Ch 1: Accounting in Action

The economic entity assumption states that: (a) assets should be initially recorded at cost and adjusted when the fair value changes. (b) activities of an entity are to be kept separate and distinct from its owner. (c) assets should be recorded at their cost. (d) only transaction data capable of being expressed in terms of money be included in the accounting records.

(b) activities of an entity are to be kept separate and distinct from its owner.

The three types of business entities are: (a)proprietorships, small businesses, and partnerships. (b)proprietorships, partnerships, and corporations. (c)proprietorships, partnerships, and large businesses. (d)financial, manufacturing, and service companies.

(b)proprietorships, partnerships, and corporations.

The historical cost principle states that: (a) assets should be initially recorded at cost and adjusted when the fair value changes. (b) activities of an entity are to be kept separate and distinct from its owner. (c) assets should be recorded at their cost. (d) only transaction data capable of being expressed in terms of money be included in the accounting records.

(c) assets should be recorded at their cost.

The financial statement that reports assets, liabilities, and stockholders' equity is the: (a)income statement. (b)retained earnings statement. (c)balance sheet. (d)statement of cash flows.

(c)balance sheet.

As of December 31, 2019, Reed Company has assets of $3,500 and stockholders' equity of $1,500. What are the liabilities for Reed Company as of December 31, 2019? (a)$1,500. (b)$1,000. (c)$2,500. (d)$2,000.

(d)$2,000.

Classify each item as an asset, liability, or stockholders' equity Accounts Receivable

Asset

Classify each item as an asset, liability, or stockholders' equity. Supplies

Asset

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Paid dividends.

Decrease in assets and decrease in stockholders' equity

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Paid monthly rent.

Decrease in assets and decrease in stockholders' equity

True/False: Relevance means that financial information matches what really happened; the information is factual.

False

True/False: The historical cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if fair value is higher than its cost.

False

True/False: The standards developed by the International Accounting Standards Board are referred to as International Financial Recording Standards.

False

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Purchased additional equipment for cash.

Increase in assets and decrease in assets

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Received cash from customers billed for the bill for customers for services performed.

Increase in assets and decrease in assets

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Purchased equipment on account.

Increase in assets and increase in liabilities

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Billed customers for services performed.

Increase in assets and increase in stockholders' equity

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Received cash from customers when service was performed.

Increase in assets and increase in stockholders' equity

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Sold common stock for cash to start business.

Increase in assets and increase in stockholders' equity

Describe the effect of each transaction on assets, liabilities, and stockholders' equity. Incurred advertising expense on account.

Increase in liabilities and decrease in stockholders' equity

Classify each item as an asset, liability, or stockholders' equity Accounts Payable

Liability

Classify each item as an asset, liability, or stockholders' equity Common Stock

Stockholders' Equity

Classify each item as an asset, liability, or stockholders' equity. Dividend

Stockholders' Equity

True/False: A business owner ' s personal expenses must be separated from expenses of the business to comply with accounting' s economic entity assumption.

True

True/False: Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals.

True

True/False: Expenses that result from operating the business are decreases in stockholders' equity

True

True/False: The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB).

True

True/False: The three most common forms of business organization, proprietorship, partnership, and corporation, are used in countries that use IFRS.

True

Which of the following is not one of the reasons that a single set of international accounting standards is needed? a) Government regulations. b) Multinational corporations. c) Information technology. d) Financial markets.

a) Government regulations.

The accounting process involves all of the following except: a) recording non-quantifiable economic events. b) analyzing and interpreting financial reports. c) identifying economic transactions that are relevant to the business. d) communicating financial information to users by preparing financial reports.

a) recording non-quantifiable economic events.

During 2019, Raritan Company's assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: a. increased $40,000 b. decreased $140,000 c. decreased $40,000 d. increased $140,000

a. increased $40,000

Which of the following financial statements is prepared as of a specific date? a.Balance sheet. b.Income statement. c.Retained earnings statement. d.Statement of cash flows.

a.Balance sheet.

A business owned by one person a.proprietorship. b.partnership. c.corporation. d.sole proprietorship.

a.proprietorship.

At the beginning of the year, Kimball Company had total assets of $700,000 and total liabilities of $400,000. If the total assets increased $100,000 and the total liabilities decreased $80,000, what is the amount of stockholders' equity at the end of the year? a) $300,000. b) $480,000. c) $20,000. d) None of these answer choices are correct.

b) $480,000.

Which of the following is not a step in the accounting process? a. Identification. b. Economic entity. c. Recording. d. Communication.

b. Economic entity.

Which of the following events is not recorded in the accounting records? a. equipment is purchased on account b. an employee is terminated c. a cash investment is made into the business d. the company pays a cash dividend

b. an employee is terminated

On the last day of the period, Neptune Company buys a $900 machine on credit. This transaction will affect the: a. income statement only b. balance sheet only c. income statement and retained earnings only d. income statement, retained earnings statement, and balance sheet

b. balance sheet only

Combining the activities of Kellogg and General Mills would violate the a.cost principle. b.economic entity assumption. c.monetary unit assumption. d.ethics principle.

b. economic entity assumption.

Performing services on account will have the following effects on the components of the accounting equation: a. increase assets and decrease stockholders' equity b. increase assets and increase stockholders' equity c. increase assets and increase liabilities d. increase liabilities and increase stockholders' equity

b. increase assets and increase stockholders' equity

Which of the following would not be considered an internal user of accounting data for a company? a) Production manager b) Controller of the company c) Internal Revenue Service d) President of the company

c) Internal Revenue Service

Which of the following statements about basic assumptions is correct? a) Basic assumptions are the same as accounting principles. b) Partnerships are not economic entities. c) The economic entity assumption states that there should be a particular unit of accountability. d) The monetary unit assumption enables accounting to measure employee morale.

c) The economic entity assumption states that there should be a particular unit of accountability.

Services provided by a public accountant include a) auditing, budgeting, and management consulting. b) internal auditing, budgeting, and management consulting. c) auditing, taxation, and management consulting. d) auditing, budgeting, and cost accounting.

c) auditing, taxation, and management consulting.

The ending retained earnings amount is shown on the a) statement of cash flows. b) retained earnings statement only. c) balance sheet and the retained earnings statement. d) balance sheet only.

c) balance sheet and the retained earnings statement.

All of the financial statements are for a period of time except the a) statement of cash flows. b) retained earnings statement. c) balance sheet. d) income statement.

c) balance sheet.

An example of an internal transaction is the a) performance of services. b) purchase of an asset. c) use of office supplies. d) payment of a liability.

c) use of office supplies.

The Sarbanes-Oxley Act determines: a)international tax regulations. b)internal control standards as enforced by the IASB. c)internal control standards of U.S. publicly traded companies. d)U.S. tax regulations.

c)internal control standards of U.S. publicly traded companies.

A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a.proprietorship. b.partnership. c.corporation. d.sole proprietorship.

c.corporation.

Job options available in public accounting include: a) auditors examining/providing an opinion on company financial statement. b) tax specialists performing tax advice and planning preparation of tax returns and representing clients before the IRS. c) management consultant providing support services on software installation, major marketing projects, or merger and acquisition activities. d) all of these answer choices are correct.

d) all of these answer choices are correct.

The intent of the Sarbanes Oxley Act of 2002 is to a) reduce unethical corporate behavior. b) decrease likelihood of future corporate scandals. c) increase severity of penalties for fraudulent financial activity. d) all of these answer choices are correct.

d) all of these answer choices are correct.

Revenues and expenses are reported on the a) statement of cash flows. b) statement of stockholders' equity. c) balance sheet. d) income statement.

d) income statement.

The receipt of cash on account will a) increase total stockholders' equity. b) decrease the Cash account balance. c) increase revenues. d) not change total assets.

d) not change total assets Increase Cash/Decrease Accounts Receivable - not change to assets

The first step in solving an ethical dilemma is to a) identify and analyze the principal elements in the situation. b) identify the alternatives. c) weigh the impact of each alternative on various stakeholders. d) recognize an ethical situation and the ethical issues involved.

d) recognize an ethical situation and the ethical issues involved.

Keeping a systematic, chronological diary of events, measured in dollars and cents is called a) processing. b) identifying. c) communicating. d) recording.

d) recording.

Payment of an account payable affects the components of the accounting equation in the following way: a. decreases stockholders' equity and decreases liabilities b. increases assets and decreases liabilities c. decreases assets and increases stockholders' equity d. decreases assets and decreases liabilities

d. decreases assets and decreases liabilities

Which of the following statements about users of accounting information is incorrect? a. management is an internal user b. taxing authorities are external users c. present creditors are external users d. regulatory authorities are internal users

d. regulatory authorities are internal users

Net income will result during a time period when: a. assets exceed liabilities b. assets exceed revenues c. expenses exceed revenues d. revenues exceed expenses

d. revenues exceed expenses

Ethics are the standards of conduct by which one's actions are judged as: a.right or wrong. b.honest or dishonest. c.fair or not fair. d.all of these options.

d.all of these options.