Test Bank for Accounting Principles 13th Edition

Test Bank for Accounting Principles 13th Edition 1. Identify the activities and users associated with accounting. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions. 2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. Generally accepted accounting principles are a common set of standards used by accountants. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owner(s) and other economic entities. 3. State the accounting equation, and define its components. The basic accounting equation is: Assets = Liabilities + Owner's Equity Assets are resources owned by a business. Liabilities are creditorship claims on total assets. Owner's equity is the ownership claim on total assets. The expanded accounting equation is: Assets  Liabilities + Owner's Capital  Owner's Drawings + Revenues  Expenses Owner's Capital is assets the owner puts into the business. Owner's drawings are the Assets the owner withdraws for personal use. Revenues are increases in assets resulting from income-earning activities. Expenses are the costs of assets consumed of services used in the process of earning revenue. 4. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in owner's equity. 5. Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or net loss for a specific period of time. An owner's equity statement summarizes the changes in owner's equity for a specific period of time. A balance sheet reports the assets, liabilities, and owner's equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. a6. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, governmental, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement. Accounting in Action 1 - 3 TRUE-FALSE STATEMENTS 1. Owners of business firms are the only people who need accounting information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: None AICPA FC: Reporting 2. Transactions that can be measured in dollars and cents are recorded in the financial information system. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: None AICPA FC: Measurement 3. The hiring of a new company president is an economic event recorded by the financial information system. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min AACSB: None AICPA FC: Measurement 4. Management of a business enterprise is the major external user of information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: None AICPA FC: Measurement 5. Accounting communicates financial information about a business enterprise to both internal and external users. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: None AICPA FC: Measurement 6. Accounting information is used only by external users with a financial interest in a business enterprise. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: None AICPA FC: Measurement