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Chapter 01 - Uses of Accounting Information and the Financial Statements TRUE/FALSE 1. The processing stage of accounting is accomplished by the recording of data. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-01-Purpose 2. Two major goals of business are to achieve profitability and to achieve liquidity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 3. Profitability means having enough funds on hand to pay debts when they fall due. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liquidity and current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 4. Earned income is a measure of profitability. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Profitability MSC: ACBSP-APC-09-Financial Statements 5. Paying taxes to the government is an example of an operating activity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 6. Obtaining funds from a bank is an example of a financing activity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 7. Buying and selling goods and services are examples of financing activities. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements

8. The purchase of equipment is an example of a financing activity. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 9. Management accounting focuses on internal decision making. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Management functions MSC: ACBSP-APC-25-Managerial Characteristics/Terminology 10. A major function of management is to provide the accountant with relevant and useful information. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Management functions MSC: ACBSP-APC-01-Purpose 11. Accounting ratios are never used as management performance measures. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Reporting LOC: Recall KEY: Performance measures MSC: ACBSP-APC-23-Financial Statement Analysis 12. Financial accounting information is used primarily by management. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Decision Modeling LOC: Recall KEY: Role of financial accounting MSC: ACBSP-APC-01-Purpose 13. The terms bookkeeping and accounting are not synonymous. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Decision Modeling LOC: Recall KEY: Bookkeeping vs. accounting MSC: ACBSP-APC-01-Purpose 14. A company's management information system is a subsystem of its accounting information system. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Technology | AICPA FN Leveraging Technology LOC: Recall KEY: Management information systems MSC: ACBSP-APC-01-Purpose 15. The modern definition of accounting focuses on how to do accounting rather than the role of accounting in making economic decisions. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Decision Modeling LOC: Recall KEY: Accounting information and the Internet MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. The unintentional preparation of misleading financial statements is referred to as fraudulent financial reporting. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

17. Fraudulent financial reporting can result from the misapplication of accounting principles. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

18. Depending on the circumstances, criminal penalties could be imposed on those who prepare fraudulent financial statements. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

19. The Sarbanes-Oxley Act orders the Financial Accounting Standards Board (FASB) to hold Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) responsible for the accuracy of their company's financial statements. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

20. Responsibility for ethical financial reporting rests solely with management. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

21. The primary external users of accounting information are investors and management. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 22. Creditors are those who lend money to others or deliver goods and services before being paid. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

23. The Federal Reserve Board is an example of a labor union. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 24. The Securities and Exchange Commission (SEC) is an accounting information user with a direct financial interest. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 25. Taxing authorities are considered accounting information users with a direct financial interest. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 26. Regulatory agencies are considered information users with an indirect financial interest. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 27. Accountants consider the euro to be the common unit of measure for all business transactions. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Measurement LOC: Recall KEY: Money measure MSC: ACBSP-APC-06-Recording Transactions 28. Payment to a creditor is an example of a nonexchange business transaction. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business transactions MSC: ACBSP-APC-06-Recording Transactions 29. For accounting purposes, a business and its owners are considered the same entity. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 30. Knowledge of the exchange rate is necessary to apply the money measure concept in case of international transactions. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Recall KEY: Money measure MSC: ACBSP-APC-06-Recording Transactions © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

31. For reporting purposes, the personal assets and debts of a business owner should not be combined with the assets and debts of the business. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 32. Exchange rates for currency change daily according to the supply and demand for each currency. ANS: T PTS: 1 NAT: AACSB Diversity KEY: Money measure

DIF: Easy OBJ: 3 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

33. Sole proprietorships in the United States generate more revenue than partnerships and corporations put together. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 34. In general, any partner can obligate the partnership to another party. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

35. A partnership is not dissolved when any partner leaves the business or dies. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

36. A corporation is an economic unit that is legally separate from its owners. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 37.

Partnerships represent the largest number of businesses in the United States. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

38. The liability of corporate stockholders is limited to the amount of their investment. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms

39. The audit committee appoints the board of directors, which in turn performs an independent audit of the company's records. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 40. The articles of incorporation may be found in the corporate charter. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 41. Authorized shares of stock refers to the number of shares authorized in the articles of incorporation.. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 42. Corporate governance is the oversight of a company's management performance and ethics by its board of directors. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 43. The board of directors decides on major business policies of a corporation. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 44. The number of authorized shares of stock may be less than the number of outstanding shares. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 45. The management of a corporation is appointed by the board of directors. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 46. Financial position may be assessed by referring to a balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements

47. One way of stating the accounting equation is: Assets + Stockholders’ Equity = Liabilities. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

48. The economic resources to which the owners have claim are represented by stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 49. Land is an asset that is considered nonmonetary in nature. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 50. Net income is another term for revenues. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 51. Stockholder’s equity is another term for retained earnings. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 52. Contributed capital appears in the stockholders' equity section of a corporate balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 53. Revenues have the effect of increasing retained earnings. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 54. The retained earnings figure is typically divided into par value and additional paid-in capital. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

55. If a corporation has suffered only net losses since its inception, the Retained Earnings account will have a positive balance. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 56. Net assets equals assets plus liabilities. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 57. Stockholders' equity equals contributed capital minus retained earnings. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 58. Par value is the minimum amount that can be reported as contributed capital. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 59. An increase in revenue will result in an increase in stockholders' equity. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

60. The statement of retained earnings discloses the dividends declared during the period. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-09-Financial Statements 61. The heading for a balance sheet might include the line “For the Year Ended December 31, 2013.” ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 62. The income statement is also known as the statement of financial position. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

63. The income statement discloses significant events related to the operating, investing, and financing activities of a business. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Statement of cash flows | Income statement MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

64. The accounting fees earned by an accounting firm would appear on its balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet | Income statement MSC: ACBSP-APC-09-Financial Statements 65. A proper heading for the income statement could include “As of December 31, 2013.” ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 66. The title “wages payable” would appear on the income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement | Balance sheet MSC: ACBSP-APC-09-Financial Statements 67. The declaration of a dividend will increase net income. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Comprehension

68. The title “land” will appear as an expense on the income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement | Balance sheet MSC: ACBSP-APC-09-Financial Statements 69. Dividends are an example of a revenue. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 70. The statement of retained earnings relates the income statement to the balance sheet by showing how the Retained Earnings account changed during the accounting period. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

71. The purchase of equipment for cash would be disclosed on the statement of cash flows. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 72. Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: GAAP

73. The Financial Accounting Standards Board (FASB) is the primary and most important determinant of generally accepted accounting principles. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

74. Companies whose securities are sold to the general public must adhere to standards established by the Securities and Exchange Commission (SEC). ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

75. The Internal Revenue Service is an agency of the federal government that has the legal power to set and enforce accounting practices for companies. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

76. Independence is the avoidance of all relationships that impair or appear to impair the objectivity of the accountant. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

77. All public accountants but not management accountants are required to adhere to a code of professional conduct. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

78. Objectivity means carrying out one's professional responsibilities with competence and diligence. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

79. Objectivity means carrying out one's professional responsibilities honestly and impartially. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

80. The Public Company Accounting Oversight Board (PCAOB) was created to determine the standards that auditors must follow. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

MULTIPLE CHOICE 1. Which of the following is the most appropriate and modern definition of accounting? a. Electronic collection, organization, and communication of vast amounts of information b. The interconnected network of subsystems necessary to operate a business c. A means of recording transactions and keeping records d. The measurement, processing, and communication of financial information about an identifiable economic entity ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 2. The correct order of the three stages of accounting is a. communication, processing, and measurement. b. measurement, communication, and processing. c. processing, measurement, and communication. d. none of these are correct. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA BB Critical Thinking LOC: Recall KEY: Stages of accounting MSC: ACBSP-APC-01-Purpose 3. Reporting to decision makers occurs at which state of the accounting process? a. Business activities b. Communication c. Processing d. Measurement ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. The measurement stage of accounting is accomplished by a. recording data. b. reporting to decision makers. c. processing data. d. storing data. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 5. The processing stage of accounting is accomplished by a. reporting to decision makers. b. recording transactions. c. controlling and evaluating data. d. storing and processing data into useful information ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 6. A company's ability to earn enough income to attract and hold investment capital ultimately depends on its a. budgeting. b. planning. c. liquidity. d. profitability. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Profitability MSC: ACBSP-APC-01-Purpose

OBJ: 1 LOC: Recall

7. The purchase of land is an example of a(n) a. investing activity. b. operating activity. c. capital activity. d. financing activity. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 8. Which of the following is an example of an operating activity? a. Obtaining capital from stockholders b. Selling goods and services to customers c. Purchasing equipment d. Selling land ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements

9. Which of the following is an example of an investing activity? a. Purchasing equipment b. Obtaining a bank loan c. Hiring employees d. Producing goods and services ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 10. Which of the following is an example of a financing activity? a. Employing workers b. Selling equipment c. Paying off a loan d. Purchasing land ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 11. The intentional preparation of misleading financial statements, known as fraudulent financial reporting, can result from all of the following except a. the misapplication of accounting principles. b. the manipulation of inventory records. c. fictitious sales or orders. d. recording a revenue that has been earned but not yet received. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

12. All of the following statements are false about the Sarbanes-Oxley Act except a. it does not apply to publicly traded companies. b. it shields chief executives from criminal penalties. c. it prevents the SEC from drawing up certain rules. d. its primary goal is to regulate financial reporting and the accounting profession. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

13. The group of users of accounting information charged with achieving the goals of the business is its a. auditors. b. creditors. c. management. d. investors. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose

14. A primary user of accounting information with a direct financial interest in the business is a(n) a. regulatory agency. b. investor c. taxing authority. d. customer ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 15. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 16. Which of the following groups uses accounting information primarily to help protect the public? a. Management b. Regulatory agencies c. Taxing authorities d. Economic planners ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 17. One user of accounting information with an indirect financial interest in a business is a. a creditor. b. a customer. c. management. d. an investor. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 18. Companies listed on the stock exchanges are regulated by the a. Financial Accounting Standards Board. b. American Institute of Certified Public Accountants. c. Securities and Exchange Commission. d. Internal Revenue Service. ANS: C PTS: 1 NAT: AACSB Communication MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 2 KEY: Professional organizations

19. Which of the following is a regulatory agency of the U.S. government? a. IASB b. SEC c. FASB d. AICPA ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Professional organizations MSC: ACBSP-APC-01-Purpose 20. Which of the following transactions does not involve an exchange of value? a. Payment of taxes b. Purchase of a building on credit c. Selling of merchandise d. Loss from fire ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business transactions MSC: ACBSP-APC-06-Recording Transactions 21. An accounting measurement is concerned with all except which of the following? a. Money measure b. Financial position c. Separate entity d. Business transaction ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-01-Purpose 22. The separate entity concept requires that a. a business have its own set of financial records that are kept separate from its owner’s financial records. b. transactions that involve an exchange of value be kept together with those that do not. c. tax records be kept separate from financial reporting records. d. a separate set of books be established for each segment of a business. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 23. The topic of foreign exchange rates relates most closely to the concept of a. separate entity. b. money measure. c. nonexchange transactions. d. business transactions. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Comprehension KEY: Money measure MSC: ACBSP-APC-01-Purpose

24. All of the following are considered nonexchange transactions except a. the daily accumulation of interest. b. the wear and tear on machinery. c. the repayment of a loan. d. losses from fire, flood, and theft. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 25. Which of the following transactions involves an exchange of value? a. Accumulation of interest b. Sale of services c. Flood loss d. Wear and tear on equipment ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 26. Which of the following is legally a separate entity from its owner(s)? a. Sole proprietorship and corporation only b. Sole proprietorship and partnership only c. Corporation only d. Corporation and partnership only ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 27. Most business enterprises in the United States are a. government units. b. partnerships. c. sole proprietorships. d. corporations. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Sole proprietorships MSC: ACBSP-APC-03-Business Forms 28. The corporate officers are responsible for a. arranging for major loans with banks. b. determining corporate policy. c. carrying out corporate policy. d. appointing the board of directors. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms

29. The board of directors of a corporation is responsible for all of the following except a. arranging for major bank loans. b. authorizing contracts. c. carrying out the daily operations of the business. d. declaring dividends. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 30. The audit committee is responsible for all of the following except a. engaging the company's independent auditors. b. assuring that reliable accounting records are kept. c. carrying out the daily operations of a company d. ascertaining that the company safeguards its resources. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 31. Dividends of a corporation are declared by its a. board of directors. b. officers. c. stockholders. d. creditors. ANS: A PTS: 1 NAT: AACSB Communication KEY: Corporations

DIF: Moderate OBJ: 4 LOC: Comprehension MSC: ACBSP-APC-03-Business Forms

32. Transfer of ownership will not affect the continuity of a a. corporation.. b. sole proprietorship. c. partnership d. corporation or partnership. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Corporations MSC: ACBSP-APC-03-Business Forms 33. Which of the following is not a satisfactory statement of the accounting equation? a. Assets = Liabilities + Stockholders' Equity b. Assets – Stockholders' Equity = Liabilities c. Assets = Liabilities – Stockholders' Equity d. Assets – Liabilities = Stockholders' Equity ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

34. The best definition of assets is the a. cash owned by the company. b. resources belonging to a company having future benefit to the company. c. collection of resources belonging to the company and the claims on these resources. d. owners' investment in the business. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-09-Financial Statements 35. All of the following will affect retained earnings except a. expenses incurred. b. dividends declared and paid. c. revenues earned. d. investments by owners. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 36. Which of the following assets could be described as nonphysical? a. Land b. Inventory c. Patents d. Equipment ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-09-Financial Statements 37. Which of the following financial statements is concerned with the enterprise at a point in time? a. Statement of retained earnings b. Income statement c. Statement of cash flows d. Balance sheet ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 38. Which of the following financial ratios has not been shown to be most predictive of company performance? a. Debt to equity ratio b. Inventory turnover c. Profit margin d. Cash flow yield ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial ratios MSC: ACBSP-APC-09-Financial Statements

39. Which of the following items has no effect on stockholders' equity? a. Land purchased b. Revenue c. Expense d. Dividends declared and paid ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 40. Which of the following accounts is not considered an asset? a. Cash b. Inventory c. Common stock d. Trademark ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-09-Financial Statements 41. An example of a monetary asset is a. Accounts Receivable. b. Copyright. c. Equipment d. Inventory ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-09-Financial Statements 42. Stockholders' equity of a corporation would not show a. retained earnings. b. additional paid-in capital on stock issued. c. the par value of stock issued. d. revenues and expenses. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 43. A liability would not include an obligation to a. transfer assets. b. hire an employee. c. pay cash. d. provide services. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-09-Financial Statements

44. The statement of cash flows would disclose the purchase of a building for cash a. nowhere on the statement. b. in the operating activities section. c. in the investing activities section. d. in the financing activities section. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 45. Which of the following represents the proper order of financial statement preparation? a. Statement of cash flows, balance sheet, income statement, statement of retained earnings b. Statement of retained earnings, income statement, statement of cash flows, balance sheet c. Balance sheet, statement of cash flows, statement of retained earnings, income statement d. Income statement, statement of retained earnings, balance sheet, statement of cash flows ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 46. All of the following items would appear on the balance sheet except a. Dividends b. Accounts Payable c. Common Stock d. Inventory ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 47. The net income figure appears in all the following financial statements except the a. statement of cash flows. b. income statement. c. statement of retained earnings. d. balance sheet. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Net income MSC: ACBSP-APC-09-Financial Statements 48. The statement of cash flows would disclose the payment of a dividend a. in the financing activities section. b. in the investing activities section. c. in the operating activities section. d. nowhere on the statement. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements

49. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

Marron Pickle Company, Inc. Balance Sheet December 31, 2013 Liabilities $ 16,000 Accounts payable 2,000 28,000 Stockholders' Equity 88,000 Common stock $80,000 26,000 Retained earnings 48,000 Total stockholders' equity $160,000 Total liabilities and stockholders' equity

$32,000

128,000 $160,000

If the equipment were sold for $26,000 cash, then the Retained Earnings account would a. increase by $74,000. b. increase by $26,000. c. decrease by $26,000. d. stay the same. ANS: D The sale of equipment would decrease the equipment account to $0 and increase the cash account to $42,000. There would be no effect on retained earnings. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

50. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

$32,000

128,000 $160,000

If the balance in the Cash account were used to pay part of Accounts Payable, then total liabilities and stockholders' equity would a. decrease by $16,000. b. increase by $16,000. c. increase by $32,000. d. decrease by $32,000. ANS: A The accounts payable payment would decrease the cash account to $0 and decrease the Accounts Payable account to $16,000, thus decreasing total liabilities and stockholders’ equity by $16,000. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

51. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

$32,000

128,000

$160,000 Total liabilities and stockholders' equity

$160,000

If the balance in the Cash account were used to buy more equipment, then the total assets would a. remain unchanged. b. increase by $16,000. c. decrease by $16,000. d. increase by $42,000. ANS: A The purchase of more equipment would reduce the cash account to $0 and increase the equipment account to $42,000, thus causing total assets to remain unchanged. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 52. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Common Stock account were $59,000, what would be the balance of the Building account? a. $29,000 b. $71,000 c. $63,000 d. $39,000

ANS: D 2,000 + X + 6,000 + 14,000 + 14,000 = 12,000 + 59,000 + 4,000 36,000 + X = 75,000 X = $39,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 53. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $53,000, what would be the total of liabilities and stockholders' equity? a. $53,000 b. $89,000 c. $83,000 d. $73,000 ANS: B Assets = Liabilities + Stockholders’ Equity Assets = 2,000 + 53,000 + 6,000 + 14,000 + 14,000 Assets = 89,000 Liabilities + Stockholders’ Equity = 89,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 54. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $30,000 and if the equipment were sold for $14,000 cash, what would be the total of stockholders' equity? a. $54,000 b. $32,000 c. $30,000 d. $66,000

ANS: A Assets = Liabilities + Stockholders’ Equity The sale of the equipment would reduce the equipment account to 0 and increase the cash account to 20,000 Assets = 2,000 + 30,000 + 20,000 + 0 + 14,000 = 66,000 Stockholders’ Equity = 66,000 - 12,000 = 54,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 55. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $28,000 and $6,000 of Accounts Payable were paid in cash, what would be the balance of the Common Stock account? a. $48,000 b. $42,000 c. $64,000 d. $68,000 ANS: A Assets = Liabilities + Stockholders’ Equity The Accounts Payable payment would decrease the Accounts Payable account to 6,000 and decrease the cash account to 0. Assets = 2,000 + 28,000 + 0 + 14,000 + 14,000 = 58,000 Common Stock = 58,000 - 6,000 - 4,000 = 48,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 56. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $16,000 and $6,000 of Accounts Payable were paid in cash, what would be the total liabilities and stockholders' equity? a. $28,000 b. $46,000 c. $36,000 d. $38,000

ANS: B Assets = Liabilities + Stockholders’ Equity The Accounts Payable payment would decrease the Accounts Payable account to 6,000 and decrease the cash account to 0. Assets = 2,000 + 16,000 + 0 + 14,000 + 14,000 = 46,000 Liabilities and Stockholders’ Equity = 46,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 57. Which of the following is a regulatory agency? a. International Accounting Standards Board (IASB) b. Securities and Exchange Commission (SEC) c. Financial Accounting Standards Board (FASB) d. Governmental Accounting Standards Board (GASB) ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

58. The most important body for developing rules on accounting practice is currently the a. Governmental Accounting Standards Board (GASB). b. Financial Accounting Standards Board (FASB). c. Public Company Accounting Oversight Board (PCAOB). d. Internal Revenue Service (IRS). ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

59. Generally accepted accounting principles (GAAP) a. are changing continually. b. are sound in theory but rarely used in practice. c. have eliminated all the weaknesses in accounting practice. d. are accounting rules formulated by the Internal Revenue Service (IRS). ANS: A PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Financial statements

60. Standards for state and local governments are established by the a. Securities and Exchange Commission (SEC). b. Financial Accounting Standards Board (FASB). c. Governmental Accounting Standards Board (GASB). d. Public Company Accounting Oversight Board (PCAOB). ANS: C PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

61. The purpose of an audit is to a. determine whether or not a company is a good investment. b. comply with income tax regulations. c. determine whether or not a company is a good credit risk. d. ascertain that the financial statements follow Generally Accepted Accounting Principles (GAAP). ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Independent CPA report MSC: ACBSP-APC-01-Purpose 62. An auditor is impartial and intellectually honest. The principle being followed is a. independence. b. integrity. c. objectivity. d. due care. ANS: C PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

63. Carrying out professional responsibilities with competence and diligence is called a. integrity. b. independence. c. objectivity. d. due care. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

64. Which of the following is one of the broad principles underlying the accountant's code of professional ethics? a. Certification b. Integrity c. Loyalty d. Trust ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

65. The development of international accounting standards is the primary function of the a. Internal Revenue Service (IRS). b. American Institute of Certified Public Accountants (AICPA). c. International Accounting Standards Board (IASB). d. Public Company Accounting Oversight Board (PCAOB). ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Global LOC: Recall KEY: Professional organizations MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

66. The Public Company Accounting Oversight Board (PCAOB) was created by the a. Sarbanes-Oxley Act. b. American Institute of Certified Public Accountants (AICPA). c. Financial Accounting Standards Board (FASB). d. International Accounting Standard Board (IASB). ANS: A PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

SHORT ANSWER 1. Distinguish between profitability and liquidity. ANS: Profitability is the ability to earn enough income to attract and hold investment capital, whereas liquidity means having enough funds on hand to pay debts when they fall due. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 2. List the input(s), the major process(es), and the output(s) of an accounting system. ANS: The data about business activities is the input to an accounting system. There are three major processes in an accounting system: measurement, processing, and communication. The output of an accounting system is the information for decision makers. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 3. State whether each of the following users of financial statements has a direct or an indirect financial interest in the financial statements. a. Local taxing authority b. Financial advisors c. Customers d. Governmental regulatory agency e. Existing creditor f. Potential investor g. Economic planners h. Potential creditor ANS: a. Indirect interest b. Indirect interest c. Indirect interest d. Indirect interest e. Direct interest © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

f. Direct interest g. Indirect interest h. Direct interest PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 4. List five possible users of financial statements and state what each would be interested in learning from its review. ANS: Possible users and their reasons for interest could be: Existing creditors who would be concerned about being repaid on time. Possible creditors who are considering extending credit or making loans to the corporation and being repaid in a timely fashion. Current stockholders who want to follow and manage their investment. Individuals or corporations considering an investment in the company. College students who would use the statements to learn about financial statement analysis. Managers of the company who would use the statements to evaluate their areas of operations and make decisions to improve them. Government bodies such as the SEC, which would review the financial statements to ensure conformity to laws that protect the general public. Labor unions involved with the company, which would review the statements to evaluate present profitability as part of preparing for contract negotiations. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 5. Define the following terms: Business transactions Money measure Separate entity ANS: Business transaction - An economic event that affects the financial position of a business. Money measure - The only factor common to all business transactions is money. Thus, all business transactions are recorded in terms of money. Separate entity - A business is distinct from its owners and thus should have its own set of financial records. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions | Separate entity concept | Money measure MSC: ACBSP-APC-01-Purpose

6. Tell whether each of the following words or phrases relates most closely to a business transaction, a separate entity, or a money measure. a. b. c. d. e. f.

Sole proprietorship Sale of goods or services U.S. dollar Payment on a loan Exchange rate Owners of a corporation

ANS: a. Sole proprietorship b. Sale of goods or services c. U.S. dollar d. Payment on a loan e. Exchange rate f. Owners of a corporation

a separate entity a business transaction a money measure a business transaction a money measure a separate entity

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Business transactions | Separate entity concept | Money measure MSC: ACBSP-APC-01-Purpose 7. Why would it be less risky for a wealthy individual to incorporate his or her business rather than to operate it as a sole proprietorship or partnership? ANS: With a sole proprietorship or partnership, the owner or owners have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Comprehension KEY: Corporations MSC: ACBSP-APC-03-Business Forms 8. Indicate by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). You may use more than one business organization for an answer. ________ a. Separate economic unit ________ b. Life limited by death of owner(s) ________ c. Separate legal entity ________ d. Unlimited liability of owner(s) ________ e. Separation of ownership and control ________ f. Transfer of ownership does not affect the continuity of business. ________ g. Ownership evidenced by stock certificates

ANS: a. S, P, C b. S, P c. C d. S, P e. C f. C g. C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Reporting LOC: Comprehension KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 9. Indicate by letter whether each item below would appear on the income statement (IS), balance sheet (BS), or statement of retained earnings (E). ________ a. Common Stock ________ b. Dividends ________ c. Wages Expense ________ d. Commissions Earned ________ e. Buildings ________ f. Accounts Payable ________ g. Utilities Expense ________ h. Beginning Retained Earnings ________ i. Accounts Receivable ________ j. Notes Payable ANS: a. BS b. E c. IS d. IS e. BS

f. BS g. IS h. E i. BS j. BS

PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 10. At the beginning of the year, Catoosa Corporation's assets were $300,000 and its stockholders' equity was $200,000. During the year, assets decreased $60,000 and liabilities increased $30,000. What was the stockholders' equity at the end of the year? ANS: Liabilities at beginning of year = $300,000 - $200,000 = $100,000 Stockholders’ equity at end of year = [($300,000 – $60,000) – ($100,000 + $30,000)] Stockholders’ equity at end of year = $110,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. At the beginning of the year, Fourman Corporation's assets were $270,000 and its stockholders' equity was $243,000. During the year, assets decreased $35,000 and liabilities increased $10,000. What was the stockholders' equity at the end of the year? ANS: Liabilities at beginning of year = $270,000 - $243,000 = $27,000 Stockholders’ equity at end of year = [($270,000 – $35,000) – ($27,000 + $10,000)] Stockholders’ equity at end of year = $198,000 $198,000 [($270,000 – $35,000) – ($27,000 + $10,000)] PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 12. Which three types of transactions affect retained earnings, and how do they affect it? ANS: Revenues increase retained earnings, whereas expenses and dividends decrease retained earnings. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-09-Financial Statements 13. How does the statement of retained earnings relate to the income statement and the balance sheet? ANS: The statement of retained earnings provides a link between the income statement and the balance sheet. Specifically, it takes the net income figure from the income statement and uses it (along with dividends) to arrive at the retained earnings figure to be presented on the balance sheet. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 14. Barrett Company's stockholders' equity equals one-fourth of the company's total assets. The company's liabilities are $360,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = .75(Assets) $360,000 = .75(Assets) Assets = $480,000 Stockholders’ Equity = $480,000 - $360,000 = $120,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements

15. Cochran Corporation's stockholders' equity equals one-third of the company's total assets. The company's liabilities are $240,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = 2/3(Assets) $240,000 = 2/3(Assets) Assets = $360,000 Stockholders’ Equity = $360,000 - $240,000 = $120,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 16. Barrow Corporation's stockholders' equity equals one-half of the company's total assets. The company's liabilities are $346,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = 1/2(Assets) $346,000 = 1/2(Assets) Assets = $692,000 Stockholders’ Equity = $692,000 - $346,000 = $346,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 17. What is the responsibility of the auditing firm? Who is responsible for the content of the financial statements? ANS: The responsibility of the auditing firm is to express an opinion on the financial statements of the corporation being audited. The company’s management is responsible for the content of the published financial statements. PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Comprehension KEY: Ethical reporting | Independent CPA report MSC: ACBSP-APC-01-Purpose 18. What is independence, and why is it important for a Certified Public Accountant (CPA) to maintain it when conducting an audit? ANS: Independence means having no financial or other compromising ties with the company under audit. To give the public confidence in their work, Certified Public Accountants (CPAs) must maintain their independence whenever they conduct an audit. PTS: 1 DIF: Moderate NAT: AACSB Ethics | AICPA BB Legal KEY: Business ethics

OBJ: 6 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

MATCHING Match each definition with the correct term below. a. The group of people who are responsible for ensuring that a company meets its goals of profitability and liquidity. b. A unit of ownership in a corporation. c. The inflows and outflows of cash into and out of a business. d. An information system that measures, processes, and communicates financial information about an economic entity. e. A set of practices that has been developed to provide guidelines for financial accounting. f. The value of one currency in terms of another. g. The government body that regulates the issuing, buying, and selling of stocks in the United States. h. The ability to earn enough income to attract and hold investment capital. i. The oversight of a corporation’s management and ethics by its board of directors. j. The accumulated earnings generated by a business’s income-producing activities less amounts that have been paid out to the stockholder’s. k. Economic events that affect a business’s financial position. l. An examination of a company’s financial statements and the accounting systems, controls, and records that produced them. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Accounting Management Cash flows Securities and Exchange Commission Corporate governance Business transactions Exchange rate Profitability Audit Generally Accepted Accounting Principles Retained earnings Share of stock

1. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Accounting systems MSC: ACBSP-APC-01-Purpose 2. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA BB Critical Thinking LOC: Recall KEY: Role of management MSC: ACBSP-APC-01-Purpose 3. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 4. ANS: G PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA BB Legal LOC: Recall KEY: Governmental bodies MSC: ACBSP-APC-01-Purpose

5. ANS: I PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 6. ANS: K PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 7. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 8. ANS: H PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 9. ANS: L PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Recall KEY: Professional standards MSC: ACBSP-APC-01-Purpose 10. ANS: E PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Recall KEY: Professional standards MSC: ACBSP-APC-01-Purpose 11. ANS: J PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Retained earnings MSC: ACBSP-APC-09-Financial Statements 12. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms PROBLEM 1. State whether the following business activities are an operating activity, an investing activity or a financing activity.

1. 2. 3. 4. 5. 6. 7. 8.

Business Activity Hiring employees Purchasing land Obtaining a loan from a bank Paying off a loan Selling equipment Selling goods and services Issuing stock Paying taxes

Type of Activity

ANS: 1. 2. 3. 4. 5. 6. 7. 8.

Business Activity Hiring employees Purchasing land Obtaining a loan from a bank Paying off a loan Selling equipment Selling goods and services Issuing stock Paying taxes

Type of Activity Operating Investing Financing Financing Investing Operating Financing Operating

PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 2. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners ANS: a. To help determine if the prospects for a profitable investment is good relative to other investment opportunities (direct interest) b. To help determine the tax that should be levied against the company (indirect interest) c. To give the labor union negotiators a basis for negotiating for higher wages and benefits (indirect interest) d. To help determine if the investing public is being given accurate and complete information (indirect interest) e. To help determine if the creditor should extend credit to the company (direct interest) f. To help the company achieve goals such as profitability and liquidity (neither direct nor indirect) g. To set economic policies and judge economic programs (indirect interest) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Financial information users MSC: ACBSP-APC-01-Purpose

3. How do the balance sheets of corporations illustrate the accounting concept of separate entity? ANS: Balance sheets (statements of financial position) of corporations illustrate the accounting concept of separate entity in the shareholders' equity section. Individual names of stockholders are not shown. Instead, their ownership is evidenced by shares of stock. The assets and liabilities shown on the consolidated balance sheets are those of the corporation itself, not of the individual stockholders. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Application KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 4. In which form of business does CVS operate? List two places where this would be revealed in the financial statements. ANS: CVS operates as a corporate form of business. This would be evidenced in several places in the financial statements: The title of each statement shows the name of the company as CVS Corporation. The shareholders' equity section of the consolidated balance sheets contains accounts for stock and retained earnings transactions. The consolidated statements of earnings contains a line for income taxes. Corporations are subject to income taxes. The consolidated statements of cash flows also shows stock transactions. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Application KEY: Corporations MSC: ACBSP-APC-03-Business Forms 5. Glascock Corporation had a balance in Retained Earnings on December 31, 2012, of $520,000. During 2013, the company reported a net income of $224,000 after taxes. During 2013, the company declared and paid cash dividends totaling $32,000. Prepare the company's statement of retained earnings for the year ended December 31, 2013. ANS: Glascock Corporation Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$520,000 224,000 $744,000 32,000 $712,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Statement of Retained Earnings MSC: ACBSP-APC-09-Financial Statements

6. Lin Wo Corporation had a balance in Retained Earnings on December 31, 2012, of $360,000. During 2013, the company reported a net income of $24,000 after taxes. During 2013, the company declared and paid cash dividends totaling $18,000. Prepare the company's statement of retained earnings for the year ended December 31, 2013. ANS: Lin Wo Corporation Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$360,000 24,000 $384,000 18,000 $366,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Statement of Retained Earnings MSC: ACBSP-APC-09-Financial Statements 7. Use the following accounts and information to prepare, in good form, an income statement, statement of retained earnings, and balance sheet for Jasper Enterprises for the year ended December 31, 2013. Accounts Payable Accounts Receivable Buildings Cash

$9,600 1,200 104,000 52,400

Sales Revenues Common Stock Dividends Utilities Expense

38,000 40,000 6,000 2,000

Land Notes Payable Rent Expense Retained Earnings, December 31, 2012 Salaries Expense Inventory

$78,000 12,000 7,200 168,800 16,800 800

ANS: Jasper Enterprises Income Statement For the Year Ended December 31, 2013 Revenues Sales revenues Expenses Utilities expense Rent expense Salaries expense Net income

$38,000

$2,000 7,200 16,800

26,000 $ 12,000

Jasper Enterprises Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$168,800 12,000 $180,800 6,000 $174,800

Jasper Enterprises Balance Sheet December 31, 2013 Assets Cash Accounts receivable Inventory Land Buildings

Total assets

Liabilities $ 52,400Accounts payable $ 9,600 1,200Notes payable 12,000 800Total liabilities 78,000 104,000 Stockholders' Equity Common stock $40,000 Retained earnings 174,800 Total stockholders' equity $236,400Total liabilities and stockholders' equity

$ 21,600

214,800 $236,400

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 8. Use the following accounts and information to prepare, in good form, an income statement, statement of retained earnings, and balance sheet for Hometown Industries for the month ended July 31, 2013. Accounts Payable Accounts Receivable Buildings Cash

$3,100 1,400 22,000 15,600

Service Revenue Common Stock Dividends Insurance Expense

12,700 20,000 8,000 2,200

Land Notes Payable Rent Expense Retained Earnings, June 30, 2013 Salaries Expense Supplies

$35,000 3,300 2,400 57,900 10,000 400

ANS: Hometown Industries Income Statement For the Month Ended July 31, 2013 Revenues Service Revenue $12,700 Expenses Insurance expense Rent expense Salaries expense

$ 2,200 2,400 10,000 14,600 ($ 1,900)

Net loss Hometown Industries Statement of Retained Earnings For the Month Ended July 31, 2013 Retained earnings, June 30, 2013

$57,900 (1,900)

Net loss for the month Subtotal

$56,000 Less dividends 8,000 Retained earnings, July 31, 2013 $48,000 Hometown Industries Balance Sheet July 31, 2013 Assets Cash Accounts Receivable Supplies Land Buildings

Total assets

PTS: 1

Liabilities $15,600Accounts payable $ 3,100 1,400Notes payable 3,300 400Total liabilities 35,000 22,000 Stockholders' Equity Common stock $20,000 Retained earnings 48,000 Total stockholders' equity $74,400Total liabilities and Stockholders' equity

DIF: Moderate

$ 6,400

68,000 $74,400

OBJ: 5

NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 9. Use the following information to calculate at, or for the year ended, December 31, 2013 (a) net income, (b) retained earnings, (c) total liabilities and stockholders' equity, and (d) accounts receivable. Supplies Wages Expense Accounts Payable Retained Earnings, December 31, 2012

$ 2,000 28,000 44,000 16,000

Cash Dividends Notes Payable Patents

$64,000 32,000 8,000 14,000

Retained Earnings, December 31, 2013 Accounts Receivable Rent Expense Sales Revenue

? 12,000 60,000

Common Stock

40,000

ANS: a. $60,000 - $12,000 - $28,000 = $20,000 b. $16,000 + $20,000 - $32,000 = $4,000 c. $44,000 + $8,000 + $40,000 + $4,000 = $96,000 d. $96,000 - $2,000 - $64,000 - $14,000 = $16,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 10. Use the following information to calculate at, or for the year ended, December 31, 2013, (a) net income, (b) retained earnings, (c) total assets, and (d) cash. Salaries Expense Accounts Payable

$4,000 7,000

Dividends Accounts Receivable

6,000 8,000

Inventories Cash Salaries Payable

22,000 ? 1,000

Sales Revenue Retained Earnings, December 31, 2013 Utilities Expense Retained Earnings, December 31, 2012 Common Stock

$20,000 ? 2,000 16,000 10,000

ANS: a. $20,000 - $4,000 - $2,000 = $14,000 b. $16,000 + $14,000 - $6,000 = $24,000 c. Total liabilities and stockholder’s equity = Total assets = $7,000 + $1,000 + $24,000 + $10,000 = $42,000 d. $42,000 - $8,000 - $22,000 = $12,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable

$20,000 24,000 9,600 4,800 26,400 12,800

ANS: Paulding Company Balance Sheet December 31, 2013 Assets Cash Accounts receivable Equipment

Total assets

Liabilities $ 9,600 Accounts payable 12,800 26,400 Stockholders' Equity Common stock $24,000 Retained earnings 4,800 Total stockholders' equity $48,800 Total liabilities and stockholders' equity

$20,000

28,800 $48,800

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 12. Following are the total assets and liabilities at the beginning and end of the year for Maren Corporation:

Beginning of the year End of the year

Assets Liabilities $70,000 $45,000 130,000 40,000

Determine the net income or loss for the year in each of the following situations: a. The stockholders made no investments in the business and no dividends were paid during the year. b. The stockholders made an investment of $20,000 and a dividend of $12,000 was paid during the year.

ANS: a. $65,000 [($130,000 – $40,000) – ($70,000 – $45,000)] b. $57,000 [($130,000 – $40,000) – ($70,000 – $45,000) – $20,000 + $12,000] PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Net income MSC: ACBSP-APC-09-Financial Statements 13. Selected amounts from the condensed financial statements of Timson Corporation for 2012 and 2013 are presented below with several amounts missing. The 2011 year-end balance of retained earnings is $82,883. Income Statement

2013

Revenues

2012

$490,304

$ (a) (h) (501,295) (853) (3,603) $__ (i) $ _ _(b)

Costs and expenses Income taxes Net income Statement of Retained Earnings Beginning-of-year balance Net income Dividends End-of-year balance

(j) $ (c) 3,747 (d) (k) (3,845) (l) $_ _ (e)

Balance Sheet Total assets Total liabilities Common stock Retained earnings Total liabilities and stockholders' equity

$ (m) $246,481 $110,192 $102,239 57,968 56,800 (n) $ (f) $255,473 $ (g)

a. Determine the missing amounts indicated by the letters. (Hint: You should not try to find them in alphabetical order.) b. Given the data presented, did the company's profitability improve from 2012 to 2013? ANS: a. Income Statement

2013

2012

Revenues Costs and expenses Income taxes Net income

$490,304 (485,704)(h) (853) $ 3,747(i)

$513,302(a) (501,295) (3,603) $ 8,404(b)

Statement of Retained Earnings Beginning-of-year balance Net income Dividends End-of-year balance

$ 87,442(j) 3,747 (3,876)(k) $ 87,313(l)

$ 82,883(c) 8,404(d) (3,845) $ 87,442(e)

$255,473(m) $110,192 57,968 87,313(n) $255,473

$246,481 $102,239 56,800 87,442(f) $246,481(g)

Balance Sheet Total assets Total liabilities Common stock Retained earnings Total liabilities and stockholders' equity

b. Timson's profitability did not improve from 2012 to 2013, as indicated by a decrease in net income from $8,404 to $3,747. PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 14. Following are the definitions of several accounting organizations. For each definition, list the name of the corresponding organization. a. Responsible for interpreting and enforcing tax laws b.. Establishes standards for state and local governments c. Developer of international accounting standards d. Consists mainly of industrial accountants e. Protector of the investing public f. Current authoritative body for developing GAAP g. The accounting profession's main organization of certified public accountants ANS: a. Internal Revenue Service (IRS) b. Governmental Accounting Standards Board (GASB) c. International Accounting Standards Board (IASB) d. Institute of Managerial Accountants (IMA) e. Securities and Exchange Commission (SEC) f. Financial Accounting Standards Board (FASB) g. American Institute of Certified Public Accountants (AICPA) PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

OBJ: 6 LOC: Recall

KEY: Professional organizations

Chapter 02 - Analyzing Business Transactions TRUE/FALSE 1. When a company receives a product previously ordered, a recordable transaction has occurred. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 2. When a business pays a new employee for the first time, a recordable transaction has occurred. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 3. The valuation issue deals with how the components of a transaction should be categorized. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 4. In accounting, to value means to record a transaction or event. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 5. The cost principle is a solution to the recognition issue. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 6. The recognition issue deals with when a business transaction should be recorded. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic LOC: Recall MSC: ACBSP-APC-06-Recording Transactions

OBJ: 1 KEY: Measurement issues

7. The most generally accepted value used in accounting is market value. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

8. Cost Value is the exchange price associated with a business transaction at the time the transaction is recognized. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 9. The classification issue involves the assignment of accounts to business transactions. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 10. When a company makes an order, a transaction has occurred. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 11. All business transactions require the application of two basic accounting concepts: recording a transaction at the right time and placing the right value on it. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 12. Purchase requisitions are recognized in the accounting records. ANS: F PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

13. When a company purchases goods that it will resell, it must record the goods in an asset account. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 14. A credit to an asset account means that asset account has been increased. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 15. A debit has a favorable effect on an account. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. For a T account, an account balance is the difference in total dollars between total debit footings and total credit footings. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 17. Column totals are called account balances. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 18. A decrease in a liability is recorded by a debit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 19. An increase in an asset is recorded by a debit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 20. The double-entry system is possible because all business transactions have two equal and opposite aspects. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 21. A decrease in a dividend account is recorded with a credit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 22. An increase in revenue is recorded with a credit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

23. Dividends should appear on the balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-05-Accounting Cycle 24. The dividends account has a normal credit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 25. Revenues have a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 26. Retained Earnings has a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 27. Accounts Payable has a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 28. A basic storage unit for accounting data is the account. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 29. When stockholders make an investment, the Common Stock account is debited. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 30. When a dividend is declared and paid, the Dividends account is credited and Cash is debited. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions

31. Liabilities are established with debits and eliminated with credits. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 32. When payment is received for services not yet rendered, no entry is recorded until that service has been rendered. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 33. When revenue has been earned, an entry can often be recorded before the related cash has been collected. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 34. A contract is an example of a source document. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 35. Wages payable is a type of liability. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 36. Dividends are classified as an expense. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-05-Accounting Cycle 37. Unearned revenues are classified as assets on the balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 38. Another word for expense is debt. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. Office supplies are classified as an asset. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 40. Investments by stockholders are recorded in the Common Stock account, not in the Retained Earnings account. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-06-Recording Transactions 41. Revenue should be recorded when the related cash has been collected, not when it has been earned. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 42. Expenses should be recorded when they have been incurred, not when they are paid. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 43. A net income of $10,000 means that the business received $10,000 more in cash from its customers than it spent to run the business. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 44. Accounts Receivable and Accounts Payable are used when there is a time delay between a transaction and its related cash flow. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 45. Generally, before Accounts Payable is credited, it is debited. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

46. Generally, before Accounts Receivable is credited, it is debited. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 47. In a trial balance, accounts are listed in the order they appear on the financial statements. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 48. A trial balance is normally prepared at the end of each week. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 49. When the columns of the trial balance equal each other, it means that no errors have occurred in recording and posting the transactions. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 50. A transposition error will cause the trial balance to be out of balance by an amount that is evenly divisible by 7. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 51. Recording an account with a debit balance as a credit, or vice versa, will cause the trial balance to be out of balance by an amount that is evenly divisible by 2. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 52. The ledger is a chronological record of all transactions. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle

53. Entering transactions into the journal is called posting. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 54. In a journal entry, debits are always recorded before credits. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 55. In a journal entry, credits are always indented. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 56. In a journal entry, the Post. Ref. column is always left blank. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 57. It is sometimes correct for a compound entry's debit totals and credit totals to be unequal. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 58. The journal account form has a Balance column. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 59. One might see “J2” correctly placed in the Post. Ref. column of the journal. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 60. Despite the advantages of a computer accounting information system, the ledger still must be maintained manually. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle

61. Journal entries are typically posted only at the end of the year. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 62. In a financial report, a single line is placed below the final total(s). ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Financial statements | Recording transactions MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 5 LOC: Recall

63. Another name for the ledger is the book of original entry. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 64. The general journal makes finding accounts in the ledger easier. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 65. All companies use the same standard set of accounts. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 66. The accounts in a chart of accounts are normally listed in order of their account number. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 67. The numbering scheme of a chart of accounts usually contains gaps. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 68. The amount of profit would always be equal to the ending cash balance. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business goals MSC: ACBSP-APC-05-Accounting Cycle

69. One can obtain a clear picture of a company's liquidity by referring to its income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liquidity and current liabilities MSC: ACBSP-APC-05-Accounting Cycle 70. One can obtain a clear picture of a company's liquidity by referring to its statement of cash flows. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liquidity and current liabilities MSC: ACBSP-APC-05-Accounting Cycle MULTIPLE CHOICE 1. A purchase is recognized in the accounting records when a. an order is placed with the seller b. the purchase requisition is sent to the purchasing department. c. title transfers from the seller to the buyer. d. the buyer receives the bill from the seller ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 2. Which of the following is not a measurement issue in accounting? a. When to record a business transaction b. How to classify the items of a business transaction c. What value to place on a business transaction d. Where to record a business transaction ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 3. The issue of deciding when to record a transaction is solved by a. properly classifying the transaction. b. determining a point of recognition. c. assigning actual cost to the transaction. d. assigning a recurring order date. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

4. Which of the following is not a measurement issue in accounting? a. Valuation b. Recognition c. Evaluation d. Classification ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 5. Fair value relates most closely to the a. recognition point. b. recognition issue. c. valuation issue. d. classification issue. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 6. The practice of recording transactions at cost is called a. cost classification. b. the cost principle. c. the valuation issue. d. cost recognition. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 7. Which of the following business events is not a transaction? a. Signing a contract b. Paying wages c. Receiving goods d. Purchasing a service ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 8. When a business records revenue when it has been earned, it is addressing the measurement issue of a. recognition. b. evaluation. c. classification. d. valuation. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

9. When a business reports an asset at an inflated dollar amount, it has violated the measurement issue of a. recognition. b. valuation. c. classification. d. realization. ANS: B PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

10. When a business correctly records its expenses and assets, it has correctly addressed the measurement issue of a. communication. b. classification. c. valuation. d. recognition. ANS: B PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

11. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 12. Which of the following is a business event that is considered a recordable transaction? a. A company hires a new employee. b. A customer purchases merchandise. c. A customer inquires about the availability of a product. d. The purchasing department sends a purchase order to the supplier. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 13. Which of the following is an illustration of the classification issue? a. At what amount should an old machine be shown on the balance sheet? b. At what point should the purchase of art supplies be recorded? c. Should tools be recorded as an asset or as an expense? d. At what point should a bill be paid for the purchase of an item? ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

14. Which of the following events does not require a journal entry? a. Purchase of a one-year insurance policy b. Agreement to perform a service at a future date c. Performance of a service agreed to at a past date d. Payment for a service performed previously ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions 15. Which of the following accounts has a normal credit balance? a. Dividends b. Automotive Equipment c. Advertising Fees Earned d. Interest Expense ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 16. Which of the following accounts has a normal debit balance? a. Dividends b. Common Stock c. Accounts Payable d. Retained Earnings ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 17. Which of the following accounts has a normal debit balance? a. Revenues Earned b. Accounts Payable c. Inventory d. Retained Earnings ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 18. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Common Stock c. Wages Expense d. Dividends ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle

19. Which of the following accounts has a normal debit balance? a. Wages Payable b. Fees Earned c. Rent Expense d. Common Stock ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 20. Which of the following accounts is decreased with a debit? a. Accounts Payable b. Accounts Receivable c. Rent Expense d. Dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

21. Which of the following accounts is decreased with a credit? a. Advertising Fees Earned b. Utilities Expense c. Common Stock d. Loan Payable ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

22. Which of the following accounts is increased with a debit? a. Common Stock b. Rent Payable c. Legal Fees Earned d. Dividends ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

23. Which of the following accounts is increased with a credit? a. Cash b. Revenues Earned c. Rent Expense d. Dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

24. Which account does not affect retained earnings? a. Dividends b. Sales Revenue c. Rent Expense d. Common Stock ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

25. Which pair of accounts follows the rules of debit and credit in the same manner? a. Revenue from Services and Equipment b. Inventory and Advertising Expense c. Repair Expense and Accounts Payable d. Common Stock and Cash ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 26. Which pair of accounts follows the rules of debit and credit in the opposite manner? a. Fixed Assets and Dividends b. Advertising Expense and Equipment c. Dividends and Medical Fees Earned d. Rent Payable and Common Stock ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle

27. If Accounts Receivable has debit postings of $58,000, credit postings of $44,000, and a normal ending balance of $48,000, which of the following was its beginning balance? a. $62,000 Dr. b. $34,000 Dr. c. $34,000 Cr. d. $62,000 Cr. ANS: B $48,000 = X + $58,000 - $44,000 X = $34,000 Dr. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 28. If Accounts Payable has debit postings of $34,000, credit postings of $28,000, and a normal ending balance of $12,000, what was its beginning balance? a. $18,000 Cr. b. $6,000 Cr. c. $18,000 Dr. d. $6,000 Dr. ANS: A $12,000 = X + $28,000 - $34,000 X = $18,000 Cr. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 29. To determine the balance of a particular account, one should refer to the a. source documents. b. chart of accounts. c. book of original entry. d. ledger. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 30. All of the following are examples of source documents except a. checks. b. contracts. c. ledgers. d. receipts. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle

31. When collection is made on Accounts Receivable, a. stockholders' equity increases. b. total assets decrease. c. total assets remain the same. d. total assets increase. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 32. If office equipment is sold at cost in exchange for a promissory note, a. total liabilities decrease. b. stockholders' equity decrease. c. total assets decrease. d. total assets remain the same. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 33. The declaration and payment of a dividend will a. decrease net income. b. increase liabilities. c. not affect total assets. d. decrease stockholders' equity. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 34. Payment on a portion of Accounts Payable will a. decrease total liabilities b. decrease net income. c. increase total liabilities. d. increase total assets ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

35. A $4,000 machine is purchased by paying $1,000 cash and issuing a promissory note for the remainder. The journal entry should include a a. credit to Machinery. b. credit to Notes Payable. c. credit to Notes Receivable. d. debit to Cash. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Comprehension

36. Which of the following transactions increases both assets and stockholders' equity? a. Payment received from a credit customer b. Received a bank loan c. Rendered a service, payment not yet received d. Declared and paid a dividend ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 37. Which of the following accounts will not affect stockholders' equity? a. Rent Expense b. Dividends c. Equipment d. Sales Revenue ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 38. A dividend will reduce which of the following accounts? a. Dividends b. Retained Earnings c. Common Stock d. Accounts Payable ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

39. Which of the following transactions affects retained earnings? a. Declaration and payment of dividends b. Prepayment of rent c. Investments by stockholders d. Obtaining a new loan ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 40. The Office Supplies account is classified as a(n) a. expense. b. stockholders' equity account. c. asset. d. liability, if the supplies have not yet been paid for. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 41. The Unearned Fees account is classified as a(n) a. liability. b. revenue. c. asset. d. dividend. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 42. Which of the following accounts is an asset? a. Retained Earnings b. Notes Payable c. Prepaid Rent d. Supplies Expense ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 43. Which of the following accounts is not a stockholders' equity account? a. Common Stock b. Retained Earnings c. Unearned Fees d. Dividends ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-05-Accounting Cycle

44. Which of the following accounts is a liability? a. Unexpired Insurance b. Insurance Expense c. Prepaid Insurance d. Unearned Insurance Fees ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 45. Cash is received for services not yet performed. This transaction affects an asset account and a(n) a. asset account. b. liability account. c. revenue account. d. expense account. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets | Liabilities MSC: ACBSP-APC-05-Accounting Cycle 46. Unearned revenues are recorded by companies that a. receive money in advance of the performance of a service. b. pay money at the time the performance of a service is complete. c. receive money at the time the performance of a service is complete. d. pay money in advance of the performance of a service. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Liabilities MSC: ACBSP-APC-05-Accounting Cycle 47. Office supplies become expenses a. when they are consumed (used up). b. when cash is paid for them. c. at no time, since they are an asset. d. when they are initially acquired. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 48. Which of the following accounts is classified differently from the others listed? a. Accounts Receivable b. Retained Earnings c. Prepaid Rent d. Cash ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle