True// False MC Accounting 391 Exam 1
(L.O.4) Under the revenue recognition principle, revenue is generally recognized when: A.a company satisfies its performance obligations. B.the merchandise has been ordered. C.all expenses have been identified. D.the accounting process is virtually complete.
A
(L.O. 3)In accounting an economic entity may be defined as: A.a business enterprise. B.an individual. C.a division within a business enterprise. D.all of the above.
D
(L.O. 4) The concept referred to by the "expense recognition" principle is A.that current liabilities have the same period of existence as the current assets. B.that all cash disbursements for a period be matched to cash receipts for the period. C.that net income should be reported on a quarterly basis. D.that where possible the expenses to be included in the income statement were incurred to produce the revenues.
D
(L.O. 1) An effective process of capital allocation is not important to a healthy economy.
False; An effective process of capital allocation is critical to a healthy enviroment.
(L.O. 1) The income statement reveals: A.resources and equities of a firm at a point in time. B.resources and equities of a firm for a period of time. C.net earnings (net income) of a firm at a point in time. D.net earnings (net income) of a firm for a period of time.
D
(L.O. 1) Which of the following is not a benefit associated with the FASB Conceptual Framework Project? A. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. B.Practical problems should be more quickly solvable by reference to an existing conceptual framework. C.A coherent set of accounting standards and rules should result. D.Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
D
(L.O. 1) Which of the following would represent the least likely use of an income statement prepared for a business enterprise? A.Use by customers to determine a company's ability to provide needed goods and services. B.Use by labor unions to examine earnings closely as a basis for salary discussions. C.Use by government agencies to formulate tax and economic policy. D.Use by investors interested in the financial position of the entity.
D
(L.O. 2) If accounting information is complete, free from error, and neutral, it can be considered: A.relevant B.timely. C.comparable. D.a faithful representation.
D
(L.O. 1) An entity perspective generally views companies as separate and distinct from the owners (present shareholders).
True
(L.O. 1) Double-entry accounting is the process that leads to the basic equality in accounting expressed by the formula: assets =liabilities +stockholders' equity.
True
(L.O. 1) Financial accounting is the process that culminates in the preparation of financial reports on an enterprise and that are used by both internal and external parties.
True
(L.O. 1) One of the limitations of the income statement is that items that cannot be measured reliably are not reported in the income statement.
True
(L.O. 1) One of the objectives of financial reporting is to provide information that is useful in assessing the cash flow prospects of the entity being reported on.
True
(L.O. 1) Relevance and reliability are the two primary qualities that make accounting information useful for decision making.
True
(L.O. 1) The essential characteristics of accounting include identification and measurement.:
True
(L.O. 1) To be relevant, accounting information must be capable of making a difference in a decision.
True
(L.O. 2) Information that has been measured and reported in a similar manner for different enterprises is considered comparable.
True
(L.O. 3) The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
True
(L.O. 3) The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information.
True
(L.O. 4) Generally, confirmation of a sale to independent interests is used to indicate the point at which revenue is recognized.
True
(L.O. 4) Recognition of revenue when cash is collected is appropriate only when it is impossible to establish the revenue figure at the time of sale because of the uncertainty of collection.
True
(L.O. 4) The Interest Expense account is credited during the closing process.
True
(L.O. 4) The difficulty in applying the cost constraint is that the costs and especially the benefits are not always evident or measurable.
True
(L.O. 8) The use of a worksheet at the end of each month or quarter permits the preparation of interim financial statements even though the books are closed only at the end of each year.
True
(L.O.3) Intra period tax allocation helps financial statement users better understand the impact of taxes on various components.
True
(L.O. 3) Adjusting entries are an optional step in the accounting process.
False; Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period.
(L.O. 4) The notes to financial statements generally summarize the items presented in the main body of the statements.
False; The notes to financial statements generally amplify or explain the items presented in the main body of the statements.
(L.O. 1) An example of an internal event would be a flood that destroyed a portion of an entity's inventory.
False; This statement characterizes an external event rather than an internal event. Internal events occur within an entity, whereas external events involve interaction between an entity and its environment.
(L.O. 1) Use of a sound conceptual framework in the development of accounting principles will make financial statements of all entities comparable because alternative accounting methods for similar transactions will be eliminated.
False; Use of a sound conceptual framework will not eliminate alternative accounting methods for similar transactions.
(L.O. 2) All those who serve on the FASB must be Certified Public Accountants.
False; at the present time it is not necessary to be a CPA to be a member of the FASB
(L.O. 2) The SEC has been the principal organization in the development of accounting standards.
False; the SEC has the mandate to establish accounting principles but has acted with remarkable restraint in the area of developing accounting standards. Generally, it has relied on the AICPA and FASB to regulate the accounting profession and develop and enforce accounting standards.
(L.O. 2) The Securities and Exchange Commission (SEC) sets accounting standards for companies that do work for the government.
False; the SEC is empowered to administer the 1933 and 1934 securities act.
(L.O. 1) The accounting profession has attempted to develop a set of standards so each enterprise can develop their own standards.
False; the accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
(L.O. 3) The results of operations of a segment that has been or will be disposed of need not be separated from the results of continuing operations as long as the gain or loss from the disposal is shown separately.
False;According to generally accepted accounting principles, companies report as discontinued operations (1) the gain or loss from disposal of a component of a business, and (2) the results of operations of a component that has been or will be disposed of separately from continuing operations.
L.O. 4) The Income Summary account used during the closing process is shown in the stockholders' equity section of the balance sheet.
False;The income summary account is a clearing account through which all revenue and expense accounts are closed at the end of an accounting period. Once the revenue and expense accounts have been closed, any balance existing in the income summary account is closed to retained earnings. Thus, the income summary account never appears on a financial statement.
(L.O. 4) The post-closing trial balance consists of asset, liability, stockholders' equity, revenue, and expense accounts.
False;The post-closing trial balance consists only of asset, liability, and owners' equity (the real) accounts
(L.O. 1) A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements.
True
(L.O. 2) One purpose of a trial balance is to prove that debits and credits of an equal amount are in the general ledger.
True
(L.O. 2) The AICPA has had a diminished role in the Standard setting process after the passage of the Sarbanes-Oxley Act of 2002.
True
(L.O. 2) The Accounting Principles Board (APB) replaced the Committee on Accounting Procedure (CAP) and was designated as the AICPA's sole authority for public pronouncements on accounting principles.
True
(L.O. 2) The Accounting Principles Board (APB) was replaced in 1973 by the Financial Accounting Standards Board (FASB), which now is primarily responsible for setting accounting standards.
True
(L.O. 2) The FASB issues accounting pronouncements through Accounting Standards Updates.
True
(L.O. 2) The Public Company Accounting Oversight Board (PCAOB) oversees the development of auditing standards.
True
(L.O. 2) The basis for determining whether an item is material is based on both quantitative and qualitative factors.
True
(L.O. 2) The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets.
True
(L.O. 2) The multiple-step income statement recognizes a separation of operating transactions from non-operating transactions and matches costs and expenses with related revenues.
True
(L.O. 2) The primary advantage of the single-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.
True
(L.O. 3) A manufacturer of computer hardware who sells a computer manufacturing facility located in a foreign country that represents 25 percent of a company's total assets can record the transaction as a disposal of a segment.
True
(L.O. 3) A non-controlling interest is a portion of equity (net assets) interests in a subsidiary not attributable to the parent company.
True
(L.O. 3) An adjustment for salaries and wages expense, incurred but unpaid at year end, is an example of an accrued liability.
True
(L.O. 3) Bad debts are recorded in the period in which the sale was made to ensure that receivables are reported at their net realizable value.
True
(L.O. 3) Generally accepted accounting principles (GAAP) are defined, in part, as those principles that have substantial authoritative support.
True
(L.O. 3) The Codification provides in one place all the authoritative literature related to a particular topic of GAAP.
True
(L.O. 3) The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent.
True
(L.O. 4) The full disclosure principle states that information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user.
True
(L.O. 4) Under the expense recognition principle, it is possible to have an expense reported on the income statement in one period and the cash payment for that expense reported in another period.
True
(L.O. 7) In general, reversing entries are used for two types of adjusting entries: accrued revenues and accrued expenses.
True
(L.O. 7) Use of reversing entries does not change the amounts reported in the financial statements for the previous period.
True
(L.O. 8) A worksheet completed through the adjusted trial balance column provides the information needed for preparation of the financial statements without reference to the ledger or other records.
True
L.O. 3) Adjusting entries result from compliance with the revenue recognition and expense recognition principles.
True
(L.O. 1) The accounting equation (A =L +SE) must remain in balance: A.throughout each step in the accounting cycle. B.only when journal entries are recorded. C.only at the time the trial balance is prepared. D.only when formal financial statements are prepared.
A
(L.O. 2) According to the FASB conceptual framework, equity A.is the residual interest in the assets of an entity that remains after deducting it's liabilities. B.is the same thing as comprehensive income. C.is the net gains less the net loses for a period of time. D.is the net revenues and expenses for a period of time.
A
(L.O. 3) Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?A.Monetary unit assumption. B.Periodicity assumption. C.Going-concern assumption. D.Economic entity assumption.
A
(L.O. 4) What is the constraint that supports considering that the benefits of the information outweigh the sacrifices to provide the information? A.Cost. B.Prudence. C.Consistency. D.Conservatism.
A
(L.O. 1) Which of the following violates the concept of faithful representation? A.The management report refers to new discoveries and inventions made, but the financial statements never report the results. B.Financial statements included buildings with a carrying amount estimated by management. C.Financial statements were issued one year late. D.All of the choices violate faithful representation.
B
(L.O. 2) Comprehensive income includes all changes in equity during a period except: A.sale of assets other than inventory. B.those resulting from investments by or distribution to owners. C.sales to a particular entity where ultimate payment by the entity is doubtful. D.those resulting from revenue generated by a totally owned subsidiary.
B
(L.O. 2) Which of the following is a characteristic describing the primary quality of relevance? A.Materiality. B.Predictive value. C.Verifiability. D.Understandability.
B
(L.O. 3) An adjusting entry should never include: A.a debit to expense and a credit to a liability .B.a debit to expense and a credit to revenue. C.a debit to a liability and a credit to revenue. D.a debit to revenue and a credit to a liability.
B
(L.O. 3) During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will: A.increase net income $4,390. B.increase expenses by $4,390. C.decrease store supplies by $6,540. D.debit accounts payable for $2,150.
B
(L.O. 3) Which of the following is an example of an accrued liability?A.Supplies purchased at the beginning of the year and debited to an expense account. B.Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. C.Depreciation expense. D.Rent, provided as a service during the period, cash to be received next year.
B
L.O. 2) The major objective of the quality of comparability is to: A.provide timely financial information for statement users. B.promote comparability between financial statements of different accounting periods. C.enable users to identify the real similarities and differences in economic events between companies. D.be sure the same information is disclosed in each accounting period.
B
(L.O. 1) The primary reason the income statement is so important to investors and creditors relates to its ability to provide information helpful in A.determining the honesty of those involved in managing the enterprise. B.assessing the financial position of the entity at a point in time. C.predicting the amount, timing, and uncertainty of future cash flows. D.determining the amount of future income the entity may generate from current operations.
C
(L.O. 1) Which of the following is correct regarding double-entry accounting?A.Each transaction is recorded twice, once in the general journal and once in a specialized journal.B.Each transaction must involve two entries, either two debits, two credits, or one debit and one credit.C.Each transaction must result in equal amounts of debits and credits.D.Each transaction appears in at least two of the financial statements
C
(L.O. 2) A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by: A.the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700. B.an error in adding the Sales Journal. C.the balance of $700 in the Equipment account being entered as a debit of $7,000. D.a net loss of $6,300.
C
(L.O. 2) The occurrence that most likely would have no effect on 2020net income is the: A.sale in 2020of an office building contributed by a stockholder in 1974. B.collection in 2020of a dividend from an investment. C.correction of an error in the financial statements of a prior period discovered subsequent to their issuance. D.stock purchased in 2006deemed worthless in 2020.
C
(L.O. 3) The economic entity assumption in accounting is best reflected by which of the following statements? A.When a parent and subsidiary company are merged for accounting and reporting purposes the economic entity assumption is violated. B.The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated. C.The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. D.A business enterprise is in business to enhance the economic well-being of its owners.
C
(L.O. 3) Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?A.Debit cash and credit an expense account. B.Credit cash and debit a revenue account. C.Debit cash and credit a liability account. D.Credit cash and debit a liability or revenue account.
C
(L.O. 2) Which of the following is not a principal purpose of an unadjusted trial balance? A.It proves that debits and credits of equal amounts are in the ledger. B.It is the basis for any adjustments to the account balances. C.It supplies a listing of open accounts and their balances. D.It proves that debits and credits were properly entered in the ledger accounts.
D
(L.O. 3) Adjusting entries are used to correct errors that occur during the posting process.
False; Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period. If errors are made in the posting process, they are corrected by means of correcting entries, not adjusting entries.
(L.O. 3) The advocates of the current operating performance concept include special gains and losses that are infrequent or unusual in the calculation of net income.
False; Advocates of the current operating performance concept argue that the net income figure should show only the regular recurring earnings of the business based on its normal operations. Gains or losses that are not expected to recur frequently would not be considered as recurring in the normal operating process of the business.
(L.O. 2) When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements.
False; Because an item is deemed to be immaterial does not justify its deletion from financial statements.
(L.O. 2) Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted.
False; Consistency means that a company applies the same methods to similar accounting transactions from period to period.
(L.O. 1) In general, debits refer to increases in account balances, and credits refer to decreases.
False; Debits are recorded on the left side of an account and can be increases or decreases.
(L.O. 1) A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary.
False; Development of a conceptual framework will not provide a solution to all future accounting problems.
(L.O. 4) It is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period.
False; Failure to post closing entries to the general ledger will leave a balance in revenue and expense accounts from a previous period and the retained earnings account will be misstated.
(L.O. 2) If an entity fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts.
False; Failure to post one journal entry to the general ledger will misstate the debit and credit side of a trial balance by the same amount. Thus, the trial balance will show an equal amount of debits and credits.
(L.O. 3) Intra period tax allocation causes a reduction in total income tax expense for the period in which it is used.
False; Intra period tax allocation is a method designed to relate the income tax expense of the fiscal period to the items that affect the amount of the tax provision. Use of this method does not affect the income tax expense for the period, merely the manner in which the income tax expense is presented.
(L.O. 3) Phasing out of a product line or class of service that represents 10 percent of a company's total revenue is a disposal of assets that qualifies as a disposal of a segment of a business.
False; Phasing out of a product line or class of service that represents 15percent of a company's total revenue is a disposal of assets that does not qualify as the disposal of a segment of a business.
(L.O. 4) Period costs such as officer salaries and administrative expenses attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods.
False; Product costs such as material, labor, and overhead attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods.
(L.O. 1) Real (permanent) accounts are revenue and expense accounts and are periodically closed.
False; Real(permanent) accounts are assets, liability, and equity accounts.
L.O. 7) Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions.
False; Reversing entries are made to simplify the recording of a subsequent transaction related to an adjusting entry. When an entry is reversed, the related subsequent transaction can be recorded as if the adjusting entry had never been recorded. Reversing entries have nothing to do with the correction of errors.
(L.O. 2) A general journal may be used by any entity in recording its transactions, whereas special journals may be used only by entities whose transactions meet certain requirements.
False; Special journals can be used by any entity for any groups of transactions possessing common characteristics.
(L.O. 2) The three elements—assets, liabilities, and equity—describe transactions, events, and circumstances that affect an enterprise during a period of time.
False; The 3 elements- assets, liabilities, and equity-- describe amounts of resources and claims to resources at a moment of time.
(L.O. 4) If Company A wishes to acquire an asset owned by Company B, the cost principle would require Company A to record the asset at the original cost to Company B.
False; The cost principle requires that assets be accounted for on the basis of acquisition cost.
(L.O. 3) The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise.
False; The economic entity assumption holds that the activity of a business entity can be kept separate and distinct from its owner and any other business unit.
(L.O. 1) Accounting theory is developed without consideration of the environment within which it exists.
False; The environment within which any discipline exists plays an integral role in shaping the theory
(L.O. 2) From a bank loan officer's point of view, the single-step income statement is preferable to the multiple-step income statement.
False; The multiple-step income statement allows a user the opportunity to observe numerous relationships among revenue and expense data. Thus, it is more suitable for use by a bank loan officer than is the single-step income statement.
(L.O. 3) The International Accounting Standards Board (IASB) has been replaced by the FASB as the rule-making body for world-wide GAAP.
The IASB and U.S accounting organization are trying to work together to reconcile U.S. GAAP with IASB standards but are currently separate agencies.