Test Bank 1st-Ed Principles of Accounting by Libby

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Test Bank 1st-Ed Principles of Accounting by Libby

Sample CHapter No 1                                                                       

 

True / False Questions

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

 

  1. Southwest Airlines would be an example of a manufacturer.
    True    False

 

  1. Wal-Mart is an example of a retailer.
    True    False

 

  1. A business owned by one individual is known as a corporation.
    True    False

 

  1. One disadvantage of a sole proprietorship and a partnership is unlimited liability.
    True    False

 

  1. A business that has one owner is a partnership.
    True    False

 

  1. One advantage of a corporation over the other forms of business is ease of formation.
    True    False

 

  1. An accounting system is a system of financial recordkeeping.
    True    False

 

 

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

 

  1. Assets – Owner’s Equity = Liabilities represents the fundamental accounting equation.
    True    False

 

  1. Resources a business owns are called revenues.
    True    False

 

  1. Accounts payable are claims a business owes to creditors.
    True    False

 

  1. An owner has a claim to a business for the amounts invested in the business.
    True    False

 

  1. The difference between assets and liabilities is called profit.
    True    False

 

  1. Expenses are resources used to earn revenue.
    True    False

 

  1. Prepaid expenses are an example of an asset.
    True    False

 

 

  1. Interest payable is an example of an expense.
    True    False

 

  1. 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

 

  1. The statement of owner’s equity links together the income statement and the balance sheet.
    True    False

 

  1. Financial statements are only prepared at the end of the year.
    True    False

 

  1. If net income is equal to $10,000 then the company’s cash has increased by $10,000.
    True    False

 

  1. The balance sheet reports a company’s financial position at a particular point in time.
    True    False

 

  1. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards Board (FASB).
    True    False

 

  1. One objective of external users of financial information is to assess the ability of a company to pay its liabilities.
    True    False

 

 

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

 

  1. Managerial accounting reports produced by the accounting system are made available for external users of accounting.
    True    False

 

  1. A manager who is considering whether to continue or discontinue a particular product would refer to financial accounting information.
    True    False

 

  1. Creditors and investors are examples of external users of accounting information.
    True    False

 

  1. Financial information that is unbiased and verifiable is said to be relevant.
    True    False

 

  1. A company’s managers have the primary responsibility for following Generally Accepted Accounting Principles (GAAP) and for preparing fair financial statements.
    True    False

 

 

Multiple Choice Questions

  1. The _________________ outlines how the profits (or losses) are shared.
    A. Stock certificate
    B. Partnership agreement
    C. Corporate charter
    D. Financial statements

 

 

  1. Which of the following would not be considered an external user of accounting information?
    A. Bank
    B. Supplier
    C. Manager
    D. Investor

 

  1. 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.

 

  1. Which of the following is considered an internal user of accounting information?
    A. Production manager
    B. Supplier
    C. Investor
    D. Customer

 

  1. Which of the following is considered an external user of accounting information?
    A. Production manager
    B. CEO
    C. IRS
    D. Controller

 

  1. A bank is most likely a(n) ___________ user of accounting information.
    A. external
    B. internal
    C. governmental
    D. managerial

 

 

  1. 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

 

  1. An example of a claim to resources of a business is:
    A. Cash.
    B. Land.
    C. Accounts payable.
    D. Accounts receivable.

 

  1. Resources a business owns are called:
    A. Liabilities.
    B. Owner’s equity.
    C. Revenues.
    D. Assets.

 

  1. Claims a business owes are called owners’ equity when they are held by:
    A. Creditors.
    B. Suppliers.
    C. Employees.
    D. Investors.

 

  1. An example of an asset is:
    A. Wages expense.
    B. Revenue.
    C. Supplies.
    D. Accounts payable.

 

 

  1. 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.

 

  1. Land is an example of a(n):
    A. Liability.
    B. Asset.
    C. Revenue.
    D. Expense.

 

  1. Unearned revenue is an example of a(n):
    A. Liability.
    B. Revenue.
    C. Asset.
    D. Expense.

 

  1. Inventory is an example of a(n):
    A. Liability.
    B. Revenue.
    C. Expense.
    D. Asset.

 

  1. 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

 

 

  1. 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

 

  1. Which financial statement should be prepared first?
    A. Balance sheet
    B. Statement of cash flows
    C. Income statement
    D. Statement of owner’s equity

 

  1. 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

 

  1. 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
    D. Statement of owner’s equity

 

  1. 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

 

 

  1. 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).

 

  1. Financial information that is __________ ensures that it is unbiased and verifiable.
    A. relevant
    B. comparable
    C. reliable
    D. consistent

 

  1. 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).
    D. American Institute of CPAs (AICPA).

 

  1. 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).

 

  1. 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

 

 

  1. The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:
    A. Accounting.
    B. Reporting.
    C. Internal control.
    D. Financing.

 

  1. _______ are the standards of conduct for judging right from wrong.
    A. Ethics
    B. Rules
    C. Internal controls
    D. Conducts

 

  1. 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

 

  1. 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.

 

  1. 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.

 

 

  1. 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

 

  1. 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

 

  1. What business type has two or more owners and unlimited liability?
    A. Corporation
    B. Sole proprietorship
    C. Partnership
    D. Retailer

 

  1. Which of the following is an example of a service company?
    A. Wal-Mart
    B. Home Depot
    C. American Airlines
    D. Ford Motor Company

 

  1. Which of the following is not a merchandiser?
    A. Target
    B. Best Western
    C. Staples
    D. Macy’s

 

 

  1. Companies which make products from raw inputs are known as:
    A. Service Companies.
    B. Wholesalers.
    C. Retailers.
    D. Manufacturers.

 

  1. Boeing would be an example of what business type?
    A. Service company
    B. Merchandiser
    C. Manufacturer
    D. Retailer

 

  1. 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

 

  1. 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.

 

  1. 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.

 

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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

 

  1. Assets should originally be recorded at:
    A. Market value.
    B. Replacement cost.
    C. Historical cost.
    D. Amount owed on the asset.

 

 

  1. 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.

 

  1. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?
    A. Assets increase $100,000; no effect on liabilities; equity increases $100,000.
    B. Assets decrease $100,000; liabilities decrease $100,000; no effect on equity.
    C. Assets decrease $100,000; no effect on liabilities; equity decreases $100,000.
    D. Assets increase $100,000; liabilities increase $100,000; no effect on equity.

 

  1. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?
    A. Assets increase $45,000; no effect on liabilities; equity increases $45,000.
    B. Assets decrease $45,000; liabilities decrease $45,000; no effect on equity.
    C. No effect on the accounting equation because assets increase and decrease by the same amount.
    D. Assets increase $45,000; liabilities increase $45,000; no effect on equity.

 

  1. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?
    A. Assets increase $23,000; no effect on liabilities; equity increases $23,000.
    B. Assets decrease $23,000; liabilities decrease $23,000; no effect on equity.
    C. Assets decrease $23,000; no effect on liabilities; equity decreases $23,000.
    D. Assets increase $23,000; liabilities increase $23,000; no effect on equity.

 

 

  1. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?
    A. Assets increase $3,400; no effect on liabilities; equity increases $3,400.
    B. Assets decrease $3,400; liabilities decrease $3,400; no effect on equity.
    C. Assets decrease $3,400; no effect on liabilities; equity decreases $3,400.
    D. Assets increase $3,400; liabilities increase $3,400; no effect on equity.

 

  1. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?
    A. Assets increase $5,000; no effect on liabilities; equity increases $5,000.
    B. Assets decrease $5,000; liabilities decrease $5,000; no effect on equity.
    C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.
    D. Assets increase $5,000; liabilities increase $5,000; no effect on equity.

 

  1. 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.

 

  1. 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

 

 

  1. 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

 

 

Essay Questions

  1. 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

 

 

 

 

 

  1. 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.

 

 

 

 

 

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

 

 

 

 

 

  1. 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.

 

 

 

 

 

  1. 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.

 

 

 

 

 

  1. 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.

 

 

 

 

 

  1. 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

 

 

 

 

 

  1. 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 (-).

 

 

 

 

  1. 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?

 

 

 

 

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

 

 

 

 

 

  1. Discuss the order in which the four basic financial statements should be prepared. Briefly describe what information each financial statement provides.

 

 

 

 

  1. 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?

 

 

 

 

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

 

 

 

 

  1. 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?

 

 

 

 

 

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

 

 

 

 

  1. 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?

 

 

 

 

 

Fill in the Blank Questions

  1. _______________ businesses make products from raw inputs.
    ________________________________________

 

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

 

  1. One benefit of the corporate form of business is __________ liability.
    ________________________________________

 

  1. A form of business which has two or more owners who are personally liable for the business’s debts is a ______________.
    ________________________________________

 

 

  1. ____________ is an information system designed to capture and communicate a business’s financial performance.
    ________________________________________

 

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

 

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

 

  1. ______________ accounting primarily provides detailed accounting information to internal users.
    ________________________________________

 

  1. The fundamental accounting equation is Assets minus _________ equals __________.
    ________________________________________

 

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

 

  1. Cash, accounts receivable, and equipment are examples of ___________.
    ________________________________________

 

 

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

 

  1. 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.
    ________________________________________

 

  1. If assets equal $110,000 and liabilities equal $65,000 then owner’s equity is equal to _________.
    ________________________________________

 

  1. If owners contribute cash to start a business then assets will __________, liabilities will __________, and owner’s equity will ___________.
    ________________________________________

 

  1. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and __________ activities.
    ________________________________________

 

  1. The ___________ sets the rules of accounting.
    ________________________________________

 

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

 

 

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

 

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

 

 

Matching Questions

  1. Fill in the appropriate letter from the list of definitions below which accurately describes each term.
1. Service company      A separate legal entity that sells stock to owners.   ____
2. Partnership      A business owned by two or more individuals.   ____
3. Manufacturer      A company that sells goods made by manufacturers to customers.   ____
4. Sole proprietorship      A business owned by one individual.   ____
5. Merchandiser      A company that makes products from raw inputs.   ____
6. Corporation      A company that provides a service to customers.   ____

 

 

  1. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:
1. AICPA      An accountant that works in public accounting.   ____
2. SEC      Governmental agency that supervises the work of the FASB and the PCAOB.   ____
3. PCAOB      Requires its members to adhere to a Code of Professional Conduct.   ____
4. CPA      The rules of accounting.   ____
5. FASB      Approves rules to be followed by auditors.   ____
6. GAAP      Has primary responsibility for setting accounting standards in the U.S.   ____

 

  1. 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. C      Tamara’s Hair Salon is owned exclusively by Tamara and is not a separate legal entity.   ____
3. S      American Auto Parts is owned by 500 shareholders.   ____
4. P      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.   ____

 

 

  1. Match each term with its related definition by entering the appropriate letter in the space provided.
1. Net income      Financial information can be compared to other companies.   ____
2. Financial accounting      Resources used to earn revenues.   ____
3. Relevant      Financial information is most useful when it is unbiased and verifiable.   ____
4. Reliable      The area of accounting which provides information to external decision makers.   ____
5. Comparable      Financial information can be compared over time.   ____
6. Ethics      Assets are initially measured at the total cost to acquire them.   ____
7. Historical cost      The positive difference between revenues and expenses.   ____
8. Revenues      Standards of conduct for judging right from wrong.   ____
9. Consistent      Financial information is helpful in making decisions should be reported.   ____
10. Expenses      Amounts earned when goods or services are delivered to customers.   ____

 

 

 

 

True / False Questions

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. Southwest Airlines would be an example of a manufacturer.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. Wal-Mart is an example of a retailer.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms


 

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. A business that has one owner is a partnership.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. An accounting system is a system of financial recordkeeping.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Topic: Accounting and business decisions


 

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Topic: Accounting and business decisions

  1. Assets – Owner’s Equity = Liabilities represents the fundamental accounting equation.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. Resources a business owns are called revenues.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. Accounts payable are claims a business owes to creditors.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. The difference between assets and liabilities is called profit.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. Expenses are resources used to earn revenue.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. Prepaid expenses are an example of an asset.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. Interest payable is an example of an expense.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. The statement of owner’s equity links together the income statement and the balance sheet.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-5
Topic: Basic financial reports

  1. Financial statements are only prepared at the end of the year.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. If net income is equal to $10,000 then the company’s cash has increased by $10,000.
    FALSE

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Hard
Learning Objective: 1-5
Topic: Basic financial reports

  1. The balance sheet reports a company’s financial position at a particular point in time.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards Board (FASB).
    TRUE

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions


 

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Topic: Accounting and business decisions

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. A manager who is considering whether to continue or discontinue a particular product would refer to financial accounting information.
    FALSE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. Creditors and investors are examples of external users of accounting information.
    TRUE

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions


 

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

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. A company’s managers have the primary responsibility for following Generally Accepted Accounting Principles (GAAP) and for preparing fair financial statements.
    TRUE

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

 

Multiple Choice Questions

  1. The _________________ outlines how the profits (or losses) are shared.
    A.Stock certificate
    B. Partnership agreement
    C. Corporate charter
    D. Financial statements

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. Which of the following would not be considered an external user of accounting information?
    A.Bank
    B. Supplier
    C. Manager
    D. Investor

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. Which of the following is considered an internal user of accounting information?
    A.Production manager
    B. Supplier
    C. Investor
    D. Customer

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions


 

  1. Which of the following is considered an external user of accounting information?
    A.Production manager
    B. CEO
    C. IRS
    D. Controller

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. A bank is most likely a(n) ___________ user of accounting information.
    A.external
    B. internal
    C. governmental
    D. managerial

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. An example of a claim to resources of a business is:
    A.Cash.
    B. Land.
    C. Accounts payable.
    D. Accounts receivable.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. Resources a business owns are called:
    A.Liabilities.
    B. Owner’s equity.
    C. Revenues.
    D. Assets.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. Claims a business owes are called owners’ equity when they are held by:
    A.Creditors.
    B. Suppliers.
    C. Employees.
    D. Investors.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. An example of an asset is:
    A.Wages expense.
    B. Revenue.
    C. Supplies.
    D. Accounts payable.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-4
Topic: Basic financial reports

  1. Land is an example of a(n):
    A.Liability.
    B. Asset.
    C. Revenue.
    D. Expense.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. Unearned revenue is an example of a(n):
    A.Liability.
    B. Revenue.
    C. Asset.
    D. Expense.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. Inventory is an example of a(n):
    A.Liability.
    B. Revenue.
    C. Expense.
    D. Asset.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. Which financial statement should be prepared first?
    A.Balance sheet
    B. Statement of cash flows
    C. Income statement
    D. Statement of owner’s equity

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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
    D. Statement of owner’s equity

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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).

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct


 

  1. Financial information that is __________ ensures that it is unbiased and verifiable.
    A.relevant
    B. comparable
    C. reliable
    D. consistent

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. 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).
    D. American Institute of CPAs (AICPA).

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. 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
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct


 

  1. 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
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. 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
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. _______ are the standards of conduct for judging right from wrong.
    A.Ethics
    B. Rules
    C. Internal controls
    D. Conducts

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct


 

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions


 

  1. 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
Bloom’s: Analysis
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. What business type has two or more owners and unlimited liability?
    A.Corporation
    B. Sole proprietorship
    C. Partnership
    D. Retailer

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. Which of the following is an example of a service company?
    A.Wal-Mart
    B. Home Depot
    C. American Airlines
    D. Ford Motor Company

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. Which of the following is not a merchandiser?
    A.Target
    B. Best Western
    C. Staples
    D. Macy’s

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. Companies which make products from raw inputs are known as:
    A.Service Companies.
    B. Wholesalers.
    C. Retailers.
    D. Manufacturers.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. Boeing would be an example of what business type?
    A.Service company
    B. Merchandiser
    C. Manufacturer
    D. Retailer

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Topic: Accounting and business decisions

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Topic: Accounting and business decisions

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Topic: Accounting and business decisions


 

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. 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
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. Assets should originally be recorded at:
    A.Market value.
    B. Replacement cost.
    C. Historical cost.
    D. Amount owed on the asset.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. 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.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?
    A.Assets increase $100,000; no effect on liabilities; equity increases $100,000.
    B. Assets decrease $100,000; liabilities decrease $100,000; no effect on equity.
    C. Assets decrease $100,000; no effect on liabilities; equity decreases $100,000.
    D. Assets increase $100,000; liabilities increase $100,000; no effect on equity.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?
    A.Assets increase $45,000; no effect on liabilities; equity increases $45,000.
    B. Assets decrease $45,000; liabilities decrease $45,000; no effect on equity.
    C. No effect on the accounting equation because assets increase and decrease by the same amount.
    D. Assets increase $45,000; liabilities increase $45,000; no effect on equity.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?
    A.Assets increase $23,000; no effect on liabilities; equity increases $23,000.
    B. Assets decrease $23,000; liabilities decrease $23,000; no effect on equity.
    C. Assets decrease $23,000; no effect on liabilities; equity decreases $23,000.
    D. Assets increase $23,000; liabilities increase $23,000; no effect on equity.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?
    A.Assets increase $3,400; no effect on liabilities; equity increases $3,400.
    B. Assets decrease $3,400; liabilities decrease $3,400; no effect on equity.
    C. Assets decrease $3,400; no effect on liabilities; equity decreases $3,400.
    D. Assets increase $3,400; liabilities increase $3,400; no effect on equity.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?
    A.Assets increase $5,000; no effect on liabilities; equity increases $5,000.
    B. Assets decrease $5,000; liabilities decrease $5,000; no effect on equity.
    C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.
    D. Assets increase $5,000; liabilities increase $5,000; no effect on equity.

 

AACSB: Analytic
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. 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
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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
Bloom’s: Application
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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
Bloom’s: Analysis
Difficulty: Hard
Learning Objective: 1-5
Topic: Basic financial reports

 

 

Essay Questions

  1. 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

 

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


  1. 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.

 

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-4
Learning Objective: 1-5
Topic: Basic financial reports


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

 

 

AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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.

 

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions


  1. 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
Bloom’s: Analysis
Difficulty: Hard
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. 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
Bloom’s: Application
Difficulty: Medium
Learning Objective: 1-4
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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
  2. $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
Bloom’s: Application
Difficulty: Hard
Learning Objective: 1-4
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Hard
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. 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
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-3
Topic: Accounting and business decisions


 

  1. 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.

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

 

 

Fill in the Blank Questions

  1. _______________ businesses make products from raw inputs.
    Manufacturing

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. One benefit of the corporate form of business is __________ liability.
    Limited

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. A form of business which has two or more owners who are personally liable for the business’s debts is a ______________.
    Partnership

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. ____________ is an information system designed to capture and communicate a business’s financial performance.
    Accounting

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Topic: Accounting and business decisions

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Topic: Accounting and business decisions

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions

  1. ______________ accounting primarily provides detailed accounting information to internal users.
    Management

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Topic: Accounting and business decisions


 

  1. The fundamental accounting equation is Assets minus _________ equals __________.
    Liabilities; owner’s equity

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports

  1. Cash, accounts receivable, and equipment are examples of ___________.
    Assets

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Topic: Basic financial reports


 

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports

  1. If assets equal $110,000 and liabilities equal $65,000 then owner’s equity is equal to _________.
    $45,000

 

AACSB: Reflective thinking
Bloom’s: Analysis
Difficulty: Medium
Learning Objective: 1-4
Topic: Basic financial reports

  1. 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

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Hard
Learning Objective: 1-4
Topic: Basic financial reports

  1. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and __________ activities.
    Operating, investing; financing

 

AACSB: Reflective thinking
Bloom’s: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Topic: Basic financial reports


 

  1. The ___________ sets the rules of accounting.
    FASB or Financial Accounting Standards Board

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

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

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

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

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

  1. The rules of accounting which publicly held companies must follow are known as ___________.
    GAAP or Generally Accepted Accounting Principles

 

AACSB: Ethics
Bloom’s: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Topic: Professional standards and ethical conduct

 

 

Matching Questions

  1. Fill in the appropriate letter from the list of definitions below which accurately describes each term.
1. Service company      A separate legal entity that sells stock to owners.   6
2. Partnership      A business owned by two or more individuals.   2
3. Manufacturer      A company that sells goods made by manufacturers to customers.   5
4. Sole proprietorship      A business owned by one individual.   4
5. Merchandiser      A company that makes products from raw inputs.   3
6. Corporation      A company that provides a service to customers.   1

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms

  1. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:
1. AICPA      An accountant that works in public accounting.   4
2. SEC      Governmental agency that supervises the work of the FASB and the PCAOB.   2
3. PCAOB      Requires its members to adhere to a Code of Professional Conduct.   1
4. CPA      The rules of accounting.   6
5. FASB      Approves rules to be followed by auditors.   3
6. GAAP      Has primary responsibility for setting accounting standards in the U.S.   5

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Topic: Professional standards and ethical conduct


 

  1. 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.   4
2. C      Tamara’s Hair Salon is owned exclusively by Tamara and is not a separate legal entity.   1
3. S      American Auto Parts is owned by 500 shareholders.   2
4. P      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).   4
6. C      ABC Limited issued 10,000 shares of stock to the public to finance the expansion of a new division.   2

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Topic: Business types and organizational forms


 

  1. Match each term with its related definition by entering the appropriate letter in the space provided.
1. Net income      Financial information can be compared to other companies.   5
2. Financial accounting      Resources used to earn revenues.   10
3. Relevant      Financial information is most useful when it is unbiased and verifiable.   4
4. Reliable      The area of accounting which provides information to external decision makers.   2
5. Comparable      Financial information can be compared over time.   9
6. Ethics      Assets are initially measured at the total cost to acquire them.   7
7. Historical cost      The positive difference between revenues and expenses.   1
8. Revenues      Standards of conduct for judging right from wrong.   6
9. Consistent      Financial information is helpful in making decisions should be reported.   3
10. Expenses      Amounts earned when goods or services are delivered to customers.   8

 

AACSB: Reflective thinking
Bloom’s: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Learning Objective: 1-2
Learning Objective: 1-3
Learning Objective: 1-4
Learning Objective: 1-5
Learning Objective: 1-6
Topic: Business types and organizational forms

Test Bank 1st-Ed Principles of Accounting by Libby

Test Bank 1st-Ed Principles of Accounting by Libby