1.1 Learning Objective 1-1
1) Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Why is Accounting Important? (H1)
2) Critical thinking and judgment skills are not necessary for accountants because technology has made the activities routine.
Answer: FALSE
Explanation: Technology plays an important supporting role in performing routine accounting functions. This allows accountants to have more time to focus on reviewing and evaluating economic activities using critical thinking and judgment.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Why is Accounting Important? (H1)
3) Accounting starts with economic activities that accountants review and evaluate using critical thinking and judgment to create useful information that helps individuals make good decisions.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Why is Accounting Important? (H1)
4) Accounting is referred to as the language of business because it is the method of communicating business information to decision makers.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Why is Accounting Important? (H1)
5) Managerial accounting focuses on providing information for external decision makers.
Answer: FALSE
Explanation: Managerial accounting focuses on providing information for internal decision makers.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
6) Investors primarily use managerial accounting information for decision-making purposes.
Answer: FALSE
Explanation: External users (investors) use financial accounting information.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
7) A creditor is a person who owes money to the business.
Answer: FALSE
Explanation: A creditor is a person to whom a business owes money.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
8) Income tax is calculated using accounting information.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
9) Financial accounting focuses on information for decision makers outside of the business, such as creditors and taxing authorities.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
10) Business owners use accounting information to set goals, evaluate progress toward those goals, and make adjustments when needed.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
11) Outside investors ordinarily use financial accounting information to decide whether or not to invest in a business.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
12) A creditor is any person who has an ownership interest in a business.
Answer: FALSE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
13) Managerial accounting focuses on information needed by lenders, customers, and the federal government.
Answer: FALSE
Explanation: Financial accounting focuses on providing information for external decision makers. Lenders, customers, and the federal government are external users.
Diff: 1
LO: 1-1
AACSB: Interpersonal relations and teamwork
AICPA Functional: Reporting
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
14) Any person or business to whom a business owes money is called the business's creditor.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
15) Decision makers are looking for an international accounting language because the most significant change in the business world in the last decade has been the huge increase in international commerce.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Reporting
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
16) Managerial accounting provides information to ________.
A) internal decision makers
B) outside investors and lenders
C) creditors
D) taxing authorities
Answer: A
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
17) The field of accounting that focuses on providing information for external decision makers is ________.
A) managerial accounting
B) financial accounting
C) cost accounting
D) nonmonetary accounting
Answer: B
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
18) The field of accounting that focuses on providing information for internal decision makers is ________.
A) managerial accounting
B) financial accounting
C) nonmonetary accounting
D) governmental accounting
Answer: A
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decision Makers: The Users of Accounting Information
19) Which of the following users would rely on managerial accounting information for decision-making purposes?
A) potential investors
B) creditors
C) customers
D) company managers
Answer: D
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decision Makers: The Users of Accounting Information
20) Which of the following is a decision made by an internal user?
A) Should we lend money to the business?
B) How much money should the business budget for production?
C) Should I invest in the business?
D) All of the above are correct.
Answer: B
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Decision Makers: The Users of Accounting Information
21) For each user of accounting information, identify if the user would use financial accounting (FA) or managerial accounting (MA).
Accounting Information User | FA or MA |
Business manager | |
Creditor | |
Stockholder | |
Human resources director | |
Internal Revenue Service | |
Answer:
Accounting Information User | FA or MA |
Business manager | MA |
Creditor | FA |
Stockholder | FA |
Human resources director | MA |
Internal Revenue Service | FA |
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decision Makers: The Users of Accounting Information
22) For each of the following decisions, identify if it applies to a financial accounting (FA) or a managerial accounting (MA) decision maker. Your answer should be either FA or MA. Include only one choice for each accounting decision.
Accounting Decision | Decision Maker (FA or MA) |
Should the business expand to a new location? | |
Is the business profitable? | |
How do actual costs compare to budgeted costs? | |
Should I invest in the business? | |
Answer:
Accounting Decision | Decision Maker (FA or MA) |
Should the business expand to a new location? | MA |
Is the business profitable? | FA |
How do actual costs compare to budgeted costs? | MA |
Should I invest in the business? | FA |
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Decision Makers: The Users of Accounting Information
23) Financial analysts perform reviews of companies to ensure compliance to rules and regulations.
Answer: FALSE
Explanation: Auditors perform reviews of companies to ensure compliance to rules and regulations.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
24) Certified Management Accountants (CMAs) specialize only in financial management knowledge and always work for a single company.
Answer: FALSE
Explanation: Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge and typically work for a single company.
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
25) Certified Public Accountants are licensed professional accountants who serve the general public.
Answer: TRUE
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
26) ________ are professional accountants who serve the general public, not one particular company.
A) Certified public accountants
B) Financial managers
C) Internal auditors
D) Controllers
Answer: A
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
Match the accounting position to the job description.
A) Performs reviews of companies to ensure compliance to rules and regulations
B) Compiles financial statements, interacts with auditors, oversees regulatory reporting
C) Specializes in accounting and financial management knowledge
D) Serves the general public
27) Controller
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
28) Certified Management Accountant
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
29) Certified Public Accountant
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
30) Auditor
Diff: 1
LO: 1-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Accounting Matters
Answers: 27) B 28) C 29) D 30) A
1.2 Learning Objective 1-2
1) The Financial Accounting Standards Board is a U.S. governmental agency that oversees the creation and governance of accounting standards.
Answer: FALSE
Explanation: The Financial Standards Board is a privately funded organization.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Governing Organizations
2) The SEC is a governmental agency that oversees world-wide financial markets and organizations that set accounting standards.
Answer: FALSE
Explanation: The SEC is a U.S. governmental agency that oversees the U.S. financial markets.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Governing Organizations
3) Which of the following organizations is responsible for the creation and governance of accounting standards in the United States?
A) Financial Accounting Standards Board
B) Institute of Management Accountants
C) American Institute of Certified Public Accountants
D) Securities and Exchange Commission
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Governing Organizations
4) The Financial Accounting Standards Board (FASB) works with the following groups. Which of these groups was congressionally created?
A) Institute of Management Accountants
B) Public Company Accounting Oversight Board
C) International Accounting Standards Board
D) American Institute of CPAs
Answer: B
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Governing Organizations
5) List three private groups that work with the Financial Accounting Standards Board (FASB).
Answer: Private groups that work with FASB are the American Institute of CPAs (AICPA), Institute of Management Accountants (IMA), and International Accounting Standards Board (IASB).
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Governing Organizations
6) The guidelines for accounting information are called Generally Accepted Accounting Principles (GAAP).
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
7) To be useful, accounting must be relevant and have faithful representation.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
8) The primary objective of financial reporting is to ensure that all investment decisions are risk free.
Answer: FALSE
Explanation: The primary objective of financial reporting is to provide information useful for making investment and lending decisions.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
9) The primary objective of financial reporting is to provide information useful for making investment and lending decisions.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
10) GAAP refers to guidelines for accounting information in the United States. The acronym GAAP in this statement refers to ________.
A) Globally Accepted Accounting Policies
B) Government Approved Accounting Principles
C) Generally Accredited Accounting Policies
D) Generally Accepted Accounting Principles
Answer: D
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
11) Regarding generally accepted accounting principles (GAAP), which of the following statements is incorrect?
A) GAAP rests on a conceptual framework that identifies the objectives, characteristics, elements, and implementation of financial statements.
B) The primary objective of financial reporting is to provide information useful for making investment and lending decisions.
C) Relevant information is complete, neutral, and free from error.
D) GAAP is currently formulated by the Financial Accounting Standards Board.
Answer: C
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
12) Which of the follow statements regarding the primary objective of financial reporting is correct?
A) The primary objective of financial reporting is to provide information useful for the acquisition of long-term assets.
B) Information that is faithfully represented is complete, neutral, and free from error.
C) Relevant information ensures that users of the information will make the correct decisions.
D) To be useful, information must follow the Generally Accepted Accounting Principles which are created and governed by the Securities and Exchange Commission.
Answer: B
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
13) What are Generally Accepted Accounting Principles (GAAP)? Which entity is currently responsible for determining GAAP?
Answer: Generally Accepted Accounting Principles (GAAP) are the guidelines for accounting information. GAAP is the main U.S. accounting rule book. The Financial Accounting Standards Board (FASB) is currently responsible for determining GAAP.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
14) What is the primary objective of financial reporting?
Answer: The primary objective of financial reporting is to provide information useful for making investment and lending decisions.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Generally Accepted Accounting Principles
15) As per the economic entity assumption, an organization and its owners should be seen as the same entity.
Answer: FALSE
Explanation: An economic entity is an organization that stands apart as a separate economic entity.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
16) An economic entity is an organization that stands apart as a separate economic entity.
Answer: TRUE
Explanation: An economic entity is an organization that stands apart as a separate economic entity.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
17) An entity refers to one business which includes its owners.
Answer: FALSE
Explanation: An entity refers to one business, separate from its owners.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
18) In a sole proprietorship, the owner is personally liable for the debts of the business.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
19) The most that the owner of a sole proprietorship can lose, as a result of business debts or lawsuits, is the amount he/she has invested in the business.
Answer: FALSE
Explanation: The owner of a sole proprietorship is personally liable for the debts of a business.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
20) Members of a limited-liability company (LLC) are not personally liable for the debts of the business.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
21) A business can be organized as a sole proprietorship, partnership, corporation, or limited-liability company (LLC).
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
22) In a limited-liability company (LLC), the members are personally liable for the debts of the business.
Answer: FALSE
Explanation: In a limited-liability company (LLC), the members are not personally liable for the debts of the business.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
23) A corporation's board of directors is elected by the chairperson of the company.
Answer: FALSE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
24) A corporation's chief executive officer appoints the members of the board of directors.
Answer: FALSE
Explanation: The stockholders elect the members of the board of directors.
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
25) The creation of a corporation begins when its incorporators obtain a charter from the state.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
26) Mutual agency of the owners is not present in a corporation as it is in a partnership.
Answer: TRUE
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
27) Regarding a business organized as a partnership, which of the following is an incorrect statement?
A) Partners pay tax on their share of the partnership earnings.
B) Partners are personally liable for the debts of the business.
C) A partnership's life is not dependent on a specific individual's ownership.
D) Mutual agency is present in a partnership.
Answer: C
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
28) Which of the following is a major reason why corporate ownership is popular in the United States?
A) Stockholders have limited liability for the debts of the corporation.
B) Most corporations are small- or medium-sized.
C) The life of a corporation is limited by the death of the owner.
D) A corporation is usually managed by the owners.
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
29) Which of the following is a characteristic of a corporation?
A) Corporations are separate taxable entities.
B) Lenders of a corporation do not have the right to claim the corporation's assets to satisfy their obligations.
C) Corporations are subjected to less governmental regulation than other forms of businesses.
D) Each stockholder has the authority to commit the corporation to a binding contract through his/her actions.
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
30) Which of the following actions determines when a corporation comes into existence?
A) The charter is obtained from the federal government.
B) The incorporators pay fees, sign the charter, and file required documents with the state.
C) The first share of stock is issued.
D) The corporate bylaws are written.
Answer: C
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
31) Regarding the separation of corporate ownership and management, which of the following is a true statement?
A) The corporate officers elect the board of directors.
B) The corporation runs better with day-to-day input from stockholders.
C) Stockholders are required to manage the business.
D) Stockholders own the business, but a board of directors appoints corporate officers to manage the business.
Answer: D
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
32) Corporations pay their own income tax on corporate income. Stockholders pay personal income tax on the dividends received from corporations. This is an example of ________.
A) double taxation
B) continuous life
C) mutual agency
D) a limited liability company
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
33) Which of the following statements is true of the corporate form of business?
A) The board of directors sets policy for the corporation and appoints the officers.
B) Changes in the ownership of stock have a negative effect on the continuity of the corporation.
C) Any stockholder may commit the corporation to a contract.
D) It is easy for stockholders to lodge an effective protest against management.
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
34) Which of the following statements is true of a sole proprietorship?
A) A sole proprietorship joins two or more individuals as co-owners.
B) The sole proprietor is personally liable for the liabilities of the business.
C) A sole proprietorship is taxed separately from the owner.
D) A sole proprietorship has to pay business income taxes.
Answer: B
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
35) Which of the following is a characteristic of a limited-liability company (LLC)?
A) An LLC's life is terminated at any member's choice or death.
B) Each member of an LLC is liable only for his or her own actions.
C) An LLC must have more than five members.
D) The earnings of an LLC are subject to double taxation.
Answer: B
Diff: 2
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
36) Jason Ford has been the sole owner of a bicycle sales and repair shop for several years. Which of the following business types would limit Jason's personal liability exposure to the entity's debts?
A) partnership
B) limited-liability company
C) sole proprietorship
D) Any of the above.
Answer: B
Diff: 2
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: The Economic Entity Assumption
37) Marcus has decided to open an auto-detailing business. He will pick up an automobile from the client, take it to his parents' garage, detail it, and return it to the client. If he does all of the work himself and takes no legal steps to form a special organization, which type of business organization, in effect, has he chosen?
A) A limited-liability company
B) A partnership
C) A corporation
D) A sole proprietorship
Answer: D
Diff: 2
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
38) In a limited-liability company, the ________.
A) members are personally liable to pay the company's debts
B) business terminates at the death of a member
C) members are liable for each other's actions
D) members pay income tax on their share of earnings
Answer: D
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
39) The earnings of a sole proprietorship are ________.
A) combined with the personal income of the proprietor
B) not combined with the proprietor's personal income
C) subject to double taxation
D) handled similarly to that of a corporation
Answer: A
Diff: 1
LO: 1-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: The Economic Entity Assumption
40) Which of the following statements is true of a corporation?
