ch1 - Testbank IncA. Statement of cash flows B. Statement of owner's equity C. Statement of...

ch1

Student: ___________________________________________________________________________

1. Companies which do not make or sell goods are known as service companies.

True False

2. Southwest Airlines would be an example of a manufacturer.

True False

3. Wal-Mart is an example of a retailer.

True False

4. A business owned by one individual is known as a corporation.

True False

5. One disadvantage of a sole proprietorship and a partnership is unlimited liability.

True False

6. A business that has one owner is a partnership.

True False

7. One advantage of a corporation over the other forms of business is ease of formation.

True False

8. An accounting system is a system of financial recordkeeping.

True False

9. An accountant who charges a fee to businesses for their services works in private accounting.

True False

10. Assets - Owner's Equity = Liabilities represents the fundamental accounting equation.

True False

11. Resources a business owns are called revenues.

True False

12. Accounts payable are claims a business owes to creditors.

True False

13. An owner has a claim to a business for the amounts invested in the business.

True False

14. The difference between assets and liabilities is called profit.

True False

15. Expenses are resources used to earn revenue.

True False

16. Prepaid expenses are an example of an asset.

True False

17. Interest payable is an example of an expense.

True False

18. The correct order to prepare the financial statements is: 1) Balance Sheet, 2) Income Statement, 3)

Statement of Cash Flows, and 4) Statement of Owner's Equity.

True False

19. The statement of owner's equity links together the income statement and the balance sheet.

True False

20. Financial statements are only prepared at the end of the year.

True False

21. If net income is equal to $10,000 then the company's cash has increased by $10,000.

True False

22. The balance sheet reports a company's financial position at a particular point in time.

True False

23. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards

Board (FASB).

True False

24. One objective of external users of financial information is to assess the ability of a company to pay its

liabilities.

True False

25. The high cost of computers has made it more difficult for business owners to do their own bookkeeping.

True False

26. Managerial accounting reports produced by the accounting system are made available for external users of

accounting.

True False

27. A manager who is considering whether to continue or discontinue a particular product would refer to

financial accounting information.

True False

28. Creditors and investors are examples of external users of accounting information.

True False

29. Financial information that is unbiased and verifiable is said to be relevant.

True False

30. A company's managers have the primary responsibility for following Generally Accepted Accounting

Principles (GAAP) and for preparing fair financial statements.

True False

31. The _________________ outlines how the profits (or losses) are shared.

A. Stock certificate

B. Partnership agreement

C. Corporate charter

D. Financial statements

32. Which of the following would not be considered an external user of accounting information?

A. Bank

B. Supplier

C. Manager

D. Investor

33. All of the following include activities of external users of accounting information except:

A. Evaluating the risk of lending money to a business.

B. Determining the amount of supplies on hand.

C. Deciding whether to buy, sell or hold stock in a company.

D. Assessing whether the company has paid the correct amount of taxes.

34. Which of the following is considered an internal user of accounting information?

A. Production manager

B. Supplier

C. Investor

D. Customer

35. Which of the following is considered an external user of accounting information?


B. CEO

C. IRS

D. Controller

36. A bank is most likely a(n) ___________ user of accounting information.

A. external

B. internal

C. governmental

D. managerial

37. Which of the following represents the fundamental accounting equation?

A. A + L = OE

B. A - L = OE

C. OE + A = L

D. L - OE = A

38. An example of a claim to resources of a business is:

A. Cash.

B. Land.

C. Accounts payable.

D. Accounts receivable.

39. Resources a business owns are called:

A. Liabilities.

B. Owner's equity.

C. Revenues.

D. Assets.

40. Claims a business owes are called owners' equity when they are held by:

A. Creditors.

B. Suppliers.

C. Employees.

D. Investors.

41. An example of an asset is:

A. Wages expense.

B. Revenue.

C. Supplies.

D. Accounts payable.

42. Which of the following is not a characteristic of an asset?

A. It is a resource controlled by the business.

B. It has measurable value.

C. It is incurred to generate revenue.

D. It is expected to provide future benefits.

43. Land is an example of a(n):

A. Liability.

B. Asset.

C. Revenue.

D. Expense.

44. Unearned revenue is an example of a(n):

A. Liability.

B. Revenue.

C. Asset.

D. Expense.

45. Inventory is an example of a(n):

A. Liability.

B. Revenue.

C. Expense.

D. Asset.

46. Which of the following is not one of the four basic financial statements?

A. Income statement

B. Statement of cash flows

C. Accounting equation

D. Balance sheet

47. Which of the four basic financial statements provides a snapshot of the business on a particular day?

A. Balance sheet

B. Income statement

C. Statement of cash Flows

D. Statement of owner's equity

48. Which financial statement should be prepared first?

A. Balance sheet


C. Income statement


49. Which financial statement links together the Income Statement and the Balance Sheet?

A. Statement of cash flows

B. Statement of owner's equity

C. Statement of operations

D. Statement of financial position

50. Which financial statement includes only those activities that result in cash changing hands during the

period?

A. Income statement

B. Balance sheet

C. Statement of cash flows


51. Which of the following is not one of the types of business activities included on the statement of cash

flows?

A. Investing

B. Operating

C. Financing

D. Reporting

52. The governmental agency that supervises the work of the Financial Accounting Standards Board (FASB) is

known as the:

A. Generally Accepted Accounting Principles (GAA).

B. Securities and Exchange Commission (SEC).

C. Public Company Accounting Oversight Board (PCAOB).

D. American Institute of CPAs (AICPA).

53. Financial information that is __________ ensures that it is unbiased and verifiable.

A. relevant

B. comparable

C. reliable

D. consistent

54. The primary responsibility for setting the rules of accounting rests with the:

A. Financial Accounting Standards Board (FASB).

B. Generally Accepted Accounting Principles (GAAP).

C. Security and Exchange Commission (SEC).


55. The rules of accounting are known as:

A. Security and Exchange Commission (SEC).

B. Financial Accounting Standards Board (FASB).

C. American Institute of CPAs (AICPA).

D. Generally Accepted Accounting Principles (GAAP).

56. In a business, who has the primary responsibility for following GAAP and preparing fair financial

statements?

A. Management

B. The accountants

C. The CPA

D. The SEC

57. The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:

A. Accounting.

B. Reporting.

C. Internal control.

D. Financing.

58. _______ are the standards of conduct for judging right from wrong.

A. Ethics

B. Rules

C. Internal controls

D. Conducts

59. Which of the following is not a required element of the title on a financial statement?

A. The company's name

B. The reporting date or period

C. The name of the financial statement

D. The preparer's name

60. The income statement reports:

A. Revenues, assets and expenses.

B. Net income or loss for the period.

C. Only sales amounts paid in cash.

D. The financial position on a particular date.

61. Which of the following would not be an objective of an external user analyzing a company's financial

statements?

A. Assessing the company's ability to pay its debts.

B. Predicting the future profitability of the company.

C. Determining whether the company should drop an unprofitable product line.

D. Understanding the financial position of the company.

62. A company reported assets of $12,000 and liabilities of $2,500, what amount would be reported for owner's

equity?

A. $14.500

B. $9,500

C. $12,000

D. $2,000

63. A company reported revenue of $100,000 and a net loss of $12,000. What amount was reported as

expenses?

A. $112,000

B. $12,000

C. $88,000

D. $100,000

64. What business type has two or more owners and unlimited liability?

A. Corporation

B. Sole proprietorship

C. Partnership

D. Retailer

65. Which of the following is an example of a service company?

A. Wal-Mart

B. Home Depot

C. American Airlines

D. Ford Motor Company

66. Which of the following is not a merchandiser?

A. Target

B. Best Western

C. Staples

D. Macy's

67. Companies which make products from raw inputs are known as:

A. Service Companies.

B. Wholesalers.

C. Retailers.

D. Manufacturers.

68. Boeing would be an example of what business type?

A. Service company

B. Merchandiser

C. Manufacturer

D. Retailer

69. Which of the following is not one of the three major ways that a business can be organized?

A. Partnership

B. Sole Proprietorship

C. Corporation

D. Wholesaler

70. One advantage of the corporate form of business over the other forms of business is:

A. Limited liability.

B. Ease of formation.

C. Separate taxation.

D. Lower legal fees.

71. Accounting is an information system designed to:

A. Provide information to external users only.

B. Provide information to internal users only.

C. Capture a business's activities and communicate results to all decision makers.

D. Handle the record keeping of a business but other functions must be performed by a CPA.

72. Accountants who are employed by a single business or nonprofit organization work in:

A. Public accounting.

B. Private accounting.

C. A CPA firm.

D. Governmental accounting only.

73. Technology and the low cost of computers have resulted in:

A. Increased complexity in accounting systems.

B. Higher fees charged by public accountants.

C. Small businesses handling their own bookkeeping.

D. An abundance of accounting reports.

74. The area of accounting which primarily serves the decision making needs of internal users is:

A. Financial accounting.

B. Bookkeeping.

C. Auditing.

D. Managerial Accounting.

75. On December 31 of the current year, a company reported the following items on its balance sheet: Cash

$10,500; Accounts receivable $5,200; Inventory $2,300; Equipment $102,400; Accounts payable $12,000;

Notes payable $56,000. What amount should be reported as owner's equity?

A. $108,400

B. $52,400

C. $120,400

D. $188,400

76. Assets should originally be recorded at:

A. Market value.

B. Replacement cost.

C. Historical cost.

D. Amount owed on the asset.

77. If owners contribute $50,000 to start a new business what is the effect on the accounting equation?

A. Assets increase $50,000; no effect on liabilities; equity increases $50,000.

B. Assets decrease $50,000; liabilities decrease $50,000; no effect on equity.

C. Assets decrease $50,000; no effect on liabilities; equity decreases $50,000.

D. Assets increase $50,000; liabilities increase $50,000; no effect on equity.

78. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?





79. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?



C. No effect on the accounting equation because assets increase and decrease by the same amount.


80. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?





81. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?





82. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?



C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.


83. When a company distributes profits to its owners the result is a(n):

A. Decrease in profits.

B. Decrease in assets and owner's equity.

C. Increase in owner's equity.

D. Increase in assets.

84. The following information is reported for Manco Company for the month of March. Determine net income.

A. $(21,500)

B. $144,500

C. $21,500

D. $73,000

85. A company reported total equity of $82,000 on its December 31, 2009 balance sheet. The following

information is available for the year ended December 31, 2010:

What are the total assets of the company as of December 31, 2010?

A. $167,000

B. $202,000

C. $85,000

D. $132,000

86. For each of the following financial statement items, indicate which type of financial statement element it is.

Use the following codes:

A - Asset

L - Liability

OE - Owner's equity

R - Revenue

E - Expense

87. For each account listed indicate the type of account and what financial statement it would appear on using

the codes provided. The first account had been completed as an example.

88. Given the following partially complete financial statements for CiCi Company, fill in the missing (?) items.

89. For each of user of accounting information listed below indicate whether the user is an internal or external

of accounting information by placing an X in the appropriate box.

90. For each of the following transactions indicate the effect on the accounting equation by placing a + or a -

under the appropriate element and including the amount. The first transaction has been provided as an example.

91. For each of the following independent cases determine the missing amounts. Assume that it is the end of

2010, the first full year of operations for the company.

92. Use the information from Fairbank Company to answer the following questions. The accountant for

Fairbank Company prepared the following information from the company's accounting records for the year

ended December 31, 2010:

Determine the following amounts for Fairbank Company:

A. Total assets at the end of 2010.

B. Total Liabilities at the end of 2010.

C. Owner's equity at the end of 2010.

D. Total revenue for 2010.

E. Total expenses for 2010.

F. Is Fairbank profitable? Explain

93. The following information was taken from a company's most recent cash flow statement for. Indicate

whether each cash flow is from operating (O), investing (I), or financing (F) and also whether the item is a cash

inflow (+) or outflow (-).

94. List at least three characteristics of a corporation. What advantages does the corporate form of business

offer over other forms of business? What is one disadvantage of a corporation over the other forms of business?

95. Discuss two reasons why owners have a claim to a business. Use examples to support your answer.

96. Discuss the order in which the four basic financial statements should be prepared. Briefly describe what

information each financial statement provides.

97. A company earns net income of $5,000 during the month of March. Discuss how the net income amount

may be different from what is in the cash balance at the end of the month of March. What might lead to

differences between net income and the cash balance?

98. Compare and contrast financial accounting and managerial accounting. Who are the users of each type of

accounting?

99. Describe the difference between internal and external users of accounting information. Give examples of

each type of users. What decisions are made by each user? What type of information does each use to make

decisions?

100. What is the fundamental accounting equation? Define each element of the equation and provide examples

of each element.

101. What is GAAP and what characteristics should financial information have in order to be useful to decision

makers? What is the role of the FASB?

102. _______________ businesses make products from raw inputs.

________________________________________

103. Companies that do not make or sell products are _____________ firms.

________________________________________

104. One benefit of the corporate form of business is __________ liability.

________________________________________

105. A form of business which has two or more owners who are personally liable for the business's debts is a

______________.

________________________________________

106. ____________ is an information system designed to capture and communicate a business's financial

performance.

________________________________________

107. Accountants who charge fees for services to a variety of businesses work in ___________ accounting.

________________________________________

108. Examples of ______________ users of accounting information include bankers, investors and suppliers.

________________________________________

109. ______________ accounting primarily provides detailed accounting information to internal users.

________________________________________

110. The fundamental accounting equation is Assets minus _________ equals __________.

________________________________________

111. ____________ are economic resources owned by a business and likely to provide future benefits.

________________________________________

112. Cash, accounts receivable, and equipment are examples of ___________.

________________________________________

113. According to the _____________ principle, assets are initially recorded at the total cost to acquire them.

________________________________________

114. The ___________ reports the performance of a business over a period of time, while the ____________ is

a snapshot of the financial position at a point in time.

________________________________________

115. If assets equal $110,000 and liabilities equal $65,000 then owner's equity is equal to _________.

________________________________________

116. If owners contribute cash to start a business then assets will __________, liabilities will __________, and

owner's equity will ___________.

________________________________________

117. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and

__________ activities.

________________________________________

118. The ___________ sets the rules of accounting.

________________________________________

119. ____________ are standards of conduct used to judge right from wrong.

________________________________________

120. When financial accounting information is ___________ then it is unbiased and verifiable.

________________________________________

121. The rules of accounting which publicly held companies must follow are known as ___________.

________________________________________

122. Fill in the appropriate letter from the list of definitions below which accurately describes each term.

1. Sole

proprietorship A separate legal entity that sells stock to owners. ____

2. Manufacturer A business owned by two or more individuals. ____

3. Corporation

A company that sells goods made by

manufacturers to customers. ____

4. Partnership A business owned by one individual. ____

5. Service company A company that makes products from raw inputs. ____

6. Merchandiser A company that provides a service to customers. ____

123. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:

1. CPA An accountant that works in public accounting. ____

2. PCAOB

Governmental agency that supervises the work of the FASB

and the PCAOB. ____

3. AICPA

Requires its members to adhere to a Code of Professional

Conduct. ____

4. SEC The rules of accounting. ____

5. GAAP Approves rules to be followed by auditors. ____

6. FASB

Has primary responsibility for setting accounting standards

in the U.S. ____

124. For each business listed below indicate the correct form of business by using the following codes: (S) Sole

Proprietorship, (P) Partnership, and (C) Corporation.

1. S

Franklin & Associates is a law firm with four owners. Each owner

shares equally in the profits/losses of the business and is personally

liable for the debts of the business. ____

2. S

Tamara's Hair Salon is owned exclusively by Tamara and is not a

separate legal entity. ____

3. P American Auto Parts is owned by 500 shareholders. ____

4. C

Jenni's Bakery is owned by Jenni and the profits are part of her

personal taxable income. ____

5. P

Mark and Ben own and operate a car wash. They have a legal

agreement which outlines how they will share profits (losses). ____

6. C

ABC Limited issued 10,000 shares of stock to the public to finance

the expansion of a new division. ____

125. Match each term with its related definition by entering the appropriate letter in the space provided.

1. Historical cost

Financial information can be compared to other

companies. ____

2. Net income Resources used to earn revenues. ____

3. Consistent

Financial information is most useful when it is

unbiased and verifiable. ____

4. Relevant

The area of accounting which provides information

to external decision makers. ____

5. Reliable Financial information can be compared over time. ____

6. Expenses

Assets are initially measured at the total cost to

acquire them. ____

7. Ethics

The positive difference between revenues and

expenses. ____

8. Comparable Standards of conduct for judging right from wrong. ____

9. Financial

accounting

Financial information is helpful in making

decisions should be reported. ____

10. Revenues

Amounts earned when goods or services are

delivered to customers. ____

ch1 Key

1. Companies which do not make or sell goods are known as service companies.

TRUE

AACSB: Reflective thinking

Blooms: Knowledge

Difficulty: Easy

Learning Objective: 1-1

Libby - Chapter 001 #1

Topic: Business types and organizational forms

2. Southwest Airlines would be an example of a manufacturer.

FALSE


Blooms: Knowledge

Difficulty: Easy




3. Wal-Mart is an example of a retailer.

TRUE


Blooms: Knowledge

Difficulty: Easy




4. A business owned by one individual is known as a corporation.

FALSE


Blooms: Knowledge

Difficulty: Easy




5. One disadvantage of a sole proprietorship and a partnership is unlimited liability.

TRUE


Blooms: Knowledge

Difficulty: Medium




6. A business that has one owner is a partnership.

FALSE


Blooms: Knowledge

Difficulty: Easy




7. One advantage of a corporation over the other forms of business is ease of formation.

FALSE


Blooms: Knowledge

Difficulty: Medium




8. An accounting system is a system of financial recordkeeping.

TRUE


Blooms: Knowledge

Difficulty: Easy



Topic: Accounting and business decisions

9. An accountant who charges a fee to businesses for their services works in private accounting.

FALSE


Blooms: Knowledge

Difficulty: Medium




10. Assets - Owner's Equity = Liabilities represents the fundamental accounting equation.

TRUE


Blooms: Knowledge

Difficulty: Easy



Topic: Basic financial reports

11. Resources a business owns are called revenues.

FALSE


Blooms: Knowledge

Difficulty: Medium




12. Accounts payable are claims a business owes to creditors.

TRUE


Blooms: Knowledge

Difficulty: Medium




13. An owner has a claim to a business for the amounts invested in the business.

TRUE


Blooms: Knowledge

Difficulty: Medium




14. The difference between assets and liabilities is called profit.

FALSE


Blooms: Knowledge

Difficulty: Medium




15. Expenses are resources used to earn revenue.

TRUE


Blooms: Knowledge

Difficulty: Easy




16. Prepaid expenses are an example of an asset.

TRUE


Blooms: Knowledge

Difficulty: Medium




17. Interest payable is an example of an expense.

FALSE


Blooms: Knowledge

Difficulty: Medium




18. The correct order to prepare the financial statements is: 1) Balance Sheet, 2) Income Statement, 3)

Statement of Cash Flows, and 4) Statement of Owner's Equity.

FALSE


Blooms: Knowledge

Difficulty: Medium




19. The statement of owner's equity links together the income statement and the balance sheet.

TRUE


Blooms: Knowledge

Difficulty: Hard




20. Financial statements are only prepared at the end of the year.

FALSE


Blooms: Knowledge

Difficulty: Medium




21. If net income is equal to $10,000 then the company's cash has increased by $10,000.

FALSE

AACSB: Analytic

Blooms: Analysis

Difficulty: Hard




22. The balance sheet reports a company's financial position at a particular point in time.

TRUE


Blooms: Knowledge

Difficulty: Medium




23. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards

Board (FASB).

TRUE

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium



Topic: Professional standards and ethical conduct

24. One objective of external users of financial information is to assess the ability of a company to pay its

liabilities.

TRUE


Blooms: Knowledge

Difficulty: Medium




25. The high cost of computers has made it more difficult for business owners to do their own bookkeeping.

FALSE


Blooms: Knowledge

Difficulty: Easy




26. Managerial accounting reports produced by the accounting system are made available for external users of

accounting.

FALSE


Blooms: Knowledge

Difficulty: Medium




27. A manager who is considering whether to continue or discontinue a particular product would refer to

financial accounting information.

FALSE


Blooms: Knowledge

Difficulty: Medium




28. Creditors and investors are examples of external users of accounting information.

TRUE


Blooms: Knowledge

Difficulty: Easy




29. Financial information that is unbiased and verifiable is said to be relevant.

FALSE

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




30. A company's managers have the primary responsibility for following Generally Accepted Accounting

Principles (GAAP) and for preparing fair financial statements.

TRUE

AACSB: Ethics

Blooms: Knowledge

Difficulty: Easy




31. The _________________ outlines how the profits (or losses) are shared.

A. Stock certificate

B. Partnership agreement

C. Corporate charter

D. Financial statements


Blooms: Knowledge

Difficulty: Medium




32. Which of the following would not be considered an external user of accounting information?

A. Bank

B. Supplier

C. Manager

D. Investor


Blooms: Knowledge

Difficulty: Easy




33. All of the following include activities of external users of accounting information except:

A. Evaluating the risk of lending money to a business.

B. Determining the amount of supplies on hand.

C. Deciding whether to buy, sell or hold stock in a company.

D. Assessing whether the company has paid the correct amount of taxes.


Blooms: Knowledge

Difficulty: Hard




34. Which of the following is considered an internal user of accounting information?


B. Supplier

C. Investor

D. Customer


Blooms: Knowledge

Difficulty: Medium




35. Which of the following is considered an external user of accounting information?


B. CEO

C. IRS

D. Controller


Blooms: Knowledge

Difficulty: Medium




36. A bank is most likely a(n) ___________ user of accounting information.

A. external

B. internal

C. governmental

D. managerial


Blooms: Knowledge

Difficulty: Easy




37. Which of the following represents the fundamental accounting equation?

A. A + L = OE

B. A - L = OE

C. OE + A = L

D. L - OE = A


Blooms: Knowledge

Difficulty: Easy




38. An example of a claim to resources of a business is:

A. Cash.

B. Land.

C. Accounts payable.

D. Accounts receivable.


Blooms: Knowledge

Difficulty: Medium




39. Resources a business owns are called:

A. Liabilities.

B. Owner's equity.

C. Revenues.

D. Assets.


Blooms: Knowledge

Difficulty: Easy




40. Claims a business owes are called owners' equity when they are held by:

A. Creditors.

B. Suppliers.

C. Employees.

D. Investors.


Blooms: Knowledge

Difficulty: Medium




41. An example of an asset is:

A. Wages expense.

B. Revenue.

C. Supplies.

D. Accounts payable.


Blooms: Knowledge

Difficulty: Easy




42. Which of the following is not a characteristic of an asset?

A. It is a resource controlled by the business.

B. It has measurable value.

C. It is incurred to generate revenue.

D. It is expected to provide future benefits.


Blooms: Knowledge

Difficulty: Hard




43. Land is an example of a(n):

A. Liability.

B. Asset.

C. Revenue.

D. Expense.


Blooms: Knowledge

Difficulty: Easy




44. Unearned revenue is an example of a(n):

A. Liability.

B. Revenue.

C. Asset.

D. Expense.


Blooms: Knowledge

Difficulty: Medium




45. Inventory is an example of a(n):

A. Liability.

B. Revenue.

C. Expense.

D. Asset.


Blooms: Knowledge

Difficulty: Easy




46. Which of the following is not one of the four basic financial statements?

A. Income statement


C. Accounting equation

D. Balance sheet


Blooms: Knowledge

Difficulty: Easy




47. Which of the four basic financial statements provides a snapshot of the business on a particular day?

A. Balance sheet

B. Income statement

C. Statement of cash Flows



Blooms: Knowledge

Difficulty: Medium




48. Which financial statement should be prepared first?

A. Balance sheet


C. Income statement



Blooms: Knowledge

Difficulty: Easy




49. Which financial statement links together the Income Statement and the Balance Sheet?

A. Statement of cash flows

B. Statement of owner's equity

C. Statement of operations

D. Statement of financial position


Blooms: Knowledge

Difficulty: Medium




50. Which financial statement includes only those activities that result in cash changing hands during the

period?

A. Income statement

B. Balance sheet

C. Statement of cash flows



Blooms: Knowledge

Difficulty: Easy




51. Which of the following is not one of the types of business activities included on the statement of cash

flows?

A. Investing

B. Operating

C. Financing

D. Reporting


Blooms: Knowledge

Difficulty: Medium




52. The governmental agency that supervises the work of the Financial Accounting Standards Board (FASB) is

known as the:

A. Generally Accepted Accounting Principles (GAA).

B. Securities and Exchange Commission (SEC).

C. Public Company Accounting Oversight Board (PCAOB).


AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




53. Financial information that is __________ ensures that it is unbiased and verifiable.

A. relevant

B. comparable

C. reliable

D. consistent

AACSB: Ethics

Blooms: Knowledge

Difficulty: Hard




54. The primary responsibility for setting the rules of accounting rests with the:

A. Financial Accounting Standards Board (FASB).

B. Generally Accepted Accounting Principles (GAAP).

C. Security and Exchange Commission (SEC).


AACSB: Ethics

Blooms: Knowledge

Difficulty: Hard




55. The rules of accounting are known as:

A. Security and Exchange Commission (SEC).

B. Financial Accounting Standards Board (FASB).

C. American Institute of CPAs (AICPA).

D. Generally Accepted Accounting Principles (GAAP).

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




56. In a business, who has the primary responsibility for following GAAP and preparing fair financial

statements?

A. Management

B. The accountants

C. The CPA

D. The SEC

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




57. The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:

A. Accounting.

B. Reporting.

C. Internal control.

D. Financing.

AACSB: Ethics

Blooms: Knowledge

Difficulty: Hard




58. _______ are the standards of conduct for judging right from wrong.

A. Ethics

B. Rules

C. Internal controls

D. Conducts

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




59. Which of the following is not a required element of the title on a financial statement?

A. The company's name

B. The reporting date or period

C. The name of the financial statement

D. The preparer's name


Blooms: Knowledge

Difficulty: Medium




60. The income statement reports:

A. Revenues, assets and expenses.

B. Net income or loss for the period.

C. Only sales amounts paid in cash.

D. The financial position on a particular date.


Blooms: Knowledge

Difficulty: Medium




61. Which of the following would not be an objective of an external user analyzing a company's financial

statements?

A. Assessing the company's ability to pay its debts.

B. Predicting the future profitability of the company.

C. Determining whether the company should drop an unprofitable product line.

D. Understanding the financial position of the company.


Blooms: Knowledge

Difficulty: Medium




62. A company reported assets of $12,000 and liabilities of $2,500, what amount would be reported for owner's

equity?

A. $14.500

B. $9,500

C. $12,000

D. $2,000

AACSB: Analytic

Blooms: Analysis

Difficulty: Easy




63. A company reported revenue of $100,000 and a net loss of $12,000. What amount was reported as

expenses?

A. $112,000

B. $12,000

C. $88,000

D. $100,000

AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




64. What business type has two or more owners and unlimited liability?

A. Corporation

B. Sole proprietorship

C. Partnership

D. Retailer


Blooms: Knowledge

Difficulty: Medium




65. Which of the following is an example of a service company?

A. Wal-Mart

B. Home Depot

C. American Airlines

D. Ford Motor Company


Blooms: Knowledge

Difficulty: Easy




66. Which of the following is not a merchandiser?

A. Target

B. Best Western

C. Staples

D. Macy's


Blooms: Knowledge

Difficulty: Easy




67. Companies which make products from raw inputs are known as:

A. Service Companies.

B. Wholesalers.

C. Retailers.

D. Manufacturers.


Blooms: Knowledge

Difficulty: Easy




68. Boeing would be an example of what business type?

A. Service company

B. Merchandiser

C. Manufacturer

D. Retailer


Blooms: Knowledge

Difficulty: Medium




69. Which of the following is not one of the three major ways that a business can be organized?

A. Partnership

B. Sole Proprietorship

C. Corporation

D. Wholesaler


Blooms: Knowledge

Difficulty: Medium




70. One advantage of the corporate form of business over the other forms of business is:

A. Limited liability.

B. Ease of formation.

C. Separate taxation.

D. Lower legal fees.


Blooms: Knowledge

Difficulty: Hard




71. Accounting is an information system designed to:

A. Provide information to external users only.

B. Provide information to internal users only.

C. Capture a business's activities and communicate results to all decision makers.

D. Handle the record keeping of a business but other functions must be performed by a CPA.


Blooms: Knowledge

Difficulty: Easy




72. Accountants who are employed by a single business or nonprofit organization work in:

A. Public accounting.

B. Private accounting.

C. A CPA firm.

D. Governmental accounting only.


Blooms: Knowledge

Difficulty: Easy




73. Technology and the low cost of computers have resulted in:

A. Increased complexity in accounting systems.

B. Higher fees charged by public accountants.

C. Small businesses handling their own bookkeeping.

D. An abundance of accounting reports.


Blooms: Knowledge

Difficulty: Medium




74. The area of accounting which primarily serves the decision making needs of internal users is:

A. Financial accounting.

B. Bookkeeping.

C. Auditing.

D. Managerial Accounting.


Blooms: Knowledge

Difficulty: Easy




75. On December 31 of the current year, a company reported the following items on its balance sheet: Cash

$10,500; Accounts receivable $5,200; Inventory $2,300; Equipment $102,400; Accounts payable $12,000;

Notes payable $56,000. What amount should be reported as owner's equity?

A. $108,400

B. $52,400

C. $120,400

D. $188,400

AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




76. Assets should originally be recorded at:

A. Market value.

B. Replacement cost.

C. Historical cost.

D. Amount owed on the asset.


Blooms: Comprehension

Difficulty: Easy




77. If owners contribute $50,000 to start a new business what is the effect on the accounting equation?





AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




78. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?





AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




79. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?



C. No effect on the accounting equation because assets increase and decrease by the same amount.


AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




80. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?





AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




81. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?





AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




82. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?



C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.


AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




83. When a company distributes profits to its owners the result is a(n):

A. Decrease in profits.

B. Decrease in assets and owner's equity.

C. Increase in owner's equity.

D. Increase in assets.

AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




84. The following information is reported for Manco Company for the month of March. Determine net income.

A. $(21,500)

B. $144,500

C. $21,500

D. $73,000

AACSB: Analytic

Blooms: Application

Difficulty: Medium




85. A company reported total equity of $82,000 on its December 31, 2009 balance sheet. The following

information is available for the year ended December 31, 2010:

What are the total assets of the company as of December 31, 2010?

A. $167,000

B. $202,000

C. $85,000

D. $132,000

AACSB: Analytic

Blooms: Analysis

Difficulty: Hard




86. For each of the following financial statement items, indicate which type of financial statement element it is.

Use the following codes:

A - Asset

L - Liability

OE - Owner's equity

R - Revenue

E - Expense



Difficulty: Medium




87. For each account listed indicate the type of account and what financial statement it would appear on using

the codes provided. The first account had been completed as an example.



Difficulty: Medium





88. Given the following partially complete financial statements for CiCi Company, fill in the missing (?) items.

AACSB: Analytic

Blooms: Application

Difficulty: Medium




89. For each of user of accounting information listed below indicate whether the user is an internal or external

of accounting information by placing an X in the appropriate box.


Blooms: Knowledge

Difficulty: Easy




90. For each of the following transactions indicate the effect on the accounting equation by placing a + or a -

under the appropriate element and including the amount. The first transaction has been provided as an example.

AACSB: Analytic

Blooms: Analysis

Difficulty: Hard




91. For each of the following independent cases determine the missing amounts. Assume that it is the end of

2010, the first full year of operations for the company.

AACSB: Analytic

Blooms: Application

Difficulty: Medium





92. Use the information from Fairbank Company to answer the following questions. The accountant for

Fairbank Company prepared the following information from the company's accounting records for the year

ended December 31, 2010:

Determine the following amounts for Fairbank Company:

A. Total assets at the end of 2010.

B. Total Liabilities at the end of 2010.

C. Owner's equity at the end of 2010.

D. Total revenue for 2010.

E. Total expenses for 2010.

F. Is Fairbank profitable? Explain

A. $110,000

B. $37,000

C. $73,000

D. $155,000

E. $126,000

F. Yes, Fairbank is profitable since revenues are greater than expenses and the company has net income for the

year.

AACSB: Analytic

Blooms: Application

Difficulty: Hard





93. The following information was taken from a company's most recent cash flow statement for. Indicate

whether each cash flow is from operating (O), investing (I), or financing (F) and also whether the item is a cash

inflow (+) or outflow (-).

AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




94. List at least three characteristics of a corporation. What advantages does the corporate form of business

offer over other forms of business? What is one disadvantage of a corporation over the other forms of business?

A corporation is a separate legal entity. Corporations are taxed separately from their owners. Owners of a

corporation cannot be held liable for more than their investment in the corporation. A major advantage of

corporation over a sole proprietorship and a partnership is limited liability. It is also easier for corporations to

raise large amounts of money to finance its growth. Ownership in a corporation is easier to transfer to someone

else than for the other forms of business. One disadvantage of a corporation over the other forms of business is

the higher legal fees necessary to form a corporation.



Difficulty: Medium




95. Discuss two reasons why owners have a claim to a business. Use examples to support your answer.

First, owners have a claim to a business because of amounts they invested in the business by making a direct

contribution to the company, also known as contributed capital. For example, upon startup if the owner

contributed amounts to purchase supplies. Second, owners have a claim to a business for the amounts the

company has earned through operating the business and earning profits. For example, if the revenues generated

from the business exceed the expenses incurred to operate the business, the owner has a claim to these profits.



Difficulty: Medium




96. Discuss the order in which the four basic financial statements should be prepared. Briefly describe what

information each financial statement provides.

First the income statement should be prepared, which reports a business' operating performance over a specific

period of time and lists revenues minus expenses to give net income. The statement of changes in owner's

equity should be prepared next and it reports investments by the owner, net income (loss), withdrawals by the

owner and provides a link between the income statement and the balance sheet. The balance sheet is prepared

next and lists the assets, liabilities, and owner's equity of a business at a specific point in time. Finally, the

statement of cash flows should be prepared last, and it reports inflows and outflows of cash during the period.



Difficulty: Medium




97. A company earns net income of $5,000 during the month of March. Discuss how the net income amount

may be different from what is in the cash balance at the end of the month of March. What might lead to

differences between net income and the cash balance?

Net income represents the amount by which revenues exceed expenses for a given period. However, the cash

balance may differ from net income because cash received for revenue and cash paid for expenses may occur in

a different month. Revenues do not necessarily equal cash received during the month and expenses do not

necessarily equal cash paid during the month.



Difficulty: Hard




98. Compare and contrast financial accounting and managerial accounting. Who are the users of each type of

accounting?

Managerial accounting provides detailed accounting information about the performance of a company to

internal users such as the president. Financial accounting provides summarized financial statement reports to

external users such as investors and creditors.

AACSB: Analytic

Blooms: Analysis

Difficulty: Medium




99. Describe the difference between internal and external users of accounting information. Give examples of

each type of users. What decisions are made by each user? What type of information does each use to make

decisions?

External users of accounting information include creditors, investors and suppliers, while internal users of

accounting information generally include managers. External users of accounting information make decision

regarding extending credit to a company or investment decisions and use primarily highly summarized financial

accounting information such as the financial statements. Internal users make decision such as whether to

continue with a product line or invest in a new asset and use more detailed information provided by managerial

accounting.



Difficulty: Medium




100. What is the fundamental accounting equation? Define each element of the equation and provide examples

of each element.

The fundamental accounting equation is Assets = Liabililtes + Owner's equity. Assets are any resource

controlled by the business that has measureable value and is expected to provide future benefits. Examples of

assets include cash, inventory and equipment. Liabilities are measurable amounts that a business owes to

creditors. Examples of liabilities include accounts payable, salaries payable and notes payable. Owner's equity

represents the owner's claim to the business and is represented by owners investments in the business and

profits that have not been distributed to owners.



Difficulty: Easy




101. What is GAAP and what characteristics should financial information have in order to be useful to decision

makers? What is the role of the FASB?

GAAP stands for Generally Accepted Accounting Principles and represent the rules to be followed when

reporting financial accounting information. In order to be useful to decision makers financial accounting should

be: 1) Relevant so that it is helpful in making decisions, 2) Reliable so that it is unbiased and verifiable; 3)

Comparable so that it can be compared to other companies; and 4) Consistent so that it can be compared over

time. The FASB is the Financial Accounting Standards Board, and this regulatory body is responsible for

setting the rules of accounting or GAAP.

AACSB: Ethics


Difficulty: Medium




102. _______________ businesses make products from raw inputs.

Manufacturing


Blooms: Knowledge

Difficulty: Easy




103. Companies that do not make or sell products are _____________ firms.

Service


Blooms: Knowledge

Difficulty: Medium




104. One benefit of the corporate form of business is __________ liability.

Limited


Blooms: Knowledge

Difficulty: Medium




105. A form of business which has two or more owners who are personally liable for the business's debts is a

______________.

Partnership


Blooms: Knowledge

Difficulty: Easy




106. ____________ is an information system designed to capture and communicate a business's financial

performance.

Accounting


Blooms: Knowledge

Difficulty: Medium




107. Accountants who charge fees for services to a variety of businesses work in ___________ accounting.

Public


Blooms: Knowledge

Difficulty: Easy




108. Examples of ______________ users of accounting information include bankers, investors and suppliers.

External


Blooms: Knowledge

Difficulty: Easy




109. ______________ accounting primarily provides detailed accounting information to internal users.

Management


Blooms: Knowledge

Difficulty: Easy




110. The fundamental accounting equation is Assets minus _________ equals __________.

Liabilities; owner's equity


Blooms: Knowledge

Difficulty: Medium




111. ____________ are economic resources owned by a business and likely to provide future benefits.

Assets


Blooms: Knowledge

Difficulty: Easy




112. Cash, accounts receivable, and equipment are examples of ___________.

Assets


Blooms: Knowledge

Difficulty: Medium




113. According to the _____________ principle, assets are initially recorded at the total cost to acquire them.

Historical cost


Blooms: Knowledge

Difficulty: Easy




114. The ___________ reports the performance of a business over a period of time, while the ____________ is

a snapshot of the financial position at a point in time.

Income statement; balance sheet


Blooms: Knowledge

Difficulty: Medium




115. If assets equal $110,000 and liabilities equal $65,000 then owner's equity is equal to _________.

$45,000


Blooms: Analysis

Difficulty: Medium




116. If owners contribute cash to start a business then assets will __________, liabilities will __________, and

owner's equity will ___________.

increase; remain the same or be unaffected; increase



Difficulty: Hard




117. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and

__________ activities.

Operating, investing; financing



Difficulty: Medium




118. The ___________ sets the rules of accounting.

FASB or Financial Accounting Standards Board

AACSB: Ethics

Blooms: Knowledge

Difficulty: Easy




119. ____________ are standards of conduct used to judge right from wrong.

Ethics

AACSB: Ethics

Blooms: Knowledge

Difficulty: Easy




120. When financial accounting information is ___________ then it is unbiased and verifiable.

Reliable

AACSB: Ethics

Blooms: Knowledge

Difficulty: Medium




121. The rules of accounting which publicly held companies must follow are known as ___________.

GAAP or Generally Accepted Accounting Principles

AACSB: Ethics

Blooms: Knowledge

Difficulty: Easy




122. Fill in the appropriate letter from the list of definitions below which accurately describes each term.

1. Sole

proprietorship A separate legal entity that sells stock to owners. 3

2. Manufacturer A business owned by two or more individuals. 4

3. Corporation

A company that sells goods made by manufacturers to

customers. 6

4. Partnership A business owned by one individual. 1

5. Service company A company that makes products from raw inputs. 2

6. Merchandiser A company that provides a service to customers. 5 AACSB: Reflective thinking

Blooms: Knowledge

Difficulty: Medium




123. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:

1. CPA An accountant that works in public accounting. 1

2. PCAOB

Governmental agency that supervises the work of the FASB and

the PCAOB. 4

3. AICPA

Requires its members to adhere to a Code of Professional

Conduct. 3

4. SEC The rules of accounting. 5

5. GAAP Approves rules to be followed by auditors. 2

6. FASB

Has primary responsibility for setting accounting standards in

the U.S. 6 AACSB: Reflective thinking

Blooms: Knowledge

Difficulty: Hard




124. For each business listed below indicate the correct form of business by using the following codes: (S) Sole

Proprietorship, (P) Partnership, and (C) Corporation.

1. S

Franklin & Associates is a law firm with four owners. Each owner

shares equally in the profits/losses of the business and is personally liable

for the debts of the business. 3

2. S

Tamara's Hair Salon is owned exclusively by Tamara and is not a

separate legal entity. 1

3. P American Auto Parts is owned by 500 shareholders. 4

4. C

Jenni's Bakery is owned by Jenni and the profits are part of her

personal taxable income. 1

5. P

Mark and Ben own and operate a car wash. They have a legal

agreement which outlines how they will share profits (losses). 3

6. C

ABC Limited issued 10,000 shares of stock to the public to finance the

expansion of a new division. 4 AACSB: Reflective thinking

Blooms: Knowledge

Difficulty: Medium




125. Match each term with its related definition by entering the appropriate letter in the space provided.

1. Historical cost

Financial information can be compared to other

companies. 8

2. Net income Resources used to earn revenues. 6

3. Consistent

Financial information is most useful when it is

unbiased and verifiable. 5

4. Relevant

The area of accounting which provides information to

external decision makers. 9

5. Reliable Financial information can be compared over time. 3

6. Expenses

Assets are initially measured at the total cost to

acquire them. 1

7. Ethics

The positive difference between revenues and

expenses. 2

8. Comparable Standards of conduct for judging right from wrong. 7

9. Financial

accounting

Financial information is helpful in making decisions

should be reported. 4

10. Revenues

Amounts earned when goods or services are delivered

to customers. 10 AACSB: Reflective thinking

Blooms: Knowledge

Difficulty: Medium









ch1 Summary

Category # of Questions

AACSB: Analytic 19

AACSB: Ethics 15

AACSB: Reflective thinking 91

Blooms: Analysis 16

Blooms: Application 4

Blooms: Comprehension 12

Blooms: Knowledge 93

Difficulty: Easy 41

Difficulty: Hard 14

Difficulty: Medium 70

Learning Objective: 1-1 23






Libby - Chapter 001 125

Topic: Accounting and business decisions 24

Topic: Basic financial reports 62

Topic: Business types and organizational forms 23

Topic: Professional standards and ethical conduct 16

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