Test Bank for Financial Accounting 8th Edition

he balance sheet is also known as the:

1. A) statement of profit and loss.
2. B) operating statement.
3. C) assets statement.
4. D) statement of financial position.


The balance sheet reports information about:

1. A) revenues, expenses, and equity.
2. B) liabilities, equity, and expenses.
3. C) assets, revenues, and liabilities.
4. D) assets, liabilities, and owners’ equity.
The income statement is prepared to determine:

1. A) the change in cash due to results of operations.
2. B) the change in retained earnings due to the results of operations.
3. C) the change in assets and liabilities due to the results of operations.
4. D) all of the above.
The amount of net income shown on the income statement also appears on
the:

1. A) balance sheet and operations statement.
2. B) statement of assets.
3. C) statement of financial position.
4. D) statement of retained earnings.
The balance sheet contains the:

1. A) amount of net income or net loss.
2. B) beginning balance in retained earnings.
3. C) ending balance in retained earnings.


4. D) amount of cash dividends paid to stockholders.
Which of the following is a component of stockholders’ equity?

1. A) Retained earnings
2. B) Notes payable
3. C) Cash
4. D) Fixed assets
Which financial statement must be prepared before the others?

1. A) Statement of Cash Flows
2. B) Income Statement
3. C) Balance Sheet
4. D) Statement of Retained Earnings
Assets are generally classified as:

1. A) producing assets and consumable assets.
2. B) current assets and producing assets.
3. C) current assets and long-term assets.
4. D) long-term assets and consumable assets.
Current assets are assets expected to be converted to cash, sold, or
consumed within the next:

1. A) 12 months or within the business’s normal operating cycle if longer than a
year.



2. B) 12 months or within the business’s normal operating cycle if less than a
year.
3. C) 6 months.
4. D) 24 months.
Notes receivable due in 60 days would be classified as a:

1. A) current liability on the Balance Sheet.
2. B) current asset on the Balance Sheet.
3. C) long-term asset on the Balance Sheet.
4. D) long-term liability on the Balance Sheet.
Equipment would appear on the:

1. A) Balance Sheet with the long-term assets.
2. B) Income Statement with the revenues.
3. C) Income Statement with the operating expenses.
4. D) Balance Sheet with the current assets.
Accumulated depreciation is normally associated with which asset on the
Balance Sheet?

1. A) Inventory
2. B) Accounts receivable
3. C) Land
4. D) Property, plant and equipment


Accounts receivable would appear on the:

1. A) Balance Sheet with the current liabilities.
2. B) Balance Sheet with the current assets.

3. C) Income Statement with the revenues.
4. D) Statement of Retained Earnings with the net income.
Notes payable (due in 60 days) would appear as a:

1. A) current liability on the Balance Sheet.
2. B) current asset on the Balance Sheet.
3. C) long-term asset on the Balance Sheet.
4. D) long-term liability on the Balance Sheet.
Income taxes owed to the federal government would be classified as
a(n):

1. A) expense on the Income Statement.
2. B) financing activity on the Statement of Cash Flows.
3. C) current asset on the Balance Sheet.
4. D) current liability on the Balance Sheet.
Liabilities are divided into two categories—

1. A) current and payable.
2. B) current and future.
3. C) accounts payable and long-term.


4. D) current and long- term.
In relation to the cash flow statement, purchases and sales of long-term
assets are examples of:

1. A) investing activities.
2. B) accrual activities.
3. C) financing activities.
4. D) operating activities.

Stockholders’ equity decreases as a result of:

1. A) owner investments.
2. B) a net loss during the period.
3. C) a net income during the period.
4. D) both A and C.
The Statement of Cash Flows is divided into which three categories?

1. A) Operating, investing, and financing activities
2. B) Planning, executing, and evaluating activities
3. C) Increasing, decreasing, and non-cash activities
4. D) Developing, producing, and marketing activities
What is the proper order for the categories of the statement of cash
flows?

1. A) Financing activities, investing activities, and operating activities


2. B) Operating activities, investing activities, and financing activities
3. C) Operating activities, financing activities, and investing activities
4. D) Investing activities, financing activities, and operating activities
Where would cash received from the sale of stock appear on the statement of
cash flows?

1. A) In the operating activity section
2. B) In the non-cash financing activity section
3. C) In the investing activity section
4. D) In the financing activity section
The main source of cash from its main business comes from:


1. A) current assets on the balance sheet.
2. B) operating activities on the statement of cash flows.
3. C) financing activities on the statement of cash flows.
4. D) investing activities on the statement of cash flows.
How would the issuance of stock for cash be classified on the Statement of
Cash Flows?

1. A) As an investing activity
2. B) As a financing activity
3. C) As an operating activity
4. D) As a current asset on the balance sheet


How would cash collected from customers appear on the Statement of Cash
Flows?

1. A) As an operating activity
2. B) As a financing activity
3. C) As an investing activity
4. D) Under the indirect method
Retained earnings appears on which of the following financial
statements?

1. A) Statement of Retained Earnings, Statement of Cash Flows, and Balance
Sheet, but not the Income Statement
2. B) Statement of Retained Earnings, Statement of Cash Flows, and Income
Statement, but not the Balance Sheet
3. C) Statement of Retained Earnings and Statement of Cash Flows, but not the
Income Statement or Balance Sheet
4. D) Statement of Retained Earnings and Balance Sheet, but not the Income

Statement or Statement of Cash Flows
An investor who wished to answer the question, "Can the company sell its
products?" should investigate the:

1. A) operating activities section of the cash flow statement.
2. B) current and projected inventory levels.
3. C) sales revenue trends and projected sales.
4. D) net income for the current period and projected net income for the next
period.


An investor who wished to answer the question, "Can the company pay its
current liabilities?" should investigate:

1. A) the financing activities section of the cash flow statement.
2. B) the current assets and current liabilities on the balance sheet.
3. C) the sales revenue trend.
4. D) none of the above.
Generally, three factors influence business and accounting decisions—

1. A) operating, investing, and financing activities.
2. B) assets, liabilities, and equity.
3. C) economic, legal, and ethical.
4. D) revenues, expenses, and dividends.
Which of the following questions should be asked in making an ethical
analysis?

1. A) Which option results in treating others as I would want to be treated?
2. B) Which options are the most honest, open, and truthful?
3. C) Which options create the greatest good for the greatest number of

stakeholders?
4. D) All of the above questions should be considered.
The decision framework for making ethical judgments does NOT consider the
following question?

1. A) What is the issue?


2. B) What are the alternatives?
3. C) What alternative maximizes profit?
4. D) Who are the stakeholders?
Bookkeeping is a type of accounting used primarily by proprietorships.

1. True
2. False
Bookkeeping is the mechanical part of accounting.

1. True
2. False
Users of accounting information include investors, creditors, and regulatory
bodies.

1. True
2. False
An example of a regulatory body that uses accounting information is the
Internal Revenue Service.

1. True
2. False
The major forms of business organizations are proprietorships, partnerships,

and for-profit organizations.

1. True


2. False
Limited Liability Companies (LLCs) have members instead of
stockholders.

1. True
2. False
In an LLP, each partner is liable for partnership debts only to the extent of
their investment in the partnership plus their share of the liabilities.

1. True
2. False
All business owners are personally liable for the debts of their
businesses.

1. True
2. False
The business records of a proprietorship should include the proprietor’s
personal finances.

1. True
2. False
Mutual agency of a partnership means that each partner may conduct
business in the name of the partnership and can legally bind all the partners
without limit for the partnership’s debts.


1. True


2. False
Financial accounting provides budgeting information to a company’s
managers.

1. True
2. False
Managerial accounting information is used mainly by external users.

1. True
2. False
Generally accepted accounting principles, or GAAP, are the rules and
procedures established by the Financial Accounting Standards Board, or the
FASB.

1. True
2. False
One overall objective of accounting is to provide financial information that is
useful to potential capital providers who are making investment and lending
decisions.

1. True
2. False
To be relevant, accounting information must be capable of making a
difference to the decision maker.

1. True



2. False
The entity assumption is the most basic accounting concept.

1. True
2. False
Another name for the continuity assumption is the going-concern
assumption.

1. True
2. False
Cost is a verifiable measure that is relatively free from bias.

1. True
2. False
Accounting is moving in the direction of reporting more and more assets and
liabilities at their fair values.

1. True
2. False
The stable monetary unit concept means that the type of currency used for
the financial statements is NOT expected to change.

1. True
2. False


Since we live in a global economy, all countries have adopted the same
accounting standards for business transactions.


1. True
2. False
No major differences exist between the accounting standards issued by the
FASB and the IASB.

1. True
2. False
The accounting equation expresses the idea that Resources – Insider claims =
Outsider claims.

1. True
2. False
The financial statements are based on the accounting equation.

1. True
2. False
The word “payable” always signifies a liability.

1. True
2. False


The accounting equation must always be in balance.

1. True
2. False
Liabilities are divided into "outsider claims" and "insider claims."

1. True
2. False

"Net assets", as stockholders’ equity is often referred to, represents the
residual amount of business assets which can be claimed by the owners.

1. True
2. False
Stockholders’ equity is the stockholders’ interest in the assets of the
corporation.

1. True
2. False
Common stock and retained earnings are the main components of paid-in
capital.

1. True
2. False


Dividends never affect net income.

1. True
2. False
Expenses are increases in retained earnings that result from operations.

1. True
2. False
Dividend payments are NOT classified as expenses.

1. True
2. False
The calculation of ending retained earnings considers beginning retained

earnings, current net income or net loss and dividends.

1. True
2. False
The owners’ equity of proprietorships and corporations are the same.

1. True
2. False


Ramos, Inc. has monthly revenues of $30,000 and monthly expenses of
$18,000, and the company paid $4,000 in dividends. Therefore, net income
for the month is $8,000.

1. True
2. False
Able Co. has $500,000 in assets and $400,000 in liabilities. Therefore, the
equity is $900,000.

1. True
2. False
Yummy Inc. has beginning retained earnings of $10,000, net income of
$50,000, and dividends paid of $5,000. Therefore, the ending retained
Earnings is $65,000.

1. True
2. False
Net income is the profit left over after subtracting expenses and losses from
revenues and gains.


1. True
2. False
Cost of goods sold is the major expense of merchandising and manufacturing
companies.

1. True
2. False


If expenses have exceeded sales revenue during the life of the company, the
accumulation of these losses will result in an accumulated deficit in retained
earnings.

1. True
2. False
Stockholders determine if a corporation will pay dividends.

1. True
2. False
Net income appears on both the income statement and the balance
sheet.

1. True
2. False
The statement of cash flows is organized in terms of the organization’s
operating, investing, and financing activities.

1. True
2. False
The amount of cash received on the sale of the company’s stock in excess of

par value is called retained earnings.

1. True
2. False


The statement of cash flows contains three “parts”—operating activities,
investing activities, and stock activities.

1. True
2. False
In accounting, the word "net" refers to an amount after a subtraction.

1. True
2. False
A balance sheet reports the company’s financial position at a specific point in
time.

1. True
2. False
Net income and net profit mean the same thing to accountants.

1. True
2. False
The ethical factor recognizes that while certain actions might be both
economically profitable and legal, they may still not be right.

1. True
2. False



Accounting:

1. A) measures business activities.
2. B) processes data into reports and communicates the data to decision
makers.
3. C) is often called the language of business.
4. D) is all of the above.
The two types of accounting are:

1. A) profit and nonprofit.
2. B) financial and managerial.
3. C) internal and external.
4. D) bookkeeping and decision-oriented.
Management accounting:

1. A) includes information such as budgets and forecasts.
2. B) is used to make strategic decisions for the entity.
3. C) must be relevant to decision makers within the entity.
4. D) is all of the above.
What type of accounting provides information for decision makers outside the
entity?

1. A) Bookkeeping
2. B) Managerial accounting.


3. C) Internal auditing.
4. D) Financial accounting.
Who ultimately controls a corporation?


1. A) Board of Directors
2. B) The Chief Executive Officer (CEO)
3. C) The stockholders
4. D) The President
Financial statements are:

1. A) standard documents issued by outside consultants who are hired to
analyze key operations of the business in financial terms.
2. B) the business documents that companies use to report the results of their
financial activities to various user groups.
3. C) reports created by management that states it is responsible for the acts of
the corporation.
4. D) the mechanical part of accounting.
For which form of business ownership are the owners of a business legally
distinct from the business?

1. A) Corporation
2. B) Partnership
3. C) Proprietorship
4. D) All of the above


Characteristics of a sole proprietor include:

1. A) multiple owners.
2. B) limited personal liability for all business debts.
3. C) a distinct entity, separate from its owner for accounting purposes.
4. D) formation under state law.
A partnership:


1. A) is a taxpaying entity.
2. B) is not a distinct entity, separate from its owners for accounting purposes.
3. C) has mutual agency.
4. D) has limited liability for the partners.
Owners of an LLC are called:

1. A) partners.
2. B) sole proprietors.
3. C) members.
4. D) stockholders.
Advantages of a corporation include:

1. A) a single owner.
2. B) the double taxation of distributed profits.
3. C) limited liability of the stockholders.


4. D) mutual agency.
All of the following are forms of business organizations EXCEPT for the:

1. A) proprietorship.
2. B) limited liability partnership.
3. C) limited proprietorship.
4. D) limited liability company.
An entity that is organized according to state law and in which ownership
units are called stock is a:

1. A) proprietorship.
2. B) corporation.

3. C) partnership.
4. D) limited liability company.
For accounting purposes, the business entity should be considered separate
from its owners if the business is organized as a:

1. A) proprietorship.
2. B) corporation.
3. C) partnership.
4. D) any of the above.
The Financial Accounting Standards Board is responsible for establishing:

1. A) the code of professional conduct for accountants.


2. B) the Securities and Exchange Commission.
3. C) generally accepted accounting principles.
4. D) the American Institute of Certified Public Accountants.
The acronym GAAP stands for:

1. A) generally acceptable authorized pronouncements.
2. B) government authorized accountant principles.
3. C) generally accepted accounting principles.
4. D) government audited accounting pronouncements.
Accountants follow guidelines for professional measurement and disclosure of
financial information called:

1. A) IASB.
2. B) GAAP.
3. C) FASB.
4. D) SEC.

International financial reporting standards are set by the:

1. A) IASB.
2. B) GAAP.
3. C) FASB.
4. D) SEC.


To be useful, accounting information must have the fundamental qualitative
characteristics of:

1. A) comparability and relevance.
2. B) relevance and faithful representation.
3. C) materiality and understandability.
4. D) faithful representation and timeliness.
All of the following are characteristics of useful accounting information
EXCEPT:

1. A) comparability.
2. B) timeliness
3. C) informative.
4. D) verifiability.
When information is important enough to the informed user, so that, if it was
omitted or erroneous, it would make a difference in the user’s decision, it
is:

1. A) comparable.
2. B) material
3. C) timely.
4. D) understandable.

Accounting information is subject to the constraints of:

1. A) comparability and consistency.