Test #1 (Ch.1)

Dividends are an expense. T/F

False

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

False

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

False

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

False

Reports assets, liabilities, and stockholders' equity on specific date.

Balance Sheet

Requires that the activities of entity be kept separate and distinct from the activities of its owner and all other economic entities.

Economic Entity Assumption

States that assets and liabilities should be reported at their fair value (the price received to sell an asset or settle a liability).

Fair Value Principle

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

False

What is the primary accounting standard-setting body in the United States?

Financial Accounting Standards Board (FASB)

Standards that are generally accepted and universally practiced.

Generally Accepted Accounting Principles (GAAP)

Dictates that companies record assets at their cost.

Historic Cost Principle

Reports profitability for a specific period of time.

Income Statement

Requires that companies include in the accounting records only transactions that can be expressed in terms of money.

Monetary Unit Assumption

Reports changes in retained earnings for a specific period of time.

Retained Earnings Statement

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

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

True