Chapter 1 - Financial Accounting

Which of the following is an important indicator of management's ability to respond to business situations and the possibility of bankruptcy? A) Total liabilities b) Inventory c) Accumulated depreciation d) Total stockholders' equity

A) Total liabilities

If stockholders' equity is $50,000 and liabilities are $78,000, then assets must equal: a) $128,000 b) $28,000 c) $50,000 d) $78,000

a) $128,000 Correct. Assets = Liabilities ($78,000) + Stockholders' Equity ($50,000) = $128,000.

Which of the following is true of public accounting? Multiple Choice a) A public accountant usually gets to work with multiple clients. b) A career in public accounting means providing accounting services to the company that employs you. c) One who takes up a public accounting career will invariably work for the government. d) Public accountants almost always earn higher starting salaries.

a) A public accountant usually gets to work with multiple clients.

Which of the following is a feature of the corporate form of business ownership? a) Double taxation b) Limited resources c) Lower tax rates d) Unlimited liability

a) Double taxation

What was the objective of the 1933 Securities Act? a) It set forth accounting and disclosure requirements for initial offerings of securities. b) It provided for the regulation of auditors and the types of services they furnish to clients. c) It paved the way for the creation of the Public Company Accounting Oversight Board. d) It created a government agency, the Securities and Exchange Commission (SEC).

a) It set forth accounting and disclosure requirements for initial offerings of securities.

You are reading a particular section of a bank's annual report. This section provides the bank's views about the impact of an upcoming regulation on the banking industry as a whole and the bank in particular. Which section of the annual report are you reading? a) Management's discussion and analysis b) The statement of stockholders' equity c) The income statement d) Note disclosures to the financial statements

a) Management's discussion and analysis

Information would be difficult to use if we listed assets as "100,000 dollars in cash, 200 computers, eight cars, and a building with all necessary fittings." Which assumption is used to overcome this difficulty? Multiple Choice a) Monetary unit assumption b) Periodicity assumption c) Going concern assumption d) Economic entity assumption

a) Monetary unit assumption

Revenues minus expenses equal(s) a) Net income. b) Total stockholders' equity. c) Total assets. d) Change in cash.

a) Net income.

Which of the following is not one of the four primary financial statements? a) Trial Balance b) Balance Sheet c) Statement of Cash Flows d) Income Statement

a) Trial Balance Correct. There are four primary financial statements: the income statement, the statement of stockholders' equity, the balance sheet, and the statement of cash flows.

Match the term and the definition. (Comparability, Understandability, Timeliness, Verifiability) a) a consensus among different measurers. b) users must be able to understand the information within the context of the decision they are making. c) the ability of users to see similarities and differences between two different business activities. d) information being available to users early enough to allow them to use it in the decision process.

a) Ver b) Und c) Comp d) Time

Indicate whether each of the following transactions is classified as a financing, investing, or operating activity: a) Purchase Equipment B) Pay Salaries to employees C) Pay dividends to shareholders D) Sell goods to customers E) Receive loan from the bank by signing a note

a) investing b) operating c) financing d) operating e) financing

Based on the concept of _____, big companies probably do not record all their assets as assets. Multiple Choice a) materiality b) relevance c) faithful representation d) reliability

a) materiality Materiality reflects the impact of financial accounting information on the decisions of investors and creditors.

The balance sheet: a) Shows the net change in cash over a period of time. b) Indicates if a company is profitable. c) Reports the difference between revenues and expenses. d) Presents the financial position of a company at a point in time.

d) Presents the financial position of a company at a point in time.

Different graders will arrive at the same exam score for multiple-choice tests, but they are more likely to differ in scoring essay exams. In this context, which characteristic does a multiple-choice test possess? Multiple Choice a) Timeliness b) Understandability c) Comparability d) Verifiability

d) Verifiability

Ethics is best described as: a) Accounting information that is complete, neutral, and free from error. b) The rules of financial accounting. c) A code or moral system that provides criteria for evaluating right and wrong behavior. d) A consensus among different measures.

c) A code or moral system that provides criteria for evaluating right and wrong behavior.

Expenses refer to a) Amounts distributed to stockholders. b) Resources of the company. c) Costs of providing sales. d) Amounts owed by the company.

c) Costs of providing sales

Nike co-founder and chairman Phil Knight's personal residence is not treated as an asset of Nike, Incorporated. Which assumption is used in making this judgment? Multiple Choice a) Going concern assumption b) Monetary unit assumption c) Economic entity assumption d) Periodicity assumption

c) Economic entity assumption A key aspect of the economic entity assumption is the distinction between the economic activities of owners and those of the company.

Which of the following best explains a company's stock price performance? a) Dividends b) Accounts receivable c) Net income d) Preferred stock

c) Net income

Which of the following characteristics is highly related to the establishment of accounting standards? Multiple Choice a) Appropriateness b) Freedom from error c) Neutrality d) Completeness

c) Neutrality Neutrality is highly related to the establishment of accounting standards. It is important because new accounting standards may favor one group of companies over others.

Information reported in the income statement includes a) Cash flows from operating, investing, and financing equal the change in cash. b) The change in common stock and change in retained earnings equal the change in total stockholders' equity. c) Revenues minus expenses equal net income. d) Assets equal liabilities plus stockholders' equity.

c) Revenues minus expenses equal net income.

Which government agency has the ultimate authority to set accounting and reporting standards in the United States? a) Public Company Accounting Oversight Board b) International Accounting Standards Board c) Securities and Exchange Commission d) Financial Accounting Standards Board

c) Securities and Exchange Commission

The statement of cash flows: a) Presents the financial position of a company at a point in time. b) Indicates if a company is profitable. c) Shows the net change in cash over a period of time. d) Reports the difference between revenues and expenses.

c) Shows the net change in cash over a period of time.

Assets (resources) of a company minus its liabilities (amounts owed) equal(s) a) Cash flows from operating activities. b) Net income. c) Stockholders' equity. d) Change in cash.

c) Stockholders' equity.

From the list that follows, identify a company where a private accountant could possibly work. Multiple Choice a) Ernst & Young b) Deloitte c) Target d) KPMG

c) Target

Which of the following questions is most likely to be asked by a creditor? a) Will the company's stock increase in value? b) What is the amount of taxes owed to the government? c) Will the company be capable of repaying its debt when it is due? d) What are the company's terms of credit with its suppliers?

c) Will the company be capable of repaying its debt when it is due?

Which of the following questions is most likely to be asked by an investor? a) Will the company be able to repay its debt when it is due? b) What are the company's terms of credit with its suppliers? c) Will the company's stock increase in value? d) What is the amount of taxes owed to the government?

c) Will the company's stock increase in value?

Match the term and the definition (Economic entity assumption, Going concern assumption selected, Periodicity assumption selected, Monetary unit assumption selected) 1. Provides justification for measuring many assets based on their original costs instead of current liquidation values. 2. A unit or scale of measurement can be used to measure financial statement elements. 3. The economic life of an enterprise can be divided into artificial time periods for financial reporting. 4. All economic events with a particular economic entity can be identified

1) Going concern assumption selected 2) Monetary unit assumption selected 3) Periodicity assumption selected 4) Economic entity assumption

Use the following amounts to calculate net income: Assets, $165,000; Dividends, $9,000; Expenses, $61,000; Liabilities, $74,000; Revenues, $82,000. a) $91,000 b) $21,000 c)$30,000 d) $12,000

b) $21,000 Net Income = Revenues ($82,000) − Expenses ($61,000) = $21,000

Franklin Corporation has the following account balances at the end of the year. What is stockholders' equity? Accounts Payable $ 17,000 Accounts Receivable $ 23,000 Cash $ 35,000 Equipment, net $ 41,000 Notes Payable $ 29,000 Salaries Payable $ 8,000 Supplies $ 3,000 a) $45,000 b) $48,000 c) $36,000 d) $156,000

b) $48,000 The accounting equation indicates that Assets = Liabilities + Stockholders' Equity. Rearranged, Stockholders' Equity = Assets − Liabilities. Assets = Accounts Receivable ($23,000) + Cash ($35,000) + Equipment, net ($41,000) + Supplies ($3,000) = $102,000. Liabilities = Accounts Payable ($17,000) + Notes Payable ($29,000) + Salaries Payable ($8,000) = $54,000. Therefore, Stockholders' Equity = Assets ($102,000) − Liabilities ($54,000) = $48,000.

Catalina Corporation begins the year with a $195,000 balance in Retained Earnings and a $320,000 balance in Common Stock. During the year, the company generated net income of $46,000, issued additional common stock for $28,000, and paid a dividend of $5,000. What is total stockholders' equity at the end of the year? a) $594,000 b) $584,000 c) $515,000 d) $589,000

b) $584,000 Stockholders' Equity at the beginning of the year = Common Stock ($320,000) + Retained Earnings ($195,000) = $515,000. The change in Stockholders' Equity during the year = Issuance of Common Stock ($28,000) + Net Income ($46,000) − Dividends ($5,000) = $69,000. Stockholders' Equity at the end of the year = $515,000 + $69,000 = $584,000.

Total stockholders' equity appears in which two financial statements? a) Income Statement and Statement of Stockholders' Equity b) Balance Sheet and Statement of Stockholders' Equity c) Income Statement and Statement of Cash Flows d) Balance Sheet and Statement of Cash Flows

b) Balance Sheet and Statement of Stockholders' Equity

What are the primary components of stockholders' equity? a) Revenues and Expenses b) Common Stock and Retained Earnings c) Assets and Liabilities d) Cash and Dividends

b) Common Stock and Retained Earnings

Net income appears in which two financial statements? a) Balance Sheet and Statement of Stockholders' Equity b) Income Statement and Statement of Stockholders' Equity c) Balance Sheet and Statement of Cash Flows d) Income Statement and Statement of Cash Flows

b) Income Statement and Statement of Stockholders' Equity

The organization responsible for creating a single set of global accounting standards is the: a) Financial Accounting Standards Board b) International Accounting Standards Board c) Securities and Exchange Commission d) Internal Revenue Service

b) International Accounting Standards Board

Revenue refers to: a) Amounts owed by the company. b) Sales of products or services. c) Amounts owed to the company. d) Resources of the company.

b) Sales of product or services

The resources of a company are referred to as a) Dividends b) Assets c) Stockholders equity d) Liabilities

b) assets

The amounts owed by a company are referred to as a) Stockholders' equity. b) Dividends. c) Assets. d) Liabilities.

d) Liabilities

The objective(s) of financial accounting is (are) to provide information that a) Is useful to investors and creditors in making decisions. b) Helps to predict cash flows. c) Tells about the economic resources, claims to resources, and changes in resources. d) All of the choices are objectives of financial accounting.

d) All of the choices are objectives of financial accounting.

Information reported in the balance sheet includes a) The change in common stock and change in retained earnings equal the change in total stockholders' equity. b) Cash flows from operating, investing, and financing activities equal the change in cash. c) Revenues minus expenses equal net income. d) Assets equal liabilities plus stockholders' equity.

d) Assets equal liabilities plus stockholders' equity.

The balance in the cash account appears in which two financial statements? a) Income Statement and Statement of Cash Flows b) Balance Sheet and Statement of Stockholders' Equity c) Income Statement and Statement of Stockholders' Equity d) Balance Sheet and Statement of Cash Flows

d) Balance Sheet and Statement of Cash Flows

Part of the inventory of memory chips of a semiconductor company is obsolete because of the launch of more advanced products. However, the company's management still carries this inventory at historical prices in its balance sheet. Which primary qualitative characteristic is being violated here? Multiple Choice a) Freedom from error b) Correctness c) Neutrality d) Completeness

d) Completeness

Expenses are best defined as: a) Amounts the owners have invested in the business. b) Distributions to stockholders. c) Amounts owed to creditors. d) Costs of providing products and services.

d) Costs of providing products and services.

The procedures that dictate how to measure business activities and how to communicate those measurements through financial statements communicated to decision makers are known as a) Standards of Professional Compliance (SPC). b) Generally Accepted Auditing Standards (GAAS). c) Rules of Financial Reporting (RFR). d) Generally Accepted Accounting Principles (GAAP).

d) Generally Accepted Accounting Principles (GAAP).

The FASB has explicitly stated the specific objectives of financial accounting. Which of the following is not one of those objectives? a) It is useful to investors and creditors in making decisions. b) Tells about economic resources, claims to resources, and changes in resources and claims. c) Helps to predict cash flows. d) It is useful to company management in making decisions.

d) It is useful to company management in making decisions.