Section A Question Set: Basic Accounting Concepts
19 Which of the following statements is true regarding the balance sheet? a. Assets are generally presented on the balance sheet in order of liquidity. b. Balance sheets are usually manipulated by understating assets or overstating liabilities. c. The accounts that appear on the balance sheet include revenues and expenses. d. The balance sheet shows the financial performance of a company over a certain period of time, such as a quarter or a year.
A
20 Assets, liabilities, and owners' equity are all items that appear on a company's balance sheet. a. True. b. False.
A
1 Which of the following is the best description of what is shown on a company's income statement? a. The company's sources and uses of cash for a particular period of time. b. How much profit or loss the company earned over a specific period of time. c. The company's financial position at a specific point in time. d. The changes in the total owners' equity accounts listed on the balance sheet.
B
10 If compliance with generally accepted accounting principles (GAAP) would be significantly more expensive than a different method that isn't GAAP, use of an alternative method is permitted. a. True. b. False.
B
13 Debits increase asset and liability accounts. a. True. b. False.
B
17 Which of the following statements is true with regard to the statement of cash flows? a. The statement of cash flows shows a company's financial position at a specific point in time. b. The statement of cash flows is often used in tandem with the income statement to determine a company's true financial performance. c. There are four types of cash flows: Cash flows from operating activities, from investing activities, from financing activities, and from revenue activities. d. The statement of cash flows is not always necessary because most companies operate under cash-basis accounting rather than accrual accounting.
B
7 Julia runs a printing company and has an antique printing press that she uses in her business. She purchased the press ten years ago for $5,000. Similar presses are selling on the market today for about $8,000. Julia mentioned she's thinking about retiring and her friend offered to give Julia $9,000 for the press. According to U.S. GAAP, how much should the printing press be listed for on Julia's books? a. $8,000 b. $9,000 c. $0 d. $3,000 e. $5,000
E
11 Which of the following appears on the balance sheet? a. Current assets b. Cost of goods sold c. Expenses d. Revenues
A
12 In double-entry accounting, every transaction in the accounting records will have both a debit and a credit side, and the dollar value of these sides will always be equal. a. True. b. False.
A
14 As a sale is made, the appropriate charges for cost of goods sold or other expenses directly corresponding to the sale should be recorded in the same accounting period. a. True. b. False.
A
15 At the end of each fiscal year, the accounts reflected on the income statement are reduced to a zero balance. a. True. b. False.
A
2 The accounting concept of consistency prohibits any change in an accounting principle previously employed. a. True. b. False.
B
5 The statement of changes in owners' equity acts as the connecting link between which two financial statements? a. Statement of cash flows and the balance sheet. b. Income statement and the statement of cash flows. c. Income statement and the balance sheet. d. Balance sheet and the statement of retained earnings.
C
21 Which of the following is an acceptable justification for a departure from generally accepted accounting principles (GAAP)? a. None of these answers are correct. b. Adhering to GAAP is significantly more expensive than using an alternative method. c. Departing from GAAP would make the company appear more profitable. d. The literal application of GAAP would render the financial statements misleading.
D
22 Which of the following statements is true regarding the balance sheet? a. The balance sheet shows the financial performance of a company over a certain period of time, such as a quarter or a year. b. Balance sheets are usually manipulated by understating assets or overstating liabilities. c. The accounts that appear on the balance sheet include revenues and expenses. d. Assets are generally presented on the balance sheet in order of liquidity.
D
23 If a fraudster wanted to conceal the misappropriation of cash, which of the following actions would not result in a balanced accounting equation? a. Reducing owners' equity. b. Creating an expense. c. Decreasing a liability. d. Decreasing another asset.
D
24 Which of the following statements is true with regard to gross margin? a. Gross margin is another term for net income. b. Gross margin is the top line of the income statement. c. Gross margin is equal to revenues less operating expenses. d. Gross margin is equal to net sales less cost of goods sold.
D
4 It is considered acceptable practice to deviate from generally accepted accounting principles (GAAP) in which of the following circumstances? a. It is common practice in the industry to give particular transactions a specific accounting treatment. b. Adherence to GAAP would produce misleading results. c. There is concern that assets or income would be overstated. d. All of these are correct.
D
3 Favorite targets for intelligence-gathering purposes include employees in all of the following departments except: a. Shipping and receiving b. Marketing c. Manufacturing and production d. Research and development
A
6 Revenue should not be recognized for work that is to be performed in subsequent accounting periods, even though the work might currently be under contract. a. True. b. False.
A
8 The ____________ details how much profit (or loss) a company earned over a particular period of time. a. Income Statement. b. Statement of Cash Flows. c. Statement of Changes in Owners' Equity. d. Balance Sheet.
A
18 Chapman Inc. has always used the last-in, first-out (LIFO) inventory valuation method when calculating its cost of goods sold. This is also the standard inventory valuation method for other comparable entities in Chapman's industry. Chapman's controller wants to change to the first-in, first-out (FIFO) method because it will make Chapman's net income appear much larger than LIFO valuation will. After several years of poor performance, management would love to boost the company's appearance to potential investors. However, Chapman must continue to use the LIFO inventory valuation method. This is reflected in which U.S. GAAP principle? a. Going concern. b. Consistency. c. Valuation. d. Full disclosure.
B
9 In double-entry accounting, every transaction in the accounting records will have an equal number of accounts on both the debit side and credits side, and the dollar value of these sides will always be equal. a. True. b. False.
B
16 Which of the following is the correct accounting equation? a. Assets + Liabilities = Owners' Equity b. Assets = Liabilities - Owners' Equity c. Assets - Liabilities = Owners' Equity d. None of these are correct.
C