Financial Accounting Exam 1

T/F: The financial statements are based on the accounting equation.

...

An Oklahoma City business paid $15,000 cash for equipment used in the business. At the time of purchase, the equipment had a list price of $20,000. When the balance sheet was prepared, the value of the equipment was $22,000. What is the relevant measure of the value of the equipment? A) Historical cost, $15,000 B) Fair market cost, $20,000 C) Current market cost, $22,000 D) $15,000 on the day of purchase, $22,000 on balance sheet date

A

Assets appear on: A) the Balance Sheet. B) the Income Statement. C) the Statement of Retained Earnings. D) both the Balance Sheet and the Statement of Retained Earnings.

A

Common stock appears on: A) the Balance Sheet. B) the Income Statement. C) the Statement of Cash Flows and the Statement of Retained Earnings. D) none of the above.

A

Current assets are assets expected to be converted to cash, sold, or consumed within the next: A) 12 months or within the business's normal operating cycle if longer than a year. B) 12 months or within the business's normal operating cycle if less than a year. C) 6 months. D) 24 months.

A

Dividends appear on: A) the Statement of Retained Earnings. B) both the Statement of Retained Earnings and the Income Statement. C) the Income Statement. D) the Balance Sheet.

A

Equipment would appear on the: A) Balance Sheet with the long-term assets. B) Income Statement with the revenues. C) Income Statement with the operating expenses. D) Balance Sheet with the current assets.

A

For which form of business ownership are the owners of a business legally distinct from the business? A) Corporation B) Partnership C) Proprietorship D) All of the above

A

In relation to the cash flow statement, purchases and sales of long-term assets are examples of: A) investing activities. B) accrual activities. C) financing activities. D) operating activities.

A

Retained earnings is increased by: A) net income. B) net loss. C) dividends. D) expenses.

A

The FASB: A) is working towards a convergence of standards with the IASB. B) will not accept IASB rules. C) does not want US companies to adopt IFRS standards. D) feels that the global use of IFRS will significantly increase costs of doing global business.

A

The heading John Smith, Capital, indicates the owners' equity of a: A) proprietorship. B) corporation. C) not-for-profit. D) regulatory body.

A

Which financial statement provides a "snapshot photo" of one moment in time for the whole entity? A) Balance Sheet only B) Income Statement only C) Statement of Retained Earnings and Income Statement D) Statement of Cash Flows only

A

A company sells its product for $100. The cost of the product to the company is $60. Selling expenses are $15. Cost of goods sold is: A) $100. B) $60. C) $40. D) $75.

B

A company's gross profit for the period is reported on the: A) Balance Sheet. B) Income Statement. C) Statement of Cash Flows. D) Statement of Retained Earnings.

B

A potential investor interested in evaluating a company's financial earning performance for the current period would probably examine which of the following financial statements? A) Balance Sheet only B) Income Statement only C) Statement of Cash Flows and Income Statement D) Statement of Retained Earnings and Balance Sheet

B

An investor who wished to answer the question, "Can the company pay its current liabilities?" should investigate: A) the financing activities section of the cash flow statement. B) the current assets and current liabilities on the balance sheet. C) the sales revenue trend. D) none of the above.

B

Cash dividends: A) decrease revenue on the income statement. B) decrease retained earnings on the statement of retained earnings. C) increase expenses on the income statement. D) decrease operating activities on the statement of cash flows.

B

Cost of goods sold appears on the: A) Statement of Retained Earnings as an addition to beginning retained earnings. B) Income Statement as a deduction from sales. C) Balance Sheet as a deduction from sales. D) Income Statement as a deduction from gross profit.

B

Financial statements are: A) standard documents issued by outside consultants who are hired to analyze key operations of the business in financial terms. B) the business documents that companies use to report the results of their financial activities to various user groups. C) reports created by management that states it is responsible for the acts of the corporation. D) the mechanical part of accounting.

B

Gains and losses appear on which of the financial statements listed below? A) Balance Sheet B) Income Statement C) Statement of Cash Flows D) Statement of Retained Earnings

B

On January 1, 2010, total assets for Liftoff Technologies were $125,000; on December 31, 2010, total assets were $145,000. On January 1, 2010, total liabilities were $110,000; on December 31, 2010, total liabilities were $115,000. What is the amount of the change and the direction of the change in Liftoff Technologies' stockholders' equity for 2010? A) Decrease of $15,000 B) Increase of $15,000 C) Increase of $30,000 D) Decrease of $30,000

B

Stockholders' equity decreases as a result of: A) owner investments. B) a net loss during the period. C) a net income during the period. D) both A and C.

B

The accounting equation can be stated as: A) Assets + Stockholders' Equity = Liabilities. B) Assets -Liabilities = Stockholders' Equity. C) Assets = Liabilities - Stockholders' Equity. D) Assets - Stockholders' Equity + Liabilities = Zero.

B

The continuity (going-concern) assumption of accounting: A) enables accountants to ignore the effect of inflation in the accounting records. B) holds that the entity will remain in operation long enough to use its existing assets. C) maintains that each organization, or section of an organization, stands apart from other organizations and individuals. D) ensures that accounting records and statements are based on the most reliable data available.

B

The ending balance in Retained Earnings appears on the: A) Balance Sheet only. B) Balance Sheet and Statement of Retained Earnings. C) Statement of Retained Earnings only. D) Income Statement and Statement of Cash Flows.

B

The income statement is prepared to determine: A) the change in cash due to results of operations. B) the change in retained earnings due to the results of operations. C) the change in assets and liabilities due to the results of operations. D) all of the above.

B

The main source of cash from its main business comes from: A) current assets on the balance sheet. B) operating activities on the statement of cash flows. C) financing activities on the statement of cash flows. D) investing activities on the statement of cash flows.

B

The owners' equity of any business is its: A) revenues minus expenses. B) assets minus liabilities. C) assets plus liabilities. D) paid-in capital plus assets.

B

To be useful, accounting information must have the fundamental qualitative characteristics of: A) comparability and relevance. B) relevance and faithful representation. C) materiality and understandability. D) faithful representation and timeliness

B

What is the proper order for the categories of the statement of cash flows? A) Financing activities, investing activities, and operating activities B) Operating activities, investing activities, and financing activities C) Operating activities, financing activities, and investing activities D) Investing activities, financing activities, and operating activities

B

A corporation's paid-in capital includes: A) revenues and expenses. B) assets and liabilities. C) common stock. D) net income.

C

Accounting information is subject to the constraints of: A) comparability and consistency. B) comparability and verifiability. C) materiality and cost. D) relevance and faithful representation.

C

All of the following are characteristics of useful accounting information EXCEPT: A) comparability. B) timeliness C) informative. D) verifiability.

C

All of the following are forms of business organizations EXCEPT for the: A) proprietorship. B) limited liability partnership. C) limited proprietorship. D) limited liability company.

C

An example of a selling, general, and administrative expense is: A) cost of goods sold. B) sales. C) sales commissions paid to employees. D) interest expense.

C

An investor who wished to answer the question, "Can the company sell its products?" should investigate the: A) operating activities section of the cash flow statement. B) current and projected inventory levels. C) sales revenue trends and projected sales. D) net income for the current period and projected net income for the next period

C

An investor wishing to assess a company's overall financial position at the end of the period would probably examine the: A) Statement of Cash Flows and the Income Statement. B) Income Statement only C) Balance Sheet. D) Statement of Retained Earnings.

C

An office building is appraised for $250,000 and offered for sale at $260,000. The buyer pays $245,000 for the building. The building should be recorded on the books of the buyer at: A) $250,000. B) $260,000. C) $245,000. D) some other amount.

C

Generally, three factors influence business and accounting decisions— A) operating, investing, and financing activities. B) assets, liabilities, and equity. C) economic, legal, and ethical. D) revenues, expenses, and dividends.

C

Owners of an LLC are called: A) partners. B) sole proprietors. C) members. D) stockholders.

C

The acronym GAAP stands for: A) generally acceptable authorized pronouncements. B) government authorized accountant principles. C) generally accepted accounting principles. D) government audited accounting pronouncements.

C

The major types of transactions that affect retained earnings are: A) paid-in capital and common stock. B) assets and liabilities. C) revenues, expenses, and dividends. D) revenues and liabilities.

C

The sum of "outsider claims" plus "insider claims" equals: A) net income. B) total liabilities. C) total assets. D) total stockholders' equity.

C

Who ultimately controls a corporation? A) Board of Directors B) The Chief Executive Officer (CEO) C) The stockholders D) The President

C

The principle stating that assets acquired by the business should be recorded at their actual cost on the date of purchase is the:

Cost (Historical Cost) Principle

The relevant measure of the value of the assets of a company that is going out of business is the:

Current Market Value

Accumulated depreciation is normally associated with which asset on the Balance Sheet? A) Inventory B) Accounts receivable C) Land D) Property, plant and equipment

D

For accounting purposes, the business entity should be considered separate from its owners if the business is organized as a: A) proprietorship. B) corporation. C) partnership. D) any of the above.

D

Income taxes owed to the federal government would be classified as a(n): A) expense on the Income Statement. B) financing activity on the Statement of Cash Flows. C) current asset on the Balance Sheet. D) current liability on the Balance Sheet.

D

Management accounting: A) includes information such as budgets and forecasts. B) is used to make strategic decisions for the entity. C) must be relevant to decision makers within the entity. D) is all of the above.

D

Retained earnings appears on which of the following financial statements? A) Statement of Retained Earnings, Statement of Cash Flows, and Balance Sheet, but not the Income Statement B) Statement of Retained Earnings, Statement of Cash Flows, and Income Statement, but not the Balance Sheet C) Statement of Retained Earnings and Statement of Cash Flows, but not the Income Statement or Balance Sheet D) Statement of Retained Earnings and Balance Sheet, but not the Income Statement or Statement of Cash Flows

D

The amount that stockholders have invested in a corporation is called: A) retained earnings. B) investment. C) revenue. D) paid-in capital.

D

The balance sheet is also known as the: A) statement of profit and loss. B) operating statement. C) assets statement. D) statement of financial position.

D

Where would cash received from the sale of stock appear on the statement of cash flows? A) In the operating activity section B) In the non-cash financing activity section C) In the investing activity section D) In the financing activity section

D

Which of the following financial statements shows the net increase or decrease in cash during the period? A) Balance Sheet only B) Statement of Operations C) Statement of Retained Earnings and Balance Sheet D) Statement of Cash Flows

D

Which of the following questions should be asked in making an ethical analysis? A) Which option results in treating others as I would want to be treated? B) Which options are the most honest, open, and truthful? C) Which options create the greatest good for the greatest number of stakeholders? D) All of the above questions should be considered.

D

Which statement(s) summarizes the revenues and expenses of an entity? A) Balance Sheet only B) Statement of Cash Flows and Income Statement C) Statement of Retained Earnings and Statement of Operations D) Income Statement

D

Dividends

Distributions to stockholders of assets (usually cash) generated by a favorable balance in retained earnings.

The accounting assumption that states that the business, rather than its owners, is the reporting unit is the:

Entity Assumption

T/F: Common stock and retained earnings are the main components of paid-in capital.

FALSE

T/F: Liabilities are divided into "outsider claims" and "insider claims."

FALSE

T/F: Net income appears on both the income statement and the balance sheet.

FALSE

T/F: No major differences exist between the accounting standards issued by the FASB and the IASB.

FALSE

T/F: Since we live in a global economy, all countries have adopted the same accounting standards for business transactions.

FALSE

T/F: Stockholders determine if a corporation will pay dividends.

FALSE

T/F: The amount of cash received on the sale of the company's stock in excess of par value is called retained earnings.

FALSE

T/F: The owners' equity of proprietorships and corporations are the same.

FALSE

T/F: The stable monetary unit concept means that the type of currency used for the financial statements is NOT expected to change.

FALSE

T/F: The statement of cash flows contains three "parts"—operating activities, investing activities, and stock activities.

FALSE

T/F:Financial accounting provides budgeting information to a company's managers.

FALSE

What is another name for the continuity assumption?

Going-concern assumption.

When information is important enough to the informed user, so that, if it was omitted or erroneous, it would make a difference in the user's decision, it is:

Material

What is the term that means that each partner may conduct business in the name of the partnership and can legally bind all the partners without limit for the partnership's debts.

Mutual agency of a partnership

The two main components of stockholders' equity are:

Retained earnings and paid-in capital.

The owners' interest in the assets of a corporation is known as:

Stockholder's Equity

T/F: "Net assets", as stockholders' equity is often referred to, represents the residual amount of business assets which can be claimed by the owners.

TRUE

T/F: A balance sheet reports the company's financial position at a specific point in time.

TRUE

T/F: A journal entry is a record of an event that has a financial impact on the business that can be reliably measured.

TRUE

T/F: Accounting is moving in the direction of reporting more and more assets and liabilities at their fair values.

TRUE

T/F: Cost is a verifiable measure that is relatively free from bias.

TRUE

T/F: Cost of goods sold is the major expense of merchandising and manufacturing companies.

TRUE

T/F: Dividend payments are NOT classified as expenses.

TRUE

T/F: Generally accepted accounting principles, or GAAP, are the rules and procedures established by the Financial Accounting Standards Board, or the FASB.

TRUE

T/F: If expenses have exceeded sales revenue during the life of the company, the accumulation of these losses will result in an accumulated deficit in retained earnings.

TRUE

T/F: In accounting, the word "net" refers to an amount after a subtraction.

TRUE

T/F: Net income and net profit mean the same thing to accountants.

TRUE

T/F: One overall objective of accounting is to provide financial information that is useful to potential capital providers who are making investment and lending decisions.

TRUE

T/F: Stockholders' equity is the stockholders' interest in the assets of the corporation.

TRUE

T/F: The Retained Earnings account represents the excess of net income over dividends retained in the business since its inception.

TRUE

T/F: The accounting equation expresses the idea that Resources - Insider claims = Outsider claims.

TRUE

T/F: The accounting equation must always be in balance.

TRUE

T/F: The calculation of ending retained earnings considers beginning retained earnings, current net income or net loss and dividends.

TRUE

T/F: The entity assumption is the most basic accounting concept.

TRUE

T/F: The ethical factor recognizes that while certain actions might be both economically profitable and legal, they may still not be right.

TRUE

T/F: The statement of cash flows is organized in terms of the organization's operating, investing, and financing activities.

TRUE

T/F: The word "payable" always signifies a liability.

TRUE

T/F: To be relevant, accounting information must be capable of making a difference to the decision maker.

TRUE

T/F: Dividends never affect net income.

TRUE; Dividends are not expenses

T/F: In an LLP, each partner is liable for partnership debts only to the extent of their investment in the partnership plus their share of the liabilities.

True