,CHAPTER 1
BASIC FINANCIAL ACCOUNTING REVIEW
INTRODUCTION
This chapter reviews basic accounting principles and procedures. It is a necessary chapter for
those whose accounting background is poor. If students have recently completed an introductory
accounting course, this chapter could be omitted, or assigned for self review. Chapters 1 and 2
lay the foundation for most of the remaining chapters in the textbook.
TRUE OR FALSE QUESTIONS
(Correct answer indicated by T for True answers and F for False answers)
1. Accounting principles and concepts are broad rules developed to create a common T
language used by accountants.
2. A business owner’s personal assets should be included with the assets of the business F
entity.
3. The cost principle of valuing assets may not indicate the true value of the assets as time T
goes by.
4. Accrual accounting is based on the principle of matching sales revenue with expenses. T
5. Cash basis accounting is never used in business. F
6. The full-disclosure principle states that all accounting records should be available at F
any time to anyone who wants to look at them.
7. Changing depreciation methods from one period to the next would not conform to the T
principle of consistency.
8. The materiality of a particular transaction may need to be considered in deciding T
whether or not to conform to other accounting principles.
9. Depreciation is a method of allocating the cost of a long-lived asset to an expense over T
the life of the asset.
10. Straight-line depreciation allocates the cost of a long-lived asset in equal units of time T
over the life of the asset.
11. Assets plus liabilities equal ownership equity. F
12. Sales revenue − Cost of sales = Gross Margin. T
13. The term operating income identifies operating income before income tax. T
14. Assets − ownership equity equals liabilities. T
15. Double-entry-accrual accounting ensures the balance sheet equation is always kept in T
balance, as long as no errors are made in recording and posting transactions.
1
,16. The debit side of a ledger account is always the left column. It is used to post debit T
values of a transaction.
17. A debit entry to a debit balanced ledger account will decrease the balance of the F
account.
18. A credit entry to a credit balanced account will increase the account balance. T
19. An expense account carries a normal debit balance. T
20. A trial balance showing the total of the debit and credit balanced accounts are equal at F
the end of an accounting period indicates all entries have been correctly posted.
21. Adjusting entries are normally necessary at the end of an accounting period to conform T
to the matching principle.
22. Beginning inventory + Purchases − Ending inventory = Cost of goods sold. T
23. A sales revenue account is debit balanced. F
24. The portion of a prepaid account to be expensed will require a debit to the prepaid F
account and a credit to an expense account.
25. End of period adjusting entries is recorded in a journal before the adjustments are T
posted to the ledger accounts.
MULTIPLE CHOICE QUESTIONS
(Correct answers indicated by asterisk)
1. A cocktail lounge owner who takes home liquor for private parties at home without reflecting
this in the lounge’s accounting records is violating the:
(a) Matching principle
(b) Going concern concept
* (c) Business entity concept
(d) Cost principle
2. A restaurant that records all purchases of food and beverages as an expense at the time of
purchase and does not consider the end of period inventories would be violating the:
(a) Cost principle
(b) Materiality concept
(c) Full disclosure principle
* (d) Matching principle
3. The cost principle is concerned with:
* (a) Recording items in the accounting records at their actual cost
(b) Matching the cost of items with the related sales revenue
(c) Valuing long-lived assets at their current market value rather than at cost
(d) Setting menu prices at a certain mark-up over cost
2
, 4. The balance sheet equation can be expressed as:
(a) Assets = Liabilities + Owners’ equity
(b) Assets − Liabilities = Owners’ equity
(c) Assets − Ownership equity = Liabilities
* (d) All of the above
5. A restaurant purchased a new point of sale terminal by paying one-half of its cost in cash and
owing the balance on account. The journal entry requires a:
(a) debit to an asset and a credit to two liability accounts
* (b) debit to an asset, a credit to an asset, and a credit to a liability
(c) debit to an asset, a debit to a liability, and a credit to a liability
(d) debit to two assets and a credit to a liability account
6. The length of the period of an accounting cycle is:
* (a) A length of time that the business deems desirable and appropriate
(b) A week at least
(c) Monthly for all hospitality enterprises
(d) Quarterly for a resort hotel
7. If cash was paid for a two-year $3,600 insurance policy on July 1, the amount of the
insurance expensed on December 31 is:
(a) $1,800
* (b) $ 900
(c) $2,700
(d) $ 600
8. A five-year depreciable asset cost $10,000 and had a residual value of $1,000. What is the
balance of its accumulated depreciation account at the end of two years using straight-line
depreciation?
(a) $6,000
(b) $4,000
(c) $5,400
* (d) $3,600
9. Which of the following is correct?
(a) Debits decrease assets
(b) Debits decrease assets; credits increase liabilities
(c) Debits increase owners’ equity
* (d) Debits increase assets
10. Cost of goods sold is calculated as:
(a) Beginning inventory + Ending inventory − Purchases
* (b) Beginning inventory + Purchases − Ending inventory
(c) Beginning inventory − Ending inventory − Purchases
(d) Beginning inventory + Ending inventory + Purchases
3
BASIC FINANCIAL ACCOUNTING REVIEW
INTRODUCTION
This chapter reviews basic accounting principles and procedures. It is a necessary chapter for
those whose accounting background is poor. If students have recently completed an introductory
accounting course, this chapter could be omitted, or assigned for self review. Chapters 1 and 2
lay the foundation for most of the remaining chapters in the textbook.
TRUE OR FALSE QUESTIONS
(Correct answer indicated by T for True answers and F for False answers)
1. Accounting principles and concepts are broad rules developed to create a common T
language used by accountants.
2. A business owner’s personal assets should be included with the assets of the business F
entity.
3. The cost principle of valuing assets may not indicate the true value of the assets as time T
goes by.
4. Accrual accounting is based on the principle of matching sales revenue with expenses. T
5. Cash basis accounting is never used in business. F
6. The full-disclosure principle states that all accounting records should be available at F
any time to anyone who wants to look at them.
7. Changing depreciation methods from one period to the next would not conform to the T
principle of consistency.
8. The materiality of a particular transaction may need to be considered in deciding T
whether or not to conform to other accounting principles.
9. Depreciation is a method of allocating the cost of a long-lived asset to an expense over T
the life of the asset.
10. Straight-line depreciation allocates the cost of a long-lived asset in equal units of time T
over the life of the asset.
11. Assets plus liabilities equal ownership equity. F
12. Sales revenue − Cost of sales = Gross Margin. T
13. The term operating income identifies operating income before income tax. T
14. Assets − ownership equity equals liabilities. T
15. Double-entry-accrual accounting ensures the balance sheet equation is always kept in T
balance, as long as no errors are made in recording and posting transactions.
1
,16. The debit side of a ledger account is always the left column. It is used to post debit T
values of a transaction.
17. A debit entry to a debit balanced ledger account will decrease the balance of the F
account.
18. A credit entry to a credit balanced account will increase the account balance. T
19. An expense account carries a normal debit balance. T
20. A trial balance showing the total of the debit and credit balanced accounts are equal at F
the end of an accounting period indicates all entries have been correctly posted.
21. Adjusting entries are normally necessary at the end of an accounting period to conform T
to the matching principle.
22. Beginning inventory + Purchases − Ending inventory = Cost of goods sold. T
23. A sales revenue account is debit balanced. F
24. The portion of a prepaid account to be expensed will require a debit to the prepaid F
account and a credit to an expense account.
25. End of period adjusting entries is recorded in a journal before the adjustments are T
posted to the ledger accounts.
MULTIPLE CHOICE QUESTIONS
(Correct answers indicated by asterisk)
1. A cocktail lounge owner who takes home liquor for private parties at home without reflecting
this in the lounge’s accounting records is violating the:
(a) Matching principle
(b) Going concern concept
* (c) Business entity concept
(d) Cost principle
2. A restaurant that records all purchases of food and beverages as an expense at the time of
purchase and does not consider the end of period inventories would be violating the:
(a) Cost principle
(b) Materiality concept
(c) Full disclosure principle
* (d) Matching principle
3. The cost principle is concerned with:
* (a) Recording items in the accounting records at their actual cost
(b) Matching the cost of items with the related sales revenue
(c) Valuing long-lived assets at their current market value rather than at cost
(d) Setting menu prices at a certain mark-up over cost
2
, 4. The balance sheet equation can be expressed as:
(a) Assets = Liabilities + Owners’ equity
(b) Assets − Liabilities = Owners’ equity
(c) Assets − Ownership equity = Liabilities
* (d) All of the above
5. A restaurant purchased a new point of sale terminal by paying one-half of its cost in cash and
owing the balance on account. The journal entry requires a:
(a) debit to an asset and a credit to two liability accounts
* (b) debit to an asset, a credit to an asset, and a credit to a liability
(c) debit to an asset, a debit to a liability, and a credit to a liability
(d) debit to two assets and a credit to a liability account
6. The length of the period of an accounting cycle is:
* (a) A length of time that the business deems desirable and appropriate
(b) A week at least
(c) Monthly for all hospitality enterprises
(d) Quarterly for a resort hotel
7. If cash was paid for a two-year $3,600 insurance policy on July 1, the amount of the
insurance expensed on December 31 is:
(a) $1,800
* (b) $ 900
(c) $2,700
(d) $ 600
8. A five-year depreciable asset cost $10,000 and had a residual value of $1,000. What is the
balance of its accumulated depreciation account at the end of two years using straight-line
depreciation?
(a) $6,000
(b) $4,000
(c) $5,400
* (d) $3,600
9. Which of the following is correct?
(a) Debits decrease assets
(b) Debits decrease assets; credits increase liabilities
(c) Debits increase owners’ equity
* (d) Debits increase assets
10. Cost of goods sold is calculated as:
(a) Beginning inventory + Ending inventory − Purchases
* (b) Beginning inventory + Purchases − Ending inventory
(c) Beginning inventory − Ending inventory − Purchases
(d) Beginning inventory + Ending inventory + Purchases
3
