Financial Accounting Chapter 1 Essay

question

Accounting
answer

A system of maintaining records of a company’s operations and communicating that information to decision makers
question

Accounting equation
answer

assets= liabilities and stockholders’ equity
question

Assets
answer

Resources owned by a company
question

Auditors
answer

Trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial statements.
question

Balance sheet
answer

A financial statement that presents the financial position of the company on a particular date.
question

Corporation
answer

An entity that is legally separate from its owners.
question

Cost effectiveness
answer

Financial accounting information is provided only when the benefits of doing so exceed the costs.
question

Decision usefulness
answer

The ability of the information to be useful in decision making.
question

Dividends
answer

Cash payments to stockholders.
question

Economic entity assumption
answer

All economic events with a particular economic entity can be identified.
question

Ethics
answer

A code or moral system that provides criteria for evaluating right and wrong behavior.
question

Expenses
answer

Costs of providing products and services.
question

Faithful representation
answer

Accounting information that is complete, neutral, and free from material error.
question

Financial accounting
answer

Measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes.
question

Financial Accounting Standards Board (FASB)
answer

An independent, private body that has primary responsibility for the establishment of GAAP in the United States.
question

Financial statements
answer

Periodic reports published by the company for the purpose of providing information to external users.
question

Financing activities
answer

Transactions involving external sources of funding.
question

Generally accepted accounting principles (GAAP)
answer

The rules of financial accounting.
question

Going concern assumption
answer

In the absence of information to the contrary, a business entity will continue to operate indefinitely.
question

Income statement
answer

A financial statement that reports the company’s revenues and expenses over an interval of time.
question

Investing activities
answer

Transactions involving the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery and (2) any resources not directly related to a company’s normal operations.
question

Liabilities
answer

Amounts owed to creditors. include: notes payable accounts payable unearned service revenue salaries and wages payable interest payable
question

Materiality
answer

The impact of financial accounting information on investors’ and creditors’ decisions.
question

Net income
answer

Difference between revenues and expenses.
question

Operating activities
answer

Transactions involving the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance.
question

Partnership
answer

Business owned by two or more persons.
question

Retained earnings
answer

Cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends.
question

Revenues
answer

Amounts earned from selling products or services to customers.
question

Sole proprietorship
answer

A business owned by one person.
question

Statement of cash flows
answer

A financial statement that measures activities involving cash receipts and cash payments over an interval of time.
question

Statement of stockholders’ equity
answer

A financial statement that summarizes the changes in stockholders’ equity over an interval of time.
question

Stockholder’s equity
answer

Stockholders’, or owners’, claims to resources, which equal the difference between total assets and total liabilities.
question

2. What is the primary purpose of financial accounting? A. Determine the amount of tax liability owed to the government. B. Communicate business transactions to internal management. C. Measure business transactions and communicate those measures to external users to make decisions. D. Measure the profitability of the company in order to assist employees with making decisions.
answer

C. Measure business transactions and communicate those measures to external users to make decisions.
question

3. Financial accounting does not deal with which of the following? A. Measuring a company’s economic activity. B. Preparing financial reports. C. Making business decisions. D. Communicating financial results to investors.
answer

C. Making business decisions.
question

4. Which of the following groups is not among the external users for whom financial statements are prepared? A. Creditors. B. Regulators. C. Investors. D. Managers.
answer

D. Managers.
question

5. Financial accounting: A. Provides information primarily for external decision makers. B. Provides information primarily for a company’s employees. C. Provides information primarily for the use of managers of the company. D. Is primarily used to compute a company’s tax obligation.
answer

A. Provides information primarily for external decision makers.
question

6. The primary purpose(s) of financial accounting is (are) to: A. Measure and record business transactions. B. Prepare federal and state tax returns. C. Communicate financial results to investors and creditors. D. a and c
answer

D. a and c
question

7. Which definition below best describes financial accounting? A. Process of measuring income taxes owed to the government. B. System of maintaining communication with a company’s customers and suppliers. C. Procedures designed to enhance the company’s image to potential investors. D. Measuring business activities and communicating them to external parties.
answer

D. Measuring business activities and communicating them to external parties.
question

8. The accounting equation is defined as: A. Assets = Liabilities + Stockholders’ Equity. B. Assets = Liabilities – Stockholders’ Equity. C. Net Income = Revenues – Expenses. D. Liabilities + Revenues = Assets.
answer

A. Assets = Liabilities + Stockholders’ Equity.
question

9. Which statement below best describes the accounting equation? A. The change in retained earnings equals net income less dividends. B. Equality of revenue and expense transactions over time. C. Resources of the company equal creditors’ and owners’ claims to those resources. D. Financing activities equal investing and operating activities.
answer

C. Resources of the company equal creditors’ and owners’ claims to those resources.
question

10. If a company has stockholders’ equity of $60,000 at the end of the year, which of the following statements must be true? A. The company’s assets exceed liabilities by $60,000. B. The company has issued $60,000 of common stock. C. Net income for the year equals $60,000. D. Total revenues earned during the year equal $60,000.
answer

A. The company’s assets exceed liabilities by $60,000.
question

11. Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders’ equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt’s liabilities? A. $55,000. B. $30,000. C. $13,000. D. $7,000.
answer

B. $30,000.
question

12. Transactions of a company involving external sources of funding are referred to as: A. Investing activities. B. Financing activities. C. External activities. D. Operating activities.
answer

B. Financing activities.
question

13. Transactions of a company that include the purchase and sale of long-term productive assets are referred to as: A. Investing activities. B. Financing activities. C. Expenditure activities. D. Operating activities.
answer

A. Investing activities.
question

14. McGill purchases additional office equipment to better serves its customers. This purchase is classified as what type of activity? A. Company activity. B. Financing activity. C. Investing activity. D. Operating activity.
answer

C. Investing activity.
question

15. Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as: A. Investing activities. B. Management activities. C. Operating activities. D. Financing activities.
answer

C. Operating activities.
question

17. The form of business organization that is legally separate from its owners is a: A. Partnership. B. Sole proprietorship. C. Corporation. D. Separation entity.
answer

C. Corporation.
question

18. Which business form has the advantage of limited liability? A. Corporation. B. Sole proprietorship. C. Partnership. D. All business forms share equal limited liability.
answer

A. Corporation.
question

19. Limited liability means: A. Stockholders of a corporation are not obligated to pay the corporation’s debts out of their own pocket. B. Liabilities of a company cannot exceed its assets. C. Companies are not allowed to borrow unless they are profitable. D. Companies are less likely to be sued if they are formed as a corporation.
answer

A. Stockholders of a corporation are not obligated to pay the corporation’s debts out of their own pocket.
question

20. One disadvantage of the corporate form of business is: A. Limited liability. B. Access to more capital. C. Smaller in size. D. Double taxation.
answer

D. Double taxation.
question

21. The costs of providing goods and services to customers are referred to as: A. Assets. B. Expenses. C. Liabilities. D. Revenues.
answer

B. Expenses.
question

22. The accounts which represent the resources of the company are called: A. Liabilities. B. Revenues. C. Expenses. D. Assets.
answer

D. Assets.
question

23. An alternative form of the accounting equation is: A. Net Income = Revenues – Expenses. B. Stockholders’ Equity = Assets + Liabilities. C. Assets = Liabilities – Stockholders’ Equity. D. Assets – Liabilities = Stockholders’ Equity.
answer

D. Assets – Liabilities = Stockholders’ Equity.
question

24. The owners’ interest in a corporation is called: A. Dividends. B. Assets. C. Liabilities. D. Stockholders’ equity.
answer

D. Stockholders’ equity.
question

25. Creditors’ claims to a corporation’s resources are referred to as: A. Dividends. B. Assets. C. Liabilities. D. Stockholders’ equity.
answer

C. Liabilities.
question

26. Net income can best be described as: A. Net cash received by a company during the year. B. Revenues minus expenses. C. The amount of profits retained in a company for the year. D. Resources owned by a company.
answer

B. Revenues minus expenses.
question

27. Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000. A. $6,000. B. $8,000. C. $4,000. D. $14,000.
answer

B. $8,000.
question

28. Liabilities are best defined as: A. Amounts the company expects to collect in the future from customers. B. Debts or obligations the company owes resulting from past transactions. C. The amounts that owners have invested in the business. D. Payments to stockholders.
answer

B. Debts or obligations the company owes resulting from past transactions.
question

29. Which of the following best describes a revenue? A. Resources owned. B. Cash received from a customer. C. Amounts earned from providing goods and services to a customer. D. Dividends paid to stockholders.
answer

C. Amounts earned from providing goods and services to a customer.
question

30. The account type that represents payments to stockholders is called: A. Liabilities. B. Assets. C. Stockholders’ equity. D. Dividends.
answer

D. Dividends.
question

31. The accounts that represent resources owed to creditors are called: A. Assets. B. Liabilities. C. Dividends. D. Stockholders’ equity.
answer

B. Liabilities.
question

33. Which of the following is an operating activity? A. Issuing common stock. B. Paying dividends. C. Borrowing cash from a bank to acquire a factory. D. Paying electricity bills for the month.
answer

D. Paying electricity bills for the month.
question

34. How many of the following transactions are operating activities? Borrowed $50,000 from the bank Purchased $12,000 in supplies Provide services to customers for $27,000 Paid the utility bill of $750 Purchased a delivery truck for $12,000 Received $25,000 from issuing common stock A. One. B. Two. C. Three. D. Four.
answer

C. Three.
question

35. The costs associated with producing revenues are referred to as: A. Dividends. B. Assets. C. Liabilities. D. Expenses.
answer

D. Expenses.
question

36. Accountants are responsible for measuring various operating, investing and financing activities. Which of the following correctly matches the activity with its type? A. Investing – paying utilities for the month. B. Investing – purchasing land. C. Operating – paying dividends to stockholders. D. Financing – selling equipment for cash.
answer

B. Investing – purchasing land.
question

37. Which of the following accounts appears in the statement of stockholders’ equity? A. Supplies. B. Cash. C. Salaries Payable. D. Retained Earnings.
answer

D. Retained Earnings.
question

38. Sooner Company has had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of the company’s existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance? A. $47,000. B. $35,000. C. $23,000. D. $7,000.
answer

C. $23,000.
question

39. The equation best describing the income statement is: A. Revenues – Expenses = Net Income. B. Assets = Revenues – Expenses. C. Assets = Liabilities + Stockholders’ Equity. D. Revenues + Expenses = Net Income.
answer

A. Revenues – Expenses = Net Income.
question

40. On January 1, 2012, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During 2012, the company earned net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders’ equity on December 31, 2012? A. $1,231,700. B. $1,097,000. C. $1,201,300. D. $1,588,300.
answer

C. $1,201,300.
question

41. The financial statement that represents activity over the entire life of the company is the: A. Income statement. B. Statement of financial accounting. C. Balance sheet. D. Statement of cash flows.
answer

C. Balance sheet.
question

42. Which of the following is the correct order for preparing the financial statements? A. Balance sheet, statement of stockholders’ equity, and income statement. B. Balance sheet, income statement, and statement of stockholders’ equity. C. Statement of stockholders’ equity, income statement, and balance sheet. D. Income statement, statement of stockholders’ equity, and balance sheet.
answer

D. Income statement, statement of stockholders’ equity, and balance sheet.
question

43. The financial statement(s) that record activity over an interval of time is (are) the: A. Income statement. B. Balance sheet. C. Balance sheet and income statement. D. Income statement and statement of cash flows.
answer

D. Income statement and statement of cash flows.
question

44. Which of the following items would not appear in an income statement? A. Salaries expense. B. Advertising expense. C. Service revenue. D. Cash.
answer

D. Cash.
question

45. The two categories of stockholders’ equity usually found in the balance sheet of a corporation are: A. Common stock and liabilities. B. Assets and liabilities. C. Common stock and retained earnings. D. Revenues and expenses.
answer

C. Common stock and retained earnings.
question

46. Which of the following statements regarding financial reports is not correct? A. A balance sheet contains assets, liabilities, and stockholders’ equity information. B. An income statement shows revenues and expenses. C. A statement of stockholders’ equity reports revenues, net income, and dividends information. D. A statement of cash flows shows cash inflows and outflows from operating, investing, and financing activities.
answer

C. A statement of stockholders’ equity reports revenues, net income, and dividends information.
question

47. Which of the following is not a balance sheet item? A. Assets. B. Common stock. C. Retained earnings. D. Revenues.
answer

D. Revenues.
question

48. In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders’ equity? A. 1, 2, 3. B. 3, 2, 1. C. 1, 3, 2. D. 2, 3, 1.
answer

D. 2, 3, 1.
question

49. Nina Corp. had the following net income (loss) the first three years of operation: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years? A. $500. B. $0. C. $9,100. D. $8,000.
answer

D. $8,000.
question

50. Aikman Company has paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company’s existence. If Retained Earnings after year four has an ending balance of $9,700, what is the average annual amount of net income (loss) over the past four years for Aikman? A. $3,685. B. $14,740. C. $840. D. $1,260.
answer

A. $3,685.
question

51. The equation best describing the balance sheet is: A. Assets = Liabilities + Stockholders’ Equity. B. Revenues – Expenses = Net Income. C. Ending Retained Earnings + Dividends = Net Income. D. Revenues + Expenses = Net Income.
answer

A. Assets = Liabilities + Stockholders’ Equity.
question

52. DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance? A. $24,300. B. $300. C. $32,900. D. $69,300.
answer

C. $32,900.
question

53. The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income earned during the year? A. $7.5 million. B. $6.4 million. C. $4.4 million. D. $1.0 million.
answer

C. $4.4 million.
question

54. Which financial statement is typically prepared first? A. Balance sheet. B. Income statement. C. Statement of stockholders’ equity. D. Statement of cash flows.
answer

B. Income statement.
question

55. Expenses are shown in which of the following statements? A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders’ equity.
answer

A. Income statement.
question

57. Retained earnings at the end of the year is calculated using: A. Beginning retained earnings, net income, and dividends. B. Common stock and dividends. C. Stockholders’ equity, net income, and dividends. D. Net income and dividends.
answer

A. Beginning retained earnings, net income, and dividends.
question

58. The financial statement that represents the accounting equation is the: A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders’ equity.
answer

C. Balance sheet.
question

59. Which of the following is not a major section in the statement of cash flows? A. Cash flows from operating activities. B. Cash flows from financing activities. C. Cash flows from customers. D. Cash flows from investing activities.
answer

C. Cash flows from customers.
question

61. Liabilities are shown in which of the following statements? A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders’ equity.
answer

C. Balance sheet.
question

64. If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows = ($13,000); then net financing cash flows = A. $15,000. B. $25,000. C. $35,000. D. $45,000.
answer

C. $35,000.
question

66. Which of the following items is reported in the statement of stockholders’ equity? A. Total assets. B. Total expenses. C. Net income. D. Operating cash flows.
answer

C. Net income.
question

67. Which of the following statements is NOT correct about the financial statements? A. An income statement reports revenues, expenses, and net income information. B. The statement of stockholders’ equity presents common stock, dividends, and retained earnings information. C. A balance sheet reports assets, liabilities, revenues, and expenses. D. The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities.
answer

C. A balance sheet reports assets, liabilities, revenues, and expenses.
question

68. Which financial accounting number impacts stock prices more than any other single piece of information? A. Retained earnings. B. Net income. C. Common stock. D. Total assets.
answer

B. Net income.
question

69. The balance sheet depicts which of the following equations? A. Net income = revenue – expenses. B. Ending retained earnings = beginning retained earnings + net income – dividends. C. Assets = liabilities + stockholders’ equity. D. Net cash flows = total cash inflows – total cash outflows.
answer

C. Assets = liabilities + stockholders’ equity.
question

70. Which financial statement reports a company’s retained earnings? A. Income statement. B. Balance sheet. C. Statement of cash flows. D. All of the above.
answer

B. Balance sheet.
question

71. Net income appears in which two financial statements? A. Balance sheet and income statement. B. Statement of stockholders’ equity and balance sheet. C. Income statement and statement of stockholders’ equity. D. Net income appears in only one financial statement.
answer

C. Income statement and statement of stockholders’ equity.
question

72. Which of the following accounts appears in the statement of stockholders’ equity? A. Accounts Payable B. Accounts Receivable C. Common Stock D. Supplies
answer

C. Common Stock
question

73. Which of the following items would not appear in an income statement? A. Delivery expense. B. Accounts payable. C. Service revenue. D. Utilities expense.
answer

B. Accounts payable.
question

74. Which of the following is not a balance sheet item? A. Assets. B. Retained Earnings. C. Expenses. D. Liabilities.
answer

C. Expenses.
question

75. Which accounting amount best represents value created for stockholders during the current period? A. Retained earnings. B. Total assets. C. Net income. D. Stockholders’ equity.
answer

C. Net income.
question

76. Which accounting number has the single greatest impact on stock prices? A. Total dividends. B. Total assets. C. Total revenues. D. Net income.
answer

D. Net income.
question

77. GAAP is an abbreviation for: A. Generally authorized accounting procedures. B. Generally applied accounting procedures. C. Generally accepted auditing practices. D. Generally accepted accounting principles.
answer

D. Generally accepted accounting principles.
question

78. Generally Accepted Accounting Principles (GAAP) are best defined as: A. Standards or methods for presenting financial accounting information. B. Government-mandated rules that companies must follow. C. Rules that best estimate profitability for a company. D. The group of individuals that create and enforce all accounting rules.
answer

A. Standards or methods for presenting financial accounting information.
question

79. Today, financial accounting and reporting standards in the United States are established primarily by the: A. Securities and Exchange Commission. B. International Accounting Standards Board. C. Financial Accounting Standards Board. D. U.S. Congress.
answer

C. Financial Accounting Standards Board.
question

80. Financial reporting objectives do not include providing information: A. Useful to investors and creditors in making decisions. B. To determine market values, assess profit potential, and evaluate management. C. Helpful to investors in predicting cash flows. D. That tells about a company’s economic resources and claims to those resources
answer

B. To determine market values, assess profit potential, and evaluate management.
question

81. Of the following, the most important objective for financial reporting is to provide information useful for: A. Predicting cash flows. B. Determining taxable income. C. Providing accountability. D. Increasing future profits.
answer

A. Predicting cash flows.
question

82. The International Accounting Standards Board: A. Is governed by the U.S. Securities and Exchange Commission. B. Can overrule the FASB when their policies disagree. C. Promotes the use of high-quality, understandable global accounting standards. D. Is the primary standard-setting body in the United States.
answer

C. Promotes the use of high-quality, understandable global accounting standards.
question

83. Independent auditors express an opinion on the: A. Fairness of financial statements. B. Amount of income taxes a company owes to the government. C. Quality of the company’s products. D. Quality of a company’s workforce.
answer

A. Fairness of financial statements.
question

84. The body of rules and procedures that guide the measurement and communication of financial accounting information is known as: A. Standards of Professional Compliance (SPC). B. Generally Accepted Accounting Principles (GAAP). C. Generally Accepted Auditing Standards (GAAS). D. Rules of Financial Reporting (RFR).
answer

B. Generally Accepted Accounting Principles (GAAP).
question

85. The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the: A. FASB. B. IASB. C. SEC. D. IRS.
answer

A. FASB.
question

86. Which statement below best describes the objectives of financial accounting? A. Provide information that helps predict cash flows. B. Provide information about the economic resources, claims to resources and changes in resources and claims. C. Provide information that is useful in making decisions. D. All of the above are correct.
answer

D. All of the above are correct.
question

87. The assumption that a business can continue to remain in operation into the future is the: A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption.
answer

D. Going concern assumption.
question

88. The qualitative characteristic that says accounting information can influence users’ decisions by allowing them to assess past performance is: A. Timeliness. B. Neutrality. C. Confirmatory value. D. Predictive value.
answer

C. Confirmatory value.
question

89. The major underlying assumptions of accounting include all of the following except: A. Economic entity. B. Monetary unit. C. Legal liability. D. Going concern.
answer

C. Legal liability.
question

90. The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the: A. Monetary unit assumption. B. Going concern assumption. C. Economic entity assumption. D. Periodicity assumption.
answer

C. Economic entity assumption.
question

91. Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of: A. Relevance. B. Consistency. C. Materiality. D. Neutrality.
answer

D. Neutrality.
question

92. If accounting information is considered to have faithful representation, then which of the following is true? A. The information represents to users what it claims to represent. B. The information follows conservatism principles and is also material. C. The information is considered pertinent to or affects decisions. D. The information will have predictive value, feedback value, and is timely.
answer

A. The information represents to users what it claims to represent.
question

93. For accounting information to be relevant, it must have which of the following characteristics? A. Predictive value or confirmatory value. B. Large in amount and timely. C. Comparability or consistency. D. Freedom from material error, neutrality, or completeness.
answer

A. Predictive value or confirmatory value.
question

94. Materiality is based upon which factor(s)? A. Timeliness of an item. B. Amount and nature of an item. C. Consistency of an item. D. Relevance of an item.
answer

B. Amount and nature of an item.
question

95. If a company has gone bankrupt, its financial statements likely violate the: A. Periodicity assumption. B. Monetary unit assumption. C. Going concern assumption. D. Economic entity assumption.
answer

C. Going concern assumption.
question

96. The conceptual framework’s qualitative characteristic of relevance includes: A. Predictive value. B. Verifiability. C. Completeness. D. Neutrality.
answer

A. Predictive value.
question

97. The conceptual framework’s qualitative characteristic of faithful representation includes: A. Predictive value. B. Neutrality. C. Confirmatory value. D. Comparability.
answer

B. Neutrality.
question

98. Constraints on qualitative characteristics of accounting information include: A. Freedom from material error. B. Going concern. C. Neutrality. D. Cost effectiveness.
answer

D. Cost effectiveness.
question

99. Primary qualitative characteristics of accounting information are: A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Faithful representation and consistency.
answer

C. Faithful representation and relevance.
question

100. Enhancing qualitative characteristics of accounting information include: A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Cost effectiveness and materiality.
answer

B. Comparability and consistency.
question

(pic) Balance Sheet
(pic) Balance Sheet
answer

question

(pic) Statement of stockholders equity
(pic) Statement of stockholders equity
answer

question

(pic) Income Statement
(pic) Income Statement
answer

Get instant access to
all materials

Become a Member