Accounting Chapters 1 and 2 Quiz Questions

Why does a company hire independent auditors? a. The auditors are responsible for the content of the financial statements. b. To verify the accounting accuracy of every transaction entered into. c. To guarantee the accuracy of both annual and quarterly financial statements. d. To report on the fairness of financial statement presentation.

To report on the fairness of financial statement presentation. Explanation: The role of auditors is to review the financial statements and issue an opinion on the fairness of these statements

Which of the following is not a typical note included in an annual report? a. A note describing the auditor's opinion of the management's past and future financial planning for the business. b. A note providing more detail about a specific item shown in the financial statements. c. A note describing the accounting rules applied in the financial statements. d. A note describing financial disclosures about items not appearing in the financial statements.

a. A note describing the auditor's opinion of the management's past and future financial planning for the business.

Which of the following is not one of the four items required to be shown in the heading of a financial statement? a. The financial statement preparer's name. b. The title of the financial statement. c. The unit of measure in the financial statement. d. The name of the business entity.

a. The financial statement preparer's name.

Which of the following is true regarding the income statement? a. The income statement is sometimes called the statement of operations. b. The income statement reports revenues, expenses, and liabilities. c. The income statement reports only revenue for which cash was received at the point of sale. d. The income statement reports the financial position of a business at a particular point in time.

a. The income statement is sometimes called the statement of operations.

Which of the following regarding GAAP is true? a. U.S. GAAP is the body of accounting knowledge followed by all countries in the world. b. Changes in GAAP can affect the interests of managers and stockholders c. GAAP is the abbreviation for generally accepted auditing procedures. d. Changes to GAAP must be approved by the Senate Finance Committee.

b. Changes in GAAP can affect the interests of managers and stockholders

Which of the following is not one of the four basic financial statements? a. Balance sheet c. Income statement b. Audit report d. Statement of cash flows

b. audit report

Which of the following regarding retained earnings is false? a. Retained earnings is increased by net income and decreased by a net loss. b. Retained earnings is a component of stockholders' equity on the balance sheet. c. Retained earnings is an asset on the balance sheet. d. Retained earnings represents earnings not distributed to stockholders in the form of dividends.

c. Retained earnings is an asset on the balance sheet.

Which of the following is false regarding the balance sheet? a. The accounts shown on a balance sheet represent the basic accounting equation for a particular business entity. b. The retained earnings balance shown on the balance sheet must agree with the ending retained earnings balance shown on the statement of stockholders' equity. c. The balance sheet reports the changes in specific account balances over a period of time. d. Thebalancesheetreportstheamountofassets,liabilities,andstockholders'equityofanaccounting entity at a point in time.

c. The balance sheet reports the changes in specific account balances over a period of time.

Which of the following statements regarding the statement of cash flows is true? a. The statement of cash flows separates cash inflows and outflows into three major categories: operating, investing, and financing. b. The ending cash balance shown on the statement of cash flows must agree with the amount shown on the balance sheet for the same fiscal period. c. The total increase or decrease in cash shown on the statement of cash flows must agree with the "bottom line" (net income or net loss) reported on the income statement. d. Both (a) and (b) are true. e. All of the above.

d. Both (a) and (b) are true.

Which of the following is true? a. FASB creates SEC. b. GAAP creates FASB c. SEC creates AICPA. d. FASB creates U.S. GAAP.

d. FASB creates U.S. GAAP.

As stated in the audit report, or Report of Independent Accountants, the primary responsibility for a company's financial statements lies with a. The owners of the company. b. Independent financial analysts. c. The auditors. d. The company's management.

d. The company's management.

On January 1, 2019, Miller Corporation had retained earnings of $8,300,000. During 2019, Miller reported net income of $1,420,000, declared dividends of $420,000, and issued common stock for $1,130,000. What were Miller's retained earnings on December 31, 2019? a. $7,170,000 b. $7,880,000 c. $9,720,000 d. $9,300,000

$9,300,000 Explanation: Ending retained earnings ($9,300,000) = Beginning retained earnings ($8,300,000) + Net income ($1,420,000) − Dividends ($420,000).

Companies typically prepare ______ financial statements each accounting period. 4 3 5 2

4 Reason: The four financial statements are the balance sheet, income statement, statement of stockholders' equity, and the statement of cash flows.

Which of the following statements is correct? a. Assets on the balance sheet include retained earnings. b. Retained earnings includes common stock. c. A corporation's net income does not necessarily equal its net cash flow from operations. d. The balance sheet equation states that assets equal liabilities.

A corporation's net income does not necessarily equal its net cash flow from operations. Explanation: Revenue is recorded as it is earned, not necessarily when the cash from the sales is collected. Expenses are recorded when incurred in generating revenue regardless of when cash is expended.

What is the term used to describe the standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement item? Account Balance sheet Business transaction External event

Account

Which of the following statement about financial accounting is true? a. Accounting for external decision makers is called financial accounting. b. Accounting for internal decision makers is called financial accounting. c. Developing accounting information for internal decision makers is called financial accounting. d. External managers typically require continuous, detailed information because they must plan and manage the day-to-day operations of the organization.

Accounting for external decision makers is called financial accounting. Explanation: financial accounting provides information for external decision makers, such as outside investors and lenders.

What kinds of transactions are entered in a general journal? All of the company's transaction. Only external transactions and events. Only internal transactions and events. Only transactions affecting asset and liability accounts.

All of the company's transaction.

Which of the following are reported on the statement of cash flows? Check All That Apply Change in cash Change in total assets Cash flows from investing activities Cash flows from operating activities

Cash flows from investing activities Cash flows from operating activities

Which of the following statements is correct? a. Net income includes a deduction for dividend payments made to stockholders. b. Revenues are reported on the income statement regardless of whether the customer has paid for the goods or services. c. Net income normally equals the net cash generated by operations. d. Expenses are reported on the income statement during the period they are paid for.

Explanation: Accrual accounting requires revenues to be reported in the period of delivering goods or services, whether or not the customer has paid for the goods or services.

When a company buys equipment for $160,000 and pays for three fourths in cash and the other one fourth is financed by a note payable, which of the following are the effects on the accounting equation? a. Total liabilities increase $160,000. b. Total assets increase $160,000. c. Total assets increase $40,000. d. Total liabilities decrease $120,000.

Explanation: Equipment increases $160,000 and cash decreases $120,000 for a net asset increase of $40,000.

True or false: Creditors hope to gain in two ways—they hope (1) to receive dividends and (2) to sell their shares at a higher price. True false question. True False

False Reason: Investors, not creditors, hope to receive dividends and to sell their shares at a higher price. Borrowers are legally obligated to pay creditors interest, not dividends, and repay the principal.

Which of the following is the acronym used to describe the rules that determine the content and amount reported in the financial statements? GAAP FASB NYSE SEC

GAAP

Which of the following is not one of the three steps taken by a corporation to assure the accuracy of its records? a. Hiring a financial analyst to ensure the actual results of operations are similar to planned results. b. Forming a committee made up of board of directors' members to oversee the integrity of the corporation's system of controls and the hiring of the independent auditors. c. Hiring an independent auditor to report on the fairness of the financial statements. d. Implementing a system of controls over the company's records and assets.

Hiring a financial analyst to ensure the actual results of operations are similar to planned results. Explanation: The three steps to ensure the accuracy of records include implementing a system of controls, hiring external auditors, and having a board of directors with an audit committee. A financial analyst does not provide services that help a corporation assure the accuracy of its records.

Which of the following is the group that has the primary responsibility for the accuracy of a company's financial information? The Financial Accounting Standards Board The Securities and Exchange Commission The company's auditors Management

Management

Which of the following reflects the impact of a transaction where $260,000 cash was invested by stockholders in exchange for stock? a. Assets and retained earnings each increased $260,000. b. Stockholders' equity and revenues each increased $260,000. c. Assets and revenues each increased $260,000. d. Stockholders' equity and assets each increased $260,000.

Stockholders' equity and assets each increased $260,000. Explanation: Receiving $260,000 cash in exchange for stock increases assets (cash) and stockholders' equity (issuing stock).

Which of the following is a disadvantage of a corporation when compared to a partnership? a. The corporation and its stockholders are subject to double taxation. b. The stockholders have limited liability. c. The corporation must account for the transactions of the business as separate and apart from those of the owners. d. The corporation is treated as a separate legal entity from the stockholders.

The corporation and its stockholders are subject to double taxation. Explanation: A corporation's income is subject to double taxation; it is taxed when it is earned and again when it is distributed to stockholders as dividends.

Which of the following best describes liabilities and stockholders' equity? a. They are reported on the income statement. b. They are the economic resources owned by a business entity c. They are the sources of financing an entity's assets. d. They both increase when assets increase.

They are the sources of financing an entity's assets. Explanation: Liabilities are a source of financing from creditors. Stockholders' equity is a source of financing from stockholders.