Question 1

Tate Corporation purchased a building for its grocery store for $30,000 in 1970.Based on inflation estimates,the amount of this asset has been adjusted in the accounting records.The building is now reported at $75,000.Which of the following concepts or principles of accounting is being violated?

Accepted Answer

The stable monetary unit concept assumes that the value of money remains stable over time. By adjusting the value of the building based on inflation estimates, this concept is violated.

Question 2

A $5,000 account payable is paid by the business.How is the accounting equation affected?

Accepted Answer

When the $5,000 account payable is paid off, both the asset (Cash/Bank) and liability (Accounts Payable) accounts are decreased by $5,000. This means that there is no net effect on the accounting equation as both sides of the equation have decreased by the same amount, thereby maintaining balance. Therefore, neither the owner's equity nor the assets increase or decrease.

Question 3

Which of the following concepts (or principles)would most likely require that data be complete,neutral,and free from error?

Accepted Answer

The faithful representation principle requires that information be complete, neutral, and free from error in order to accurately represent the underlying economic events being reported. The cost principle refers to the initial valuation of assets and does not necessarily require completeness or neutrality of data. The entity concept refers to the separation of business and personal financial transactions, and the going-concern concept refers to the assumption that the business will continue to operate in the foreseeable future.

Question 4

Which of the following concepts (or principles)require an assumption that the entity will remain in operation for the foreseeable future?

Accepted Answer

The going-concern concept assumes that the entity will continue to operate in the foreseeable future. This assumption is necessary for the preparation of financial statements in accordance with generally accepted accounting principles. By assuming that the entity will continue to operate, assets can be valued at their expected future cash flows rather than their current market value, and liabilities can be reported at their expected settlement amounts rather than their current liquidation values. This concept is essential for the interpretation and analysis of financial statements by investors, creditors, and other stakeholders.

Question 5

The owners' claims to the assets of the business are called:

Accepted Answer

Owners' claims to the assets of the business refer to the amount of capital that the owners have invested in the business. This is represented by the owners' equity account in the balance sheet. Therefore, the correct answer is C - owners' equity.

Question 6

The faithful representation principle requires that information is complete,neutral and free from material error.

Accepted Answer

The faithful representation principle indeed requires that information is complete, neutral, and free from material error. This means that the information should accurately represent the economic phenomena that it purports to represent, without bias or distortion, and without omissions or misstatements that could affect users' understanding of the information.

Question 7

Bill Rogers has three different businesses.He has only one bank account for transactions relating to all of his various businesses.Which of the following concepts or principles of accounting is Bill violating?

Accepted Answer

Bill Rogers is violating the entity concept in accounting. The entity concept states that the business transactions should be kept separate from the personal transactions of the owner. In this case, Bill Rogers is using only one bank account for all his businesses, which violates the entity concept.

Question 8

The Ragun Cajun Bar and Grill,Inc.has been a popular restaurant in Beaumont,Texas.With no insurance,a recent hurricane has left the business with large losses due to a damaged building and lost business income.Which of the following concepts or principles of accounting will be of the greatest concern to Ragun Cajun's auditors?

Accepted Answer

The going-concern concept assumes that a business will continue its operations and meet its financial obligations in the future. In Ragun Cajun's case, the hurricane damage and lost business income could raise doubt about the company's ability to continue as a going concern, which would have a significant impact on the company's financial statements and audit. Therefore, auditors would be most concerned with the going-concern concept.

Question 9

An American business records transactions using the U.S.dollar and disregards fluctuation in the buying power of the dollar over time.This represents the:

Accepted Answer

The stable monetary unit principle assumes that the value of the U.S. dollar remains stable over time and disregards inflation or changes in buying power. This principle allows for easier record-keeping and accounting, but may not accurately reflect the true financial position of the business.

Question 10

One beneficial characteristic of a proprietorship is:

Accepted Answer

One beneficial characteristic of a proprietorship is that the owner also manages the business. This ensures that the owner has complete control over the business operations and can make quick decisions without having to consult anyone else. It also ensures that the owner's vision for the business is consistently executed since they are the ones overseeing the operations.

Question 11

Assets are $270,000 and owner's equity is $90,000.Liabilities will be:

Accepted Answer

D) Calculations: $270,000 - $90,000 = $180,000

Question 12

Which of the following concepts (or principles)would require that an item be recorded at the amount actually paid rather than at the estimated market value?

Accepted Answer

The cost principle requires that assets be recorded at their original cost, even if their market value has increased or decreased since the time of acquisition. This ensures that financial statements are not based on subjective estimates of value, but rather on objective and verifiable documented transactions.

Question 13

Many liabilities have the word "receivable" in their titles.

Accepted Answer

Liabilities typically have the word "payable" in their titles, while "receivable" is used for assets representing amounts owed to the entity.

Question 14

Which of the following concepts (or principles)addresses the ability of partners to commit other partners and the business to a contract?

Accepted Answer

The principle of mutual agency allows partners to commit other partners and the business to a contract. This means that one partner's actions can bind the entire partnership, making it important for partners to trust each other and work together effectively. The other options listed are accounting concepts or principles that do not relate to the ability of partners to commit the business to a contract.

Question 15

Assets are $150,000 and total liabilities are $90,000.Total owners' equity will be:

Accepted Answer

D) Calculations: $150,000 - $90,000 = $60,000

Question 16

Counting the actual physical inventory of a company and comparing it to accounting records would be an example of the:

Accepted Answer

Counting physical inventory and comparing it to accounting records is an example of the faithful representation principle, which requires that financial information accurately represents the transactions and events it purports to represent.

Question 17

Which of the following concepts (or principles)would dictate that a person with three different businesses keep three different checking accounts?

Accepted Answer

The Entity concept states that the business and the owner are separate entities, and therefore, the personal and business transactions should be kept separate. In this case, a person with three different businesses should have three different checking accounts to maintain the separation and identity of each business entity.

Question 18

Owner's equity is $150,000 and total liabilities are $90,000.Total assets would be:

Accepted Answer

D) Calculations: $150,000 + $90,000 = $240,000

Question 19

Lindsey Smith decided to start her own CPA practice as a professional corporation,Smith CPA PC.Her corporation purchased an office building for $35,000 which her real estate agent said was worth $50,000 in the current market.The corporation records the building as a $50,000 asset because Lindsey believes that is the real value of the building.Which of the following concepts or principles of accounting is being violated?

Accepted Answer

The concept being violated is the cost principle, which states that assets should be recorded at their original cost, not their estimated fair market value. By recording the building at $50,000 instead of its actual cost of $35,000, the company is violating the cost principle.

Question 20

Which of the following is the CORRECT accounting equation?

Accepted Answer

The correct accounting equation is Assets = Liabilities + Owners' Equity. This equation states that the amount of assets a company has must equal the combined amount of liabilities and owners' equity. This equation is the foundation for all accounting and financial reporting.

Quiz 1: Accounting and the Business Environment