Fundamental Accounting Principles Wild Shaw 20th Edition Test Bank

Fundamental Accounting Principles Wild Shaw 20th Edition Test Bank   Fundamental Accounting Principles Wild Shaw 20th Edition Test Bank Chapter 01 Accounting in Business True / False Questions 1. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities. True False 2. Bookkeeping is the recording of transactions and events and is only part of accounting. True False 3. An accounting information system communicates data to help businesses make better decisions. True False 4. Managerial accounting is the area of accounting that provides internal reports to assist the decision making needs of internal users. True False 5. Internal operating activities include research and development, distribution, and human resources. True False 6. The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities. True False 7. External auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles. True False 8. External users include lenders, shareholders, customers, and regulators. True False 9. Regulators often have legal authority over certain activities of organizations. True False 10. Internal users include lenders, shareholders, brokers and managers. True False 11. Opportunities in accounting include auditing, consulting, market research, and tax planning. True False 12. Identifying the proper ethical path is easy. True False 13. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether it has adopted a code of ethics for its senior financial officers and the contents of that code. True False 14. Good ethics are good business. True False 15. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both accounting oversight and stringent internal controls. True False 16. A partnership is a business owned by two or more people. True False 17. Owners of a corporation are called shareholders or stockholders. True False 18. In the partnership form of business, the owners are called stockholders. True False 19. The balance sheet shows a company's net income or loss due to earnings activities over a period of time. True False 20. The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles. True False 21. The business entity principle means that a business will continue operating for an indefinite period of time. True False 22. Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements. True False 23. The business entity assumption means that a business is accounted for separately from other business entities, including its owner or owners. True False 24. As a general rule, revenues should not be recognized in the accounting records until it is received in cash. True False 25. Specific accounting principles are basic assumptions, concepts, and guidelines for preparing financial statements and arise out of long-used accounting practice. True False 26. General accounting principles arise from long-used accounting practices. True False 27. A sole proprietorship is a business owned by one or more persons. True False 28. Unlimited liability is an advantage of a sole proprietorship. True False 29. Understanding generally accepted accounting principles is not necessary to use and interpret financial statements. True False 30. The International Accounting Standards board (IASB) has the authority to impose its standards on companies around the world. True False 31. Objectivity means that financial information is supported by independent unbiased evidence. True False 32. The idea that a business will continue to operate instead of being closed or sold underlies the going-concern assumption. True False 33. According to the cost principle, it is preferable for managers to report an estimate of an asset's value. True False 34. The monetary unit assumption means that all international transactions must be expressed in dollars. True False 35. The International Accounting Standards Board (IASB) is the government group that establishes reporting requirements for companies that issue stock to the public. True False 36. A limited liability company offers the limited liability of a partnership or proprietorship and the tax treatment of a corporation. True False 37. The Securities and Exchange Commission (SEC) is a government agency that has legal authority to establish GAAP. True False 38. The three common forms of business ownership include sole proprietorship, partnership, and non-profit. True False 39. The three major types of business activities are operating, financing, and investing. True False 40. Planning is defining an organization's ideas, goals, and actions. True False 41. Strategic management is the process of determining the right mix of operating activities for the type of organization, its plans, and its markets. True False 42. Planning activities are the means an organization uses to pay for resources like land, buildings, and equipment to carry out its plans. True False 43. Investing activities are the acquiring and disposing of resources that an organization uses to acquire and sell its products or services. True False 44. Owner financing refers to resources contributed by creditors or lenders. True False 45. Revenues are increases in equity from a company's earning activities. True False 46. A net loss occurs when revenues exceed expenses. True False 47. Net income occurs when revenues exceed expenses. True False 48. Liabilities are the owner's claim on assets. True False 49. Assets are the resources of a company and are expected to yield future benefits. True False 50. Owner's withdrawals are expenses. True False 51. The accounting equation can be restated as: Assets - Equity = Liabilities. True False 52. The accounting equation implies that: Assets + Liabilities = Equity. True False 53. Owner's investments are increases in equity from a company's earnings activities. True False 54. Every business transaction leaves the accounting equation in balance. True False 55. An external transaction is an exchange of value within an organization. True False 56. From an accounting perspective, an event is a happening that affects the accounting equation, but cannot be measured. True False 57. Owner's equity is increased when cash is received from customers in payment of previously recorded accounts receivable. True False 58. An owner's investment in a business always creates an asset (cash), a liability (note payable), and owner's equity (investment.) True False 59. Return on assets is often stated in ratio form as the amount of average total assets divided by income. True False 60. Return on assets is also known as return on investment. True False 61. Return on assets is useful to decision makers for evaluating management, analyzing and forecasting profits, and in planning activities. True False 62. Arrow's net income of $117 million and average assets of $1,400 million results in a return on assets of 8.36%. True False 63. Return on assets reflects the effectiveness of a company's ability to generate profit through productive use of its assets. True False 64. Risk is the uncertainty about the return we expect to earn. True False 65. Generally the lower the risk, the lower the return that can be expected. True False 66. U. S. Government Treasury bonds provide high return and low risk to investors. True False 67. The four basic financial statements include the balance sheet, income statement, statement of owner's equity, and statement of cash flows. True False 68. An income statement reports on investing and financing activities. True False 69. A balance sheet covers a period of time such as a month or year. True False 70. The income statement displays revenues earned and expenses incurred over a specified period of time due to earnings activities. True False 71. The statement of cash flows shows the net effect of revenues and expenses for a reporting period. True False 72. The income statement shows the financial position of a business on a specific date. True False 73. The first section of the income statement reports cash flows from operating activities. True False 74. The balance sheet is based on the accounting equation. True False 75. Investing activities involve the buying and selling of assets such as land and equipment that are held for long-term use in the business. True False 76. Operating activities include long-term borrowing and repaying cash from lenders, and cash investments or withdrawals by the owner. True False 77. The purchase of supplies appears on the statement of cash flows as an investing activity because it involves the purchase of assets. True False 78. The income statement reports on operating activities at a point in time. True False 79. The statement of cash flows identifies cash flows separated into operating, investing, and financing activities over a period of time. True False 80. Ending capital reported on the statement of owner's equity is calculated by adding owner investments and net losses and subtracting net incomes and withdrawals. True False Multiple Choice Questions 81. Accounting is an information and measurement system that does all of the following except: A. Identifies business activities. B. Records business activities. C. Communicates business activities. D. Does not use technology to improve accuracy in reporting. E. Helps people make better decisions. 82. Technology A. Has replaced accounting. B. Has not changed the work that accountants do. C. Has closely linked accounting with consulting, planning, and other financial services. D. In accounting has replaced the need for decision makers. E. In accounting is only available to large corporations. 83. The primary objective of financial accounting is: A. To serve the decision-making needs of internal users. B. To provide financial statements to help external users analyze an organization's activities. C. To monitor and control company activities. D. To provide information on both the costs and benefits of looking after products and services. E. To know what, when, and how much to produce. 84. The area of accounting aimed at serving the decision making needs of internal users is: A. Financial accounting. B. Managerial accounting. C. External auditing. D. SEC reporting. E. Bookkeeping. 85. External users of accounting information include all of the following except: A. Shareholders. B. Customers. C. Purchasing managers. D. Government regulators. E. Creditors. 86. All of the following regarding a Certified Public Accountant are True except: A. Must meet education and experience requirements. B. Must pass an examination. C. Must exhibit ethical character. D. May also be a Certified Management Accountant. E. Cannot hold any certificate other than a CPA. 87. Ethical behavior requires: A. That auditors' pay not depend on the success of the client's business. B. Auditors to invest in businesses they audit. C. Analysts to report information favorable to their companies. D. Managers to use accounting information to benefit themselves. E. That auditors' pay depend on the success of the client's business. 88. Social responsibility: A. Is a concern for the impact of our actions on society. B. Is a code that helps in dealing with confidential information. C. Is required by the SEC. D. Requires that all businesses conduct social audits. E. Is limited to large companies. 89. All of the following are True regarding ethics except: A. Ethics are beliefs that separate right from wrong. B. Ethics rules are often set for CPAs. C. Ethics do not affect the operations or outcome of a company. D. Are critical in accounting. E. Ethics can be hard to apply. 90. The accounting concept that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is: A. Business entity assumption. B. Monetary unit assumption. C. Going-concern assumption. D. Time-period assumption. E. Objectivity. 91. A corporation: A. Is a business legally separate from its owners. B. Is controlled by the FASB. C. Has shareholders who have unlimited liability for the acts of the corporation. D. Is the same as a limited liability partnership. E. Is not subject to double taxation. 92. The group that attempts to create more harmony among the accounting practices of different countries is the: A. AICPA. B. IASB. C. CAP. D. SEC. E. FASB. 93. The private group that currently has the authority to establish generally accepted accounting principles in the United States is the: A. APB. B. FASB. C. AAA. D. AICPA. E. SEC. 94. The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the: A. Time-period assumption. B. Business entity assumption. C. Going-concern assumption. D. Revenue recognition principle. E. Cost principle. 95. The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue, is the: A. Going-concern assumption. B. Business entity assumption. C. Objectivity principle. D. Cost Principle. E. Monetary unit assumption. 96. If a parcel of land that was originally acquired for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000, the land should be recorded in the purchaser's books at: A. $95,000. B. $137,000. C. $138,500. D. $140,000. E. $150,000. 97. To include the personal assets and transactions of a business's owner in the records and reports of the business would be in conflict with the: A. Objectivity principle. B. Monetary unit assumption. C. Business entity assumption. D. Going-concern assumption. E. Revenue recognition principle. 98. The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange, is the: A. Accounting equation. B. Cost principle. C. Going-concern assumption. D. Realization principle. E. Business entity assumption. 99. The rule that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash, and (3) measures the amount of revenue as the cash plus the cash equivalent value of any noncash assets received from customers in exchange for goods or services, is called the: A. Going-concern assumption. B. Cost principle. C. Revenue recognition principle. D. Objectivity principle. E. Business entity assumption. 100. The question of when revenue should be recognized on the income statement (according to GAAP) is addressed by the: A. Revenue recognition principle. B. Going-concern assumption. C. Objectivity principle. D. Business entity assumption. E. Cost principle. 101. The International Accounting Standards Board (IASB) A. Hopes to create harmony among accounting practices of different countries. B. Is the government group that establishes reporting requirements for companies that issue stock to the public. C. Has the authority to impose its standards on companies. D. Is the only source of generally accepted accounting principles (GAAP). E. Only applies to companies that are members of the European Union. 102. The Maxim Company acquired a building for $500,000. Maxim had the building appraised, and found that the building was easily worth $575,000. The seller had paid $300,000 for the building 6 years ago. Which accounting principle would require Maxim to record the building on its records at $500,000? A. Monetary unit assumption. B. Going-concern assumption. C. Cost principle. D. Business entity assumption. E. Revenue recognition principle. 103. On December 15 of the current year, Myers Legal Services signed a $50,000 contract with a client to provide legal services to the client in the following year. Which accounting principle would require Myers Legal Services to record the legal fees revenue in the following year and not the year the cash was received? A. Monetary unit assumption. B. Going-concern assumption. C. Cost principle. D. Business entity assumption. E. Revenue recognition principle. 104. Marian Mosely is the owner of Mosely Accounting Services. Which accounting principle requires Marian to keep her personal financial information separate from the financial information of Mosely Accounting Services? A. Monetary unit assumption. B. Going-concern assumption. C. Cost principle. D. Business entity assumption. E. Matching principle. 105. A limited partnership: A. Includes a general partner with unlimited liability. B. Is subject to double taxation. C. Has owners called stockholders. D. Is the same as a corporation. E. May only have two partners. 106. A partnership: A. Is also called a sole proprietorship. B. Has unlimited liability for its partners. C. Has to have a written agreement in order to be legal. D. Is a legal organization separate from its owners. E. Has owners called shareholders. 107. Which of the following accounting principles would require that all goods and services purchased be recorded at cost? A. Going-concern assumption. B. Matching principle. C. Cost principle. D. Business entity assumption. E. Consideration assumption. 108. Which of the following accounting principles prescribes that a company record its expenses incurred to generate the revenue reported? A. Going-concern assumption. B. Matching principle. C. Cost principle. D. Business entity assumption. E. Consideration assumption. 109. Revenue is properly recognized: A. When the customer's order is received. B. Only if the transaction creates an account receivable. C. At the end of the accounting period. D. Upon completion of the sale or when services have been performed and the business obtains the right to collect the sales price. E. When cash from a sale is received. 110. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000, the land account transaction amount to handle the sale of the land in the seller's books is: A. $85,000 increase. B. $85,000 decrease. C. $137,000 increase. D. $137,000 decrease. E. $140,000 decrease. 111. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000. What is the effect of the sale on the accounting equation for the seller? A. Assets increase $52,000; owner's equity increases $52,000. B. Assets increase $85,000; owner's equity increases $85,000. C. Assets increase $137,000; owner's equity increases $137,000. D. Assets increase $140,000; owner's equity increases $140,000. E. Assets decrease $85,000; owner's equity decreases $85,000. 112. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000. At the time of the sale, assume that the seller still owed $30,000 to TrustOne Bank on the land that was purchased for $85,000. Immediately after the sale, the seller paid off the loan to TrustOne Bank. What is the effect of the sale and the payoff of the loan on the accounting equation? A. Assets increase $52,000; owner's equity increases $22,000; liabilities decrease $30,000 B. Assets increase $52,000; owner's equity increases $30,000; liabilities decrease $30,000 C. Assets increase $22,000; owner's equity increases $52,000; liabilities decrease $30,000 D. Assets decrease $30,000; owner's equity decreases $30,000; liabilities decrease $30,000 E. Assets decrease $55,000; owner's equity decreases $55,000; liabilities decrease $30,000 113. An example of a financing activity is: A. Buying office supplies. B. Obtaining a long-term loan. C. Buying office equipment. D. Selling inventory. E. Buying land. 114. An example of an operating activity is: A. Paying wages. B. Purchasing office equipment. C. Borrowing money from a bank. D. Selling stock. E. Paying off a loan. 115. Operating activities: A. Are the means organizations use to pay for resources like land, buildings and equipment. B. Involve using resources to research, develop, purchase, produce, distribute and market products and services. C. Involve acquiring and disposing of resources that a business uses to acquire and sell its products or services. D. Are also called asset management. E. Are also called strategic management. 116. An example of an investing activity is: A. Paying wages of employees. B. Withdrawals by the owner. C. Purchase of land. D. Selling inventory. E. Contribution from owner. 117. Net Income: A. Decreases equity. B. Represents the amount of assets owners put into a business. C. Equals assets minus liabilities. D. Is the excess of revenues over expenses. E. Represents owners' claims against assets. 118. If equity is $300,000 and liabilities are $192,000, then assets equal: A. $108,000. B. $192,000. C. $300,000. D. $492,000. E. $792,000. 119. Resources that are expected to yield future benefits are: A. Assets. B. Revenues. C. Liabilities. D. Owner's Equity. E. Expenses. 120. Increases in equity from a company's earnings activities are: A. Assets. B. Revenues. C. Liabilities. D. Owner's Equity. E. Expenses. 121. The difference between a company's assets and its liabilities, or net assets is: A. Net income. B. Expense. C. Equity. D. Revenue. E. Net loss. 122. Creditors' claims on the assets of a company are called: A. Net losses. B. Expenses. C. Revenues. D. Equity. E. Liabilities. 123. Decreases in equity that represent costs of assets or services used to earn revenues are called: A. Liabilities. B. Equity. C. Withdrawals. D. Expenses. E. Owner's Investment. 124. The description of the relation between a company's assets, liabilities, and equity, which is expressed as Assets = Liabilities + Equity, is known as the: A. Income statement equation. B. Accounting equation. C. Business equation. D. Return on equity ratio. E. Net income. 125. Revenues are: A. The same as net income. B. The excess of expenses over assets. C. Resources owned or controlled by a company. D. The increase in equity from a company's earning activities. E. The costs of assets or services used. 126. If assets are $99,000 and liabilities are $32,000, then equity equals: A. $32,000. B. $67,000. C. $99,000. D. $131,000. E. $198,000. 127. Another name for equity is: A. Net income. B. Expenses. C. Net assets. D. Revenue. E. Net loss. 128. The excess of expenses over revenues for a period is: A. Net assets. B. Equity. C. Net loss. D. Net income. E. A liability. 129. A payment to an owner is called a(n): A. Liability. B. Withdrawal. C. Expense. D. Contribution. E. Investment. 130. Distributions of assets by a business to its owners are called: A. Withdrawals. B. Expenses. C. Assets. D. Retained earnings. E. Net Income. 131. The assets of a company total $700,000; the liabilities, $200,000. What are the claims of the owners? A. $900,000. B. $700,000. C. $500,000. D. $200,000. E. It is impossible to determine unless the amount of this owners' investment is known. 132. On June 30 of the current year, the assets and liabilities of Phoenix, Inc. are as follows: Cash $20,500; Accounts Receivable, $7,250; Supplies, $650; Equipment, $12,000; Accounts Payable, $9,300. What is the amount of owner's equity as of July 1 of the current year? A. $8,300 B. $13,050 C. $20,500 D. $31,100 E. $40,400 133. Assets created by selling goods and services on credit are: A. Accounts payable. B. Accounts receivable. C. Liabilities. D. Expenses. E. Equity. 134. An exchange of value between two entities is called: A. The accounting equation. B. Recordkeeping or bookkeeping. C. An external transaction. D. An asset. E. Net Income. 135. Photometer Company paid off $30,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation? A. Assets, $30,000 increase; liabilities, no effect; equity, $30,000 increase. B. Assets, $30,000 decrease; liabilities, $30,000 decrease; equity, no effect. C. Assets, $30,000 decrease; liabilities, $30,000 increase; equity, no effect. D. Assets, no effect; liabilities, $30,000 decrease; equity, $30,000 increase. E. Assets, $30,000 decrease; liabilities, no effect; equity $30,000 decrease. 136. How would the accounting equation of Boston Company be affected by the billing of a client for $10,000 of consulting work completed? A. +$10,000 accounts receivable, -$10,000 accounts payable. B. +$10,000 accounts receivable, +$10,000 accounts payable. C. +$10,000 accounts receivable, +$10,000 cash. D. +$10,000 accounts receivable, +$10,000 revenue. E. +$10,000 accounts receivable, -$10,000 revenue. 137. Zion Company has assets of $600,000, liabilities of $250,000, and equity of $350,000. It buys office equipment on credit for $75,000. What would be the effects of this transaction on the accounting equation? A. Assets increase by $75,000 and expenses increase by $75,000. B. Assets increase by $75,000 and expenses decrease by $75,000. C. Liabilities increase by $75,000 and expenses decrease by $75,000. D. Assets decrease by $75,000 and expenses decrease by $75,000. E. Assets increase by $75,000 and liabilities increase by $75,000. 138. Viscount Company collected $42,000 cash on its accounts receivable. The effects of this transaction as reflected in the accounting equation are: A. Total assets decrease and equity increases. B. Both total assets and total liabilities decrease. C. Total assets, total liabilities, and equity are unchanged. D. Both total assets and equity are unchanged and liabilities increase. E. Total assets increase and equity decreases. 139. If the liabilities of a business increased $75,000 during a period of time and the owner's equity in the business decreased $30,000 during the same period, the assets of the business must have: A. Decreased $105,000. B. Decreased $45,000. C. Increased $30,000. D. Increased $45,000. E. Increased $105,000. 140. If the assets of a business increased $89,000 during a period of time and its liabilities increased $67,000 during the same period, equity in the business must have: A. Increased $22,000. B. Decreased $22,000. C. Increased $89,000. D. Decreased $156,000. E. Increased $156,000. 141. If the liabilities of a company increased $74,000 during a period of time and equity in the company decreased $19,000 during the same period, what was the effect on the assets? A. Assets would have increased $55,000. B. Assets would have decreased $55,000. C. Assets would have increased $19,000. D. Assets would have decreased $19,000. E. None of these. 142. If a company paid $38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity? A. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would decrease $38,000. B. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would increase $38,000. C. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would not change. D. There would be no effect on the accounts because the accounts are affected by the same amount. E. None of these. 143. If assets are $365,000 and equity is $120,000, then liabilities are: A. $120,000. B. $245,000. C. $365,000. D. $485,000. E. $610,000. 144. Reston had income of $150 million and average invested assets of $1,800 million. Its return on assets is: A. 8.3%. B. 83.3%. C. 12%. D. 120%. E. 16.7%. 145. Nick's had income of $350 million and average invested assets of $2,000 million. Its ROA is: A. 1.8%. B. 35%. C. 17.5%. D. 5.7%. E. 3.5%. 146. FastLane has net income of $18,955, and assets at the beginning of the year of $200,000. Assets at the end of the year total $246,000. Compute its return on assets. A. 7.7%. B. 8.5%. C. 9.5%. D. 11.8%. E. 13.0%. 147. Harris Co. has a net income of $43,000, assets at the beginning of the year are $250,000 and assets at the end of the year are $300,000. Compute its return on assets. A. 8.4% B. 17.2% C. 14.3% D. 15.6% E. 1.5% 148. U. S. government bonds are: A. High-risk and high-return investments. B. Low-risk and low-return investments. C. High-risk and low-return investments. D. Low-risk and high-return investments. E. High risk and no-return investments. 149. Risk is: A. Net income divided by average total assets. B. The reward for investment. C. The uncertainty about the expected return to be earned. D. Unrelated to expected return. E. Derived from the idea of getting something back from an investment. 150. The statement of cash flows reports all of the following except: A. Cash flows from operating activities. B. Cash flows from investing activities. C. Cash flows from financing activities. D. The net increase or decrease in assets for the period reported. E. The net increase or decrease in cash for the period reported. 151. The basic financial statements include all of the following except: A. Balance Sheet. B. Income Statement. C. Statement of Owner's Equity. D. Statement of Cash Flows. E. Trial Balance. 152. The statement of owner's equity: A. Reports how equity changes at a point in time. B. Reports how equity changes over a period of time. C. Reports on cash flows for operating, financing, and investing activities over a period of time. D. Reports on cash flows for operating, financing, and investing activities at a point in time. E. Reports on amounts for assets, liabilities, and equity at a point in time. 153. The financial statement that reports whether the business earned a profit and also lists the revenues and expenses is called: A. A Balance sheet. B. A Statement of owner's equity. C. A Statement of cash flows. D. An Income statement. E. A Statement of financial position. 154. A balance sheet lists: A. The types and amounts of the revenues and expenses of a business. B. Only the information about what happened to equity during a time period. C. The types and amounts of assets, liabilities, and equity of a business as of a specific date. D. The inflows and outflows of cash during the period. E. The assets and liabilities of a company but not the owner's equity. 155. A financial statement providing information that helps users understand a company's financial status, and which lists the types and amounts of assets, liabilities, and equity as of a specific date, is called a(n): A. Balance sheet. B. Income statement. C. Statement of cash flows. D. Statement of owner's equity. E. Financial Status Statement. 156. The financial statement that identifies where a company's cash came from and where it went during the period is the: A. Statement of financial position. B. Statement of cash flows. C. Balance sheet. D. Income statement. E. Statement of changes in owner's equity. 157. The financial statement that shows the beginning balance of owner's equity; the changes in equity that resulted from new investments by the owner, net income (or net loss); withdrawals; and the ending balance, is the: A. Statement of financial position. B. Statement of cash flows. C. Balance sheet. D. Income statement. E. Statement of owner's equity. 158. Cash investments by owners are listed on which of the following statements? A. Balance sheet. B. Income statement. C. Statement of owner's equity only. D. Statement of cash flows only. E. Statement of owner's equity and statement of cash flows. 159. Accounts payable appear on which of the following statements? A. Balance sheet. B. Income statement. C. Statement of owner's equity. D. Statement of cash flows. E. Transaction statement. 160. The income statement reports all of the following except: A. Revenues earned by a business. B. Expenses incurred by a business. C. Assets owned by a business. D. Net income or loss earned by a business. E. The time period over which the earnings occurred. 161. Use the following information as of December 31 to determine equity. A. $57,000. B. $141,000. C. $297,000. D. $438,000. E. $579,000. 162. Determine the net income of a company for which the following information is available for the month of May. A. $190,000. B. $210,000. C. $230,000. D. $400,000. E. $610,000. 163. A company acquires equipment for $75,000 cash. This represents a(n) A. Operating activity. B. Investing activity. C. Financing activity. D. Revenue activity. E. Expense activity. 164. A company borrows $125,000 from the Eastside Bank and receives the loan proceeds in cash. This represents a(n): A. Revenue activity. B. Operating activity. C. Expense activity. D. Investing activity. E. Financing activity. 165. Flash had cash inflows from operations $62,500; cash outflows from investing activities of $47,000; and cash inflows from financing of $25,000. The net change in cash was: A. $40,500 increase. B. $40,500 decrease. C. $134,500 decrease. D. $134,000 increase. E. $9,500 increase. 166. Flash has beginning equity of $257,000, net income of $51,000, withdrawals of $40,000 and investments by owners of $6,000. Its ending equity is: A. $223,000. B. $240,000. C. $268,000. D. $274,000. E. $208,000. 167. Rent expense that is paid with cash appears on which of the following statements? A. Balance sheet. B. Income statement. C. Statement of owner's equity. D. Income statement and statement of cash flows. E. Statement of cash flows only. 168. A company's balance sheet shows: cash $22,000, accounts receivable $16,000, office equipment $50,000, and accounts payable $17,000. What is the amount of owner's equity? A. $17,000. B. $29,000. C. $71,000. D. $88,000. E. $105,000. 169. A company reported total equity of $145,000 at the beginning of the year. The company reported $210,000 in revenues and $165,000 in expenses for the year. Liabilities at the end of the year totaled $92,000. What are the total assets of the company at the end of the year? A. $45,000. B. $92,000. C. $98,000. D. $210,000. E. $282,000. 170. Flash reported net income of $17,500 for the past year. At the beginning of the year the company had $200,000 in assets and $50,000 in liabilities. By the end of the year, assets had increased to $300,000 and liabilities were $75,000. Calculate its return on assets: A. 8.8% B. 7.0% C. 5.8% D. 35.0% E. 23.3% 171. Quick Computer Service had revenues of $80,000 and expenses of $50,000 for the year. Its assets at the beginning of the year were $400,000. At the end of the year assets were worth $450,000. Calculate its return on assets. A. 7.1% B. 7.5% C. 6.7% D. 20.0% E. 18.8% 172. Della's Donuts had cash inflows from operating activities of $27,000; cash outflows from investing activities of $22,000, and cash outflows from financing activities of $12,000. Calculate the net increase or decrease in cash. A. $61,000 increase. B. $37,000 increase. C. $7,000 decrease. D. $7,000 increase. E. $34,000 decrease. 173. Della's Donuts owner made investments of $50,000 and withdrawals of $20,000. The company has revenues of $83,000 and expenses of $64,000. Calculate its net income. A. $30,000. B. $83,000. C. $64,000. D. $19,000. E. $49,000. 174. Cool Tours had beginning equity of $72,000; revenues of $90,000, expenses of $65,000, and withdrawals by owners of $9,000. Calculate the ending equity. A. $88,000. B. $25,000. C. $97,000. D. $38,000. E. $47,000. 175. A company's balance sheet shows: cash $24,000, accounts receivable $30,000, equipment $50,000, and equity $72,000. What is the amount of liabilities? A. $104,000. B. $76,000. C. $32,000. D. $68,000. E. $176,000. Matching Questions 176. Match the following terms with the appropriate definition. 1. Recordkeeping An information and measurement system that identifies, records and communicates relevant reliable and comparable information about an organization's business activities. ____ 2. Internal users The part of accounting that involves recording transactions and events, either electronically or manually. ____ 3. Ethics Persons using accounting information who are not directly involved in the running of the organization. ____ 4. Accounting Persons using accounting information who are directly involved in managing the organization. ____ 5. Operating activities The use of resources to research, develop, purchase, produce, distribute, and market products and services. ____ 6. External users The acquisition and disposing of resources that an organization uses to acquire and sell products and services. ____ 7. Financing activities Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. ____ 8. Social responsibility Beliefs that distinguish right from wrong. ____ 9. Investing activities Concern for the impact of actions on society. ____ 177. Match each of the following terms with the most appropriate definition. 1. Expenses The uncertainty about the expected return to be earned. ____ 2. Financial accounting Area of accounting aimed at serving the decision making needs of internal users. ____ 3. Planning A financial ratio useful in evaluating management, analyzing and forecasting profits, and planning activities. ____ 4. Risk Creditor's claims on a company's assets. ____ 5. Managerial accounting Costs of assets or services used to earn revenues. ____ 6. Net income Defining the idea, goals, and actions of an organization. ____ 7. Return on assets Area of accounting aimed at serving external users. ____ 8. Liabilities The excess of revenue over expenses. ____ 178. The following is a list of selected users of accounting information. Match the appropriate user to the following information needs. 1. Production Managers Monitor costs and ensure quality. ____ 2. Lenders Judge the soundness of a customer before making sales on credit. ____ 3. Shareholders Assessing employment opportunities. ____ 4. Employees Measuring risk and return of loans. ____ 5. Suppliers Assessing the risk and return of acquiring shares. ____ 179. Match the following definitions with terms 1 through 8. Place the letter that identifies the best definition in the blank space next to the term. 1. Assets an owner takes from the company for personal use Assets ____ 2. A principle that requires the information in financial statements to be supported by independent unbiased evidence Going-concern principle ____ 3. A principle that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold. Statement of owner's equity. ____ 4. The accounting principle that requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange Net assets ____ 5. A financial statement that reports the changes in equity over the reporting period; including increases such as owner investment and net income and for decreases such as owner withdrawals or net loss Objectivity principle ____ 6. Resources owned or controlled by a company that are expected to yield future benefits Cost principle ____ 7. Another term for equity Owner withdrawal ____ 8. Gross increase in equity from a company's earnings activities Revenues ____ 180. Match the following definitions with the terms 1 through 9. Place the letter that identifies the best definition in the blank space next to the term. 1. The cost of assets or services used to earn revenue Statement of cash flows ____ 2. An exchange of value between two parties Business transaction ____ 3. A financial statement that lists cash inflows (receipts) and cash outflows (payments); the cash flows are arranged by operating, investing, and financing activities Monetary unit principle ____ 4. Creditor's claims on assets Business entity principle ____ 5. A financial statement that reports the changes in equity over the reporting period; adjusted for increases such as owner investment and net income and for decreases such as owner withdrawals or net loss Revenue recognition principle ____ 6. The principle that requires a business to be accounted for separately from its owners Accounting equation ____ 7. The relation between a company's assets, liabilities, and equity Statement of owner's equity ____ 8. The principle that assumes transactions and events can be expressed in money units Expenses ____ 9. The principle that revenue is recognized when earned Liabilities ____ 181. Identify each of the following business activities 1 through 6 into the appropriate category a, b, and c. 1. Operating Paid utilities expenses. ____ 2. Financing Withdrawal of funds by owners. ____ 3. Investing Purchase of land. ____ 4. Investing Sale of used equipment. ____ 5. Operating Borrowed money from a bank on a long-term note. ____ 6. Financing Paid employee wages. ____ 182. Match each of the following items 1 through 8 with the financial statement a through d in which each item would most likely appear. An item may appear on more than one statement. 1. Statement of owner's equity Assets. ____ 2. Income statement Withdrawals. ____ 3. Statement of cash flows Revenues. ____ 4. Balance sheet Cash from investing activities. ____ 5. Income statement Expenses. ____ 6. Balance sheet Liabilities. ____ 7. Statement of cash flows Cash from operating activities. ____ 8. Statement of owner's equity and Balance sheet Equity. ____ 183. Select the appropriate financial statement for each of the following accounts. (Note: Some items may appear on more than one financial statement.) 1. Income statement Cash ____ 2. Income statement Cash Withdrawals ____ 3. Balance sheet Notes payable ____ 4. Balance sheet Fees earned ____ 5. Income statement Jay Miller, Capital ____ 6. Statement of owner's equity, Balance sheet Accounts receivable ____ 7. Statement of owner's equity, Statement of cash flows Rent Expense ____ 8. Balance sheet, Statement of cash flows Supplies Expense ____ 184. Select the appropriate financial statement for each of the following items. (Note: some items may appear on more than one financial statement.) 1. Balance sheet Supplies ____ 2. Statement of cash flows Cash withdrawals by owner. ____ 3. Statement of owner's equity, Balance sheet Ahmad Khan, Capital ____ 4. Statement of owner's equity, Statement of cash flows Advertising Expense ____ 5. Statement of owner's equity, Statement of cash flows Cash payments to purchase equipment ____ 6. Statement of cash flows Cash investments by owner ____ 7. Income statement Consulting Revenue ____ 8. Income statement Cash proceeds from a long-term loan ____ 185. Classify the following activities according to the appropriate section of the statement of cash flows. 1. Investing activity Cash received from a one-time sale of used office equipment. ____ 2. Financing activity Cash paid for withdrawals by owners. ____ 3. Financing activity Cash received from customers. ____ 4. Investing activity Cash received from owner contributions. ____ 5. Operating activity Cash paid for utilities. ____ 6. Operating activity Cash paid for a delivery van to be used in the business. ____ Short Answer Questions 186. Explain the role of accounting in the information age. 187. What is the balance sheet? What is its purpose? 188. Identify the users and uses of accounting information. 189. Identify several opportunities in accounting and its related fields. 190. Explain why ethics are an integral part of accounting. 191. Describe the three important guidelines for revenue recognition. 192. Identify the three basic forms of business organizations. 193. How does the objectivity principle support ethical behavior? 194. Identify the two main groups involved in establishing generally accepted accounting principles. 195. How does the going-concern principle affect reporting asset values of a business? 196. Describe the relation between revenues, expenses, and net income. 197. Explain the accounting equation, and define its terms. 198. What distinguishes liabilities from equity? 199. What is the purpose of return on assets as an analytical tool? 200. Discuss the relation between risk and return. 201. Describe the three types of activities reported on the statement of cash flows. 202. Identify and describe the four basic financial statements: Essay Questions 203. The characteristics below apply to at least one of the forms of business organization. a. Is a separate legal entity. b. Is allowed to be owned by one person only. c. Owner or owners are personally liable for debts of the business. d. Is a taxable entity. e. Is a business entity. f. May have a contract specifying the division of profits among the owners. g. Has an unlimited life Use the following format to indicate (with a "yes" or "no") whether or not a characteristic applies to each type of business organization. 204. A parcel of land is offered for sale at $600,000, is assessed for tax purposes at $500,000, is recognized by its purchasers as easily being worth $575,000, and is sold for $570,000. At what amount should the land be recorded in the purchaser's books? What accounting principle supports your answer? 205. You are reviewing the accounting records of Cathy's Antiques, owned by Cathy Miller. You have uncovered the following situations. Compose a memo to Ms. Miller. Cite the appropriate accounting principle and suggest an action for each separate item. 1. In August, a check for $500 was written to Wee Day Care Center. This amount represents child care for her son Brandon. 2. Cathy plans a Going Out of Business Sale for May, since she will be closing her business for a month-long vacation in June. She plans to reopen July 1 and will continue operating Cathy's Antiques indefinitely. 3. Cathy received a shipment of pine furniture from Quebec, Canada. The invoice was stated in Canadian dollars. 4. Joseph Clark paid $1,500 for a dining table. The amount was recorded as revenue. The table will be delivered to Mr. Clark in six weeks. 206. At the beginning of the year, a company had $120,000 worth of liabilities. During the year, assets increased by $160,000 and at year-end they equaled $360,000. Liabilities decreased $20,000 during the year. Calculate the beginning and ending values of equity. 207. The accounts of Garfield Company with the increases or decreases that occurred during the past year are as follows: Except for net income, an investment of $3,000 by the owner, and a withdrawal of $11,000 by the owner, no other items affected the owner's capital account. Using the balance sheet equation, compute net income for the past year. 208. Annie's Attic has the following account balances for the dates given: Also, its net income, for September 1 through September 30 was $20,000 and there were no investments or withdrawals by the owner. Determine the equity at both September 1 and September 30. 209. If the liabilities of a company increased $92,000 during a period of time and equity in the business decreased $30,000 during the same period, did the assets of the company increase or decrease? By what amount? 210. Hal Burton began a Web Consulting practice and completed these transactions during September of the current year: Show the effects of the above transactions on the accounting equation of Halley Burton, Consultant. Use the following format for your answers. The first item is shown as an example. Increase = I Decrease = D No effect = N 211. For each of the following transactions, identify the effects as reflected in the accounting equation. Use "+" to indicate an increase and "-" to indicate a decrease. Use "A", "L", and "E" to indicate assets, liabilities, and equity, respectively. Part A has been completed as an example. 212. The following schedule reflects shows the first month's transactions of the Bill Blue Real Estate Company: Provide descriptions for each transaction. 213. The accountant of Magic Video Games prepared a balance sheet immediately after each transaction was recorded. During September, the first month of operation, the following balance sheets were prepared: Required: Describe the nature of each of these five transactions for the month of September. 214. Identify the risk and the return in each of the following examples. a. Investing $500 in a CD at 4.5% interest. b. Placing a $100 bet on an NBA game. c. Investing $10,000 in Microsoft stock. d. Borrowing $20,000 in student loans. 215. Prepare a November 30 balance sheet in proper form for Green Bay Delivery Service from the following alphabetical list of the accounts at November 30: 216. Prepare a December 31 balance sheet in proper form for Surety Insurance using the following accounts and amounts: 217. From the information given below, prepare a November income statement, a November statement of owner's equity, and a November 30 balance sheet. On November 1 of the current year, Lois Bell began Lois Bell, Interior Design with an initial investment of $50,000 cash. On November 30 her records showed the following (alphabetically arranged) items and amounts. 218. Data for Madison Realty are as follows: The owner, Mary Madison, withdrew a total of $30,000 for personal use during the year. Using the above data, prepare Madison Realty's Statement of Owner's Equity for the year ended December 31. 219. FastForward has the following beginning cash balance and cash transactions for the month of January. Using this information prepare a statement of cash flows. 220. The records of Skymaster Airplane Rentals show the following information as of December 31. Skymaster withdrew $52,000 during the year for personal expenses. Prepare a December income statement, a December statement of owner's equity, and a December 30 balance sheet. 221. Graham Roofing Company, owned by R. Graham, began operations in May and completed the following transactions during that first month of operations. Show the effects of the transactions on the accounts of the accounting equation by recording increases and decreases in the appropriate columns in the table below. Do not determine new account balances after each transaction. Determine the final total for each account and verify that the equation is in balance. Fill in the Blank Questions 222. Accounting is an ______________________ that identifies, records and communicates relevant, reliable and comparable information about an organization's economic activities. ________________________________________ 223. A ____________________ is a business that is owned by only one person. ________________________________________ 224. ______________ users of accounting information are not directly involved in running the organization. ________________________________________ 225. ______________ is the area of accounting aimed at serving external users. ________________________________________ 226. Congress passed the ______________________ to help curb financial abuses at companies that issue their stock to the public. ________________________________________ 227. _________ are beliefs that separate right from wrong. ________________________________________ 228. The assumption that requires that a business be accounted for separately from its owners is the __________________ assumption. ________________________________________ 229. The _______________ assumption requires that financial information is supported by independent, unbiased evidence. ________________________________________ 230. The ______________ assumption assumes business will continue operating indefinitely instead of being closed or sold. ________________________________________ 231. The ________________ assumption states that transactions and events are expressed in money units. ________________________________________ 232. In accounting, the rule that requires that assets, services, and liabilities be recorded initially at the cash or cash-equivalent value of what was given up or of the item received is called _____________________________. ________________________________________ 233. A disadvantage of a sole proprietorship is the fact that the owner has __________________. ________________________________________ 234. There are at least three types of partnerships that limit the partners' liability. They are 1) _______________________, 2) __________________, and 3) ______________________. ________________________________________ 235. ________________ activities are the means organizations use to pay for resources such as land, building, and equipment. ________________________________________ 236. ________________ activities involve the acquisition and disposal of resources that an organization uses to acquire and sell its products or services. ________________________________________ 237. ______________ activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. ________________________________________ 238. Assets removed from the business by the business owner for personal use are called ___________. ________________________________________ 239. ____________ are the increases in equity from a company's earnings activities ________________________________________ 240. A common characteristic of __________ is their ability to provide expected future benefits to a business. ________________________________________ 241. Creditors claims on assets that reflect obligations to transfer assets are called ____________. ________________________________________ 242. The owner's claim on assets is called _________________. ________________________________________ 243. The accounting equation is _____________________________. ________________________________________ 244. The term __________________ refers to a liability that promises a future outflow of resources. ________________________________________ 245. Using the accounting equation, equity is equal to _______________________. ________________________________________ 246. ______________________ is the recording of financial transactions and events, either manually or electronically. ________________________________________ 247. _________________ is net income divided by average total assets. ________________________________________ 248. Risk is the _________________ about the return an investor expects to earn. ________________________________________ 249. ________________________________ reports changes in the owner's claim on the business's assets over a period of time. ________________________________________ 250. The ____________________ describes a company's revenues and expenses over a period of time due to earnings activities. ________________________________________ Chapter 01 Accounting in Business Answer Key True / False Questions 1. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C1 Explain the purpose and importance of accounting. 2. Bookkeeping is the recording of transactions and events and is only part of accounting. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C1 Explain the purpose and importance of accounting. 3. An accounting information system communicates data to help businesses make better decisions. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C1 Explain the purpose and importance of accounting. 4. Managerial accounting is the area of accounting that provides internal reports to assist the decision making needs of internal users. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 5. Internal operating activities include research and development, distribution, and human resources. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 6. The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 7. External auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 8. External users include lenders, shareholders, customers, and regulators. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 9. Regulators often have legal authority over certain activities of organizations. TRUE AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 10. Internal users include lenders, shareholders, brokers and managers. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 11. Opportunities in accounting include auditing, consulting, market research, and tax planning. TRUE AACSB: Communications AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: C2 Identify users and uses of; and opportunities in; accounting. 12. Identifying the proper ethical path is easy. FALSE AACSB: Ethics AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: C3 Explain why ethics are crucial to accounting. 13. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether it has adopted a code of ethics for its senior financial officers and the contents of that code. TRUE AACSB: Ethics AICPA BB: Legal AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: C3 Explain why ethics are crucial to accounting. 14. Good ethics are good business. TRUE AACSB: Ethics AICPA BB: Resource Management AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C3 Explain why ethics are crucial to accounting. 15. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both accounting oversight and stringent internal controls. FALSE AACSB: Ethics AICPA BB: Legal AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: C4 Explain generally accepted accounting principles and define and apply several accounting principles. 16. A partnership is a business owned by two or more people. TRUE AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C4 Explain generally accepted accounting principles and define and apply several accounting principles. 17. Owners of a corporation are called shareholders or stockholders. TRUE AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: C4 Explain generally accepted accounting principles and define and apply several accounting principles. 18. In the partnership form of business, the owners are called stockholders. FALSE AACSB: Communications AICPA BB: Legal AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: C4 Explain generally accepted accounting principles and define and apply several accounting principles. 19. The balance sheet shows a company's net income or loss due to earnings activities over a period of time. FALSE AACSB: Communications AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: P2 Identify and prepare basic financial statements and explain how they interrelate. 20. The Financial Accounting Standards Board is the private group that sets both