, TESTBANK For Financial Accounting 12e
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, CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the activities and users associated with accounting. Accounting is an information
system that identifies, records, and communicates the economic events of an organization to
interested users. The major users and uses of accounting are as follows. (a) Management uses
accounting information to plan, organize, and run the business. (b) Investors (owners) decide
whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors
(suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of
accounting information. Other groups that use accounting information are taxing authorities,
regulatory agencies, customers, and labor unions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics
are the standards of conduct by which actions are judged as right or wrong. Effective financial
reporting depends on sound ethical behavior. Generally accepted accounting principles are a
common set of standards used by accountants. The primary accounting standard-setting body
in the United States is the Financial Accounting Standards Board. The monetary unit
assumption requires that companies include in the accounting records only transaction data
that can be expressed in terms of money. The economic entity assumption requires that the
activities of each economic entity be kept separate from the activities of its owner(s) and other
economic entities.
3. State the accounting equation, and define its components. The basic accounting equation
is:
Assets = Liabilities + Stockholders' Equity
Assets are resources a business owns. Liabilities are creditorship claims on total assets.
Stockholders' equity is the ownership claim on total assets.
4. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual
asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase
in a specific liability, or (3) increase in stockholders' equity.
The expanded accounting equation is:
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Common stock is affected when the company issues new shares of stock in exchange for cash.
Revenues are increases in assets resulting from income-earning activities. Expenses are the
costs of assets consumed or services used in the process of earning revenue. Dividends are
payments the company makes to its stockholders.
5. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses and resulting net income or net loss for a specific period
of time. A retained earnings statement summarizes the changes in retained earnings for a
specific period of time. A balance sheet reports the assets, liabilities, and stockholders' equity
at a specific date. A statement of cash flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental accounting, and forensic
accounting. Accounting is a popular major because there are many different types of jobs, with
unlimited potential for career advancement.
,1-2 Test Bank for Financial & Managerial Accounting, Fourth Edition
TRUE-FALSE STATEMENTS
1.Owners of business firms are the only people who need accounting information.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2.Transactions that can be measured in dollars and cents are recorded in the financial information
system.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3.The hiring of a new company president is an economic event recorded by the financial information
system.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4.Management of a business enterprise is the major external user of information.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reportin g
5.Accounting communicates financial information about a business enterprise to both internal and
external users.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
6.Accounting information is used only by external users with financial interests in a business
enterprise.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
7.Financial statements are the primary means of communicating accounting information to
interested parties.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
8.Bookkeeping and accounting are one and the same because the bookkeeping function includes
the accounting process.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
9.The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
10.The study of accounting is not useful for a business career unless your career objective is to
become an accountant.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
11.A working knowledge of accounting is not relevant to a lawyer or an architect.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
,1-3 Accounting in Action
12.A partnership must have more than one owner.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
13.The economic entity assumption requires that the activities of an entity be kept separate and
distinct from the activities of its owner and all other economic entities.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
14.The monetary unit assumption states that only transactions that can be measured in terms of
money should be recorded in the accounting records.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
15.Accountants rely on a fundamental business concept—ethical behavior—in reporting financial
information.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
16.The primary accounting standard-setting body in the United States is the International
Accounting Standards Board.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
17.The Financial Accounting Standards Board is a part of the Securities and Exchange
Commission.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
18.The Securities and Exchange Commission oversees U.S. financial markets and accounting
standard-setting bodies.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
19.The cost and fair value of an asset are the same at the time of acquisition and in all subsequent
periods.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
20.Even though a partnership is not a separate legal entity, for accounting purposes the partnership
affairs should be kept separate from the personal activities of the owners.
Ans: T LO 2, Section 2 BT: C Difficulty; Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
21.In order to possess future service potential, an asset must have physical substance.
Ans: F LO 3, Section 3, BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
22.Owners' claims to total business assets take precedence over the claims of creditors because
owners invest assets in the business and are liable for losses.
Ans: F LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
23.The basic accounting equation states that Assets = Liabilities.
Ans: F LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
24.Both internal and external transactions are recorded in accounting records.
Ans: T LO 4, Section 4 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
25.Internal transactions do not affect the basic accounting equation because they are economic
events that occur entirely within one company.
Ans: F LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
,1-4 Test Bank for Financial & Managerial Accounting, Fourth Edition
26.The purchase of store equipment for cash reduces assets and stockholders’ equity by an equal
amount.
Ans: F LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
27.The purchase of office equipment on credit increases total assets and total liabilities.
Ans: T LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
28.The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company during a period.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
29. Net income for the period is determined by subtracting total expenses and drawings from
total revenues.
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
30.The income statement is sometimes referred to as the statement of operations.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
31.A balance sheet reports the assets and liabilities of a company for a specific period of time.
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
32.The ending retained earnings balance is reported on both the retained earnings statement and
the balance sheet.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
33. The study of accounting will be useful only if a student is interested in working for a profit-
oriented business firm.
Ans: F LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
34. Private accountants are accountants who are not employees of business enterprises.
Ans: F LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
35. Expressing an opinion as to the fairness of the information presented in financial statements
is a service performed by CPAs.
Ans: T LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
36.Identifying is the process of keeping a chronological diary of events measured in dollars and
cents.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
37.Management consulting includes examining the financial statements of companies and
expressing an opinion as to the fairness of their presentation.
Ans: F LO 1, Section 1 BT: K Difficulty; Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
38.Accountants do not have to worry about issues of ethics.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
39.At the time an asset is acquired, cost and fair value should be the same.
Ans: T LO 2, Section 2 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
40.The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
41.The basic accounting equation is in balance when the creditor and ownership claims against
the business equal the assets.
FOR INSTRUCTOR USE ONLY
,1-5 Accounting in Action
Ans: T LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
42.External transactions involve economic events between the company and some other enterprise
or party.
Ans: T LO 4, Section 4 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
43.In the retained earnings statement, revenues are listed first, followed by expenses, and net
income (or net loss).
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
MULTIPLE CHOICE QUESTIONS
44.Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
45.The starting point of the accounting process is
a. communicating information to users.
b. identifying economic events.
c. recording economic events.
d. none of these answers are correct.
Ans: b LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
46.Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
,1-6 Test Bank for Financial & Managerial Accounting, Fourth Edition
47.Which of the following events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. the appointment of a new CPA firm to perform an audit
b. the purchase of a new computer
c. the sale of store equipment
d. payment of income taxes
Ans: a LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
48.Interpretation of reported information involves each of the following except
a. limitations of reported data.
b. meaning of reported data.
c. uses of reported data.
d. all of these choices are correct.
Ans: d LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
49. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording non-quantifiable economic events.
d. analyzing and interpreting financial reports.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
50.The accounting process is correctly sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
51.Which of the following techniques is not used by accountants to interpret and report financial
information?
a. graphs
b. special memos for each class of external users
c. charts
d. ratios
Ans: b LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
52.Accounting consists of three basic activities that are related to economic events of an
organization. These include
a. identifying, recording, and communicating.
b. identifying, calculating, and responding.
c. classifying, numbering, and reporting.
d. issuing, reporting, and classifying.
Ans: a LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
,1-7 Accounting in Action
53.All of the following statements are correct except
a. good decision-making depends on good information.
b. a vital element in communicating economic events is the accountant's ability to analyze
and interpret reported information.
c. the origins of accounting are generally attributed to Socrates, a classical Greek
philosopher, who promoted accounting as a social contract.
d. the information that a user of financial information needs depends upon the kinds of
decisions the user makes.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
54.Which of the following is not considered an internal user of accounting data?
a. president of the company
b. production manager
c. merchandise inventory clerk
d. president of the employees' labor union
Ans: d LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
55.Which of the following would not be considered an external user of accounting data for the GHI
Company?
a. Internal Revenue Service agent
b. management
c. creditors
d. customers
Ans: b LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
56.Which of the following would not be considered internal users of accounting data for a
company?
a. the president of a company
b. the controller of a company
c. creditors of a company
d. salesmen of the company
Ans: c LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
57.Which of the following is an external user of accounting information?
a. labor union
b. finance director
c. company officer
d. manager
Ans: a LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
58.Which one of the following is not an external user of accounting information?
a. regulatory agency
b. customer
c. investor
d. all of these are external users.
Ans: d LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
, 1-8 Test Bank for Financial & Managerial Accounting, Fourth Edition
59.Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the
accounting process?
a. identification
b. communication
c. recording
d. analysis
Ans: c LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
60.The origins of accounting are generally attributed to the work of
a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
61.Financial accounting provides economic and financial information for all of the following
external users except
a. creditors.
b. investors.
c. managers.
d. regulators.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
62.The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.
Ans: c LO 2, Section 2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
63.The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.
Ans: c LO 2, Section 2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
64.Ethics are the standards of conduct by which one's actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. all of these answers are correct.
Ans: d LO 2, Section 2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
Weygandt
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the activities and users associated with accounting. Accounting is an information
system that identifies, records, and communicates the economic events of an organization to
interested users. The major users and uses of accounting are as follows. (a) Management uses
accounting information to plan, organize, and run the business. (b) Investors (owners) decide
whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors
(suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of
accounting information. Other groups that use accounting information are taxing authorities,
regulatory agencies, customers, and labor unions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics
are the standards of conduct by which actions are judged as right or wrong. Effective financial
reporting depends on sound ethical behavior. Generally accepted accounting principles are a
common set of standards used by accountants. The primary accounting standard-setting body
in the United States is the Financial Accounting Standards Board. The monetary unit
assumption requires that companies include in the accounting records only transaction data
that can be expressed in terms of money. The economic entity assumption requires that the
activities of each economic entity be kept separate from the activities of its owner(s) and other
economic entities.
3. State the accounting equation, and define its components. The basic accounting equation
is:
Assets = Liabilities + Stockholders' Equity
Assets are resources a business owns. Liabilities are creditorship claims on total assets.
Stockholders' equity is the ownership claim on total assets.
4. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual
asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase
in a specific liability, or (3) increase in stockholders' equity.
The expanded accounting equation is:
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Common stock is affected when the company issues new shares of stock in exchange for cash.
Revenues are increases in assets resulting from income-earning activities. Expenses are the
costs of assets consumed or services used in the process of earning revenue. Dividends are
payments the company makes to its stockholders.
5. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses and resulting net income or net loss for a specific period
of time. A retained earnings statement summarizes the changes in retained earnings for a
specific period of time. A balance sheet reports the assets, liabilities, and stockholders' equity
at a specific date. A statement of cash flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental accounting, and forensic
accounting. Accounting is a popular major because there are many different types of jobs, with
unlimited potential for career advancement.
,1-2 Test Bank for Financial & Managerial Accounting, Fourth Edition
TRUE-FALSE STATEMENTS
1.Owners of business firms are the only people who need accounting information.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2.Transactions that can be measured in dollars and cents are recorded in the financial information
system.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3.The hiring of a new company president is an economic event recorded by the financial information
system.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4.Management of a business enterprise is the major external user of information.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reportin g
5.Accounting communicates financial information about a business enterprise to both internal and
external users.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
6.Accounting information is used only by external users with financial interests in a business
enterprise.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
7.Financial statements are the primary means of communicating accounting information to
interested parties.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
8.Bookkeeping and accounting are one and the same because the bookkeeping function includes
the accounting process.
Ans: F LO 1, Section 1 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
9.The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
Ans: T LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
10.The study of accounting is not useful for a business career unless your career objective is to
become an accountant.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
11.A working knowledge of accounting is not relevant to a lawyer or an architect.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
,1-3 Accounting in Action
12.A partnership must have more than one owner.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
13.The economic entity assumption requires that the activities of an entity be kept separate and
distinct from the activities of its owner and all other economic entities.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
14.The monetary unit assumption states that only transactions that can be measured in terms of
money should be recorded in the accounting records.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
15.Accountants rely on a fundamental business concept—ethical behavior—in reporting financial
information.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
16.The primary accounting standard-setting body in the United States is the International
Accounting Standards Board.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
17.The Financial Accounting Standards Board is a part of the Securities and Exchange
Commission.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
18.The Securities and Exchange Commission oversees U.S. financial markets and accounting
standard-setting bodies.
Ans: T LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
19.The cost and fair value of an asset are the same at the time of acquisition and in all subsequent
periods.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
20.Even though a partnership is not a separate legal entity, for accounting purposes the partnership
affairs should be kept separate from the personal activities of the owners.
Ans: T LO 2, Section 2 BT: C Difficulty; Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
21.In order to possess future service potential, an asset must have physical substance.
Ans: F LO 3, Section 3, BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
22.Owners' claims to total business assets take precedence over the claims of creditors because
owners invest assets in the business and are liable for losses.
Ans: F LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
23.The basic accounting equation states that Assets = Liabilities.
Ans: F LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
24.Both internal and external transactions are recorded in accounting records.
Ans: T LO 4, Section 4 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
25.Internal transactions do not affect the basic accounting equation because they are economic
events that occur entirely within one company.
Ans: F LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
,1-4 Test Bank for Financial & Managerial Accounting, Fourth Edition
26.The purchase of store equipment for cash reduces assets and stockholders’ equity by an equal
amount.
Ans: F LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
27.The purchase of office equipment on credit increases total assets and total liabilities.
Ans: T LO 4, Section 4 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
28.The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company during a period.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
29. Net income for the period is determined by subtracting total expenses and drawings from
total revenues.
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
30.The income statement is sometimes referred to as the statement of operations.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
31.A balance sheet reports the assets and liabilities of a company for a specific period of time.
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
32.The ending retained earnings balance is reported on both the retained earnings statement and
the balance sheet.
Ans: T LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
33. The study of accounting will be useful only if a student is interested in working for a profit-
oriented business firm.
Ans: F LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
34. Private accountants are accountants who are not employees of business enterprises.
Ans: F LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
35. Expressing an opinion as to the fairness of the information presented in financial statements
is a service performed by CPAs.
Ans: T LO 6, Section 6 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
36.Identifying is the process of keeping a chronological diary of events measured in dollars and
cents.
Ans: F LO 1, Section 1 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
37.Management consulting includes examining the financial statements of companies and
expressing an opinion as to the fairness of their presentation.
Ans: F LO 1, Section 1 BT: K Difficulty; Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
38.Accountants do not have to worry about issues of ethics.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
39.At the time an asset is acquired, cost and fair value should be the same.
Ans: T LO 2, Section 2 BT: C Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
40.The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar.
Ans: F LO 2, Section 2 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
41.The basic accounting equation is in balance when the creditor and ownership claims against
the business equal the assets.
FOR INSTRUCTOR USE ONLY
,1-5 Accounting in Action
Ans: T LO 3, Section 3 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
42.External transactions involve economic events between the company and some other enterprise
or party.
Ans: T LO 4, Section 4 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
43.In the retained earnings statement, revenues are listed first, followed by expenses, and net
income (or net loss).
Ans: F LO 5, Section 5 BT: K Difficulty: Easy TOT: 0.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
MULTIPLE CHOICE QUESTIONS
44.Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
45.The starting point of the accounting process is
a. communicating information to users.
b. identifying economic events.
c. recording economic events.
d. none of these answers are correct.
Ans: b LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
46.Communication of economic events is the part of the accounting process that involves
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
,1-6 Test Bank for Financial & Managerial Accounting, Fourth Edition
47.Which of the following events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. the appointment of a new CPA firm to perform an audit
b. the purchase of a new computer
c. the sale of store equipment
d. payment of income taxes
Ans: a LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
48.Interpretation of reported information involves each of the following except
a. limitations of reported data.
b. meaning of reported data.
c. uses of reported data.
d. all of these choices are correct.
Ans: d LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
49. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the business.
b. communicating financial information to users by preparing financial reports.
c. recording non-quantifiable economic events.
d. analyzing and interpreting financial reports.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
50.The accounting process is correctly sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. identification, recording, communication.
d. communication, recording, identification.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
51.Which of the following techniques is not used by accountants to interpret and report financial
information?
a. graphs
b. special memos for each class of external users
c. charts
d. ratios
Ans: b LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
52.Accounting consists of three basic activities that are related to economic events of an
organization. These include
a. identifying, recording, and communicating.
b. identifying, calculating, and responding.
c. classifying, numbering, and reporting.
d. issuing, reporting, and classifying.
Ans: a LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
,1-7 Accounting in Action
53.All of the following statements are correct except
a. good decision-making depends on good information.
b. a vital element in communicating economic events is the accountant's ability to analyze
and interpret reported information.
c. the origins of accounting are generally attributed to Socrates, a classical Greek
philosopher, who promoted accounting as a social contract.
d. the information that a user of financial information needs depends upon the kinds of
decisions the user makes.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
54.Which of the following is not considered an internal user of accounting data?
a. president of the company
b. production manager
c. merchandise inventory clerk
d. president of the employees' labor union
Ans: d LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
55.Which of the following would not be considered an external user of accounting data for the GHI
Company?
a. Internal Revenue Service agent
b. management
c. creditors
d. customers
Ans: b LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
56.Which of the following would not be considered internal users of accounting data for a
company?
a. the president of a company
b. the controller of a company
c. creditors of a company
d. salesmen of the company
Ans: c LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
57.Which of the following is an external user of accounting information?
a. labor union
b. finance director
c. company officer
d. manager
Ans: a LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
58.Which one of the following is not an external user of accounting information?
a. regulatory agency
b. customer
c. investor
d. all of these are external users.
Ans: d LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
FOR INSTRUCTOR USE ONLY
, 1-8 Test Bank for Financial & Managerial Accounting, Fourth Edition
59.Bookkeeping differs from accounting in that bookkeeping primarily involves which part of the
accounting process?
a. identification
b. communication
c. recording
d. analysis
Ans: c LO 1, Section 1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
60.The origins of accounting are generally attributed to the work of
a. Christopher Columbus.
b. Abner Doubleday.
c. Luca Pacioli.
d. Leonardo da Vinci.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
61.Financial accounting provides economic and financial information for all of the following
external users except
a. creditors.
b. investors.
c. managers.
d. regulators.
Ans: c LO 1, Section 1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
62.The final step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. recognize an ethical situation.
c. identify the alternatives and weigh the impact of each alternative on stakeholders.
d. recognize the ethical issues involved.
Ans: c LO 2, Section 2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN:
Reporting
63.The first step in solving an ethical dilemma is to
a. identify and analyze the principal elements in the situation.
b. identify the alternatives.
c. recognize an ethical situation and the ethical issues involved.
d. weigh the impact of each alternative on various stakeholders.
Ans: c LO 2, Section 2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
64.Ethics are the standards of conduct by which one's actions are judged as
a. right or wrong.
b. honest or dishonest.
c. fair or unfair.
d. all of these answers are correct.
Ans: d LO 2, Section 2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
FOR INSTRUCTOR USE ONLY
