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Student: ___________________________________________________________________________
1. Companies which do not make or sell goods are known as service companies.
True False
2. Southwest Airlines would be an example of a manufacturer.
True False
3. Wal-Mart is an example of a retailer.
True False
4. A business owned by one individual is known as a corporation.
True False
5. One disadvantage of a sole proprietorship and a partnership is unlimited liability.
True False
6. A business that has one owner is a partnership.
True False
7. One advantage of a corporation over the other forms of business is ease of formation.
True False
8. An accounting system is a system of financial recordkeeping.
True False
9. An accountant who charges a fee to businesses for their services works in private accounting.
True False
10. Assets - Owner's Equity = Liabilities represents the fundamental accounting equation.
True False
11. Resources a business owns are called revenues.
True False
12. Accounts payable are claims a business owes to creditors.
True False
13. An owner has a claim to a business for the amounts invested in the business.
True False
14. The difference between assets and liabilities is called profit.
True False
15. Expenses are resources used to earn revenue.
True False
16. Prepaid expenses are an example of an asset.
True False
17. Interest payable is an example of an expense.
True False
18. The correct order to prepare the financial statements is: 1) Balance Sheet, 2) Income Statement, 3)
Statement of Cash Flows, and 4) Statement of Owner's Equity.
True False
19. The statement of owner's equity links together the income statement and the balance sheet.
True False
20. Financial statements are only prepared at the end of the year.
True False
21. If net income is equal to $10,000 then the company's cash has increased by $10,000.
True False
22. The balance sheet reports a company's financial position at a particular point in time.
True False
23. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards
Board (FASB).
True False
24. One objective of external users of financial information is to assess the ability of a company to pay its
liabilities.
True False
25. The high cost of computers has made it more difficult for business owners to do their own bookkeeping.
True False
26. Managerial accounting reports produced by the accounting system are made available for external users of
accounting.
True False
27. A manager who is considering whether to continue or discontinue a particular product would refer to
financial accounting information.
True False
28. Creditors and investors are examples of external users of accounting information.
True False
29. Financial information that is unbiased and verifiable is said to be relevant.
True False
30. A company's managers have the primary responsibility for following Generally Accepted Accounting
Principles (GAAP) and for preparing fair financial statements.
True False
31. The _________________ outlines how the profits (or losses) are shared.
A. Stock certificate
B. Partnership agreement
C. Corporate charter
D. Financial statements
32. Which of the following would not be considered an external user of accounting information?
A. Bank
B. Supplier
C. Manager
D. Investor
33. All of the following include activities of external users of accounting information except:
A. Evaluating the risk of lending money to a business.
B. Determining the amount of supplies on hand.
C. Deciding whether to buy, sell or hold stock in a company.
D. Assessing whether the company has paid the correct amount of taxes.
34. Which of the following is considered an internal user of accounting information?
A. Production manager
B. Supplier
C. Investor
D. Customer
35. Which of the following is considered an external user of accounting information?
A. Production manager
B. CEO
C. IRS
D. Controller
36. A bank is most likely a(n) ___________ user of accounting information.
A. external
B. internal
C. governmental
D. managerial
37. Which of the following represents the fundamental accounting equation?
A. A + L = OE
B. A - L = OE
C. OE + A = L
D. L - OE = A
38. An example of a claim to resources of a business is:
A. Cash.
B. Land.
C. Accounts payable.
D. Accounts receivable.
39. Resources a business owns are called:
A. Liabilities.
B. Owner's equity.
C. Revenues.
D. Assets.
40. Claims a business owes are called owners' equity when they are held by:
A. Creditors.
B. Suppliers.
C. Employees.
D. Investors.
41. An example of an asset is:
A. Wages expense.
B. Revenue.
C. Supplies.
D. Accounts payable.
42. Which of the following is not a characteristic of an asset?
A. It is a resource controlled by the business.
B. It has measurable value.
C. It is incurred to generate revenue.
D. It is expected to provide future benefits.
43. Land is an example of a(n):
A. Liability.
B. Asset.
C. Revenue.
D. Expense.
44. Unearned revenue is an example of a(n):
A. Liability.
B. Revenue.
C. Asset.
D. Expense.
45. Inventory is an example of a(n):
A. Liability.
B. Revenue.
C. Expense.
D. Asset.
46. Which of the following is not one of the four basic financial statements?
A. Income statement
B. Statement of cash flows
C. Accounting equation
D. Balance sheet
47. Which of the four basic financial statements provides a snapshot of the business on a particular day?
A. Balance sheet
B. Income statement
C. Statement of cash Flows
D. Statement of owner's equity
48. Which financial statement should be prepared first?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Statement of owner's equity
49. Which financial statement links together the Income Statement and the Balance Sheet?
A. Statement of cash flows
B. Statement of owner's equity
C. Statement of operations
D. Statement of financial position
50. Which financial statement includes only those activities that result in cash changing hands during the
period?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of owner's equity
51. Which of the following is not one of the types of business activities included on the statement of cash
flows?
A. Investing
B. Operating
C. Financing
D. Reporting
52. The governmental agency that supervises the work of the Financial Accounting Standards Board (FASB) is
known as the:
A. Generally Accepted Accounting Principles (GAA).
B. Securities and Exchange Commission (SEC).
C. Public Company Accounting Oversight Board (PCAOB).
D. American Institute of CPAs (AICPA).
53. Financial information that is __________ ensures that it is unbiased and verifiable.
A. relevant
B. comparable
C. reliable
D. consistent
54. The primary responsibility for setting the rules of accounting rests with the:
A. Financial Accounting Standards Board (FASB).
B. Generally Accepted Accounting Principles (GAAP).
C. Security and Exchange Commission (SEC).
D. American Institute of CPAs (AICPA).
55. The rules of accounting are known as:
A. Security and Exchange Commission (SEC).
B. Financial Accounting Standards Board (FASB).
C. American Institute of CPAs (AICPA).
D. Generally Accepted Accounting Principles (GAAP).
56. In a business, who has the primary responsibility for following GAAP and preparing fair financial
statements?
A. Management
B. The accountants
C. The CPA
D. The SEC
57. The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:
A. Accounting.
B. Reporting.
C. Internal control.
D. Financing.
58. _______ are the standards of conduct for judging right from wrong.
A. Ethics
B. Rules
C. Internal controls
D. Conducts
59. Which of the following is not a required element of the title on a financial statement?
A. The company's name
B. The reporting date or period
C. The name of the financial statement
D. The preparer's name
60. The income statement reports:
A. Revenues, assets and expenses.
B. Net income or loss for the period.
C. Only sales amounts paid in cash.
D. The financial position on a particular date.
61. Which of the following would not be an objective of an external user analyzing a company's financial
statements?
A. Assessing the company's ability to pay its debts.
B. Predicting the future profitability of the company.
C. Determining whether the company should drop an unprofitable product line.
D. Understanding the financial position of the company.
62. A company reported assets of $12,000 and liabilities of $2,500, what amount would be reported for owner's
equity?
A. $14.500
B. $9,500
C. $12,000
D. $2,000
63. A company reported revenue of $100,000 and a net loss of $12,000. What amount was reported as
expenses?
A. $112,000
B. $12,000
C. $88,000
D. $100,000
64. What business type has two or more owners and unlimited liability?
A. Corporation
B. Sole proprietorship
C. Partnership
D. Retailer
65. Which of the following is an example of a service company?
A. Wal-Mart
B. Home Depot
C. American Airlines
D. Ford Motor Company
66. Which of the following is not a merchandiser?
A. Target
B. Best Western
C. Staples
D. Macy's
67. Companies which make products from raw inputs are known as:
A. Service Companies.
B. Wholesalers.
C. Retailers.
D. Manufacturers.
68. Boeing would be an example of what business type?
A. Service company
B. Merchandiser
C. Manufacturer
D. Retailer
69. Which of the following is not one of the three major ways that a business can be organized?
A. Partnership
B. Sole Proprietorship
C. Corporation
D. Wholesaler
70. One advantage of the corporate form of business over the other forms of business is:
A. Limited liability.
B. Ease of formation.
C. Separate taxation.
D. Lower legal fees.
71. Accounting is an information system designed to:
A. Provide information to external users only.
B. Provide information to internal users only.
C. Capture a business's activities and communicate results to all decision makers.
D. Handle the record keeping of a business but other functions must be performed by a CPA.
72. Accountants who are employed by a single business or nonprofit organization work in:
A. Public accounting.
B. Private accounting.
C. A CPA firm.
D. Governmental accounting only.
73. Technology and the low cost of computers have resulted in:
A. Increased complexity in accounting systems.
B. Higher fees charged by public accountants.
C. Small businesses handling their own bookkeeping.
D. An abundance of accounting reports.
74. The area of accounting which primarily serves the decision making needs of internal users is:
A. Financial accounting.
B. Bookkeeping.
C. Auditing.
D. Managerial Accounting.
75. On December 31 of the current year, a company reported the following items on its balance sheet: Cash
$10,500; Accounts receivable $5,200; Inventory $2,300; Equipment $102,400; Accounts payable $12,000;
Notes payable $56,000. What amount should be reported as owner's equity?
A. $108,400
B. $52,400
C. $120,400
D. $188,400
76. Assets should originally be recorded at:
A. Market value.
B. Replacement cost.
C. Historical cost.
D. Amount owed on the asset.
77. If owners contribute $50,000 to start a new business what is the effect on the accounting equation?
A. Assets increase $50,000; no effect on liabilities; equity increases $50,000.
B. Assets decrease $50,000; liabilities decrease $50,000; no effect on equity.
C. Assets decrease $50,000; no effect on liabilities; equity decreases $50,000.
D. Assets increase $50,000; liabilities increase $50,000; no effect on equity.
78. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?
A. Assets increase $100,000; no effect on liabilities; equity increases $100,000.
B. Assets decrease $100,000; liabilities decrease $100,000; no effect on equity.
C. Assets decrease $100,000; no effect on liabilities; equity decreases $100,000.
D. Assets increase $100,000; liabilities increase $100,000; no effect on equity.
79. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?
A. Assets increase $45,000; no effect on liabilities; equity increases $45,000.
B. Assets decrease $45,000; liabilities decrease $45,000; no effect on equity.
C. No effect on the accounting equation because assets increase and decrease by the same amount.
D. Assets increase $45,000; liabilities increase $45,000; no effect on equity.
80. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?
A. Assets increase $23,000; no effect on liabilities; equity increases $23,000.
B. Assets decrease $23,000; liabilities decrease $23,000; no effect on equity.
C. Assets decrease $23,000; no effect on liabilities; equity decreases $23,000.
D. Assets increase $23,000; liabilities increase $23,000; no effect on equity.
81. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?
A. Assets increase $3,400; no effect on liabilities; equity increases $3,400.
B. Assets decrease $3,400; liabilities decrease $3,400; no effect on equity.
C. Assets decrease $3,400; no effect on liabilities; equity decreases $3,400.
D. Assets increase $3,400; liabilities increase $3,400; no effect on equity.
82. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?
A. Assets increase $5,000; no effect on liabilities; equity increases $5,000.
B. Assets decrease $5,000; liabilities decrease $5,000; no effect on equity.
C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.
D. Assets increase $5,000; liabilities increase $5,000; no effect on equity.
83. When a company distributes profits to its owners the result is a(n):
A. Decrease in profits.
B. Decrease in assets and owner's equity.
C. Increase in owner's equity.
D. Increase in assets.
84. The following information is reported for Manco Company for the month of March. Determine net income.
A. $(21,500)
B. $144,500
C. $21,500
D. $73,000
85. A company reported total equity of $82,000 on its December 31, 2009 balance sheet. The following
information is available for the year ended December 31, 2010:
What are the total assets of the company as of December 31, 2010?
A. $167,000
B. $202,000
C. $85,000
D. $132,000
86. For each of the following financial statement items, indicate which type of financial statement element it is.
Use the following codes:
A - Asset
L - Liability
OE - Owner's equity
R - Revenue
E - Expense
87. For each account listed indicate the type of account and what financial statement it would appear on using
the codes provided. The first account had been completed as an example.
88. Given the following partially complete financial statements for CiCi Company, fill in the missing (?) items.
89. For each of user of accounting information listed below indicate whether the user is an internal or external
of accounting information by placing an X in the appropriate box.
90. For each of the following transactions indicate the effect on the accounting equation by placing a + or a -
under the appropriate element and including the amount. The first transaction has been provided as an example.
91. For each of the following independent cases determine the missing amounts. Assume that it is the end of
2010, the first full year of operations for the company.
92. Use the information from Fairbank Company to answer the following questions. The accountant for
Fairbank Company prepared the following information from the company's accounting records for the year
ended December 31, 2010:
Determine the following amounts for Fairbank Company:
A. Total assets at the end of 2010.
B. Total Liabilities at the end of 2010.
C. Owner's equity at the end of 2010.
D. Total revenue for 2010.
E. Total expenses for 2010.
F. Is Fairbank profitable? Explain
93. The following information was taken from a company's most recent cash flow statement for. Indicate
whether each cash flow is from operating (O), investing (I), or financing (F) and also whether the item is a cash
inflow (+) or outflow (-).
94. List at least three characteristics of a corporation. What advantages does the corporate form of business
offer over other forms of business? What is one disadvantage of a corporation over the other forms of business?
95. Discuss two reasons why owners have a claim to a business. Use examples to support your answer.
96. Discuss the order in which the four basic financial statements should be prepared. Briefly describe what
information each financial statement provides.
97. A company earns net income of $5,000 during the month of March. Discuss how the net income amount
may be different from what is in the cash balance at the end of the month of March. What might lead to
differences between net income and the cash balance?
98. Compare and contrast financial accounting and managerial accounting. Who are the users of each type of
accounting?
99. Describe the difference between internal and external users of accounting information. Give examples of
each type of users. What decisions are made by each user? What type of information does each use to make
decisions?
100. What is the fundamental accounting equation? Define each element of the equation and provide examples
of each element.
101. What is GAAP and what characteristics should financial information have in order to be useful to decision
makers? What is the role of the FASB?
102. _______________ businesses make products from raw inputs.
________________________________________
103. Companies that do not make or sell products are _____________ firms.
________________________________________
104. One benefit of the corporate form of business is __________ liability.
________________________________________
105. A form of business which has two or more owners who are personally liable for the business's debts is a
______________.
________________________________________
106. ____________ is an information system designed to capture and communicate a business's financial
performance.
________________________________________
107. Accountants who charge fees for services to a variety of businesses work in ___________ accounting.
________________________________________
108. Examples of ______________ users of accounting information include bankers, investors and suppliers.
________________________________________
109. ______________ accounting primarily provides detailed accounting information to internal users.
________________________________________
110. The fundamental accounting equation is Assets minus _________ equals __________.
________________________________________
111. ____________ are economic resources owned by a business and likely to provide future benefits.
________________________________________
112. Cash, accounts receivable, and equipment are examples of ___________.
________________________________________
113. According to the _____________ principle, assets are initially recorded at the total cost to acquire them.
________________________________________
114. The ___________ reports the performance of a business over a period of time, while the ____________ is
a snapshot of the financial position at a point in time.
________________________________________
115. If assets equal $110,000 and liabilities equal $65,000 then owner's equity is equal to _________.
________________________________________
116. If owners contribute cash to start a business then assets will __________, liabilities will __________, and
owner's equity will ___________.
________________________________________
117. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and
__________ activities.
________________________________________
118. The ___________ sets the rules of accounting.
________________________________________
119. ____________ are standards of conduct used to judge right from wrong.
________________________________________
120. When financial accounting information is ___________ then it is unbiased and verifiable.
________________________________________
121. The rules of accounting which publicly held companies must follow are known as ___________.
________________________________________
122. Fill in the appropriate letter from the list of definitions below which accurately describes each term.
1. Sole
proprietorship A separate legal entity that sells stock to owners. ____
2. Manufacturer A business owned by two or more individuals. ____
3. Corporation
A company that sells goods made by
manufacturers to customers. ____
4. Partnership A business owned by one individual. ____
5. Service company A company that makes products from raw inputs. ____
6. Merchandiser A company that provides a service to customers. ____
123. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:
1. CPA An accountant that works in public accounting. ____
2. PCAOB
Governmental agency that supervises the work of the FASB
and the PCAOB. ____
3. AICPA
Requires its members to adhere to a Code of Professional
Conduct. ____
4. SEC The rules of accounting. ____
5. GAAP Approves rules to be followed by auditors. ____
6. FASB
Has primary responsibility for setting accounting standards
in the U.S. ____
124. For each business listed below indicate the correct form of business by using the following codes: (S) Sole
Proprietorship, (P) Partnership, and (C) Corporation.
1. S
Franklin & Associates is a law firm with four owners. Each owner
shares equally in the profits/losses of the business and is personally
liable for the debts of the business. ____
2. S
Tamara's Hair Salon is owned exclusively by Tamara and is not a
separate legal entity. ____
3. P American Auto Parts is owned by 500 shareholders. ____
4. C
Jenni's Bakery is owned by Jenni and the profits are part of her
personal taxable income. ____
5. P
Mark and Ben own and operate a car wash. They have a legal
agreement which outlines how they will share profits (losses). ____
6. C
ABC Limited issued 10,000 shares of stock to the public to finance
the expansion of a new division. ____
125. Match each term with its related definition by entering the appropriate letter in the space provided.
1. Historical cost
Financial information can be compared to other
companies. ____
2. Net income Resources used to earn revenues. ____
3. Consistent
Financial information is most useful when it is
unbiased and verifiable. ____
4. Relevant
The area of accounting which provides information
to external decision makers. ____
5. Reliable Financial information can be compared over time. ____
6. Expenses
Assets are initially measured at the total cost to
acquire them. ____
7. Ethics
The positive difference between revenues and
expenses. ____
8. Comparable Standards of conduct for judging right from wrong. ____
9. Financial
accounting
Financial information is helpful in making
decisions should be reported. ____
10. Revenues
Amounts earned when goods or services are
delivered to customers. ____
ch1 Key
1. Companies which do not make or sell goods are known as service companies.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #1
Topic: Business types and organizational forms
2. Southwest Airlines would be an example of a manufacturer.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #2
Topic: Business types and organizational forms
3. Wal-Mart is an example of a retailer.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #3
Topic: Business types and organizational forms
4. A business owned by one individual is known as a corporation.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #4
Topic: Business types and organizational forms
5. One disadvantage of a sole proprietorship and a partnership is unlimited liability.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #5
Topic: Business types and organizational forms
6. A business that has one owner is a partnership.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #6
Topic: Business types and organizational forms
7. One advantage of a corporation over the other forms of business is ease of formation.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #7
Topic: Business types and organizational forms
8. An accounting system is a system of financial recordkeeping.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Libby - Chapter 001 #8
Topic: Accounting and business decisions
9. An accountant who charges a fee to businesses for their services works in private accounting.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Libby - Chapter 001 #9
Topic: Accounting and business decisions
10. Assets - Owner's Equity = Liabilities represents the fundamental accounting equation.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #10
Topic: Basic financial reports
11. Resources a business owns are called revenues.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #11
Topic: Basic financial reports
12. Accounts payable are claims a business owes to creditors.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #12
Topic: Basic financial reports
13. An owner has a claim to a business for the amounts invested in the business.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #13
Topic: Basic financial reports
14. The difference between assets and liabilities is called profit.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #14
Topic: Basic financial reports
15. Expenses are resources used to earn revenue.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #15
Topic: Basic financial reports
16. Prepaid expenses are an example of an asset.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #16
Topic: Basic financial reports
17. Interest payable is an example of an expense.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #17
Topic: Basic financial reports
18. The correct order to prepare the financial statements is: 1) Balance Sheet, 2) Income Statement, 3)
Statement of Cash Flows, and 4) Statement of Owner's Equity.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #18
Topic: Basic financial reports
19. The statement of owner's equity links together the income statement and the balance sheet.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-5
Libby - Chapter 001 #19
Topic: Basic financial reports
20. Financial statements are only prepared at the end of the year.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #20
Topic: Basic financial reports
21. If net income is equal to $10,000 then the company's cash has increased by $10,000.
FALSE
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
Learning Objective: 1-5
Libby - Chapter 001 #21
Topic: Basic financial reports
22. The balance sheet reports a company's financial position at a particular point in time.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #22
Topic: Basic financial reports
23. The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards
Board (FASB).
TRUE
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #23
Topic: Professional standards and ethical conduct
24. One objective of external users of financial information is to assess the ability of a company to pay its
liabilities.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #24
Topic: Accounting and business decisions
25. The high cost of computers has made it more difficult for business owners to do their own bookkeeping.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Libby - Chapter 001 #25
Topic: Accounting and business decisions
26. Managerial accounting reports produced by the accounting system are made available for external users of
accounting.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #26
Topic: Accounting and business decisions
27. A manager who is considering whether to continue or discontinue a particular product would refer to
financial accounting information.
FALSE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #27
Topic: Accounting and business decisions
28. Creditors and investors are examples of external users of accounting information.
TRUE
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #28
Topic: Accounting and business decisions
29. Financial information that is unbiased and verifiable is said to be relevant.
FALSE
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #29
Topic: Professional standards and ethical conduct
30. A company's managers have the primary responsibility for following Generally Accepted Accounting
Principles (GAAP) and for preparing fair financial statements.
TRUE
AACSB: Ethics
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Libby - Chapter 001 #30
Topic: Professional standards and ethical conduct
31. The _________________ outlines how the profits (or losses) are shared.
A. Stock certificate
B. Partnership agreement
C. Corporate charter
D. Financial statements
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #31
Topic: Business types and organizational forms
32. Which of the following would not be considered an external user of accounting information?
A. Bank
B. Supplier
C. Manager
D. Investor
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #32
Topic: Accounting and business decisions
33. All of the following include activities of external users of accounting information except:
A. Evaluating the risk of lending money to a business.
B. Determining the amount of supplies on hand.
C. Deciding whether to buy, sell or hold stock in a company.
D. Assessing whether the company has paid the correct amount of taxes.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-3
Libby - Chapter 001 #33
Topic: Accounting and business decisions
34. Which of the following is considered an internal user of accounting information?
A. Production manager
B. Supplier
C. Investor
D. Customer
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #34
Topic: Accounting and business decisions
35. Which of the following is considered an external user of accounting information?
A. Production manager
B. CEO
C. IRS
D. Controller
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #35
Topic: Accounting and business decisions
36. A bank is most likely a(n) ___________ user of accounting information.
A. external
B. internal
C. governmental
D. managerial
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #36
Topic: Accounting and business decisions
37. Which of the following represents the fundamental accounting equation?
A. A + L = OE
B. A - L = OE
C. OE + A = L
D. L - OE = A
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #37
Topic: Basic financial reports
38. An example of a claim to resources of a business is:
A. Cash.
B. Land.
C. Accounts payable.
D. Accounts receivable.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #38
Topic: Basic financial reports
39. Resources a business owns are called:
A. Liabilities.
B. Owner's equity.
C. Revenues.
D. Assets.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #39
Topic: Basic financial reports
40. Claims a business owes are called owners' equity when they are held by:
A. Creditors.
B. Suppliers.
C. Employees.
D. Investors.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #40
Topic: Basic financial reports
41. An example of an asset is:
A. Wages expense.
B. Revenue.
C. Supplies.
D. Accounts payable.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #41
Topic: Basic financial reports
42. Which of the following is not a characteristic of an asset?
A. It is a resource controlled by the business.
B. It has measurable value.
C. It is incurred to generate revenue.
D. It is expected to provide future benefits.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-4
Libby - Chapter 001 #42
Topic: Basic financial reports
43. Land is an example of a(n):
A. Liability.
B. Asset.
C. Revenue.
D. Expense.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #43
Topic: Basic financial reports
44. Unearned revenue is an example of a(n):
A. Liability.
B. Revenue.
C. Asset.
D. Expense.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #44
Topic: Basic financial reports
45. Inventory is an example of a(n):
A. Liability.
B. Revenue.
C. Expense.
D. Asset.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #45
Topic: Basic financial reports
46. Which of the following is not one of the four basic financial statements?
A. Income statement
B. Statement of cash flows
C. Accounting equation
D. Balance sheet
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Libby - Chapter 001 #46
Topic: Basic financial reports
47. Which of the four basic financial statements provides a snapshot of the business on a particular day?
A. Balance sheet
B. Income statement
C. Statement of cash Flows
D. Statement of owner's equity
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #47
Topic: Basic financial reports
48. Which financial statement should be prepared first?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Statement of owner's equity
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Libby - Chapter 001 #48
Topic: Basic financial reports
49. Which financial statement links together the Income Statement and the Balance Sheet?
A. Statement of cash flows
B. Statement of owner's equity
C. Statement of operations
D. Statement of financial position
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #49
Topic: Basic financial reports
50. Which financial statement includes only those activities that result in cash changing hands during the
period?
A. Income statement
B. Balance sheet
C. Statement of cash flows
D. Statement of owner's equity
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-5
Libby - Chapter 001 #50
Topic: Basic financial reports
51. Which of the following is not one of the types of business activities included on the statement of cash
flows?
A. Investing
B. Operating
C. Financing
D. Reporting
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #51
Topic: Basic financial reports
52. The governmental agency that supervises the work of the Financial Accounting Standards Board (FASB) is
known as the:
A. Generally Accepted Accounting Principles (GAA).
B. Securities and Exchange Commission (SEC).
C. Public Company Accounting Oversight Board (PCAOB).
D. American Institute of CPAs (AICPA).
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #52
Topic: Professional standards and ethical conduct
53. Financial information that is __________ ensures that it is unbiased and verifiable.
A. relevant
B. comparable
C. reliable
D. consistent
AACSB: Ethics
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Libby - Chapter 001 #53
Topic: Professional standards and ethical conduct
54. The primary responsibility for setting the rules of accounting rests with the:
A. Financial Accounting Standards Board (FASB).
B. Generally Accepted Accounting Principles (GAAP).
C. Security and Exchange Commission (SEC).
D. American Institute of CPAs (AICPA).
AACSB: Ethics
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Libby - Chapter 001 #54
Topic: Professional standards and ethical conduct
55. The rules of accounting are known as:
A. Security and Exchange Commission (SEC).
B. Financial Accounting Standards Board (FASB).
C. American Institute of CPAs (AICPA).
D. Generally Accepted Accounting Principles (GAAP).
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #55
Topic: Professional standards and ethical conduct
56. In a business, who has the primary responsibility for following GAAP and preparing fair financial
statements?
A. Management
B. The accountants
C. The CPA
D. The SEC
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #56
Topic: Professional standards and ethical conduct
57. The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:
A. Accounting.
B. Reporting.
C. Internal control.
D. Financing.
AACSB: Ethics
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Libby - Chapter 001 #57
Topic: Professional standards and ethical conduct
58. _______ are the standards of conduct for judging right from wrong.
A. Ethics
B. Rules
C. Internal controls
D. Conducts
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #58
Topic: Professional standards and ethical conduct
59. Which of the following is not a required element of the title on a financial statement?
A. The company's name
B. The reporting date or period
C. The name of the financial statement
D. The preparer's name
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #59
Topic: Basic financial reports
60. The income statement reports:
A. Revenues, assets and expenses.
B. Net income or loss for the period.
C. Only sales amounts paid in cash.
D. The financial position on a particular date.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #60
Topic: Basic financial reports
61. Which of the following would not be an objective of an external user analyzing a company's financial
statements?
A. Assessing the company's ability to pay its debts.
B. Predicting the future profitability of the company.
C. Determining whether the company should drop an unprofitable product line.
D. Understanding the financial position of the company.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #61
Topic: Accounting and business decisions
62. A company reported assets of $12,000 and liabilities of $2,500, what amount would be reported for owner's
equity?
A. $14.500
B. $9,500
C. $12,000
D. $2,000
AACSB: Analytic
Blooms: Analysis
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #62
Topic: Basic financial reports
63. A company reported revenue of $100,000 and a net loss of $12,000. What amount was reported as
expenses?
A. $112,000
B. $12,000
C. $88,000
D. $100,000
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #63
Topic: Basic financial reports
64. What business type has two or more owners and unlimited liability?
A. Corporation
B. Sole proprietorship
C. Partnership
D. Retailer
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #64
Topic: Business types and organizational forms
65. Which of the following is an example of a service company?
A. Wal-Mart
B. Home Depot
C. American Airlines
D. Ford Motor Company
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #65
Topic: Business types and organizational forms
66. Which of the following is not a merchandiser?
A. Target
B. Best Western
C. Staples
D. Macy's
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #66
Topic: Business types and organizational forms
67. Companies which make products from raw inputs are known as:
A. Service Companies.
B. Wholesalers.
C. Retailers.
D. Manufacturers.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #67
Topic: Business types and organizational forms
68. Boeing would be an example of what business type?
A. Service company
B. Merchandiser
C. Manufacturer
D. Retailer
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #68
Topic: Business types and organizational forms
69. Which of the following is not one of the three major ways that a business can be organized?
A. Partnership
B. Sole Proprietorship
C. Corporation
D. Wholesaler
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #69
Topic: Business types and organizational forms
70. One advantage of the corporate form of business over the other forms of business is:
A. Limited liability.
B. Ease of formation.
C. Separate taxation.
D. Lower legal fees.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-1
Libby - Chapter 001 #70
Topic: Business types and organizational forms
71. Accounting is an information system designed to:
A. Provide information to external users only.
B. Provide information to internal users only.
C. Capture a business's activities and communicate results to all decision makers.
D. Handle the record keeping of a business but other functions must be performed by a CPA.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Libby - Chapter 001 #71
Topic: Accounting and business decisions
72. Accountants who are employed by a single business or nonprofit organization work in:
A. Public accounting.
B. Private accounting.
C. A CPA firm.
D. Governmental accounting only.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Libby - Chapter 001 #72
Topic: Accounting and business decisions
73. Technology and the low cost of computers have resulted in:
A. Increased complexity in accounting systems.
B. Higher fees charged by public accountants.
C. Small businesses handling their own bookkeeping.
D. An abundance of accounting reports.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Libby - Chapter 001 #73
Topic: Accounting and business decisions
74. The area of accounting which primarily serves the decision making needs of internal users is:
A. Financial accounting.
B. Bookkeeping.
C. Auditing.
D. Managerial Accounting.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #74
Topic: Accounting and business decisions
75. On December 31 of the current year, a company reported the following items on its balance sheet: Cash
$10,500; Accounts receivable $5,200; Inventory $2,300; Equipment $102,400; Accounts payable $12,000;
Notes payable $56,000. What amount should be reported as owner's equity?
A. $108,400
B. $52,400
C. $120,400
D. $188,400
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #75
Topic: Basic financial reports
76. Assets should originally be recorded at:
A. Market value.
B. Replacement cost.
C. Historical cost.
D. Amount owed on the asset.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #76
Topic: Basic financial reports
77. If owners contribute $50,000 to start a new business what is the effect on the accounting equation?
A. Assets increase $50,000; no effect on liabilities; equity increases $50,000.
B. Assets decrease $50,000; liabilities decrease $50,000; no effect on equity.
C. Assets decrease $50,000; no effect on liabilities; equity decreases $50,000.
D. Assets increase $50,000; liabilities increase $50,000; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #77
Topic: Basic financial reports
78. How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?
A. Assets increase $100,000; no effect on liabilities; equity increases $100,000.
B. Assets decrease $100,000; liabilities decrease $100,000; no effect on equity.
C. Assets decrease $100,000; no effect on liabilities; equity decreases $100,000.
D. Assets increase $100,000; liabilities increase $100,000; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #78
Topic: Basic financial reports
79. A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?
A. Assets increase $45,000; no effect on liabilities; equity increases $45,000.
B. Assets decrease $45,000; liabilities decrease $45,000; no effect on equity.
C. No effect on the accounting equation because assets increase and decrease by the same amount.
D. Assets increase $45,000; liabilities increase $45,000; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #79
Topic: Basic financial reports
80. What is the effect on the accounting equation if a company earns revenues of $23,000 on account?
A. Assets increase $23,000; no effect on liabilities; equity increases $23,000.
B. Assets decrease $23,000; liabilities decrease $23,000; no effect on equity.
C. Assets decrease $23,000; no effect on liabilities; equity decreases $23,000.
D. Assets increase $23,000; liabilities increase $23,000; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #80
Topic: Basic financial reports
81. A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?
A. Assets increase $3,400; no effect on liabilities; equity increases $3,400.
B. Assets decrease $3,400; liabilities decrease $3,400; no effect on equity.
C. Assets decrease $3,400; no effect on liabilities; equity decreases $3,400.
D. Assets increase $3,400; liabilities increase $3,400; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #81
Topic: Basic financial reports
82. If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?
A. Assets increase $5,000; no effect on liabilities; equity increases $5,000.
B. Assets decrease $5,000; liabilities decrease $5,000; no effect on equity.
C. Assets decrease $5,000; no effect on liabilities; equity increases $5,000.
D. Assets increase $5,000; liabilities increase $5,000; no effect on equity.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #82
Topic: Basic financial reports
83. When a company distributes profits to its owners the result is a(n):
A. Decrease in profits.
B. Decrease in assets and owner's equity.
C. Increase in owner's equity.
D. Increase in assets.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #83
Topic: Basic financial reports
84. The following information is reported for Manco Company for the month of March. Determine net income.
A. $(21,500)
B. $144,500
C. $21,500
D. $73,000
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #84
Topic: Basic financial reports
85. A company reported total equity of $82,000 on its December 31, 2009 balance sheet. The following
information is available for the year ended December 31, 2010:
What are the total assets of the company as of December 31, 2010?
A. $167,000
B. $202,000
C. $85,000
D. $132,000
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
Learning Objective: 1-5
Libby - Chapter 001 #85
Topic: Basic financial reports
86. For each of the following financial statement items, indicate which type of financial statement element it is.
Use the following codes:
A - Asset
L - Liability
OE - Owner's equity
R - Revenue
E - Expense
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #86
Topic: Basic financial reports
87. For each account listed indicate the type of account and what financial statement it would appear on using
the codes provided. The first account had been completed as an example.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-4
Learning Objective: 1-5
Libby - Chapter 001 #87
Topic: Basic financial reports
88. Given the following partially complete financial statements for CiCi Company, fill in the missing (?) items.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #88
Topic: Basic financial reports
89. For each of user of accounting information listed below indicate whether the user is an internal or external
of accounting information by placing an X in the appropriate box.
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #89
Topic: Accounting and business decisions
90. For each of the following transactions indicate the effect on the accounting equation by placing a + or a -
under the appropriate element and including the amount. The first transaction has been provided as an example.
AACSB: Analytic
Blooms: Analysis
Difficulty: Hard
Learning Objective: 1-4
Libby - Chapter 001 #90
Topic: Basic financial reports
91. For each of the following independent cases determine the missing amounts. Assume that it is the end of
2010, the first full year of operations for the company.
AACSB: Analytic
Blooms: Application
Difficulty: Medium
Learning Objective: 1-4
Learning Objective: 1-5
Libby - Chapter 001 #91
Topic: Basic financial reports
92. Use the information from Fairbank Company to answer the following questions. The accountant for
Fairbank Company prepared the following information from the company's accounting records for the year
ended December 31, 2010:
Determine the following amounts for Fairbank Company:
A. Total assets at the end of 2010.
B. Total Liabilities at the end of 2010.
C. Owner's equity at the end of 2010.
D. Total revenue for 2010.
E. Total expenses for 2010.
F. Is Fairbank profitable? Explain
A. $110,000
B. $37,000
C. $73,000
D. $155,000
E. $126,000
F. Yes, Fairbank is profitable since revenues are greater than expenses and the company has net income for the
year.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Learning Objective: 1-4
Learning Objective: 1-5
Libby - Chapter 001 #92
Topic: Basic financial reports
93. The following information was taken from a company's most recent cash flow statement for. Indicate
whether each cash flow is from operating (O), investing (I), or financing (F) and also whether the item is a cash
inflow (+) or outflow (-).
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #93
Topic: Basic financial reports
94. List at least three characteristics of a corporation. What advantages does the corporate form of business
offer over other forms of business? What is one disadvantage of a corporation over the other forms of business?
A corporation is a separate legal entity. Corporations are taxed separately from their owners. Owners of a
corporation cannot be held liable for more than their investment in the corporation. A major advantage of
corporation over a sole proprietorship and a partnership is limited liability. It is also easier for corporations to
raise large amounts of money to finance its growth. Ownership in a corporation is easier to transfer to someone
else than for the other forms of business. One disadvantage of a corporation over the other forms of business is
the higher legal fees necessary to form a corporation.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #94
Topic: Business types and organizational forms
95. Discuss two reasons why owners have a claim to a business. Use examples to support your answer.
First, owners have a claim to a business because of amounts they invested in the business by making a direct
contribution to the company, also known as contributed capital. For example, upon startup if the owner
contributed amounts to purchase supplies. Second, owners have a claim to a business for the amounts the
company has earned through operating the business and earning profits. For example, if the revenues generated
from the business exceed the expenses incurred to operate the business, the owner has a claim to these profits.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #95
Topic: Basic financial reports
96. Discuss the order in which the four basic financial statements should be prepared. Briefly describe what
information each financial statement provides.
First the income statement should be prepared, which reports a business' operating performance over a specific
period of time and lists revenues minus expenses to give net income. The statement of changes in owner's
equity should be prepared next and it reports investments by the owner, net income (loss), withdrawals by the
owner and provides a link between the income statement and the balance sheet. The balance sheet is prepared
next and lists the assets, liabilities, and owner's equity of a business at a specific point in time. Finally, the
statement of cash flows should be prepared last, and it reports inflows and outflows of cash during the period.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #96
Topic: Basic financial reports
97. A company earns net income of $5,000 during the month of March. Discuss how the net income amount
may be different from what is in the cash balance at the end of the month of March. What might lead to
differences between net income and the cash balance?
Net income represents the amount by which revenues exceed expenses for a given period. However, the cash
balance may differ from net income because cash received for revenue and cash paid for expenses may occur in
a different month. Revenues do not necessarily equal cash received during the month and expenses do not
necessarily equal cash paid during the month.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Hard
Learning Objective: 1-5
Libby - Chapter 001 #97
Topic: Basic financial reports
98. Compare and contrast financial accounting and managerial accounting. Who are the users of each type of
accounting?
Managerial accounting provides detailed accounting information about the performance of a company to
internal users such as the president. Financial accounting provides summarized financial statement reports to
external users such as investors and creditors.
AACSB: Analytic
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #98
Topic: Accounting and business decisions
99. Describe the difference between internal and external users of accounting information. Give examples of
each type of users. What decisions are made by each user? What type of information does each use to make
decisions?
External users of accounting information include creditors, investors and suppliers, while internal users of
accounting information generally include managers. External users of accounting information make decision
regarding extending credit to a company or investment decisions and use primarily highly summarized financial
accounting information such as the financial statements. Internal users make decision such as whether to
continue with a product line or invest in a new asset and use more detailed information provided by managerial
accounting.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-3
Libby - Chapter 001 #99
Topic: Accounting and business decisions
100. What is the fundamental accounting equation? Define each element of the equation and provide examples
of each element.
The fundamental accounting equation is Assets = Liabililtes + Owner's equity. Assets are any resource
controlled by the business that has measureable value and is expected to provide future benefits. Examples of
assets include cash, inventory and equipment. Liabilities are measurable amounts that a business owes to
creditors. Examples of liabilities include accounts payable, salaries payable and notes payable. Owner's equity
represents the owner's claim to the business and is represented by owners investments in the business and
profits that have not been distributed to owners.
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #100
Topic: Basic financial reports
101. What is GAAP and what characteristics should financial information have in order to be useful to decision
makers? What is the role of the FASB?
GAAP stands for Generally Accepted Accounting Principles and represent the rules to be followed when
reporting financial accounting information. In order to be useful to decision makers financial accounting should
be: 1) Relevant so that it is helpful in making decisions, 2) Reliable so that it is unbiased and verifiable; 3)
Comparable so that it can be compared to other companies; and 4) Consistent so that it can be compared over
time. The FASB is the Financial Accounting Standards Board, and this regulatory body is responsible for
setting the rules of accounting or GAAP.
AACSB: Ethics
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #101
Topic: Professional standards and ethical conduct
102. _______________ businesses make products from raw inputs.
Manufacturing
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #102
Topic: Business types and organizational forms
103. Companies that do not make or sell products are _____________ firms.
Service
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #103
Topic: Business types and organizational forms
104. One benefit of the corporate form of business is __________ liability.
Limited
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #104
Topic: Business types and organizational forms
105. A form of business which has two or more owners who are personally liable for the business's debts is a
______________.
Partnership
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-1
Libby - Chapter 001 #105
Topic: Business types and organizational forms
106. ____________ is an information system designed to capture and communicate a business's financial
performance.
Accounting
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-2
Libby - Chapter 001 #106
Topic: Accounting and business decisions
107. Accountants who charge fees for services to a variety of businesses work in ___________ accounting.
Public
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-2
Libby - Chapter 001 #107
Topic: Accounting and business decisions
108. Examples of ______________ users of accounting information include bankers, investors and suppliers.
External
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #108
Topic: Accounting and business decisions
109. ______________ accounting primarily provides detailed accounting information to internal users.
Management
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-3
Libby - Chapter 001 #109
Topic: Accounting and business decisions
110. The fundamental accounting equation is Assets minus _________ equals __________.
Liabilities; owner's equity
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #110
Topic: Basic financial reports
111. ____________ are economic resources owned by a business and likely to provide future benefits.
Assets
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #111
Topic: Basic financial reports
112. Cash, accounts receivable, and equipment are examples of ___________.
Assets
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #112
Topic: Basic financial reports
113. According to the _____________ principle, assets are initially recorded at the total cost to acquire them.
Historical cost
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-4
Libby - Chapter 001 #113
Topic: Basic financial reports
114. The ___________ reports the performance of a business over a period of time, while the ____________ is
a snapshot of the financial position at a point in time.
Income statement; balance sheet
AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #114
Topic: Basic financial reports
115. If assets equal $110,000 and liabilities equal $65,000 then owner's equity is equal to _________.
$45,000
AACSB: Reflective thinking
Blooms: Analysis
Difficulty: Medium
Learning Objective: 1-4
Libby - Chapter 001 #115
Topic: Basic financial reports
116. If owners contribute cash to start a business then assets will __________, liabilities will __________, and
owner's equity will ___________.
increase; remain the same or be unaffected; increase
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Hard
Learning Objective: 1-4
Libby - Chapter 001 #116
Topic: Basic financial reports
117. The statement of cash flows reports the inflows and outflows of cash from _________, ___________, and
__________ activities.
Operating, investing; financing
AACSB: Reflective thinking
Blooms: Comprehension
Difficulty: Medium
Learning Objective: 1-5
Libby - Chapter 001 #117
Topic: Basic financial reports
118. The ___________ sets the rules of accounting.
FASB or Financial Accounting Standards Board
AACSB: Ethics
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Libby - Chapter 001 #118
Topic: Professional standards and ethical conduct
119. ____________ are standards of conduct used to judge right from wrong.
Ethics
AACSB: Ethics
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Libby - Chapter 001 #119
Topic: Professional standards and ethical conduct
120. When financial accounting information is ___________ then it is unbiased and verifiable.
Reliable
AACSB: Ethics
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-6
Libby - Chapter 001 #120
Topic: Professional standards and ethical conduct
121. The rules of accounting which publicly held companies must follow are known as ___________.
GAAP or Generally Accepted Accounting Principles
AACSB: Ethics
Blooms: Knowledge
Difficulty: Easy
Learning Objective: 1-6
Libby - Chapter 001 #121
Topic: Professional standards and ethical conduct
122. Fill in the appropriate letter from the list of definitions below which accurately describes each term.
1. Sole
proprietorship A separate legal entity that sells stock to owners. 3
2. Manufacturer A business owned by two or more individuals. 4
3. Corporation
A company that sells goods made by manufacturers to
customers. 6
4. Partnership A business owned by one individual. 1
5. Service company A company that makes products from raw inputs. 2
6. Merchandiser A company that provides a service to customers. 5 AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #122
Topic: Business types and organizational forms
123. Fill in the appropriate abbreviation from the list below which correctly identifies each definition:
1. CPA An accountant that works in public accounting. 1
2. PCAOB
Governmental agency that supervises the work of the FASB and
the PCAOB. 4
3. AICPA
Requires its members to adhere to a Code of Professional
Conduct. 3
4. SEC The rules of accounting. 5
5. GAAP Approves rules to be followed by auditors. 2
6. FASB
Has primary responsibility for setting accounting standards in
the U.S. 6 AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Hard
Learning Objective: 1-6
Libby - Chapter 001 #123
Topic: Professional standards and ethical conduct
124. For each business listed below indicate the correct form of business by using the following codes: (S) Sole
Proprietorship, (P) Partnership, and (C) Corporation.
1. S
Franklin & Associates is a law firm with four owners. Each owner
shares equally in the profits/losses of the business and is personally liable
for the debts of the business. 3
2. S
Tamara's Hair Salon is owned exclusively by Tamara and is not a
separate legal entity. 1
3. P American Auto Parts is owned by 500 shareholders. 4
4. C
Jenni's Bakery is owned by Jenni and the profits are part of her
personal taxable income. 1
5. P
Mark and Ben own and operate a car wash. They have a legal
agreement which outlines how they will share profits (losses). 3
6. C
ABC Limited issued 10,000 shares of stock to the public to finance the
expansion of a new division. 4 AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Libby - Chapter 001 #124
Topic: Business types and organizational forms
125. Match each term with its related definition by entering the appropriate letter in the space provided.
1. Historical cost
Financial information can be compared to other
companies. 8
2. Net income Resources used to earn revenues. 6
3. Consistent
Financial information is most useful when it is
unbiased and verifiable. 5
4. Relevant
The area of accounting which provides information to
external decision makers. 9
5. Reliable Financial information can be compared over time. 3
6. Expenses
Assets are initially measured at the total cost to
acquire them. 1
7. Ethics
The positive difference between revenues and
expenses. 2
8. Comparable Standards of conduct for judging right from wrong. 7
9. Financial
accounting
Financial information is helpful in making decisions
should be reported. 4
10. Revenues
Amounts earned when goods or services are delivered
to customers. 10 AACSB: Reflective thinking
Blooms: Knowledge
Difficulty: Medium
Learning Objective: 1-1
Learning Objective: 1-2
Learning Objective: 1-3
Learning Objective: 1-4
Learning Objective: 1-5
Learning Objective: 1-6
Libby - Chapter 001 #125
Topic: Business types and organizational forms
ch1 Summary
Category # of Questions
AACSB: Analytic 19
AACSB: Ethics 15
AACSB: Reflective thinking 91
Blooms: Analysis 16
Blooms: Application 4
Blooms: Comprehension 12
Blooms: Knowledge 93
Difficulty: Easy 41
Difficulty: Hard 14
Difficulty: Medium 70
Learning Objective: 1-1 23
Learning Objective: 1-2 9
Learning Objective: 1-3 17
Learning Objective: 1-4 41
Learning Objective: 1-5 26
Learning Objective: 1-6 17
Libby - Chapter 001 125
Topic: Accounting and business decisions 24
Topic: Basic financial reports 62
Topic: Business types and organizational forms 23
Topic: Professional standards and ethical conduct 16