(Test Bank) Financial Accounting for Undergraduates

Wallace, 4

Business

Test Bank

4th Edition

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©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-1 Chapter 1 Financial Accounting and Business Decisions Learning Objectives – Coverage by question True / False Multiple Choice Exercises Problems LO1 – Explain business organization and its three forms. 1-3 1 LO2 – Describe business activities. 6-8 4-10 3 LO3 – Indicate who uses accounting information. 1-5 11-17 1, 2 LO4 – Explain the accounting process and generally accepted accounting principles. 9-12 18-23 LO5 – Describe the accounting equation and each financial statement. 13-24 24-105 4-17 1-3 LO6 – Explain additional disclosures that accompany financial statements. 106-110 18 LO7 – Describe careers in accounting. LO8 – Appendix 1A: Discuss FASB’s conceptual framework. 25-30 111-125 19, 20 ©Cambridge Business Publishers, 2020 1-2 Financial Accounting for Undergraduates, 4th Edition Chapter 1: Financial Accounting and Business Decisions True / False Topic: Managerial Accounting LO: 3 1. A major function of managerial accounting is to provide general purpose financial statements for parties outside the organization. Answer: False Rationale: A major function of managerial accounting is to provide management with accounting data for decisions related to a firm’s operations. Providing general purpose financial statements for parties outside an organization is a function of financial accounting. Topic: Ethics LO: 3 2. It is unusual for U.S. businesses to develop written codes of ethics to guide their employees. Answer: False Rationale: It is now commonplace for businesses to develop written codes of ethics to help guide the behavior of their employees. Topic: Ethics LO: 3 3. An emphasis on short-term profits may contribute to ethical breakdowns within a business. Answer: True Rationale: A criticism of U.S. business practices is that they are too “bottom-line” (that is, short-term profit) oriented. This orientation can lead to unethical actions by management to increase reported short-term profits. Topic: Accounting Information Users LO: 3 4. Financial accounting is designed primarily for decision makers within a company. Answer: False Rationale: Financial accounting is designed primarily to provide information to decision makers outside of a company, while managerial accounting is designed primarily to provide accounting information for decision makers within a company. Topic: Ethics and Accounting LO: 3 5. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external users have in a company’s financial statements. Answer: True Rationale: In the wake of various business scandals, like that involving Enron Corporation, the U.S. Congress passed the Sarbanes-Oxley Act to improve external user confidence in financial statement reporting. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-3 Topic: Investing Activities LO: 2 6. Investing activities involve the acquiring and disposing of liabilities that a company needs in order to finance its operating activities. Answer: False Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company’s products and services. Topic: Financing Activities LO: 2 7. Other than operating profit, there are three main sources of external financing. Answer: False Rationale: There are two main sources of financing: equity (also called shareholder or owner) financing and debt (also called creditor or lender) financing. Topic: Financing and Investing Activities LO: 2 8. Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Answer: False Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Topic: Purpose of Accounting LO: 4 9. The basic purpose of accounting is to provide useful financial information. Answer: True Rationale: The purpose of accounting is to provide useful financial information. Accordingly, the accounting process (1) prepared financial reports to meet the needs of the user and (2) helps interpret the financial results for the user. Topic: GAAP LO: 4 10. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Answer: True Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. ©Cambridge Business Publishers, 2020 1-4 Financial Accounting for Undergraduates, 4th Edition Topic: Sources of GAAP LO: 4 11. Federal income tax regulations constitute a primary source of generally accepted accounting principles. Answer: False Rationale: FASB, AICPA, and SEC have been instrumental in the development of GAAP in the United States. Topic: Sources of GAAP LO: 4 12. Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. Answer: True Rationale: The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: Accounting Equation LO: 5 13. Assets must always equal the sum of liabilities plus stockholders’ equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must always exist. Topic: Balance Sheet LO: 5 14. If a company reports retained earnings of $22.4 million on its balance sheet, it will also report $22.4 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal the sum of total liabilities plus stockholders’ equity. That does not imply, however, that liability and stockholders’ equity accounts relate directly to specific assets. Topic: Accounting Equation LO: 5 15. The accounting equation states that the economic resources of an entity are equal to the claims on those resources. Answer: True Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Throughout the accounting process, the accounting equation must always remain in balance. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-5 Topic: Assets LO: 5 16. The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by an entity. Answer: True Rationale: Assets are the economic resources of a business that can be expressed in monetary form. Assets take many forms, but the key characteristic is that an asset represents a probable future economic benefit owned or controlled by an entity. Topic: Net Assets LO: 5 17. The net assets of an entity are equal to the assets minus the stockholders’ equity. Answer: False Rationale: The net assets of an entity are equal to its stockholders’ equity. Topic: Statement of Cash Flows LO: 5 18. A statement of cash flows reports on the cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on the cash flows for operating, investing, and financing activities over a period of time. Topic: Retained Earnings LO: 5 19. Retained earnings are reported on both the income statement and the statement of stockholders’ equity. Answer: False Rationale: Retained earnings are reported on the statement of retained earnings and the balance sheet. The income statement represents current period earnings. Topic: Income Statement LO: 5 20. The income statement is also called the earnings statement. Answer: True Rationale: The income statement reports the results of operations for a business for a given time period usually a quarter or a year. The income statement lists the revenues and expenses of the business. The income statement is also called the statement of operations, the statement of income, and the earnings statement. ©Cambridge Business Publishers, 2020 1-6 Financial Accounting for Undergraduates, 4th Edition Topic: Preparing Financial Statements LO: 5 21. The income statement, statement of stockholders’ equity, and statement of cash flows are referred to as period-in-time statements. Answer: True Rationale: Specific periods of time are reported on all financial statements, except the balance sheet. The balance sheet is referred to as a point-in-time statement. Topic: Income Statement LO: 5 22. The income statement is also known as the statement of financial position. Answer: False Rationale: The income statement is also known as the statement of operations, the statement of income, and the earnings statement. The balance sheet is sometimes referred to as the statement of financial position. Topic: Statement of Cash Flows LO: 5 23. The statement of cash flows reports information about cash flows in two categories: cash received and cash disbursed. Answer: False Rationale: The cash flows are grouped into the three business activities of operating, investing, and financing. Topic: Relations Among the Financial Statements LO: 5 24. When financial statements are prepared, the balance sheet is usually prepared first. Answer: False Rationale: The income statement is prepared first, followed by the statement of stockholders’ equity, the balance sheet, and finally the statement of cash flows. Topic: Conceptual Framework for Financial Reporting LO: 8 25. The conceptual framework developed by the FASB includes a statement of the objectives of financial reporting and a discussion about the qualitative characteristics of accounting information. Answer: True Rationale: The conceptual framework includes, among other things, a statement of the objectives of financial reporting along with a discussion about the qualitative characteristics of accounting information that are important to users. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-7 Topic: Accrual Accounting LO: 8 26. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash. Topic: Comparability and Consistency LO: 8 27. The qualitative characteristic of accounting information known as comparability means that the same accounting methods should be used from one period to the next, whenever possible. Answer: False Rationale: The statement describes consistency. Comparability speaks to firms in the same industry using similar reporting techniques. Topic: Cost Principle LO: 8 28. The cost principle states that assets are initially recorded at the amounts paid or obligated to pay to acquire the assets. Answer: True Rationale: The cost principle means that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller. Topic: Going Concern Concept LO: 8 29. The going concern concept assumes that an entity will be going out of business within the next several years. Answer: False Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or otherwise liquidated. Topic: Accrual Basis of Accounting LO: 8 30. Under the accrual basis of accounting, revenue may be recorded even though cash has not yet been received from a customer or client. Answer: True Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is both earned and realized (revenue recognition principle) and expenses are recorded tin the period in which they generate the earned revenue (expense recognition principle). Recording revenues and expenses does not depend upon the receipt or payment of cash. ©Cambridge Business Publishers, 2020 1-8 Financial Accounting for Undergraduates, 4th Edition Multiple Choice Topic: Business Organizations LO: 1 Level of Difficulty: EASY 1. Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union Answer: C Rationale: A corporation is a form of business organization that exists as a legal entity, subject to taxes, that issues shares of stock to its owners or shareholders in exchange for cash or other resources. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 2. The three principal forms of business organization are: A) A sole proprietorship, a stockholder, and a corporation B) A partnership, a sub-S corporation, and a labor union C) A corporation, a partnership, and a sole proprietorship D) A labor union, a stockholder, and a partnership Answer: C Rationale: The three principal forms of business organization are the sole proprietorship, the partnership, and the corporation. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 3. Which of the following is not an advantage of the corporate form of business organization? A) The ease with which capital can be raised B) The protection afforded stockholders against personal liability C) Both the business and the owners are taxed D) The relative ease of selling ownership shares Answer: C Rationale: The advantage of the corporate form of business organization include the ease of raising capital, stockholder protection against personal liability, and the ease of selling ownership shares. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-9 Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 4. The three types of business activities in which every business, regardless of organizational form, its industry or its size, is involved are: A) Financing activities, banking activities, financial accounting activities B) Operating activities, banking activities, financing activities C) Financing activities, investing activities, financial accounting activities D) Financing activities, operating activities, investing activities Answer: D Rationale: The three types of business activities are financing activities, operating activities, and investing activities. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 5. Financing activities are generally categorized as: A) Debt financing B) Bond financing C) Equity financing D) Either debt or equity financing Answer: D Rationale: Financing activities are generally categorized as either debt or equity financing. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 6. Equity financing involves: A) Selling shares of stock to investors B) Borrowing money from a bank C) Issuing bonds payable D) Repayment of principal and interest to a creditor Answer: A Rationale: Equity financing involves selling shares of stock to investors. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 7. Which of the following statements about operating activities is not correct? A) Operating activities refers to the day-to-day activities of producing and selling a product or providing a service. B) Creditors and stockholders beliefs about a company’s ability to generate a profit are unimportant. C) Operating activities are critical for a business. D) If a company is unable to generate income from its operations it is very likely that it will fail. Answer: B Rationale: If creditors and stockholders do not believe that a company will be able to generate a profit, they are unlikely to provide the financing needed to start, or maintain its operations. ©Cambridge Business Publishers, 2020 1-10 Financial Accounting for Undergraduates, 4th Edition Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 8. Which of the following activities is an example of an operating activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: B Rationale: Selling merchandise online is an example of an operating activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 9. Which of the following activities is an example of an investing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: C Rationale: Purchasing a delivery truck is an example of an investing activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 10. Which of the following activities is an example of a financing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Paying employee salaries Answer: A Rationale: Receiving a loan from a bank is an example of a financing activity. Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 11. Which one of the following is not an external user of financial information? A) Stockholders B) Creditors C) Internal Revenue Service D) Senior company management Answer: D Rationale: Decision makers outside the company include stockholders, creditors, and tax agencies such as the Internal Revenue Service. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-11 Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 12. Which one of the following is not an internal user of financial information? A) The Marketing Department B) Creditors C) The Finance Department D) Senior company management Answer: B Rationale: Decision makers inside the company include various departments, such as marketing or finance, and members of the company’s senior management team. Topic: Managerial Accounting LO: 3 Level of Difficulty: EASY 13. The accounting activities carried out by a firm’s accounting staff primarily to provide management with accounting data for decisions related to a firm’s operations is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: B Rationale: The process of generating and analyzing data needed by the internal management of a company for decision making and the efficient management of the business is referred to as managerial accounting. Financial Accounting LO: 3 Level of Difficulty: EASY 14. The area of accounting dealing with the preparation of financial statements showing a business’s results of operations, financial position, and cash flow is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: A Rationale: The process of accumulating and reporting accounting information that details a business’s results of operations, cash flows, and financial position is referred to as financial accounting. ©Cambridge Business Publishers, 2020 1-12 Financial Accounting for Undergraduates, 4th Edition Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 15. Which of the following represents an aspect of the accounting environment that may create ethical pressures on an accountant? A) Accountants have access to confidential and sensitive information. B) The output produced by accountants may have significant financial implications for one or more persons. C) Management may emphasize short-run profits. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work, These include: access to confidential and sensitive information, output produced by accountants may have significant financial implications for individuals as well as businesses, and that management may emphasize short-run (“bottom line”) profits. Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 16. Which of the following situations has the potential to create ethical pressure on an accountant? A) Preparing an individual’s income tax return when much of the supporting documentation is missing. B) Informing a sales manager that the travel and entertainment expenses turned in by the top performing sales representative exceed company allowances. C) Discovering that the company has made a mistake in computing refunds granted to customers, causing the refunds to be too small. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work. All of the situations noted would present the accountant with ethical pressure when deciding the correct action to take when dealing with each situation. Topic: Ethics LO: 3 Level of Difficulty: EASY 17. The branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud is called: A) Internal auditing B) Cost accounting. C) Forensic accounting. D) All of the above E) None of the above Answer: C Rationale: Forensic accounting is the branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud. Forensic accountants are involved both before and after the commission of a crime. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-13 Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 18. The measurement activity of the accounting process must do all of the following except: A) Identify the relevant economic activities of a business B) Prepare financial reports to meet the needs of the user C) Quantify the economic activities of a business D) Record the resulting measures in a systematic manner Answer: B Rationale: The measurement process identifies, measures, and records the economic activity of an entity. Preparation of the financial reports is part of the communication activity of the accounting process. Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 19. The communication activity of the accounting process must: A) Identify the relevant economic activities of a business B) Record the resulting measures in a systematic manner C) Quantify the economic activities of a business D) Prepare financial reports and help interpret financial results to meet users’ needs Answer: D Rationale: The communication activity of the accounting process provides useful financial reports to users and provides various techniques, such as formatting of reports, charts and graphs, and ratios, to users to help them interpret the content of the reports. Topic: Generally Accepted Accounting Principles LO: 4 Level of Difficulty: MEDIUM 20. Which of the following statements is true regarding generally accepted accounting principles (GAAP)? A) GAAP is a set of laws. B) GAAP is subject to change as conditions warrant. C) Under GAAP, if two companies engage in the same transactions, they must choose the same accounting methods. D) U.S. GAAP is the same as GAAP in other countries. Answer: B Rationale: Specific rules under GAAP are altered or new practices are formulated to fit changes in underlying economic circumstances of business transactions. ©Cambridge Business Publishers, 2020 1-14 Financial Accounting for Undergraduates, 4th Edition Topic: GAAP LO: 4 Level of Difficulty: EASY 21. Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the: A) American Institute of Certified Public Accountants B) Securities and Exchange Commission C) Financial Accounting Standards Board D) Internal Revenue Service E) None of the above Answer: C Rationale: Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: GAAP LO: 4 Level of Difficulty: EASY 22. Generally accepted accounting principles are: A) Guides to action that apply primarily to the process of managerial accounting. B) Accounting standards enforced by the Internal Revenue Service. C) Accounting standards that never change. D) Guides to action that apply primarily to the process of financial accounting. E) None of the above Answer: D Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Topic: Financial Accounting Oversight LO: 4 Level of Difficulty: MEDIUM 23. Financial accounting oversight in the United States is provided by all of the following organizations except the: A) International Accounting Standards Board (IASB) B) Financial Accounting Standards Board (FASB) C) Public Company Accounting Oversight Board (PCAOB) D) U.S. Securities Exchange Commission (SEC) Answer: A Rationale: While the United States is working to converge national standards with those standards set by the IASB, no final decision requiring the adoption of the IASB’s standards has been made. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-15 Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 24. Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditor financing + owner financing C) Economic resources = creditor financing – owner financing D) Creditor financing = investing + operating Answer: B Rationale: The accounting equation is assets = liabilities + stockholders’ equity. Another way of viewing this equation is Economic resources = Creditor Financing + Owner Financing Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 25. What are the obligations or debts that a business must pay in cash or in goods and services at some future time because of past transactions or events called and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: D Rationale: Liabilities are probable future economic sacrifices resulting from a current or past event. They are obligations that must be satisfied with a future cash payment or delivery of goods or services. Topic: Assets LO: 5 Level of Difficulty: MEDIUM 26. What are the economics resources of a business that can be expressed in monetary and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: A Rationale: Assets are economic resources of a business that can be represented in monetary terms and that represent a probable future economic benefit to a business.