TEST BANK
INTRODUCTORY FINANCIAL ACCOUNTING FOR BUSINESS
2ND EDITION
CHAPTER 1: AN INTRODUCTION TO ACCOUNTING
TRUE/FALSE
1) In a market, creditors are resource providers.
⊚ true
⊚ false
ANS: TRUE
This is true. Resource providers include creditors and investors.
2) In a market, a company that manufactures cars would be referred to as a business.
⊚ true
⊚ false
ANS: TRUE
This is true. Businesses transform resources into goods and services, such as cars, that are desirable to
consumers.
3) The value created by a business is created by its assets.
⊚ true
⊚ false
ANS: FALSE
This is false. A business creates value by earning income, so earnings or income describe that value, not
assets.
4) The types of resources needed by a business are financial, physical, and labor resources.
⊚ true
⊚ false
ANS: TRUE
This is true. The types of resources needed by a business are financial, physical, and labor resources
5) Financial accounting information is usually less detailed than managerial accounting information.
⊚ true
⊚ false
ANS: TRUE
This is true. Financial accounting information is usually less detailed than managerial accounting
information.
6) The Financial Accounting Standards Board is a privately funded organization with authority for
establishing accounting standards for businesses in the US.
, ⊚ true
⊚ false
ANS: TRUE
This is true. The Financial Accounting Standards Board is charged with establishing accounting standards
for US businesses. It is not an agency of the US government, but rather a privately funded organization.
7) A business and the person who owns the business are separate reporting entities.
⊚ true
⊚ false
ANS: TRUE
This is true. A business must report its income, assets, liabilities and equity separate from the owner of
that business.
8) Land is an element of the financial statements.
⊚ true
⊚ false
ANS: FALSE
This is false. Land is an account within the element assets. The elements of the financial statements
include assets, liabilities, stockholders’ equity. Stockholders’ equity can be further broken down into two
additional elements: common stock, and retained earnings.
9) Liabilities are obligations of a business to relinquish assets, provide services, or accept other
obligations.
⊚ true
⊚ false
ANS: TRUE
This is true. Liabilities represent the future obligations of a business entity.
10) Liabilities are not a source of assets for a business.
⊚ true
⊚ false
ANS: FALSE
This is false. There are three sources of assets. First, a business can borrow assets from creditors. The
second source of assets is investors. The third source of assets is operations.
11) Retained earnings reduces a company's commitment to use its assets for the benefit of its
stockholders.
⊚ true
⊚ false
ANS: FALSE
This is false. If a business retains the assets, it commits to use those assets for the benefit of the
stockholders. This increase in the business’s commitments to its stockholders is normally called retained
earnings.
,12) The historical cost concept requires that most assets be recorded at the amount paid for them,
regardless of increases in market value.
⊚ true
⊚ false
ANS: TRUE
This is true. Once an asset is recorded, it is not adjusted for increases in market value.
13) An asset source transaction increases a business’s assets and the claims to assets.
⊚ true
⊚ false
ANS: TRUE
This is true. An asset source transaction increases a business's assets and either liabilities or equity, which
make up claims to assets.
14) Borrowing money from the bank is an example of an asset source transaction.
⊚ true
⊚ false
ANS: TRUE
This is true. Borrowing money from the bank is an example of an asset source transaction because the
asset cash increases as well as the liability notes payable.
15) An asset use transaction does not affect the total amount of claims to a company's assets.
⊚ true
⊚ false
ANS: FALSE
This is false. Because asset use transactions result in a decrease in total assets, total claims must decrease
as well.
16) The four financial statements prepared by a business bear no relationship to each other.
⊚ true
⊚ false
ANS: FALSE
This is false. All four financial statements are interconnected.
17) The dividends a business pays to its owners appear on the income statement.
⊚ true
⊚ false
ANS: FALSE
This is false. Dividends are not expenses. Therefore, they are not reported on the income statement.
Dividends are reported on the statement of changes in stockholders’ equity and the statement of cash
flows.
, MULTIPLE CHOICE
18) Which of the following groups has the primary responsibility for establishing generally accepted
accounting principles for business entities in the United States?
A) Securities and Exchange Commission
B) U.S. Congress
C) International Accounting Standards Board
D) Financial Accounting Standards Board
ANS: D
The Financial Accounting Standards Board is a privately funded group charged with establishing
accounting standards for the U.S. It is not a branch of the U.S. government.
19) The Heritage Company is a manufacturer of office furniture. Which term best describes
Heritage's role in society?
A) Business
B) Regulatory agency
C) Consumer
D) Resource owner
ANS: A
Businesses serve as conversion agents in the marketplace, transforming basic resources provided by
resource owners into goods and services that consumers demand. Regulatory agencies set policies that
affect the way that businesses operate.
20) Which resource providers lend financial resources to a business with the expectation of
repayment with interest?
A) Consumers
B) Creditors
C) Investors
D) Owners
ANS: B
Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known
as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the
business. Consumers demand goods and services from businesses.
INTRODUCTORY FINANCIAL ACCOUNTING FOR BUSINESS
2ND EDITION
CHAPTER 1: AN INTRODUCTION TO ACCOUNTING
TRUE/FALSE
1) In a market, creditors are resource providers.
⊚ true
⊚ false
ANS: TRUE
This is true. Resource providers include creditors and investors.
2) In a market, a company that manufactures cars would be referred to as a business.
⊚ true
⊚ false
ANS: TRUE
This is true. Businesses transform resources into goods and services, such as cars, that are desirable to
consumers.
3) The value created by a business is created by its assets.
⊚ true
⊚ false
ANS: FALSE
This is false. A business creates value by earning income, so earnings or income describe that value, not
assets.
4) The types of resources needed by a business are financial, physical, and labor resources.
⊚ true
⊚ false
ANS: TRUE
This is true. The types of resources needed by a business are financial, physical, and labor resources
5) Financial accounting information is usually less detailed than managerial accounting information.
⊚ true
⊚ false
ANS: TRUE
This is true. Financial accounting information is usually less detailed than managerial accounting
information.
6) The Financial Accounting Standards Board is a privately funded organization with authority for
establishing accounting standards for businesses in the US.
, ⊚ true
⊚ false
ANS: TRUE
This is true. The Financial Accounting Standards Board is charged with establishing accounting standards
for US businesses. It is not an agency of the US government, but rather a privately funded organization.
7) A business and the person who owns the business are separate reporting entities.
⊚ true
⊚ false
ANS: TRUE
This is true. A business must report its income, assets, liabilities and equity separate from the owner of
that business.
8) Land is an element of the financial statements.
⊚ true
⊚ false
ANS: FALSE
This is false. Land is an account within the element assets. The elements of the financial statements
include assets, liabilities, stockholders’ equity. Stockholders’ equity can be further broken down into two
additional elements: common stock, and retained earnings.
9) Liabilities are obligations of a business to relinquish assets, provide services, or accept other
obligations.
⊚ true
⊚ false
ANS: TRUE
This is true. Liabilities represent the future obligations of a business entity.
10) Liabilities are not a source of assets for a business.
⊚ true
⊚ false
ANS: FALSE
This is false. There are three sources of assets. First, a business can borrow assets from creditors. The
second source of assets is investors. The third source of assets is operations.
11) Retained earnings reduces a company's commitment to use its assets for the benefit of its
stockholders.
⊚ true
⊚ false
ANS: FALSE
This is false. If a business retains the assets, it commits to use those assets for the benefit of the
stockholders. This increase in the business’s commitments to its stockholders is normally called retained
earnings.
,12) The historical cost concept requires that most assets be recorded at the amount paid for them,
regardless of increases in market value.
⊚ true
⊚ false
ANS: TRUE
This is true. Once an asset is recorded, it is not adjusted for increases in market value.
13) An asset source transaction increases a business’s assets and the claims to assets.
⊚ true
⊚ false
ANS: TRUE
This is true. An asset source transaction increases a business's assets and either liabilities or equity, which
make up claims to assets.
14) Borrowing money from the bank is an example of an asset source transaction.
⊚ true
⊚ false
ANS: TRUE
This is true. Borrowing money from the bank is an example of an asset source transaction because the
asset cash increases as well as the liability notes payable.
15) An asset use transaction does not affect the total amount of claims to a company's assets.
⊚ true
⊚ false
ANS: FALSE
This is false. Because asset use transactions result in a decrease in total assets, total claims must decrease
as well.
16) The four financial statements prepared by a business bear no relationship to each other.
⊚ true
⊚ false
ANS: FALSE
This is false. All four financial statements are interconnected.
17) The dividends a business pays to its owners appear on the income statement.
⊚ true
⊚ false
ANS: FALSE
This is false. Dividends are not expenses. Therefore, they are not reported on the income statement.
Dividends are reported on the statement of changes in stockholders’ equity and the statement of cash
flows.
, MULTIPLE CHOICE
18) Which of the following groups has the primary responsibility for establishing generally accepted
accounting principles for business entities in the United States?
A) Securities and Exchange Commission
B) U.S. Congress
C) International Accounting Standards Board
D) Financial Accounting Standards Board
ANS: D
The Financial Accounting Standards Board is a privately funded group charged with establishing
accounting standards for the U.S. It is not a branch of the U.S. government.
19) The Heritage Company is a manufacturer of office furniture. Which term best describes
Heritage's role in society?
A) Business
B) Regulatory agency
C) Consumer
D) Resource owner
ANS: A
Businesses serve as conversion agents in the marketplace, transforming basic resources provided by
resource owners into goods and services that consumers demand. Regulatory agencies set policies that
affect the way that businesses operate.
20) Which resource providers lend financial resources to a business with the expectation of
repayment with interest?
A) Consumers
B) Creditors
C) Investors
D) Owners
ANS: B
Businesses borrow money from creditors, and repay the amount borrowed, plus an additional fee known
as interest. Investors, in contrast, provide financial resources in exchange for ownership interest in the
business. Consumers demand goods and services from businesses.
