Question 1

In March 2010, a company salesperson sold some inventory and would receive a commission on those sales in April. The commission should be recognized as
A) an expense in April under the accrual principle.
B) an expense in April under the matching principle.
C) an expense in March under the matching principle.
D) an asset until April under the going concern principle.
E) a dividend in March under the entity principle.

Accepted Answer

The commission should be recognized as an expense in March under the matching principle because expenses should be recognized in the period in which the related revenues are earned, aligning the cost of the salesperson's commission with the period in which the sales were made.

Question 2

During 2010, a high-tech company spent $1,000,000 on research and development; however, no new products have been completed as of the end of the year. This amount will be shown in the company's financial statements as a(an)
A) immediate expense under the expense recognition rules.
B) long-term intangible asset until a patentable item is produced.
C) inventory in the current asset category of the balance sheet.
D) long-term investment.
E) part of cost of goods sold on the income statement.

Accepted Answer

Research and development costs are expensed as incurred according to the expense recognition principle, rather than capitalized as assets. This means they are recognized immediately as expenses in the period they are incurred if they do not directly lead to a patentable item or a tangible asset.

Question 3

Requiring a company to include all information necessary for a thorough understanding of a company's financial affairs in its financial statements or accompanying footnotes is an application of the
A) entity concept.
B) historical cost principle.
C) matching principle.
D) going concern assumption.
E) full disclosure principle.

Accepted Answer

The full disclosure principle mandates that a company must provide all information necessary for a thorough understanding of its financial statements and any accompanying notes. This ensures that users of the financial statements have a complete view of the company's financial situation.

Question 4

The accounting system
A) provides a systematic approach to collecting, processing, and communicating financial information to decision makers.
B) provides a means for companies to increase the market price of their common stock on the stock exchanges.
C) is comprised of T-accounts and financial statements.
D) uses a general ledger to record all transactions in chronological order.
E) keeps track of all transactions engaged in by a business organization.

Accepted Answer

The accounting system provides a systematic approach to collecting, processing, and communicating financial information to decision makers.

Question 5

A chart of accounts is
A) a T-account containing all business assets.
B) a numerical listing of all the accounts of a business.
C) prepared from the transactions in the general journal.
D) the same accounting document as the general ledger.
E) the listing of the financial statements that must be prepared by a business.

Accepted Answer

A chart of accounts is essentially a numerical listing of all the accounts of a business, organizing and simplifying the structure of financial information for reporting and analysis purposes. It does not contain transactions or financial statements but serves as an organizational tool.

Question 6

Each transaction of a business is initially recorded in a
A) chart of accounts.
B) general journal.
C) general ledger.
D) set of financial statements.
E) none of the above

Accepted Answer

The general journal is the initial book where each transaction of a business is first recorded, using a process called journalizing. This record includes the date of the transaction, the accounts affected, the amounts to be debited or credited, and a brief description of the transaction.

Question 7

An accounting record that contains all the transactional information for the individual accounts for a business is a
A) balance sheet.
B) chart of accounts.
C) general journal.
D) general ledger.
E) set of financial statements.

Accepted Answer

The general ledger is the accounting record that contains all the transactional information for the individual accounts for a business. It is where all the business transactions are recorded in detail, showing debits and credits for each account.

Question 8

A trial balance is prepared at the end of the accounting period
A) and lists all accounts contained in the chart of accounts.
B) and lists all general ledger accounts and their balances.
C) and, if debits equal credits, verifies that the accounting records are correct.
D) to determine that revenues and expenses are equal.
E) to determine that the balance sheet is in balance.

Accepted Answer

A trial balance lists all general ledger accounts and their balances at the end of an accounting period to ensure that total debits equal total credits.

Question 9

Businesses that allow their customers to charge their purchases on national credit cards usually collect the credit card charges, less a service fee, daily from the credit card companies.

Accepted Answer

Businesses typically receive payments for credit card purchases from the credit card companies on a daily basis, minus a service fee, which compensates the credit card company for processing the transaction and assuming the risk of fraud or non-payment.

Question 10

Companies often invest in the stocks or bonds of another company so that they can receive a stream of income from that investment.

Accepted Answer

Companies invest in stocks or bonds of other companies as a way to generate additional income through dividends or interest payments, respectively, and potentially benefit from capital gains.

Question 11

An asset's book value minus its accumulated depreciation is equal to its historical cost.

Accepted Answer

An asset's book value minus its accumulated depreciation is equal to its net book value, not its historical cost. Historical cost is the original cost of the asset, while net book value is the asset's current value on the books after depreciation.

Question 12

Many companies that have valuable patents do not show a value for those patents in the asset section of the balance sheet.

Accepted Answer

This is because patents are intangible assets, and accounting rules often require that internally generated intangible assets (like patents developed through a company's own research and development) are not capitalized on the balance sheet. Instead, the costs associated with creating the patents are typically expensed as incurred. Patents acquired from others can be capitalized, but their valuation might not reflect the current market value due to amortization or impairment.

Question 13

Businesses may recognize money received in advance of selling a profit or performing a service in current period operating income.

Accepted Answer

Money received in advance of selling a product or performing a service is recorded as a liability (deferred revenue) and is not recognized in operating income until the product is delivered or the service is performed.

Question 14

The par value of a corporation's stock often has little relationship to its market value.

Accepted Answer

The par value of a stock is a nominal value assigned by the corporation at issuance and often does not reflect the market value, which fluctuates based on supply and demand, company performance, and other factors.

Question 15

A manufacturing company that charges employees a nominal amount to park in a close-in parking garage would report those parking fees as operating revenues.

Accepted Answer

Parking fees collected from employees for using a parking garage do not relate to the primary operations of a manufacturing company; therefore, they would be classified as non-operating revenues.

Question 16

Corporations report earnings per share each period to assist stockholders in determining the profit that period that is attributable to their ownership interest in the firm.

Accepted Answer

Earnings per share (EPS) is a financial metric that corporations use to indicate the portion of a company's profit allocated to each outstanding share of common stock, helping stockholders understand the profit attributable to their ownership interest in the firm.

Question 17

The SEC's "plain English" rules apply to all financial statements submitted to that agency.

Accepted Answer

The SEC's "plain English" rules primarily apply to certain parts of prospectuses and reports filed with the SEC, such as the narrative sections, rather than to the financial statements themselves. Financial statements must adhere to the accounting standards such as GAAP, which have their own presentation requirements.

Question 18

Usefulness in decision making is the most important qualitative characteristic that accounting information should possess.

Accepted Answer

The primary objective of financial reporting is to provide financial information that is useful in making informed decisions, making usefulness the most important qualitative characteristic that accounting information should possess.

Question 19

To qualify as useful to decision makers, accounting information should be understandable, relevant, and reliable.

Accepted Answer

Accounting information must be understandable, allowing users to comprehend its meaning, relevant, so it can influence decisions by being pertinent to the decision-making process, and reliable, meaning it is dependable and can be verified. These characteristics ensure that the information is useful for decision-making purposes.

Question 20

Verifiability means that the accounting information presented can be checked and confirmed for accuracy.

Accepted Answer

The answer of Verifiability means that the accounting information presented...

Quiz 2: Concepts and Elements Underlying Accounting

In March 2010, a company salesperson sold some inventory and would receive a commission on those sales in April. The commission should be recognized as

During 2010, a high-tech company spent $1,000,000 on research and development; however, no new products have been completed as of the end of the year. This amount will be shown in the company's financial statements as a(an)

Requiring a company to include all information necessary for a thorough understanding of a company's financial affairs in its financial statements or accompanying footnotes is an application of the

The accounting system

A chart of accounts is

Each transaction of a business is initially recorded in a

An accounting record that contains all the transactional information for the individual accounts for a business is a

A trial balance is prepared at the end of the accounting period