Financial Accounting Chapters: 1,3,4

The ethical concept of independence means that an accountant employed: A) by a corporation cannot prepare financial statements for use by the company's bank. B) by one company cannot work part-time for another company. C) by an auditing firm cannot own any stock in the company being audited. D) by one company cannot accept a job with another company in the same industry. E) an accountant's independence would be impaired in any of the above situations.

By an auditing firm cannot own any stock in the company being audited.

Examples of how investors, creditors, and others commonly use reported earnings figures and the related information about the elements of financial statements include all of the following except: A) All of the above are examples of how these data are used. B) Evaluating management's past performance. C) Predicting future earnings. D) Assessing the risks of future cash flows. E) Estimating the number of employees the firm will hire during the next year.

Estimating the number of employees the firm will hire during the next year.

Arch Co. has a note payable to its bank. An adjusting entry is likely to be required on Arch's books at the end of every month that the loan is outstanding to record the: A) amount of interest paid during the month. B) amount of total interest to be paid when the note is paid off. C) amount of principal payable at the maturity date of the note. D) accrued interest expense for the month. E) all of the above.

accrued interest expense for the month.

Which of the following is not an example of a decision or informed judgment that a potential investor would make from accounting information? A) Future profitability based on past profitability. B) Probability of success of a new product development. C) A forecast of dividends. D) Assessment of risk that a company may have more debt than it can repay if the economy enters a recession. E) Assessment of the risk that the company may become bankrupt in the near future.

Probability of success of a new product development.

Assume that Kulpa Company has a current ratio of 0.7. Which of the following transactions would increase this ratio? A) Paying off Long-term Debt with Cash. B) Selling Merchandise Inventory at cost for Cash. C) Collecting Accounts Receivable in Cash. D) Paying off Accounts Payable with Cash. E) Purchasing Merchandise Inventory on credit.

Purchasing Merchandise Inventory on credit.

For a firm that presently has a current ratio of 2.0, the effect on this ratio of paying a current liability is: A) Raises the current ratio. B) Lowers the current ratio. C) Doesn't affect the current ratio. D) Depends on the amount paid. E) Not determinable based on the facts given.

Raises the current ratio.

Return on equity: A) Will be the same as return on investment. B) Relates dividends and turnover. C) Relates dividends and stockholders' equity. D) Relates net income and stockholders' equity. E) Uses net cash flows as the measure of return.

Relates net income and stockholders' equity.

Working capital includes all of the following accounts except: A) Accounts Payable B) Cash C) Retained Earnings D) Merchandise Inventory E) Accounts Receivable

Retained Earnings

Retained Earnings is not: A) increased by net income. B) decreased by expenses. C) increased by revenues. D) decreased by dividends declared. E) decreased by losses.

decreased by losses.

In the buyer's records, the purchase of merchandise on account would: A) increase assets and increase expenses. B) increase assets and increase liabilities. C) increase liabilities and increase paid-in capital. D) increase liabilities and decrease assets. E) have no effect on total assets.

increase assets and increase liabilities.

The return on investment measure of performance is: A) relevant only to business enterprises. B) used by individuals to compare investment performance. C) calculated using sales as the amount of return. D) calculated using total assets at the beginning of the period as the amount of investment. E) calculated using average stockholders' equity as the amount of investment.

used by individuals to compare investment performance.

Which of the following lists of accounts all have debit balances? A) Land, Equipment, and Paid-in Capital. B) Accounts Receivable, Merchandise Inventory, and Salary Expense. C) Notes Receivable, Dividends Payable, and Interest Expense. D) Accounts Receivable, Accumulated Depreciation, and Buildings. E) None of the above.

Accounts Receivable, Merchandise Inventory, and Salary Expense

Return on Investment (ROI) can be described or computed in each of the following ways, except: A) Amount Invested / Amount of Return = ROI. B) Net Income / Average Total Assets = ROI. C) (Net Income / Sales) x (Sales / Average Total Assets) = ROI. D) Turnover x Margin = ROI. E) All of the above describe ROI.

Amount Invested / Amount of Return = ROI.

Which of the following would not decrease working capital? A) A decrease in Cash. B) An increase in Accounts Payable. C) An increase in Merchandise Inventory. D) A decrease in Accounts Receivable. E) All of the above decrease working capital.

An increase in Merchandise Inventory.

Which of the following is not a correct expression of the accounting equation? A) Assets = Equities B) Assets = Liabilities - Stockholders' Equity C) Assets = Liabilities + Paid-in Capital + Retained Earnings D) Assets = Liabilities + Paid-in Capital + Revenues - Expenses E) Assets - Liabilities = Stockholders' Equity

Assets = Liabilities - Stockholders' Equity

Which of the following statements related to the origins and traditions of auditing is most true? A) Auditing has always followed a codified set of rules designed to detect and report fraud. B) Little judgment has traditionally been required on the auditor's part because the numbers a firm reports are either correct or they're not. C) Auditing evolved as a response to the needs of absentee owners of large corporations who had entrusted their money in the hands of managers they could not directly control. D) In the early 1920's, auditors became unified in their efforts, and generally accepted auditing procedures were consistently followed to the point that financial statements were considered quite reliable. E) Auditing was traditionally done only for banks. 8

Auditing evolved as a response to the needs of absentee owners of large corporations who had entrusted their money in the hands of managers they could not directly control.

Which of the following is not one of the 5 questions of transaction analysis? A) What's going on? B) Which accounts are affected? C) Is this an accrual? D) Does the balance sheet balance? E) Does my analysis make sense?

Is this an accrual?

Which of the following accounts is part of working capital? A) Retained Earnings B) Sales C) Merchandise Inventory D) Common Stock E) Long-Term Debt

Merchandise Inventory

Which of the following are qualified to express an auditor's opinion about an entity's financial statements? A) A Comptroller. B) A Certified Public Accountant. C) A Certified Internal Auditor. D) A Certified Management Accountant. E) None of the above.

A Certified Public Accountant.

As it relates to financial reporting, which of the following is not required of an accounting entity? A) A financial statement presenting the results of the entity's operations for a period of time. B) A financial statement presenting the financial position of the entity at a point in time. C) A financial statement presenting the amount that the entity expects to earn next year. D) A financial statement summarizing the entity's cash flows for a period of time. E) All of the above are required of an accounting entity.

A financial statement presenting the amount that the entity expects to earn next year.

Credits are used to record: A) decreases to assets and increases to expenses, liabilities, revenues, and stockholders' equity. B) decreases to assets and expenses and increases to liabilities, revenues, and stockholders' equity. C) increases to assets, and decreases to expenses, liabilities, and stockholders' equity. D) increases to assets and expenses and decreases to revenues, liabilities, and stockholders' equity. E) decreases to assets and stockholders' equity and increases to liabilities, expenses and revenues.

Decreases to assets and expenses and increases to liabilities, revenues, and stockholders' equity

The authoritative financial accounting standards-setting body in the United States is presently the: A) Securities and Exchange Commission (SEC). B) International Accounting Standards Board (IASB). C) Public Company Accounting Oversight Board (PCAOB). D) Financial Accounting Standards Board (FASB). E) Accounting Principles Board (APB).

Financial Accounting Standards Board (FASB).

Major classifications of accounting activity would not include: A) financial accounting, internal auditing, public accounting B) internal auditing, governmental accounting, managerial accounting C) auditing, income tax accounting, governmental accounting D) financial accounting, managerial accounting, governmental accounting E) financial accounting, national accounting, cost accounting

Financial accounting, national accounting, cost accounting

An advantage of the DuPont model for calculating ROI is that it: A) focuses on asset utilization as well as net income. B) is easier to use than the straightforward ROI formula. C) uses average total assets whereas the straightforward ROI formula does not. D) uses average total stockholders' equity. E) breaks ROI into its margin and return components.

Focuses on asset utilization as well as net income.

Accounting is defined as the process of: A) Reporting assets, liabilities, stockholders' equity, revenues, expenses, and dividends to investors and creditors for their decision-making purposes. B) Identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgments. C) Accruing, adjusting and closing the financial statements to provide the most relevant and reliable financial information possible for the purpose of making decisions and informed judgments. D) Providing financial information so that potential investors or creditors can make their own predictions of future earnings. E) Presenting the financial position and results of operations in the most favorable light possible to enhance shareholder wealth.

Identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgments

In the seller's records, the sale of merchandise on account at an amount that yields a gross profit would: A) increase assets and increase expenses. B) increase assets and decrease liabilities. C) increase assets and increase paid-in capital. D) increase assets and decrease revenues. E) decrease assets and increase expenses

Increase assets and increase expenses.

The effect of an adjustment on the financial statements is usually to A) make the balance sheet balance. B) increase net income. C) increase the accuracy of both the balance sheet and income statement. D) match revenues and assets. E) increase or decrease cash.

Increase the accuracy of both the balance sheet and income statement.

Which of the following statements about the Financial Accounting Standards Board is correct? A) The FASB is an agency of the Federal government. B) The FASB has the authority to fine a noncompliant firm. C) The FASB follows a due process procedure that permits input from interested parties before an Accounting Standards Update is issued. D) The FASB is controlled by the American Institute of CPA's. E) None of the above statements is correct.

The FASB follows a due process procedure that permits input from interested parties before an Accounting Standards Update is issued.

Financial statement ratios support informed judgments and decision making most effectively when: A) viewed for a single year. B) viewed as a trend of entity data. C) compared to an industry average for the most recent year. D) the trend of entity data is compared to the trend of industry data. E) the trend of entity data is compared to industry data for the most recent year.

The trend of entity data is compared to the trend of industry data.

Which statement best describes the purpose of closing entries: A) To continue recording the effects of transactions which began in one year and will be completed in another year. B) To compute net income or net loss for the year. C) To prepare the books for the posting process and taking a trial balance. D) To eliminate the balances in the revenue and expense accounts so they have zero balances at the beginning of the next fiscal year. E) To eliminate the need for preparing adjustments.

To eliminate the balances in the revenue and expense accounts so they have zero balances at the beginning of the next fiscal year.