Question 1

To include the personal assets and transactions of a business's stockholders in the records and reports of the business would be in conflict with the:

Accepted Answer

The business entity assumption states that the business's financial information is separate from the personal assets and transactions of its owners, and should be recorded and reported accordingly. Including the personal assets and transactions of stockholders would violate this assumption.

Question 2

Revenue is properly recognized:

Accepted Answer

Revenue should be recognized when goods have been delivered or services have been performed, regardless of whether payment has been received or not. This method of recognition is called the accrual basis of accounting and is in accordance with Generally Accepted Accounting Principles (GAAP).

Question 3

The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange,is the:

Accepted Answer

The measurement (cost) principle requires all accounting information to be based on actual cost and mandates that assets and services should initially be recorded at the cash or cash equivalent amount given in exchange. This principle is important for providing reliable and objective information in financial statements.

Question 4

If a company receives $12,000 from its sole stockholder to establish a corporation,the effect on the accounting equation would be:

Accepted Answer

The transaction of receiving $12,000 from the sole stockholder will increase the company's cash (an asset) by $12,000, resulting in an increase in assets. At the same time, it will increase the company's equity by $12,000, representing the owner's investment in the company. Therefore, the correct answer is E - Assets increase $12,000 and equity increases $12,000. There are no changes to liabilities in this transaction, as the company did not borrow any money or incur any debts.

Question 5

A partnership:

Accepted Answer

A partnership is a type of business organization in which two or more individuals own and manage the business together. Partners share in the profits and losses of the business and have unlimited liability for its debts and obligations. Unlike a corporation, a partnership is not legally required to have a written agreement, and it is not a separate legal entity from its owners (as in choice D). Finally, shareholders (as in choice E) are owners of a corporation, not a partnership.

Question 6

In a business decision where there are ethical concerns,the preferred course of action should be one that:

Accepted Answer

The preferred course of action in a business decision where there are ethical concerns should be one that avoids casting doubt on the decision maker and upholds trust. This means that the decision should be made in a way that maintains the ethical standards of the company and ensures that stakeholders trust the decision maker. Maximizing profits, maintaining operations at the current level, and cost considerations should not take precedence over ethics and trust. While gaining agreement from managers may be important, it should not be the main determining factor in the decision-making process.

Question 7

The Superior Company acquired a building for $500,000.The building was appraised at a value of $575,000.The seller had paid $300,000 for the building 6 years ago.Which accounting principle would require Superior to record the building on its records at $500,000?

Accepted Answer

The measurement (cost) principle requires that assets be recorded at their original cost, even if their market value has increased over time. In this case, Superior acquired the building for $500,000, which is the original cost of the asset, so it should be recorded at that value on the company's records. The fact that the seller paid $300,000 for the building 6 years ago or that it was appraised at $575,000 does not impact the initial cost of the asset for Superior.

Question 8

The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold,unless evidence shows that it will not continue,is the:

Accepted Answer

The going-concern assumption posits that a business will continue operation into the foreseeable future, so financial statements should reflect this by valuing assets at their historical cost, rather than their liquidation value. This is important information for stakeholders to have to make informed decisions about the business's future prospects.

Question 9

The question of when revenue should be recognized on the income statement according to GAAP is addressed by the:

Accepted Answer

The revenue recognition principle is the accounting principle that outlines the specific conditions under which revenue is recognized, or accounted for, on the income statement. This principle ensures that revenue is recognized only when it is earned and can be reliably measured.

Question 10

On December 15 of the current year,Conrad Accounting Services signed a $40,000 contract with a client to provide bookkeeping services to the client in the following year.The client paid the entire $40,000 on the date the contract was signed.Which accounting principle would require Conrad Accounting Services to record the bookkeeping revenue in the following year and not the year the cash was received?

Accepted Answer

The revenue recognition principle requires that revenue is recognized in the accounting records when it is earned, regardless of when the cash is received. In this case, the bookkeeping services will be provided in the following year, so the revenue should be recorded in that year.

Question 11

If a company is considering the purchase of a parcel of land that was acquired by the seller for $85,000,is offered for sale at $150,000,is assessed for tax purposes at $95,000,is recognized by the purchaser as easily being worth $140,000,and is purchased for $137,000,the land should be recorded in the purchaser's books at:

Accepted Answer

The land should be recorded in the purchaser's books at the purchase price of $137,000. This is in accordance with the historical cost principle, which states that assets should be recorded at their cost at the time of acquisition.

Question 12

The rule that (1)requires revenue to be recognized when goods or services are provided to the customer and (2)at the amount expected to be received from the customer is called the:

Accepted Answer

The revenue recognition principle specifies when revenue is to be recognized and at what amount. It requires revenue to be recognized when goods or services are provided to the customer and at the amount expected to be received from the customer. This is a fundamental accounting principle that is important for the accurate reporting of a company's financial performance. Choices A, B, D, and E are all other important accounting principles but are not directly related to revenue recognition.

Question 13

If a company purchases equipment costing $4,500 on credit,the effect on the accounting equation would be:

Accepted Answer

When a company purchases equipment on credit, its assets increase by the value of the equipment ($4,500 in this case) because it now owns more property. At the same time, its liabilities increase by the same amount because it owes money (the $4,500 credit) to another entity.

Question 14

Marsha Bogswell is the sole stockholder of Bogswell Legal Services.Which accounting principle requires Marsha to keep her personal financial information separate from the financial information of Bogswell Legal Services?

Accepted Answer

The business entity assumption requires that the financial information of the business be kept separate from the personal financial information of its owner(s). This allows for accurate tracking of the financial performance and position of the business, as well as compliance with tax and other legal requirements.

Question 15

Which of the following purposes would financial statements serve for external users?

Accepted Answer

Financial statements serve as a regulatory requirement for companies whose stock is sold to the public. External users such as investors, creditors, and analysts rely on these statements to evaluate the financial health and performance of the company before making investment decisions.

Question 16

A limited liability company:

Accepted Answer

A limited liability company (LLC) has one or more owners, called members. They have limited personal liability for the company's debts and obligations, and the company is taxed as a partnership. Unlike corporations, LLCs are not subject to double taxation. The statement about stockholders is incorrect. The statement about only having two partners is incorrect, as a partnership can have more than two partners.

Question 17

If a company uses $1,300 of its cash to purchase supplies,the effect on the accounting equation would be:

Accepted Answer

When a company uses cash to purchase supplies, one asset (cash) decreases while another asset (supplies) increases by the same amount, leaving the overall accounting equation unchanged.

Question 18

Which of the following accounting principles prescribes that a company record its expenses incurred to generate the revenue reported?

Accepted Answer

The expense recognition (matching) principle requires a company to record expenses in the same period as the revenue they generate. This ensures that the income statement accurately reflects a company's profitability for a given period.

Question 19

The International Accounting Standards Board (IASB):

Accepted Answer

The IASB identifies globally preferred accounting practices to increase comparability among financial statements. It does not have authority to impose standards on companies, nor is it the only source of GAAP. Its scope is not limited to companies in the European Union.

Question 20

Which of the following accounting principles require that all goods and services purchased be recorded at actual cost?

Accepted Answer

The Measurement (Cost) principle requires that all goods and services purchased be recorded at their actual cost, which means the amount paid to acquire them. This principle helps ensure the accuracy and reliability of financial statements by ensuring that all transactions are recorded at their true value.

Quiz 1: Introducing Financial Statements