Accounting Chapter 1 Review

The Duce Company has five plants nationwide that cost a total of $100 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at

$100 million

If total assets equal $345,000 and total stockholders' equity equal $120,000, then total liabilities must equal

$225,000

Which organization(s) primarily responsible for establishing generally accepted accounting principles?

FASB and SEC

Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction?

The appointment of a new CPA firm to perform an audit

The amount of stockholders' equity in a business is not affected by

The percentage of total assets held in cash.

Stockholders' Equity is decreased by

expenses

The first part of the accounting process is

identifying

If the retained earnings account increases from the beginning of the year to the end of the year, then

net income is greater than dividends

Keeping a systematic, chronological diary of events that are measured in dollars and cents is called

recording

GAAP stands for

Generally Accepted Accounting Principles

The origins of accounting are generally attributed to the work of

Luca Pacioli.

A dividend is

a distribution of the company's earnings to its stockholders.

All of the financial statements are for a period of time except the

balance sheet

The financial statement that summarizes the financial position of a company is the

balance sheet

A service not offered by public accountants is

budgeting

Liabilities are existing:

debts and obligations

A net loss will result during a time period when

expenses exceed revenues

The basic accounting equation states that Assets = Liabilities.

false

The hiring of a new company president is an economic event recorded by the financial information system.

false

The common characteristic possessed by all assets is

future economic benefit

The fair value principle is applied for

investment securities

A business organized as a corporation is owned by

its stockholders

The economic entity assumption requires that the activities

of an entity be kept separate from the activities of its owner.

Stockholders' equity can be described as

ownership claim on total assets.

John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a

partnership

Communication of economic events is the part of the accounting process that involves

preparing accounting reports

If total liabilities decreased by $15,000 and stockholders' equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period?

$5,000 decrease

Centro-matic Company began the year with stockholders' equity of $15,000. During the year, Centro-matic issued additional shares of stock in exchange for cash of $21,000, recorded expenses of $60,000, and paid dividends of $4,000. If Centro-matic's ending stockholders' equity was $56,000, what was the company's revenue for the year?

$84,000

When assets are distributed to the owners of a corporation, these distributions are termed

dividends

Net income for the period is determined by subtracting total expenses and drawings from total revenues.

false

The cost and fair value of an asset are the same at the time of acquisition and in all subsequent periods.

false

The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.

false

The primary accounting standard-setting body in the United States is the International Accounting Standards Board.

false

The purchase of store equipment for cash reduces stockholders' equity by an equal amount.

false

The study of accounting is not useful for a business career unless your career objective is to become an accountant.

false

The study of accounting will be useful only if a student is interested in working for a profit-oriented business firm.

false

Auditing is the examination of

financial statements by a CPA in order to express an opinion on their fairness.

Bright Eyes Downtown Diner received a bill of $600 from the Jronand Wine Advertising Agency. The owner, A. A. Bondy, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is

increase in Accounts Payable and decrease in Retained Earnings

Collection of a $1,000 Accounts Receivable

increases an asset $1,000; decreases an asset $1,000.

The primary purpose of the statement of cash flows is to report

information about cash receipts and cash payments of a company.

Internal users do not include

investors

Stockholders' equity is often referred to as

residual equity

Retained earnings at the end of the period is equal to

retained earnings at the beginning of the period plus net income minus dividends.

If a corporation distributes cash to its stockholders', then

stockholders' equity will decrease

If supplies that have been purchased are used in the course of business, then

stockholders' equity will decrease

If services are rendered for credit, then

stockholders' equity will increase

The balance sheet is frequently referred to as

the statement of financial position

If an individual asset is increased, then

there must be an equal decrease in another asset.

External transactions involve economic events between the company and some other enterprise or party.

true

Financial statements are the major means of communicating accounting information to interested parties.

true

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

true

The origins of accounting are attributed to Luca Pacioli, a famous mathematician.

true

What is true regarding the corporate form of business organization?

The revenues of corporations are greater than the combined revenues of partnerships and proprietorships

Which of the following will not cause a change in the stockholders' equity of a business?

an increase in prepaid expenses

Preparing tax returns and engaging in tax planning is performed by

both public and private accountants

The ending retained earnings amount is shown on

both the retained earnings statement and the balance sheet

A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the

economic entity assumption.

A balance sheet reports the assets and liabilities of a company for a specific period of time.

false

A working knowledge of accounting is not relevant to a lawyer or an architect.

false

Accountants do not have to worry about issues of ethics.

false

Accounting information is used only by external users with a financial interest in a business enterprise.

false

In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss).

false

Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company.

false

Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation.

false

Management of a business enterprise is the major external user of information.

false

Revenues are

gross increases in stockholders' equity resulting from business activities.

The use of computers in recording business events

has made the recording process more efficient

All of the following are steps in analyzing ethics cases in financial reporting

identify and analyze the principle elements in the situation. identify the alternatives and weigh the impact of each alternative on various stakeholders. recognize an ethical situation and the ethical issues involved.

The final step in solving an ethical dilemma is to

identify the alternatives and weigh the impact of each alternative on stakeholders.

The accounting process involves all of the following

identifying economic transactions that are relevant to the business. communicating financial information to users by preparing financial reports. analyzing and interpreting financial reports.

Stockholders' equity is decreased by

net losses expenses dividends

Matador Company purchases $1,300 of equipment from Danger Mouse Inc. for cash. The effect on the components of the basic accounting equation of Matador Company is

no change in total assets

Stockholders' Equity is increased by

revenues

What are advantages of the corporate form of business organization?

Limited liability of stockholders Transferability of ownership Unlimited life

The purchase of office equipment on credit increases total assets and total liabilities.

true

Transactions that can be measured in dollars and cents are recorded in the financial information system.

true

The accounting equation for Quattro Enterprises is as follows: $120,000 = $60,000 + $60,000 If Quattro purchases office equipment on account for $15,000, the accounting equation will change to:

$135,000 = $75,000 + $60,000

Mofro's Computer Repair Shop started the year with total assets of $270,000 and total liabilities of $180,000. During the year, the business recorded $450,000 in computer repair revenues, $270,000 in expenses, and Mofro paid dividends of $45,000. Stockholders' equity at the end of the year was

$225,000

If total liabilities increased by $15,000 and stockholders' equity increased by $10,000 during a period of time, then total assets must change by what amount and direction during that same period?

$25,000 increase

Black Keys Company began the year with stockholders'; equity of $185,000. During the year, the company recorded revenues of $250,000, expenses of $190,000, and paid dividends of $20,000. What was Black Keys' stockholders' equity at the end of the year?

$250,000

If the transaction causes an asset account to decrease, which of the following related effects may occur?

An increase of equal amount in another asset account.

Sources of increases to stockholder's equity are

additional investments by owners

If expenses are paid in cash, then

assets will decrease

What are the major services performed by public accountants?

auditing taxation management consulting

A basic assumption of accounting assumes that the dollar is

the common unit of measure for all business transactions.

A problem with the monetary unit assumption is that

the dollar has not been stable over time.

Andre Dickinson, owner of Andre's Fine Wines, also owns a personal residence that costs $475,000. The market value of his residence is $625,000. During preparation of the financial statements for Andre's Fine Wines, the accounting concept most relevant to the presentation of Andre's home is

the economic entity assumption.

The cost of an asset and its fair value are

the same on the date of acquisition

Accountants refer to an economic event as a

transaction

A partnership must have more than one owner.

true

Accountants record both internal and external transactions.

true

Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information.

true

What are examples of external users of accounting information?

Regulatory agencies. Customers. Investors.

Druganaut Company buys a $21,000 van on credit. The transaction will affect the

balance sheet only

The process of recording transactions has become more efficient because

computers are used in processing business events

The first step in solving an ethical dilemma is to

recognize an ethical situation and the ethical issues involved.

The private sector organization involved in developing accounting principles is the

Financial Accounting Standards Board

Liabilities of a company are owed to

creditors

The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies.

true

The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets.

true

The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities.

true

The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet.

true

The income statement is sometimes referred to as the statement of operations.

true

The following techniques are used by accountants to interpret and report financial information

Graphs Charts. Ratios.

Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the accounting process?

Recording

The body of theory underlying accounting is based on

concepts principles definitions

In order to increase comparability, in recent years, the FASB and IASB have made efforts to reduce the differences between U.S.GAAP and IFRS through a process known as

convergence

Owners enjoy limited liability in a

corporation

The cost principle requires that when assets are acquired, they be recorded at

cost

Martin Corporation purchased land in 2007 for $290,000. In 2013, it purchased a nearly identical parcel of land for $460,000. In its 2013 balance sheet, Martin valued these two parcels of land at a combined value of $920,000. By reporting the land in this manner, Martin Corp. has violated the

cost principle

Financial accounting provides economic and financial information for all of the following

creditors. investors. other external users

Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process.

false

Identifying is the process of keeping a chronological diary of events measured in dollars and cents.

false

In order to possess future service potential, an asset must have physical substance.

false

Owners of business firms are the only people who need accounting information.

false

Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses.

false

Private accountants are accountants who are not employees of business enterprises.

false

The Financial Accounting Standards Board is a part of the Securities and Exchange Commission.

false

The accounting process is correctly sequenced as

identification, recording, communication.

Accounting consists of three basic activities which are related to economic events of an organization. These include

identifying, recording, and communicating

The partnership form of business organization has

limited liability

The assumption that the unit of measure remains sufficiently constant over time is part of the

monetary unit assumption.

A small neighborhood barber shop that is operated by its owner would likely be organized as a

proprietorship

Financial information that is capable of making a difference in a decision is

relevant

The proprietorship form of business organization

represents the largest number of businesses in the United States.

Ethics are the standards of conduct by which one's actions are judged as

right or wrong. honest or dishonest. fair or unfair.

Generally accepted accounting principles are

standards that indicate how to report economic events.

The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that

the SEC often mandates guidelines when no accounting principles exist.

Accounting communicates financial information about a business enterprise to both internal and external users.

true

At the time an asset is acquired, cost and fair value should be the same.

true

Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners.

true

Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CPAs.

true

The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period.

true

What is an external user of accounting information?

Labor Unions

Owner's equity is best depicted by the following:

Assets-Liabilities

Ted Leo is the proprietor (owner) of Ted's, a retailer of golf apparel. When recording the financial transactions of Ted's, Ted does not record an entry for a car he purchased for personal use. Ted took out a personal loan to pay for the car. What accounting concept guides Ted's behavior in this situation?

Economic entity assumption

The primary accounting standard-setting body in the United States is the

Financial Accounting Standards Board

What is not part of the accounting process?

Financial decision making

If total liabilities increased by $8,000, then

assets must have increased by $8,000, or stockholders' equity must have decreased by $8,000.