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Accounting Chapter 1 Exam Questions And
Complete Solutions
Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. TRUE/FALSE - ANSWER TRUE
Accounting is referred to as the language of business because it is the method of communicating business information to stakeholders. TRUE/FALSE - ANSWER TRUE
Managerial accounting focuses on information for external decision makers. TRUE/FALSE - ANSWER FALSE
Stockholders primarily use managerial accounting information for decision-making purposes. TRUE/FALSE - ANSWER FALSE
A creditor is a person who owes money to the business. TRUE/FALSE - ANSWER FALSE
Local, state, and federal governments use accounting information to calculate income tax. TRUE/FALSE - ANSWER TRUE
Financial accounting focuses on information for decision makers outside of the business, such as creditors and taxing authorities. TRUE/FALSE - ANSWER TRUE
Business owners use accounting information to set goals, evaluate progress
toward those goals, and make adjustments when needed. TRUE/FALSE - ANSWER TRUE
Outside investors would ordinarily use managerial accounting information to decide whether or not to invest in a business. TRUE/FALSE - ANSWER FALSE
A creditor is any person who has an ownership interest in a business. TRUE/FALSE - ANSWER FALSE
Different users of financial statements focus on the different parts of the financial statements for the information they need. TRUE/FALSE - ANSWER TRUE
Any person or business to whom a business owes money is called the business's creditor. TRUE/FALSE - ANSWER TRUE
Managerial accounting provides information to ________. A) internal decision makers B) outside investors and lenders C) auditors D) taxing authorities - ANSWER A) internal decision makers
Which of the following statements best defines financial statements? A) Financial statements are the information systems that record monetary and nonmonetary business transactions. B) Financial statements are the verbal statements made to business news organizations by chief financial officers. C) Financial statements are documents that report on a business in monetary terms, providing information to help people make informed business decisions.
A) customers B) cost accountant C) company manager D) the board of directors - ANSWER A) customers
_______ are professional accountants who serve the general public, not one particular company. A) Certified public accountants B) Certified financial accountants C) Audit accountants D) Controllers - ANSWER A) Certified public accountants
As per the economic entity assumption, an organization and its owner should be seen as the same entity. TRUE/FALSE - ANSWER FALSE
The guidelines for accounting information are called Generally Accepted Accounting Principles (GAAP). TRUE/FALSE - ANSWER TRUE
IFRS is the main U.S. accounting rule book and is currently created and governed by the FASB. TRUE/FALSE - ANSWER FALSE
A publicly traded company in the United States does not come under SEC regulations as long as it follows the rules of GAAP. TRUE/FALSE - ANSWER FALSE
International Financial Reporting Standards (IFRS) are the international accounting rules that U.S. companies must follow for their international operations. TRUE/FALSE - ANSWER TRUE
IFRS are comparatively more specific and more rule based than U.S. GAAP. TRUE/FALSE - ANSWER FALSE
The Public Company Accounting Oversight Board is a watchdog agency that monitors the work of independent accountants who audit public companies. TRUE/FALSE - ANSWER TRUE
An examination of a company's financial statements and records is called an audit. TRUE/FALSE - ANSWER TRUE
The Sarbanes-Oxley Act (SOX) requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports. TRUE/FALSE - ANSWER TRUE
In a sole proprietorship, the owner is personally liable for the debts of the business. TRUE/FALSE - ANSWER TRUE
The most that the owner of a sole proprietorship can lose, as a result of business debts or lawsuits, is the amount he/she has invested in the business. TRUE/FALSE - ANSWER FALSE
Members of a limited-liability company (LLC) are not personally liable for the debts of the business. TRUE/FALSE - ANSWER TRUE
A business can be organized as a sole proprietorship, partnership, corporation, or limited-liability company (LLC). TRUE/FALSE - ANSWER TRUE
In a limited-liability company (LLC), the members are personally liable for the debts of the business. TRUE/FALSE - ANSWER FALSE
C) American Institute of Certified Public Accountants D) Securities and Exchange Commission - ANSWER A) Financial Accounting Standards Board
- GAAP are the rules that govern accounting in the United States. The acronym GAAP in this statement refers to ________. A) Globally Accepted and Accurate Policies B) Global Accommodation Accounting Principles C) Generally Accredited Accounting Policies D) Generally Accepted Accounting Principles - ANSWER D) Generally Accepted Accounting Principles
The formation of a partnership firm requires a minimum of ________. A) four partners B) three partners C) one partner D) two partners - ANSWER D) two partners
Which of the following is a major reason why corporate ownership is popular in the United States? A) Stockholders have limited liability for the debts of the corporation. B) Most corporations are small or medium-sized. C) The life of a corporation is limited by the death of the owner. D) A corporation is usually managed by the owners. - ANSWER A) Stockholders have limited liability for the debts of the corporation.
Which of the following is a characteristic of a corporation?
A) A corporation is owned by stockholders. B) Lenders of a corporation do not have the right to claim the corporation's assets to satisfy their obligations. C) All shares of a corporation must be held by a single individual. D) Each stockholder has the authority to commit the corporation to a binding contract through his/her actions. - ANSWER A) A corporation is owned by stockholders.
Which of the following statements is true of a sole proprietorship? A) A sole proprietorship joins two or more individuals as co-owners. B) The sole proprietor is personally liable for the liabilities of the business. C) A sole proprietorship is taxed separately from the owner. D) A sole proprietorship has to pay business income taxes. - ANSWER B) The sole proprietor is personally liable for the liabilities of the business.
Which of the following is a characteristic of a limited-liability company (LLC)? A) An LLC's life is terminated at any member's choice or death. B) Each member of an LLC is liable only for his or her own actions. C) An LLC must have more than five members. D) The income of members from an LLC is not taxed. - ANSWER B) Each member of an LLC is liable only for his or her own actions.
Caleb Brown has been the sole owner of a bicycle sales and repair shop for several years. Which of the following business types would limit Caleb's personal liability exposure to the entity's debts? A) partnership B) limited-liability company C) sole proprietorship
B) not combined with the proprietor's personal income C) not taxable. D) handled similarly to that of a corporation - ANSWER A) combined with the personal income of the proprietor
Genity Inc., located in Texas, records business transactions in dollars and disregards changes in the value of a dollar over time. Which of the following accounting assumptions does this represent? A) economic entity assumption B) going concern assumption C) accounting period assumption D) monetary unit assumption - ANSWER D) monetary unit assumption
According to the ________, the acquired assets should be recorded at the amount actually paid rather than at the estimated market value. A) going concern assumption B) economic entity concept C) cost principle D) monetary unit assumption - ANSWER C) cost principle
As per the ________, the entity will remain in operation for the foreseeable future. A) economic entity concept B) monetary unit assumption C) going concern assumption D) cost principle - ANSWER C) going concern assumption
Joshua Thomas Corporation manufactures and retails computer hardware. The president of the corporation bought a new car as a gift for his daughter and paid for it using cash from the business. Since the corporation paid for the car, it was recorded in its books as an asset. Which of the following concepts or principles of accounting did the corporation violate? A) monetary unit assumption B) economic entity assumption C) cost principle D) going concern assumption - ANSWER B) economic entity assumption
Lorna Smith decided to start her own CPA practice as a professional corporation, Smith CPA PC. Her corporation purchased an office building for $35,000 that her real estate agent said was worth $50,000 in the current market. The corporation records the building as a $50,000 asset because Lorna believes that is the real value of the building. Which of the following concepts or principles of accounting is being violated? A) cost principle B) economic entity assumption C) monetary unit assumption D) going concern assumption - ANSWER A) cost principle
Thirty years ago, Star Grocer Corporation had purchased a building for its grocery store by paying $30,000. Based on inflation estimates, the amount of the building has been adjusted in the accounting records. The building is now reported at $75,000 in Star Grocer's financial statements. Which of the following concepts or principles of accounting is being violated? A) going concern assumption B) revenue realization concept C) economic entity assumption D) cost principle - ANSWER D) cost principle
TRUE
The total of the amount of assets that a business possesses may or may not be equal to the total of liabilities and equity of the business. TRUE/FALSE - ANSWER FALSE
Equity increases when revenues are earned. TRUE/FALSE - ANSWER TRUE
Equity decreases with expenses and revenues. TRUE/FALSE - ANSWER FALSE
Dividends are the expenses of a business. TRUE/FALSE - ANSWER FALSE
The three types of events that affect retained earnings are—dividends, revenues, and expenses. TRUE/FALSE - ANSWER TRUE
Distribution of dividends represents increases in retained earnings. TRUE/FALSE - ANSWER FALSE
Common stock represents the basic ownership of every corporation. TRUE/FALSE - ANSWER TRUE
A debt that a business owes to an outside party is called ________. A) an asset B) a liability C) stockholders' equity D) revenue - ANSWER B) a liability
Viva Inc. produces and sells coffee beans. This month it earned $500 by selling coffee beans to Morning Cuppa Inc. The $500 received by Viva is its ________. A) revenue B) equity C) gain D) debt - ANSWER A) Revenue
The owners' claim to the assets of the business is called ________. A) return on assets B) expenses C) equity D) debt - ANSWER C) equity
The economic resources of a business such as furniture, building, and land are its ________. A) liabilities B) revenues C) assets D) dividends. - ANSWER C) assets
Which of the following is the correct accounting equation? A) Assets + Liabilities = Equity B) Assets = Liabilities + Equity C) Assets + Revenues = Equity D) Assets + Revenues = Liabilities + Expenses - ANSWER B) Assets = Liabilities
The net income of Vista Camera Services is $29,000. The beginning and ending stockholders' equity balances were $34,000 and $55,000, respectively. The company issued no common stock. Calculate the amount of dividends. A) $18, B) $8, C) $5, D) $60,000 - ANSWER B) $8,
Glendale Corporation had the following transactions in August: Earned $2,000 as revenues on account; collected $4,000 from a customer for goods sold last month; incurred $600 of repair expense and paid cash; paid $200 to a supplier that it owed from the previous month. What is the net income in August? A) $ B) $5, C) $2, D) $1,400 - ANSWER D) $1,
________ is the capital earned by profitable operations that is not distributed to stockholders. A) Assets B) Dividend C) Retained earnings D) Common Stock - ANSWER C) Retained earnings
Which of the following transactions will affect the balance of retained earnings?
A) issued common stock for cash B) paid rent expense for the month C) purchased land for cash D) collection on account - ANSWER B) paid rent expense for the month
Which of the following is true of retained earnings? A) Retained earnings decrease with payment of dividends. B) Retained earnings increase with purchase of capital assets. C) Retained earnings decrease with collection of revenue. D) Retained earnings increase with payment on account. - ANSWER A) Retained earnings decrease with payment of dividends.
Equity of a corporation is broken out into two components. Which of the following are the two components of the equity of a corporation? A) current assets and fixed assets B) common stock and liabilities C) revenues and expenses D) contributed capital and retained earnings - ANSWER D) contributed capital and retained earnings
John contributed $6,000 in the business by opening a bank account in the name of the business, United Internists. The corporation issued common stock to John. This transaction results in an increase in the assets of the business. TRUE/FALSE - ANSWER TRUE
For an accounting equation to balance, a transaction must affect both sides of the equation. TRUE/FALSE - ANSWER FALSE
B) increase the assets of the business C) increase the liabilities of the business D) decrease the liabilities of the business - ANSWER A) decrease the stockholders' equity
Hamilton Lawn Services incurred $500 as labor expense and promised to pay the labor agency within 30 days. Which of the following accounts would increase as a result of this transaction? A) Accounts Receivable B) Cash C) Accounts Payable D) Retained Earnings - ANSWER C) Accounts Payable
Lush Lawns Corporation incurred $1,500 labor expense and promised to pay the labor agency within 30 days. Which of the following would decrease as a result of this transaction? A) Assets B) Stockholders' Equity C) Liabilities D) Revenues - ANSWER B) Stockholders' Equity
Marsh Supply Services paid $350 cash to a materials supplier that it owed from the previous month. Which of the following accounts decreases? A) Accounts Receivable B) Accounts Payable C) Retained Earnings D) Office Supplies - ANSWER B) Accounts Payable
Marsh Supply Services received $1,000 cash from a customer which was owed to the business from the previous month. What is the effect of the cash receipt on the accounting equation? A) Accounts Receivable decreases and Stockholders' Equity decreases B) Cash account increases and Accounts Receivable decreases C) Accounts Payable increases and Stockholders' Equity decreases D) Cash account increases and Accounts Payable decreases - ANSWER B) Cash account increases and Accounts Receivable decreases
Marsh Supply Services received $1,000 cash from a customer which was owed to the business from the previous month. Which of the following accounts would decrease as a result of this transaction? A) Cash B) Equity C) Accounts Payable D) Accounts Receivable - ANSWER D) Accounts Receivable
Ace Inc. had the following transactions in June: Sold goods for $4,000 on account; received cash on account, $5,000; paid $ for repair expense; paid $2,000 to a supplier that it owed from the previous month. What is the combined effect on Cash of the June transactions? A) a $2,200 increase B) a $2,200 decrease C) a $5,000 increase D) a $2,800 decrease - ANSWER A) a $2,200 increase
The equity of Autumn Company is $150,000 and the total liabilities are $90,000. Its total assets would be ________.
