Deck 1: The Financial Statements

Question 1

The accounting process begins and ends with people making decisions.

Answer 1

True

Question 2

The ________ is elected by the stockholders and is responsible for setting policy and appointing officers.

A) board of directors
B) chief executive officer (CEO)
C) chief financial officer (CFO)
D) advisory council

Answer 2

A

Question 3

Mutual agency of a partnership means that each partner may conduct business in the name of the partnership and can legally bind all the partners without limit for the partnership's debts.

Answer 3

True

Question 4

An entity that must pay its own income taxes is:

A) proprietorship.
B) partnership.
C) limited-liability company.
D) corporation.

Question 5

Which type of business organization transacts the most business and is the largest in terms of assets, income, and number of employees?

A) Proprietorship.
B) Partnership.
C) Limited-liability company.
D) Corporation.

Question 6

Financial accounting provides budgeting information to a company's managers.

Question 7

All business owners are personally liable for the debts of their businesses.

Question 8

Accounting is an information system that measures business activities.

Question 9

Accounting:

A) measures business activities.
B) processes data into reports and communicates the data to decision makers.
C) is often called the language of business.
D) is all of the above.

Question 10

Accounting information is used by investors and creditors, but not by individuals.

Question 11

A partnership is formed under state law.

Question 12

Decision makers who use accounting include:

A) the SEC
B) investors.
C) managers.
D) all of the above.

Question 13

Nonprofit organizations do not use accounting information since they are not concerned about making a profit.

Question 14

The type of accounting that makes projections to determine if a company should build a new store is:

A) financial accounting.
B) business accounting.
C) managerial accounting.
D) projection accounting.

Question 15

Accounting is often called the language of business.

Question 16

The two types of accounting are:

A) profit and nonprofit.
B) financial and managerial.
C) internal and external.
D) bookkeeping and decision-oriented.

Question 17

The business records of a sole proprietorship should include the proprietor's personal finances.

Question 18

Bookkeeping is the mechanical part of accounting.

Question 19

Accounting produces financial statements, which report information about a business entity.

Question 20

In which form of business ownership are the owners of a business legally distinct from the business?

A) Corporation.
B) Partnership.
C) Proprietorship.
D) All of the above.

Question 21

Which of the following is a correct statement about GAAP and IFRS?

A) IFRS prefers valuing assets at historical cost while GAAP prefers using fair value.
B) IFRS is more "rules-based" than GAAP.
C) The FASB and the IASB are working towards convergence of standards.
D) The SEC will require all companies to use IFRS beginning in 2013.

Question 22

________ means that the accounting information for a company must be prepared in such a way as to be capable of being compared with information from other companies in the same period and consistent with similar information for that company in previous periods.

A) Verifiability
B) Timeliness
C) Understandability
D) Comparability

Question 23

An entity that is organized according to state law and in which ownership units are called stock is a:

A) proprietorship.
B) corporation.
C) partnership.
D) limited liability company.

Question 24

Advantages of a corporation include:

A) a single owner.
B) the double taxation of distributed profits.
C) limited liability of the stockholders.
D) mutual agency.

Question 25

Which of the following is a true statement about the characteristics of partnerships?

A) In a limited-liability partnership, a wayward partner can create a large liability for the other partners.
B) General partners have mutual agency and limited liability.
C) Income and loss of the partnership "flows through" to the partners.
D) The partnership agreement must be in writing.

Question 26

Information that is material must be separately disclosed in the financial statements.

Question 27

Shareholders of a corporation:

A) receive one vote for each share of stock they own.
B) have unlimited liability.
C) have mutual agency.
D) receive dividends from the corporation without having to pay tax on the distribution.

Question 28

The SEC sets international financial reporting standards.

Question 29

Owners of an LLC are called:

A) partners.
B) sole proprietors.
C) members.
D) stockholders.

Question 30

The stable monetary unit concept means that the type of currency used for the financial statements is NOT expected to change.

Question 31

The acronym GAAP stands for:

A) generally acceptable authorized pronouncements.
B) government authorized accountant principles.
C) generally accepted accounting principles.
D) government audited accounting pronouncements.

Question 32

Under current accounting rules, the carrying value of a building can be increased to its fair value.

Question 33

Cost is a verifiable measure that is relatively free from bias.

Question 34

Accounting is moving in the direction of reporting more and more assets and liabilities at their fair values.

Question 35

Another name for the continuity assumption is the going-concern assumption.

Question 36

The fundamental qualitative characteristics of accounting are relevance and materiality.

Question 37

Generally accepted accounting principles, or GAAP, are the rules and procedures established by the Financial Accounting Standards Board, or the FASB.

Question 38

An important fact to consider when determining how to organize a business is that:

A) members of an LLC have unlimited liability and are taxed like members of a partnership.
B) for accounting purposes, a proprietorship is a distinct entity.
C) the records of a partnership can include the partner's personal finances.
D) the proprietor and the proprietorship are separate legal entities.

Question 39

Since we live in a global economy, all countries have adopted the same accounting standards for business transactions.

Question 40

The Financial Accounting Standards Board is responsible for establishing:

A) the code of professional conduct for accountants.
B) the Securities and Exchange Commission.
C) generally accepted accounting principles.
D) international accounting financial standards.

Question 41

The principle stating that assets acquired by the business should be recorded at their actual cost on the date of purchase is the:

A) historical cost principle.
B) objectivity principle.
C) reliability principle.
D) stable dollar principle.

Question 42

Historical cost:

A) is determined for each asset on a yearly basis.
B) is equal to the amount of cash paid less the dollar value of all non-cash consideration given in the exchange.
C) is a verifiable measure that is relatively free from bias.
D) is the amount that the business could sell the asset for.

Question 43

The stable-monetary-unit assumption:

A) ensures that accounting records and statements are based on the most reliable data available.
B) holds that the entity will remain in operation for the foreseeable future.
C) maintains that each organization or section of an organization stands apart from other organizations and individuals.
D) enables accountants to ignore the effect of inflation in the accounting records.

Question 44

The relevant measure of the value of the assets of a company that is going out of business is the:

A) book value.
B) current fair market value.
C) historical cost.
D) recorded value.

Question 45

The accounting equation expresses the idea that Resources - Insider claims = Outsider claims.

Question 46

The word "payable" always signifies a liability.

Question 47

A construction company paid $80,000 cash for equipment used in the business. At the time of purchase, the equipment had a list price of $90,000. When the balance sheet was prepared, the value of the equipment was $83,000. At what amount should the equipment be recorded in the records of the company?

A) $80,000
B) $83,000
C) $85,000
D) $90,000

Question 48

Verifiability means that the information:

A) is timely.
B) is understandable.
C) must be capable of being checked for accuracy.
D) is material and relevant.

Question 49

The CEO of ABC Company owns a vacation home in Hawaii. ABC owns a factory in Detroit where they are headquartered. Which of these properties is considered an asset(s) of the business?

A) Only the vacation home in Hawaii
B) Only the factory in Detroit
C) Both the vacation home in Hawaii and the factory in Detroit
D) Neither the vacation home in Hawaii nor the factory in Detroit

Question 50

Claims to assets must come from outsiders.

Question 51

If a company prepares its financial statements three years after the end of their accounting period, they have violated the qualitative characteristic of :

A) understandability.
B) timeliness.
C) verifiability.
D) full disclosure.

Question 52

When preparing accounting information, understand that:

A) the auditors are primarily responsible for preparing the information.
B) the cost of disclosure should not exceed the expected benefits to the users.
C) accounting information can be produced quickly and inexpensively.
D) all information must be disclosed for a complete understanding of the underlying economic facts.

Question 53

The accounting equation must always be in balance.

Question 54

The accounting assumption that states that the business, rather than its owners, is the reporting unit is the:

A) entity assumption.
B) going concern assumption.
C) stable-monetary-unit assumption.
D) historical cost assumption.

Question 55

Elements are the building blocks of the financial statements.

Question 56

An important fact to remember when studying GAAP and IFRS is:

A) if the U.S. adopts IFRS, the accounting information being taught currently will all be outdated.
B) there is no difference in way information is arranged on the balance sheet and income statement if IFRS is adopted.
C) newly issued U.S. accounting standards have conformed U.S. practices to IFRS.
D) there is no terminology difference between GAAP and IFRS.

Question 57

All of the following are true statements about the entity assumption EXCEPT for:

A) the entity assumption draws a sharp boundary around each entity.
B) the transactions of the business cannot be mingled with the transactions of the owner.
C) the entity assumption ensures that the business will continue indefinitely.
D) under the entity assumption, the entity is any organization that stands apart as a separate economic unit

Question 58

To be useful, accounting information must have the fundamental qualitative characteristics of:

A) comparability and relevance.
B) relevance and faithful representation.
C) materiality and understandability.
D) faithful representation and timeliness.

Question 59

Below is a list of qualitative characteristics of accounting. Following the list is a series of descriptive phrases.

A) faithful representation
B) timeliness
C) relevance
D) comparability
E) verifiability
F) understandability
_____ 1. When information can make a difference in a decision
_____ 2. Accounting information is reported the same way by different companies.
_____ 3. The information must be capable of being checked for accuracy and completeness.
_____ 4. Making information available early enough to users to help them make decisions
_____ 5. Information must be complete, free from bias, and without material error.
_____ 6. Information must be transparent so it makes sense to reasonably informed users.
Required: Match each characteristic with the appropriate phrase.

Question 60

ABC Company had the following transactions during the year:

A) ABC Company delayed issuing its financial statements because the accountant was on vacation.
B) ABC Company determined that land that they purchased several years ago for $100,000 had a current fair market value of $140,000. To make the financial statements look better, they increased the carrying value of the land to $140,000.
C) The president of ABC Company borrowed $30,000 from the bank to remodel his yacht. ABC put the loan on their books.
D) ABC Company was involved in an very complex accounting transaction that they did not want the bank to know about. They decided to make the description of the transaction extremely complex so that no one would realize what the transaction was about.
E) ABC believes that the purchasing price of the dollar has changed significantly over the last several years and therefore adjusted the financial statements to reflect current year price levels.
F) ABC recently purchased a building that was listed by the realtor for a price of $275,000. ABC paid $250,000 for the building and recorded it on their books for $250,000.
G) ABC Company is in excellent financial health and has no plans to go out of business. However, management decided that they did not need to depreciate the cost of their assets to business operations over the assets' economic lives.

Question 61

Dividends are distributions to the stockholders and represent an expense of the business.

Question 62

Long-term debt is a liability that is payable beyond one year from the date of the financial statements.

Question 63

The two main components of stockholders' equity are paid-in capital and retained earnings.

Question 64

The accounting equation shows the relationship among assets, liabilities and net income.

Question 65

Stockholders' equity is the stockholders' interest in the assets of the corporation.

Question 66

Examples of liabilities include:

A) accounts payable and accounts receivable.
B) accounts payable and land.
C) investments and owners' equity.
D) accounts payable and long-term debt.

Question 67

Delta Company has total assets of $400,000 and total liabilities of $180,000, Delta's equity must therefore be $$580,000.

Question 68

The owners' equity of any business is its:

A) revenues minus expenses.
B) assets minus liabilities.
C) assets plus liabilities.
D) paid-in capital plus assets.

Question 69

The Candy Company had beginning retained earnings of $5,000, net income of $3,000, and paid dividends of $1,000 to their stockholders. Therefore, the ending retained Earnings is $7,000.

Question 70

The accounting equation can be stated as:

A) Assets + Stockholders' Equity = Liabilities.
B) Assets -Liabilities = Stockholders' Equity.
C) Assets = Liabilities - Stockholders' Equity.
D) Assets - Stockholders' Equity + Liabilities = Zero.

Question 71

The assets of a company:

A) must equal the liabilities of the company.
B) include property, plant, and equipment and common stock.
C) represent economic resources that are expected to produce a future benefit.
D) include merchandise inventory and accounts payable.

Question 72

Another way to state the accounting equation is:

A) Assets = Liabilities + Paid-in Capital - Common Stock
B) Assets = Liabilities + Retained Earnings
C) Assets = Liabilities + Paid-in Capital + Retained Earnings
D) Assets = Liabilities - Paid-in Capital - Dividends

Question 73

When dealing with the elements of the financial statements, it is important to consider that:

A) the current portion of long-term debt is the amount due within the next year and must be disclosed separately.
B) fixed assets are short-term assets the company plans on selling in the near future.
C) cost of goods sold is a component of paid-in capital.
D) retained earnings is a long-term liability account.

Question 74

Liabilities are:

A) a form of paid-in capital.
B) future economic benefits to which a company is entitled.
C) debts payable to outsiders called creditors.
D) the outflow of resources that decrease common stock.

Question 75

Owners' equity is called stockholders' equity for a corporation.

Question 76

The basic component of paid-in capital is common stock.

Question 77

Expenses are increases in retained earnings that result from operations.

Question 78

Common stock:

A) is issued to shareholders as evidence of their ownership.
B) is only issued by large, international companies.
C) is the basic component of retained earnings.
D) represents the amount the company owes its shareholders.

Question 79

The calculation of ending retained earnings considers beginning retained earnings, current net income or net loss, and dividends.

Question 80

Regarding financial statement elements:

A) assets must provide immediate benefits to the company.
B) stockholders' equity represents the "outsider claims" to the assets.
C) merchandise inventory and dividends are assets of a company.
D) revenues are inflows of resources that increase retained earnings.