, are prepared periodically to provide information to people not employed by the business.

Difficulty: 1 Easy

Topic: Accounting for Business Decisions

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) Which of the following statements about organizational forms of a business is not correct?

A) In a sole proprietorship form of business or in a partnership form, the owner(s) are personally responsible for the debts of the business.

B) The partnership agreement states how profits are to be shared between partners and what happens when a new partner is to be admitted or an existing partner is retiring.

C) A corporation is a separate entity from both a legal and accounting perspective.

D) The owners of a corporation are legally responsible for the corporation's debts and taxes.

Answer: D

Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts.

Difficulty: 2 Medium

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) A legal document called a stock certificate is used to indicate ownership in a:

A) corporation.

B) sole proprietorship.

C) partnership.

D) both sole proprietorship and partnership.

Answer: A

Explanation: A share of the corporation's ownership is indicated on a legal document called a stock certificate.

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) Which of the following statements below is correct about a corporation and a partnership?

A) A partnership is comprised of two or more owners, whereas a corporation must have only one owner.

B) A corporation is legally responsible for its own taxes and debts.

C) Owners of both entities are legally responsible for the taxes and debts of the business.

D) Both entities issue shares of stock to owners.

Answer: B

Explanation: A key difference between a corporation and a partnership is that the corporation is a separate entity from both a legal and accounting perspective. This means that a corporation (not its shareholders) is legally responsible for its own taxes and debts; the owners of a partnership have this responsibility.

Difficulty: 1 Easy

Topic: Organizational Forms

Learning Objective: 01-01 Describe various organizational forms and business decision makers.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

40) Which of the following expressions of the accounting equation is correct?

A) Liabilities + Assets = Stockholders' Equity

B) Stockholders' Equity + Assets = Liabilities

C) Assets = Liabilities – Stockholders' Equity

D) Stockholders' Equity = Assets – Liabilities

Answer: D

Explanation: Assets = Liabilities + Stockholders' Equity

Stockholders' Equity = Assets – Liabilities

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

41) Net income is the amount:

A) the company earned after subtracting expenses and dividends from revenue.

B) by which assets exceed expenses.

C) by which assets exceed liabilities.

D) by which revenues exceed expenses.

Answer: D

Explanation: Net income is calculated as revenues minus expenses. Dividends are not expenses of doing business and are not involved in determining the amount of net income on the income statement. Assets and liabilities are reported on the balance sheet.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

42) Expenses are reported on the:

A) income statement in the time period in which they are paid.

B) income statement in the time period in which they are incurred.

C) balance sheet in the time period in which they are paid.

D) balance sheet in the time period in which they are incurred.

Answer: B

Explanation: Expenses are reported on the income statement when incurred (that is, when the related goods or services are used) regardless of when the cash is paid.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

43) The financial reports of a business include only the results of that business's activities. This is:

A) required only for large corporations.

B) the cost principle.

C) the accounting equation.

D) true only for financial statements prepared under IFRS.

E) the separate entity assumption.

Answer: E

Explanation: The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

44) The separate entity assumption assumes:

A) the financial reports of a business include only the results of that business's activities.

B) assets equal liabilities plus stockholder's equity.

C) revenues and expenses are reported in separate sections of a company's income statement.

D) assets are reported in a separate financial statement from liabilities.

Answer: A

Explanation: The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

45) Mauricio invested $30,000 in Pizza Aroma in exchange for its stock. Pizza Aroma now has:

A) a liability.

B) retained earnings.

C) common stock.

D) net income.

Answer: C

Explanation: The owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock).

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

46) Amounts earned by selling goods or services to customers are called:

A) revenues.

B) expenses.

C) dividends.

D) common stocks.

Answer: A

Explanation: Revenues are earned by selling goods or services to customers.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

47) Profit is equal to:

A) revenues minus expenses.

B) assets minus liabilities.

C) the amount of cash that a company has.

D) the amount of cash that owners have contributed to the business.

Answer: A

Explanation: Although profit is used in casual conversation, the preferred term in accounting is net income. Net income is calculated as revenues minus expenses.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

48) If revenues are less than expenses, the company's Retained Earnings:

A) decrease.

B) increase.

C) must be replenished by stockholders.

D) are paid to stockholders.

Answer: A

Explanation: If revenues are less than expenses, the company would have a net loss which would decrease Retained Earnings.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

49) A cost of doing business is referred to as a(n) ________ and is considered necessary to earn ________.

A) revenue; assets

B) expense; revenue

C) liability; expenses

D) dividend; revenue

Answer: B

Explanation: Expenses are all costs of doing business that are necessary to earn revenues.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

50) Expenses are:

A) equal to a company's liabilities.

B) always less than revenues.

C) the costs of doing business that are necessary to earn revenue.

D) always less than the amount of cash a company has available.

Answer: C

Explanation: Expenses are all costs of doing business that are necessary to earn revenues.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

51) An economic resource that is owned by a company and will provide future benefits is referred to as:

A) revenue.

B) an asset.

C) retained earnings.

D) net income.

Answer: B

Explanation: An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

52) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Alpha will report a $2,000:

A) Accounts Receivable.

B) Account Payable.

C) increase in Cash, since Beta is sure to pay next month.

D) net loss.

Answer: A

Explanation: Alpha is the seller and thus will report accounts receivable, which is a right to collect for sales/services provided on account.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

53) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Beta will report a $2,000:

A) Payable.

B) Accounts Receivable.

C) decrease in Cash, since it plans to pay next month.

D) net income.

Answer: A

Explanation: The buyer, Beta, will report accounts payable, which is the amount owed to suppliers for prior credit purchases on account.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

54) TreeTop Nursery sold $7,500 of goods to customers of which $4,500 has been collected. TreeTop should report revenues of:

A) $7,500.

B) $4,500.

C) $3,000.

D) $0.

Answer: A

Explanation: Revenues equal the amount earned, regardless of whether the cash has been collected.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

55) Cash flows from (used in) investing activities include amounts:

A) received from a company's stockholders for the sale of stock.

B) received from the sale of the company's office building.

C) paid for dividends to the company's stockholders.

D) paid for salaries of employees.

Answer: B

Explanation: Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

56) Which of the following would not represent a financing activity?

A) Paying dividends to stockholders.

B) An investment of capital by the owners.

C) Borrowing money from a bank to purchase new equipment.

D) Buying supplies.

Answer: D

Explanation: Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders. Operating activities are directly related to running the business to earn profit and would include buying supplies.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

57) Operating activities include:

A) interest paid on a bank loan.

B) the buying or selling of land, buildings, equipment, and other long-term investments.

C) the repayment of loan proceeds to the bank.

D) obtaining a bank loan to cover the payment of wages, rent and other operating costs.

Answer: A

Explanation: Operating activities are directly related to running the business to earn profit and would include paying interest on a loan. Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

58) The separate entity assumption means:

A) a company's financial statements reflect only the business activities of that company.

B) each separate owner's finances must be revealed in the financial statements.

C) each separate entity that has a claim on a company's assets must be shown in the financial statements.

D) if the business is a sole proprietorship, the owners' personal activities are included in the company's financial statements.

Answer: A

Explanation: The separate entity assumption means that the financial reports of a business are assumed to include the results of only that business's activities.

Difficulty: 2 Medium

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

59) Operating activities, investing activities, and financing activities are presented on the:

A) balance sheet.

B) statement of cash flows.

C) statement of retained earnings.

D) income statement.

Answer: B

Explanation: The statement of cash flows includes operating activities (which are directly related to running the business to earn profit), investing activities (which involve buying and selling productive resources with long lives), and financing activities (which include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders).

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

60) Financial statements are most commonly prepared:

A) daily.

B) monthly, quarterly, and annually.

C) as needed.

D) weekly.

Answer: B

Explanation: Financial statements can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports).

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

61) Which of the following statements about a fiscal year is correct?

A) Companies can choose to end their fiscal year on any date they feel is most relevant.

B) Companies must end their fiscal year on March 31, June 30, September 30, or December 31.

C) Companies can select any date except a holiday to end their fiscal year.

D) Companies must end their fiscal year on December 31.

Answer: A

Explanation: Companies are allowed to choose a calendar or fiscal year-end. A calendar year is a 12-month period ending on December 31, and a fiscal year is a 12-month period ending on a day other than December 31.

Difficulty: 2 Medium

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

62) Assets:

A) represent the amounts earned by a company.

B) must equal the liabilities of a company.

C) must equal the stockholders' equity of the company.

D) represent the resources presently controlled by a company.

Answer: D

Explanation: An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

63) A net loss for a period arises when:

A) assets are greater than liabilities.

B) revenues are less than expenses.

C) liabilities are greater than stockholder's equity.

D) revenues are greater than expenses.

Answer: B

Explanation: The determination of net income or loss is made from revenues and expenses for a period. A net loss results when revenues are less than expenses.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

64) Net income that has been paid out to the company's stockholders for their own personal use is referred to as:

A) dividends.

B) equities.

C) revenues.

D) retained earnings.

Answer: A

Explanation: Net income can be left in the company to accumulate (with earnings that have been retained from prior years) or it can be paid out to the company's stockholders for their own personal use (called dividends).

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

65) Crystal Lodging recorded $330,000 in revenues, $247,500 in expenses, and $45,000 of dividends for the year. The company began the year with total assets of $285,000 and stockholder's equity of $130,500.

What net income (loss) was reported by Crystal Lodging for the year?

A) $37,500

B) $94,500

C) $82,500

D) $49,500

Answer: C

Explanation: Net income = Revenues – Expenses

= $330,000 – $247,500 = $82,500

Difficulty: 3 Hard

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

66) Crystal Lodging recorded $330,000 in revenues, $247,500 in expenses, and $45,000 of dividends for the year. The company began the year with total assets of $285,000 and stockholder's equity of $130,500.

Suppose that liabilities increased by $90,000 and stockholders' equity increased by $37,500. What would be the change in Crystal Lodging's assets?

A) $168,000 increase

B) $127,500 increase

C) $154,500 increase

D) $52,500 increase

Answer: B

Explanation: Assets = Liabilities + Stockholders' Equity

Change in Assets = Change in Liabilities + Change in Stockholders' Equity

= $90,000 in Liabilities + $37,500 = $127,500

Difficulty: 3 Hard

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

67) The obligations and debts of a business are referred to as:

A) equities.

B) assets.

C) dividends.

D) liabilities.

Answer: D

Explanation: Liabilities are measurable amounts that the company owes to creditors. From a legal perspective, creditors have priority over stockholders. Thus, if a company goes out of business, liabilities must be paid before any amounts are paid to stockholders.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

68) Which of the following are the three basic elements of the balance sheet?

A) Assets, liabilities, and retained earnings.

B) Assets, liabilities, and common stock.

C) Assets, liabilities, and revenues.

D) Assets, liabilities, and stockholders' equity.

Answer: D

Explanation: The balance sheet reports the amount of a business's assets, liabilities, and stockholders' equity at a specific point in time.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

69) Coast Company has 5,000 items of building supplies on hand that cost $150,000; a bill from the vendor for $50,000 of these supplies has not yet been paid. The company expects to earn $400,000 for its services when it uses the building supplies. The company's balance sheet would include an asset, Supplies, in the amount of:

A) $5,000.

B) $100,000.

C) $150,000.

D) $400,000.

Answer: C

Explanation: An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. The building supplies on hand that cost $150,000 would be reported as an asset on the balance sheet.

Difficulty: 3 Hard

Topic: Financial Statements; The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

70) The Publish or Perish Printing Company paid a dividend to stockholders. This will be reported on the:

A) audit report.

B) income statement.

C) balance sheet.

D) statement of retained earnings.

Answer: D

Explanation: The company's profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend. Dividends are not an expense incurred to generate earnings and, as a result, are not reported on the income statement. Rather, a dividend is an optional distribution of earnings to stockholders, approved by the company's board of directors. Dividends are reported as a reduction in Retained Earnings on the statement of retained earnings.

Difficulty: 1 Easy

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

71) Which of the following is not correct?

A) Assets = Liabilities + Stockholders' Equity

B) Liabilities = Assets − Stockholders' Equity

C) Stockholders' Equity + Liabilities – Assets = 0

D) Assets = Liabilities − Stockholders' Equity

Answer: D

Explanation: The basic accounting equation is: Assets = Liabilities + Stockholders' Equity. It can be rearranged algebraically as Liabilities = Assets − Stockholders' Equity or as Assets = Liabilities − Stockholders' Equity.

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

72) At the end of last year, the company's assets totaled $430,000 and its liabilities totaled $370,000. During the current year, the company's total assets increased by $29,000 and its total liabilities increased by $12,000. At the end of the current year, stockholders' equity was:

A) $77,000.

B) $60,000.

C) $17,000.

D) $89,000.

Answer: A

Explanation: Stockholders' equity = Assets − Liabilities

Beginning stockholders' equity = $430,000 − $370,000 = $60,000

Change in stockholders' equity = Change in assets − Change in liabilities

= $29,000 − $12,000 = $17,000

Ending stockholders' equity = Beginning stockholders' equity + Change in stockholders' equity

= $60,000 + $17,000 = $77,000

Difficulty: 3 Hard

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

73) If total liabilities decreased by $50,000 and stockholders' equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same time period?

A) $40,000 increase

B) $40,000 decrease

C) $60,000 increase

D) $60,000 decrease

Answer: B

Explanation: Assets = Liabilities + Stockholders' Equity

Change in Assets = Change in Liabilities + Change in Stockholders' Equity

= ($50,000) + $10,000 = ($40,000)

Difficulty: 3 Hard

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

74) A company's balance sheet contained the following information:

Common Stock

$

24,000

Total Assets

$

352,000

Accounts Payable

128,000

Retained Earnings

56,000

Notes Payable is the only other item on the balance sheet. Notes Payable must equal:

A) $400,000.

B) $16,000.

C) $144,000.

D) $688,000.

Answer: C

Explanation: Total assets = Total liabilities + Total stockholders' equity

$352,000 = ($128,000 + Notes Payable) + ($24,000 + $56,000)

Notes Payable = $352,000 − $128,000 − $24,000 − $56,000 = $144,000

Difficulty: 3 Hard

Topic: Financial Statements

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

75) During Year 5, a company's assets increase by $112,000 and its liabilities increase by $76,000. If no dividends were paid and there were no changes in the amount of common stock issued during the year, net income for Year 5 was:

A) $112,000.

B) $36,000.

C) $188,000.

D) $76,000.

Answer: B

Explanation: The basic accounting equation can also be thought of as follows:

Change in Assets = Change in Liabilities + Change in Stockholders' Equity

Change in Stockholders' Equity = Change in Assets − Change in Liabilities

= $112,000 − $76,000 = $36,000

Since there were no dividends and no changes in the common stock, the change in stockholders' equity must equal net income.

Difficulty: 2 Medium

Topic: Financial Statements; The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

76) A company began the year with assets of $200,000, liabilities of $40,000, and stockholders' equity of $160,000. During the year assets increased $110,000 and stockholders' equity increased $40,000. What was the change in liabilities for the year?

A) Increase of $150,000

B) Increase of $70,000

C) Decrease of $150,000

D) Decrease of $70,000

Answer: B

Explanation: Assets = Liabilities + Stockholders' equity

Liabilities = Assets − Stockholders' equity

Change in liabilities = Change in assets − Change in stockholders' equity

= $110,000 − $40,000 = $70,000

Difficulty: 3 Hard

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

77) During its first year of operations, Puffin, Inc. reported Sales Revenue of $772,000 but collected only $606,000 from customers. At the end of the year, Accounts Receivable equals:

A) $1,378,000.

B) $772,000.

C) $606,000.

D) $166,000.

Answer: D

Explanation: Of the $772,000 of Sales Revenue, customers have paid the company only $606,000, which leaves a balance of Accounts Receivable of $166,000.

Difficulty: 2 Medium

Topic: Financial Statements; The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

78) If Blair Industries had $24 million in revenue and net income of $6 million, then its:

A) expenses must have been $30 million.

B) expenses must have been $18 million.

C) assets must have been $24 million.

D) assets must have been $6 million.

Answer: B

Explanation: Net income = Revenues − Expenses

Expenses = Net income − Revenues

$24 million − $6 million = $18 million

Difficulty: 1 Easy

Topic: The Basic Accounting Equation

Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

79) If Boward Co. has Common Stock of $40,000, total assets of $85,000, and total liabilities of $35,000, its Retained Earnings equals:

A) $10,000.

B) $45,000.

C) $50,000.

+
-
Only 0 units of this product remain

You might also be interested in