, Chapter 1
Financial Accounting and Its Economic Context
MULTIPLE CHOICE QUESTIONS
1. A bank that loans money to a company is called
a. a supplier.
b. a creditor.
c. an equity investor.
d. a shareholder.
Ans: B LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
2. The auditors are charged with responsibility
a. to detect financial fraud committed by employees during the course of their audit
b. to conduct a thorough and independent audit
c. to correct all errors in the financial statements
d. for the accuracy and completeness of the financial statements
Ans: B LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
3. Which of the following best describes the two perspectives of the financial reporting
process that managers need to understand in investing decisions?
a. Economic consequences and user orientation.
b. Corporate governance and user orientation.
c. User orientation and debt covenants.
d. Economic consequences and corporate governance.
Ans: A LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
4. Considering and understanding how business decisions affect the financial statements is
a. the sole responsibility of the Securities and Exchange Commission.
b. provided in the auditor’s report.
c. referred to as an economic consequence perspective.
d. interpreted strictly by the company’s suppliers.
Ans: C LO 1,2,5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
1-1
,1-2 Test Bank – Chapter 1 – Financial Accounting and Its Economic Context
5. A statement that “the financial statements were prepared in accordance with generally
accepted accounting principles” is found in the
a. collateral.
b. stock market.
c. footnotes to the balance sheet.
d. auditor’s report.
Ans: D LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
6. A statement that financial statement information “is the responsibility of the company”
issuing the statements is found in the
a. footnotes to the financial statements.
b. loan contract.
c. management letter.
d. board of directors’ report.
Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
7. CPA is an abbreviation for
a. Certified Public Accountant.
b. Certified Production Accountant.
c. Consumer Protection Agency.
d. Certified Permissible Accounting.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
8. An explanation about the assumptions, estimates, and choices of alternative accounting
methods used in the financial statements is found in the
a. footnotes to the balance sheet.
b. auditor’s report.
c. statement of shareholders’ equity.
d. president’s letter to the shareholders.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
9. Which of the following best describes assets paid to owners of a company as a return for
their initial investment?
a. payables
b. compensation contracts
c. dividends
d. interest
Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
, Test Bank – Chapter 1 – Financial Accounting and Its Economic Context 1-3
10. All of the following would likely be part of a loan contract except:
a. maturity date
b. earning power
c. collateral
d. annual interest
Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
11. A Certified Public Accountant
a. reviews every transaction that a company conducts during any given year.
b. performs a company’s audit.
c. is one of the investors of a company.
d. is responsible for the preparation and integrity of a company’s financial statements.
Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
12. An internal control system
a. is maintained to ensure that transactions of a company are properly recorded and
reported and the assets are safeguarded.
b. is included in the set of footnotes to the financial statements.
c. is an estimate of the profits a company expects to earn in the future.
d. measures how much control management has over its staff.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
13. Footnotes to financial statements
a. more fully explain certain items in the financial statements.
b. reflect financial notes personalized by the company’s executive team.
c. show the detail of salaries of every employee.
d. justify fraudulent business practices.
Ans: A LO 2,3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
14. The balance sheet communicates
a. proof to the investor that the company is profitable.
b. assets, liabilities, and shareholders’ equity with all transactions reflected through the
year.
c. assets, liabilities, and shareholders’ equity as of a certain date.
d. operating, investing, and financing activities.
Ans: C LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
Financial Accounting and Its Economic Context
MULTIPLE CHOICE QUESTIONS
1. A bank that loans money to a company is called
a. a supplier.
b. a creditor.
c. an equity investor.
d. a shareholder.
Ans: B LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
2. The auditors are charged with responsibility
a. to detect financial fraud committed by employees during the course of their audit
b. to conduct a thorough and independent audit
c. to correct all errors in the financial statements
d. for the accuracy and completeness of the financial statements
Ans: B LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
3. Which of the following best describes the two perspectives of the financial reporting
process that managers need to understand in investing decisions?
a. Economic consequences and user orientation.
b. Corporate governance and user orientation.
c. User orientation and debt covenants.
d. Economic consequences and corporate governance.
Ans: A LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
4. Considering and understanding how business decisions affect the financial statements is
a. the sole responsibility of the Securities and Exchange Commission.
b. provided in the auditor’s report.
c. referred to as an economic consequence perspective.
d. interpreted strictly by the company’s suppliers.
Ans: C LO 1,2,5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
1-1
,1-2 Test Bank – Chapter 1 – Financial Accounting and Its Economic Context
5. A statement that “the financial statements were prepared in accordance with generally
accepted accounting principles” is found in the
a. collateral.
b. stock market.
c. footnotes to the balance sheet.
d. auditor’s report.
Ans: D LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
6. A statement that financial statement information “is the responsibility of the company”
issuing the statements is found in the
a. footnotes to the financial statements.
b. loan contract.
c. management letter.
d. board of directors’ report.
Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
7. CPA is an abbreviation for
a. Certified Public Accountant.
b. Certified Production Accountant.
c. Consumer Protection Agency.
d. Certified Permissible Accounting.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
8. An explanation about the assumptions, estimates, and choices of alternative accounting
methods used in the financial statements is found in the
a. footnotes to the balance sheet.
b. auditor’s report.
c. statement of shareholders’ equity.
d. president’s letter to the shareholders.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
9. Which of the following best describes assets paid to owners of a company as a return for
their initial investment?
a. payables
b. compensation contracts
c. dividends
d. interest
Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
, Test Bank – Chapter 1 – Financial Accounting and Its Economic Context 1-3
10. All of the following would likely be part of a loan contract except:
a. maturity date
b. earning power
c. collateral
d. annual interest
Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
11. A Certified Public Accountant
a. reviews every transaction that a company conducts during any given year.
b. performs a company’s audit.
c. is one of the investors of a company.
d. is responsible for the preparation and integrity of a company’s financial statements.
Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
12. An internal control system
a. is maintained to ensure that transactions of a company are properly recorded and
reported and the assets are safeguarded.
b. is included in the set of footnotes to the financial statements.
c. is an estimate of the profits a company expects to earn in the future.
d. measures how much control management has over its staff.
Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
13. Footnotes to financial statements
a. more fully explain certain items in the financial statements.
b. reflect financial notes personalized by the company’s executive team.
c. show the detail of salaries of every employee.
d. justify fraudulent business practices.
Ans: A LO 2,3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
14. The balance sheet communicates
a. proof to the investor that the company is profitable.
b. assets, liabilities, and shareholders’ equity with all transactions reflected through the
year.
c. assets, liabilities, and shareholders’ equity as of a certain date.
d. operating, investing, and financing activities.
Ans: C LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
