Fundamentals of Financial Accounting Fred Phillips 6th Edition-Test Bank

Fundamentals of Financial Accounting, 6e (Phillips) Chapter 1 Business Decisions and Financial Accounting 1) Stockholders are owners of a corporation. Answer: TRUE Explanation: Stockholders are the owners of a corporation. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) All corporations acquire financing by issuing stock for sale on public stock exchanges. Answer: FALSE Explanation: Most corporations start out as private companies and will apply to become public companies ("go public") if they need a lot of financing. Financing can also be acquired by borrowing from banks. Difficulty: 2 Medium Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The company owes $10 million dollars to its creditors. As a result of the bankruptcy, you are responsible for paying $100,000 (or $10 million × 1%) of the amount owed to the creditors. Answer: FALSE Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. Difficulty: 2 Medium Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Apply AACSB: Analytical Thinking Accessibility: Keyboard Navigation 1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4) Cash paid for wages is an example of an operating activity on the statement of cash flows. Answer: TRUE Explanation: Cash flows from running the business, including cash paid for wages, are operating activities on the statement of cash flows. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) Borrowing money from a bank is a financing activity on the statement of cash flows. Answer: TRUE Explanation: On the statement of cash flows, borrowing and repaying bank loans are financing activities. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) The daily activities involved in running a business, such as buying supplies and paying salaries and wages, are classified as operating activities on the statement of cash flows. Answer: TRUE Explanation: Buying supplies and paying salaries and wages are normal operating costs on the statement of cash flows. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) Stockholders' equity is the difference between a company's assets and its liabilities. Answer: TRUE Explanation: Assets = Liabilities + Stockholders' Equity; therefore, Assets – Liabilities = Stockholders' Equity Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) A company owes $200,000 on a bank loan. It will be reported by the company as Accounts Payable. Answer: FALSE Explanation: Formal debt, evidenced by a written contract or note, is reported as Notes Payable. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 9) Amounts reported on financial statements are sometimes rounded to the nearest million. Answer: TRUE Explanation: Large businesses often round the numbers on their financial statements to the nearest thousand or million. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10) Accounts Payable, Notes Payable, and Salaries and Wages Payable are examples of liabilities. Answer: TRUE Explanation: An account with the word "payable" in its title is a liability. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 11) Dividends are subtracted from revenues on the income statement. Answer: FALSE Explanation: The income statement reports revenues and expenses. Dividends are not expenses. Rather, dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors, and are presented on the statement of retained earnings. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) If a company reports net income on the income statement, then the statement of cash flows will report the same amount as cash flows from operating activities for the period. Answer: FALSE Explanation: Net income is not the same as cash flows from operating activities. Net income is not necessarily equal to cash because revenues are reported when earned and expenses when incurred regardless of when cash is received or paid. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13) Revenue is reported on the income statement only if cash was received at the point of sale. Answer: FALSE Explanation: Revenues are reported on the income statement when goods or services are provided to customers. It's quite common for a business to provide goods or services to customers, but not collect cash from them until a later time period. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) Generally Accepted Accounting Principles (GAAP) require profitable companies to distribute some of their earnings to their stockholders. Answer: FALSE Explanation: There is no GAAP requirement that companies pay dividends. Dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15) Common Stock is reported as an asset on the balance sheet. Answer: FALSE Explanation: Common Stock is a component of stockholders' equity. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 16) Investors are mainly interested in the profitability of a company. Answer: TRUE Explanation: Investors expect a return on their investment in the company, and as a result, investors look closely at the company's ability to generate profits. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-03 Explain how financial statements are used by decision makers. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 17) A stock that does not pay a dividend is an undesirable investment. Answer: FALSE Explanation: There are two sources of potential return on an investment in stock: the dividend and an increase in the stock price. Difficulty: 3 Hard Topic: Financial Statements Learning Objective: 01-03 Explain how financial statements are used by decision makers. Bloom's: Evaluate AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) In order to be considered useful, information must have two fundamental characteristics: reliability and understandability. Answer: FALSE Explanation: In order to be judged useful, financial information must have two fundamental characteristics: relevance and faithful representation. Difficulty: 1 Easy Topic: Useful Financial Information Learning Objective: 01-04 Describe factors that contribute to useful financial information. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 19) The Securities and Exchange Commission (SEC) is the government agency that has primary responsibility for setting accounting standards in the U.S. Answer: FALSE Explanation: Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. The Securities and Exchange Commission (SEC) is responsible for the functioning of stock markets. Difficulty: 1 Easy Topic: Useful Financial Information Learning Objective: 01-04 Describe factors that contribute to useful financial information. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 20) The Sarbanes-Oxley Act (SOX) requires top management of companies to sign a report certifying that the financial statements are free of error. Answer: FALSE Explanation: SOX requires top managers of public companies to sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal controls to ensure accuracy in the accounting reports, and maintain an independent committee to oversee top management and ensure that they cooperate with auditors. SOX does not require a certification that states the financial statements are free from error. Difficulty: 3 Hard Topic: Useful Financial Information Learning Objective: 01-04 Describe factors that contribute to useful financial information. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21) Public corporations are businesses: A) owned by two or more people, each of whom is personally liable for the debts of the business. B) whose stock is bought and sold on a stock exchange. C) whose stock is bought and sold privately. D) where stock is not used as evidence of ownership. Answer: B Explanation: The owners of a company's stock (stockholders) can buy and sell stock privately or publicly on a stock exchange if the company has legally registered to do so. Most corporations start out as private companies and will apply to become public companies ("go public"). Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 22) The owner(s) of a business are not taxed on the profits of the business if the business is a: A) sole proprietorship. B) partnership. C) corporation. D) public partnership. Answer: C Explanation: A corporation, not its owners, is legally responsible for its own taxes and debts. In sole proprietorships and partnerships, the owners are taxed on the profits of the business. A sole proprietorship is considered a part of the owner's life, with all profits becoming part of the taxable income of the owner. A partnership is similar to a sole proprietorship in this regard, except that the taxes are the responsibility of two or more owners instead of just one. Difficulty: 2 Medium Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 23) Which of the following is typically considered a disadvantage of sole proprietorships? A) Income taxes are paid by both the business and its owner. B) The business is considered a separate legal entity from its owner. C) Establishing the business usually requires legal assistance. D) Owner is personally liable for all debts of the business. Answer: D Explanation: Sole proprietorships are easy to establish and the business is considered a part of the owner's life with all profits and losses becoming part of the taxable income of the owner. However, a sole proprietor is personally liable for all debts of the business. Difficulty: 2 Medium Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Communication Accessibility: Keyboard Navigation 8 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 24) With respect to the audience targeted for financial accounting reports, which of the parties below is not an external user? A) Customers of the company issuing the reports B) Creditors of the company issuing the reports C) Managers of the company issuing the reports D) Stockholders of the company issuing the reports Answer: C Explanation: External users of financial accounting reports include creditors, investors, directors, and government. Managers are considered internal users. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25) Accounting systems: A) are summarized in publicly published reports. B) analyze, record, and summarize the activities affecting its financial condition and performance. C) monitor business activities only in financial terms. D) capture only the information that is needed by the owners of the company. Answer: B Explanation: Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization. Difficulty: 2 Medium Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 9 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26) People or organizations to whom a business owes money are considered: A) owners of a business. B) creditors of a business. C) stockholders of a business. D) customers of a business. Answer: B Explanation: Creditors include suppliers, banks, and anyone to whom money is owed. Difficulty: 2 Medium Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 27) The owner is not responsible for the entity's taxes and debts if the entity is organized as a(n): A) corporation B) sole proprietorship. C) unlimited liability corporation. D) limited liability corporation. Answer: A Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 10 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 28) Which of the following is a characteristic of a partnership? A) The profits, taxes, and legal liability are the responsibility of two or more owners. B) It is a legal entity separate from its owners. C) Its income is taxed twice—once on the partnership's income tax return and again on the partners' individual income tax returns. D) It is the only organizational form appropriate for service businesses. Answer: A Explanation: A partnership is similar to a sole proprietorship, except that profits, taxes, and legal liability are the responsibility of two or more owners instead of just one. Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 29) Managerial accounting reports prepared for internal use are used by the company's: A) suppliers. B) bank. C) employees. D) stockholders. Answer: C Explanation: Managerial accounting reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 11 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 30) Directors of a corporation: A) want to ensure they will be paid for the goods and services they deliver. B) oversee managers to ensure their decisions are in the best interests of its stockholders. C) assess the financial strength of a business and attempt to estimate its value. D) are responsible for the functioning of stock markets and ensuring that taxes are correctly computed. Answer: B Explanation: Directors are elected to oversee a company's managers and ensure their decisions are in the best financial interest of stockholders. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 31) The main goal of an accounting system is to: A) capture information about a business so that it can be reported to decision makers. B) earn a profit for the company's stockholders. C) prove that assets equal liabilities plus stockholders' equity. D) provide initial financing for a new startup. Answer: A Explanation: Managerial accounting reports include detailed financial plans and continually updated reports about the operating performance of the company. These reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 32) Financing that individuals or institutions have provided to a corporation is: A) always classified as a liability. B) classified as a liability when provided by creditors and as stockholders' equity when provided by owners. C) always classified as equity. D) classified as a stockholders' equity when provided by creditors and a liability when provided by owners. Answer: B Explanation: Financing can be provided by creditors (classified as liabilities) or owners (classified as stockholders' equity). Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 33) An investor who is looking at a company's financial statements cannot determine whether the: A) company's earnings are rising or falling. B) company pays a dividend. C) company has positive cash flow. D) company's owners are financially sound. Answer: D Explanation: As set forth in the separate entity assumption, the financial reports of a business are assumed to include the results of only that business's activities. A company's financial statements do not contain information about the company's owners. Difficulty: 3 Hard Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 13 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 34) A sole proprietorship is: A) a separate legal and accounting entity from its owner(s). B) owned and operated by one individual. C) considered a public company. D) can easily raise large amounts of capital for growth. Answer: B Explanation: A sole proprietorship is the form of business owned (and usually operated) by one individual. Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 35) Internal users of financial data include: A) investors. B) creditors. C) management. D) regulatory authorities. Answer: C Explanation: Internal users include managers, supervisors, etc. External users include creditors, investors, etc. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 36) Which of the following statements about financial accounting is correct? A) Financial accounting reports are used primarily by employees to make business decisions related to production. B) Financial accounting reports are used primarily by management to understand whether a product line should be discontinued. C) Financial accounting reports are primarily prepared to provide information for external decision makers. D) Financial accounting reports primarily contain detailed internal records of the company. Answer: C Explanation: Financial accounting reports, called financial statements, are prepared periodically to provide information to people not employed by the business. Difficulty: 1 Easy Topic: Accounting for Business Decisions Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 37) Which of the following statements about organizational forms of a business is not correct? A) In a sole proprietorship form of business or in a partnership form, the owner(s) are personally responsible for the debts of the business. B) The partnership agreement states how profits are to be shared between partners and what happens when a new partner is to be admitted or an existing partner is retiring. C) A corporation is a separate entity from both a legal and accounting perspective. D) The owners of a corporation are legally responsible for the corporation's debts and taxes. Answer: D Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. Difficulty: 2 Medium Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 38) A legal document called a stock certificate is used to indicate ownership in a: A) corporation. B) sole proprietorship. C) partnership. D) both sole proprietorship and partnership. Answer: A Explanation: A share of the corporation's ownership is indicated on a legal document called a stock certificate. Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 39) Which of the following statements below is correct about a corporation and a partnership? A) A partnership is comprised of two or more owners, whereas a corporation must have only one owner. B) A corporation is legally responsible for its own taxes and debts. C) Owners of both entities are legally responsible for the taxes and debts of the business. D) Both entities issue shares of stock to owners. Answer: B Explanation: A key difference between a corporation and a partnership is that the corporation is a separate entity from both a legal and accounting perspective. This means that a corporation (not its shareholders) is legally responsible for its own taxes and debts; the owners of a partnership have this responsibility. Difficulty: 1 Easy Topic: Organizational Forms Learning Objective: 01-01 Describe various organizational forms and business decision makers. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 40) Which of the following expressions of the accounting equation is correct? A) Liabilities + Assets = Stockholders' Equity B) Stockholders' Equity + Assets = Liabilities C) Assets = Liabilities – Stockholders' Equity D) Stockholders' Equity = Assets – Liabilities Answer: D Explanation: Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets – Liabilities Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 41) Net income is the amount: A) the company earned after subtracting expenses and dividends from revenue. B) by which assets exceed expenses. C) by which assets exceed liabilities. D) by which revenues exceed expenses. Answer: D Explanation: Net income is calculated as revenues minus expenses. Dividends are not expenses of doing business and are not involved in determining the amount of net income on the income statement. Assets and liabilities are reported on the balance sheet. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 42) Expenses are reported on the: A) income statement in the time period in which they are paid. B) income statement in the time period in which they are incurred. C) balance sheet in the time period in which they are paid. D) balance sheet in the time period in which they are incurred. Answer: B Explanation: Expenses are reported on the income statement when incurred (that is, when the related goods or services are used) regardless of when the cash is paid. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 43) The financial reports of a business include only the results of that business's activities. This is: A) required only for large corporations. B) the cost principle. C) the accounting equation. D) true only for financial statements prepared under IFRS. E) the separate entity assumption. Answer: E Explanation: The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 44) The separate entity assumption assumes: A) the financial reports of a business include only the results of that business's activities. B) assets equal liabilities plus stockholder's equity. C) revenues and expenses are reported in separate sections of a company's income statement. D) assets are reported in a separate financial statement from liabilities. Answer: A Explanation: The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 45) Mauricio invested $30,000 in Pizza Aroma in exchange for its stock. Pizza Aroma now has: A) a liability. B) retained earnings. C) common stock. D) net income. Answer: C Explanation: The owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock). Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 19 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 46) Amounts earned by selling goods or services to customers are called: A) revenues. B) expenses. C) dividends. D) common stocks. Answer: A Explanation: Revenues are earned by selling goods or services to customers. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 47) Profit is equal to: A) revenues minus expenses. B) assets minus liabilities. C) the amount of cash that a company has. D) the amount of cash that owners have contributed to the business. Answer: A Explanation: Although profit is used in casual conversation, the preferred term in accounting is net income. Net income is calculated as revenues minus expenses. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 20 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 48) If revenues are less than expenses, the company's Retained Earnings: A) decrease. B) increase. C) must be replenished by stockholders. D) are paid to stockholders. Answer: A Explanation: If revenues are less than expenses, the company would have a net loss which would decrease Retained Earnings. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 49) A cost of doing business is referred to as a(n) ________ and is considered necessary to earn ________. A) revenue; assets B) expense; revenue C) liability; expenses D) dividend; revenue Answer: B Explanation: Expenses are all costs of doing business that are necessary to earn revenues. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 21 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 50) Expenses are: A) equal to a company's liabilities. B) always less than revenues. C) the costs of doing business that are necessary to earn revenue. D) always less than the amount of cash a company has available. Answer: C Explanation: Expenses are all costs of doing business that are necessary to earn revenues. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 51) An economic resource that is owned by a company and will provide future benefits is referred to as: A) revenue. B) an asset. C) retained earnings. D) net income. Answer: B Explanation: An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. Difficulty: 1 Easy Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 22 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 52) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Alpha will report a $2,000: A) Accounts Receivable. B) Account Payable. C) increase in Cash, since Beta is sure to pay next month. D) net loss. Answer: A Explanation: Alpha is the seller and thus will report accounts receivable, which is a right to collect for sales/services provided on account. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 53) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Beta will report a $2,000: A) Payable. B) Accounts Receivable. C) decrease in Cash, since it plans to pay next month. D) net income. Answer: A Explanation: The buyer, Beta, will report accounts payable, which is the amount owed to suppliers for prior credit purchases on account. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 23 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 54) TreeTop Nursery sold $7,500 of goods to customers of which $4,500 has been collected. TreeTop should report revenues of: A) $7,500. B) $4,500. C) $3,000. D) $0. Answer: A Explanation: Revenues equal the amount earned, regardless of whether the cash has been collected. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 55) Cash flows from (used in) investing activities include amounts: A) received from a company's stockholders for the sale of stock. B) received from the sale of the company's office building. C) paid for dividends to the company's stockholders. D) paid for salaries of employees. Answer: B Explanation: Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 24 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 56) Which of the following would not represent a financing activity? A) Paying dividends to stockholders. B) An investment of capital by the owners. C) Borrowing money from a bank to purchase new equipment. D) Buying supplies. Answer: D Explanation: Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders. Operating activities are directly related to running the business to earn profit and would include buying supplies. Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 57) Operating activities include: A) interest paid on a bank loan. B) the buying or selling of land, buildings, equipment, and other long-term investments. C) the repayment of loan proceeds to the bank. D) obtaining a bank loan to cover the payment of wages, rent and other operating costs. Answer: A Explanation: Operating activities are directly related to running the business to earn profit and would include paying interest on a loan. Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 25 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 58) The separate entity assumption means: A) a company's financial statements reflect only the business activities of that company. B) each separate owner's finances must be revealed in the financial statements. C) each separate entity that has a claim on a company's assets must be shown in the financial statements. D) if the business is a sole proprietorship, the owners' personal activities are included in the company's financial statements. Answer: A Explanation: The separate entity assumption means that the financial reports of a business are assumed to include the results of only that business's activities. Difficulty: 2 Medium Topic: The Basic Accounting Equation Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 59) Operating activities, investing activities, and financing activities are presented on the: A) balance sheet. B) statement of cash flows. C) statement of retained earnings. D) income statement. Answer: B Explanation: The statement of cash flows includes operating activities (which are directly related to running the business to earn profit), investing activities (which involve buying and selling productive resources with long lives), and financing activities (which include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders). Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 26 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 60) Financial statements are most commonly prepared: A) daily. B) monthly, quarterly, and annually. C) as needed. D) weekly. Answer: B Explanation: Financial statements can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports). Difficulty: 1 Easy Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 61) Which of the following statements about a fiscal year is correct? A) Companies can choose to end their fiscal year on any date they feel is most relevant. B) Companies must end their fiscal year on March 31, June 30, September 30, or December 31. C) Companies can select any date except a holiday to end their fiscal year. D) Companies must end their fiscal year on December 31. Answer: A Explanation: Companies are allowed to choose a calendar or fiscal year-end. A calendar year is a 12-month period ending on December 31, and a fiscal year is a 12-month period ending on a day other than December 31. Difficulty: 2 Medium Topic: Financial Statements Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic financial statements. Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation fundamental accounting principles - test bank, basic accounting test bank pdf, basic accounting principles test, fundamental accounting bpa, fundamental accounting principles answer key, accounting fundamentals practice test,