(Test Bank) Introduction To Financial Accounting

Sundem,Philbrick, 11

Business

Test Bank

11th Edition

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Test Bank for Introduction To Financial Accounting, The downloadable file consists of 510 pages, and the total size of the file is 3.25 MB. Purchase now only for highly discounted price.

Author(s): Sundem, Philbrick

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1 Copyright © 2014 Pearson Education, Inc. Introduction to Financial Accounting, 11e (Horngren) Chapter 1 Accounting: The Language of Business Learning Objective 1.1 Questions 1) The primary purpose of financial accounting is to A) supply information for external users' decision making. B) pr ovide data for internal users' decision making. C) produce data for income taxes. D) create an audit report. E) organize the data for management. Answer: A Diff: 1 Objective: L.O. 1 - 1 2) Footnotes are A) included in the audit report. B) an integral part of financial statement information. C) an appendix to the letter from corporate management. D) at the bottom of the report of the independent auditors. E) explanatory information in the statement of management's responsibility for preparation of financial statements. Answer: B Diff: 2 Objective: L.O. 1 - 1 3) Accountants analyze and record A) economic events. B) costs. C) revenues. D) financial statements. E) creditor statements. Answer: A Diff: 1 Objective: L.O. 1 - 1 4) Annual reports include all, but which of the following? A) A letter from corporate management B) Footnotes that explain many elements of the financial statements in more detail C) The report of the independent registered public accounting firm (auditors) D) Statements by both management and auditors on the company's internal controls E) The company's handbook for new employees Answer: E Diff: 2 Objective: L.O. 1 - 1 2 Copyright © 2014 Pearson Education, Inc. 5) The accountant at Forgum Corporation is asked to prepare the financial statements for the month of July. Which financial statement will he NOT prepare? A) Balance sheet B) Income statement C) Statement of earnings and taxation D) Statement of cash flows E) Statement of stockholders' equity Answer: C Diff: 1 Objective: L.O. 1 - 1 6) Which of the following would be classifie d as external users of financial statements? A) Creditors of the organization and the Internal Revenue Service B) Stockholders and the CFO of the organization C) Management of the organization and the audit firm D) Management of the organization and SEC E) Stockholders and middle managers of the organization Answer: A Diff: 2 Objective: L.O. 1 - 1 7) Which of the following individuals are most interested in management accounting information for Dotty Industries? A) Bankers who loan money to Dotty Industrie s B) The IRS, who Dotty Industries pays taxes to C) Stockholders who buy stock in Dotty Industries D) Management who work for Dotty Industries E) Suppliers who sell goods to Dotty Industries Answer: D Diff: 2 Objective: L.O. 1 - 1 8) The governmental agen cy that regulates the stock market and the financial reporting of firms that trade in the market is the A) Financial Accounting Standards Board. B) Internal Revenue Service. C) Public Company Accounting Oversight Board. D) Securities and Exchange Commissio n. E) Generally Accepted Accounting Board. Answer: D Diff: 1 Objective: L.O. 1 - 1 9) Accounting does not provide information that is useful in making decisions that have economic consequences. Answer: FALSE Diff: 2 Objective: L.O. 1 - 1 3 Copyright © 2014 Pearson Education, Inc. 10) Because offi cials in federal, state, and local governments are not in the business of making a profit, they do not need an understanding of accounting. Answer: FALSE Diff: 2 Objective: L.O. 1 - 1 11) Financial accounting serves external decision makers, such as suppl iers, banks, government agencies, and stockholders. Answer: TRUE Diff: 1 Objective: L.O. 1 - 1 12) Management accounting serves internal decision makers, such as top executives and department heads. Answer: TRUE Diff: 1 Objective: L.O. 1 - 1 13) Manageri al accounting serves external users while financial accounting serves internal users. Answer: FALSE Diff: 2 Objective: L.O. 1 - 1 14) The annual report is a document prepared by the board of directors and distributed to current and potential investors. An swer: FALSE Diff: 1 Objective: L.O. 1 - 1 15) It is against SEC regulations to promote the corporation in the annual report. Answer: FALSE Diff: 1 Objective: L.O. 1 - 1 16) Describe the differences between financial accounting and management accounting. Answer: Financial accounting focuses on the specific needs of decision makers external to the organization such as stockholders, suppliers, banks, and government agencies. Management accounting serves internal decision makers, such as top executives, depa rtment heads, college deans, hospital administrators, and people at other management levels within an organization. The two fields of accounting share many of the same procedures for analyzing and recording the effects of individual transactions. Diff: 2 O bjective: L.O. 1 - 1 4 Copyright © 2014 Pearson Education, Inc. Learning Objective 1.2 Questions 1) A liability that results from a purchase of goods or services on open account is referred to as a(n) A) accounts receivable. B) notes payable. C) accounts payable. D) notes receivable. E) capital st ock. Answer: C Diff: 1 Objective: L.O. 1 - 2 2) Which of the following statements is true? A) Owners' equities are economic sacrifices after deducting liabilities. B) Assets are expected to benefit no one. C) Liabilities are future cash inflows. D) Assets are always the sum of liabilities and owners' equities. E) Owners' equities have priority over liabilities for assets upon liquidation. Answer: D Diff: 1 Objective: L.O. 1 - 2 3) The accounting equation can be stated as which of the following? A) Assets - liabilities = owners' equity B) Assets + liabilities = owners' equity C) Liabilities + assets = owners' equity D) Owners' equity + assets = liabilities E) Liabilities - owners' equity = assets Answer: A Diff: 2 Objective: L.O. 1 - 2 4) Which of the foll owing describes a liability? A) Future economic benefit B) Economic obligations to creditors C) Paid - in capital D) Investment by owners E) Present value of customer future payments Answer: B Diff: 2 Objective: L.O. 1 - 2 5 Copyright © 2014 Pearson Education, Inc. 5) Notes Payable are classified a s A) equity. B) assets. C) owner investments. D) liabilities. E) expenses. Answer: D Diff: 2 Objective: L.O. 1 - 2 6) Income taxes owed to the federal government would be classified as a(n) A) liability on the balance sheet. B) asset on the balance sheet. C) liability on the statement of cash flows. D) equity on the balance sheet. E) They would not appear on a financial statement. Answer: A Diff: 2 Objective: L.O. 1 - 2 7) An example of stockholders' equity is A) accounts payable. B) accounts receivable. C ) capital stock. D) marketable securities. E) cash and cash equivalents. Answer: C Diff: 1 Objective: L.O. 1 - 2 8) Statement of financial position is another name for the balance sheet. Answer: TRUE Diff: 1 Objective: L.O. 1 - 2 9) Assets and owners' eq uity are presented on the right side of the balance sheet. Answer: FALSE Diff: 1 Objective: L.O. 1 - 2 10) The balance sheet equation is assets = liabilities - owner's equity. Answer: FALSE Diff: 1 Objective: L.O. 1 - 2 11) Liabilities are economic oblig ations of the organization to outsiders, or claims against its assets by outsiders. Answer: TRUE Diff: 2 Objective: L.O. 1 - 2 6 Copyright © 2014 Pearson Education, Inc. 12) Accountants use the terms notes payable or notes receivable to describe the existence of promissory notes. Answer: TRUE Dif f: 1 Objective: L.O. 1 - 2 13) Examples of assets include cash, inventory, and capital stock. Answer: FALSE Diff: 1 Objective: L.O. 1 - 2 14) Inventory is goods held by a company for the purpose of sale to customers, and is considered a liability on the ba lance sheet. Answer: FALSE Diff: 2 Objective: L.O. 1 - 2 15) A balance sheet is dated for a period of time, such as "for the year ended December 31, 20X2." Answer: FALSE Diff: 1 Objective: L.O. 1 - 2 16) Owners' equity is the residual interest in the org anization's assets after deducting liabilities. Answer: TRUE Diff: 1 Objective: L.O. 1 - 2 7 Copyright © 2014 Pearson Education, Inc. 17) Long - term debt $ 190 Cash (1) Total stockholders' equity (2) Total liabilities (3) Accounts receivable 450 Common stock 75 Inventory 375 Accounts payabl e 575 Property, plant, and equipment 525 Additional stockholders' equity 650 Other assets 200 Other liabilities (4) Total assets 2,000 Using the balance sheet equation as a starting point, determine the missing amounts: (1), (2), (3), and (4) above. Answer: (1) $2,000 - $450 - $375 - $525 - $200 = $450 (2) $75 + $650 = $725 (3) $2,000 - $725 = $1275 (4) $1,275 - $575 - $190 = $510 Diff: 2 Objective: L.O. 1 - 2 18) What is the purpose of a balance sheet? Answer: A balance sheet shows the financial position of an entity at a point in time. The accounting equation is represented in the balance sheet. The balance sheet reports a company's assets, liabilities and owners' equity. Diff: 2 Objective: L.O. 1 - 2 8 Copyright © 2014 Pearson Education, Inc. Learning Objective 1.3 Questions 1) An entit y A) is a separate economic unit. B) allows a section of an organization to be a separate economic unit. C) helps accountants relate events to a defined area of accounting. D) All of the above E) None of the above Answer: D Diff: 2 Objective: L.O. 1 - 3 2 ) If liabilities increase by $10,000 during a given period and stockholders' equity decreases by $6,000 during the same period, assets must have A) increased by $16,000. B) increased by $4,000. C) decreased by $4,000. D) decreased by $16,000. E) This canno t be determined with the given information. Answer: B Diff: 3 Objective: L.O. 1 - 3 3) A transaction A) affects the financial position of an entity. B) maintains the equality of the balance sheet equation. C) affects the cash position of an entity. D) wil l always change values on the income statement. E) both A and B Answer: E Diff: 2 Objective: L.O. 1 - 3 4) Surround Sound, LLC owned land originally costing $33,000. A real estate agent appraised the land and stated that it is now worth $38,000. Surround Sound, LLC should A) increase the land account by $5,000 and increase the capital stock account by $5,000. B) increase the land account by $5,000 and increase the cash account by $5,000. C) increase the land account by $5,000 and increase the paid - in capit al in excess of par account by $5,000. D) There is no effect from the increase in the value of the land on the accounts of Surround Sound, LLC. E) increase the land account and the investment account. Answer: D Diff: 2 Objective: L.O. 1 - 3 9 Copyright © 2014 Pearson Education, Inc. 5) Which of th e following statements is false? A) If you increase an asset account, you may increase a liability account. B) If you increase an asset account, you may decrease an asset account. C) If you decrease an asset account, you may increase an owners' equity acco unt. D) If you decrease an asset account, you may decrease an owners' equity account. E) If you increase an asset account, you may increase an owners' equity account. Answer: C Diff: 2 Objective: L.O. 1 - 3 6) Mexland Company, acquired land costing $25,00 0. Mexland Company paid $10,000 in cash and issued a short - term note for the balance. The effect of this transaction on Mexland Company, would be to A) increase the land account by $25,000, decrease the cash account by $10,000, and decrease the balance in the notes payable account by $15,000. B) increase the land account by $25,000, decrease the cash account by $10,000, and decrease the balance in the notes receivable account by $15,000. C) increase the land account by $25,000, decrease the cash account by $10,000, and increase the balance in the notes receivable account by $15,000. D) increase the land account by $10,000 and decrease the cash account by $10,000. E) increase the land account by $25,000, decrease the cash account by $10,000, and increase the balance in the notes payable account by $15,000. Answer: E Diff: 2 Objective: L.O. 1 - 3 7) Assets amount to $35,000 at the beginning of the period and $40,000 at the end of the period. Liabilities amount to $10,000 at the beginning of the period and $20, 000 at the end of the period. What is the amount of the change and the direction of the change in owners' equity for the period? A) Increase of $15,000 B) Decrease of $10,000 C) Increase of $5,000 D) Increase of $10,000 E) Decrease of $5,000 Answer: E Dif f: 2 Objective: L.O. 1 - 3 10 Copyright © 2014 Pearson Education, Inc. 8) Smith's Medical Supplies sold unused land at cost, which was $15,000. The buyer paid $6,000 in cash, with the balance to be paid on a note due in 6 months. The effect on Smith's Medical Supplies is to A) decrease the land acco unt by $15,000, increase the cash account by $6,000, and increase the balance in the notes payable account by $9,000. B) decrease the land account by $15,000, increase the cash account by $6,000, and increase the balance in the notes receivable account by $9,000. C) decrease the land account by $15,000, increase the cash account by $6,000, and decrease the balance in the notes receivable by $9,000. D) decrease the land account by $6,000 and increase the cash account by $6,000. E) decrease the land account b y $15,000, increase the cash account by $6,000, and decrease the balance in the notes payable account by $9,000. Answer: B Diff: 2 Objective: L.O. 1 - 3 9) Mailers Manufacturing, acquired equipment for $19,000. Mailers Manufacturing, paid $6,000 in cash, with the balance due on a note. The effect of this transaction on Mailers Manufacturing, would be to A) increase the equipment account by $19,000, decrease the cash account by $6,000 and increase the notes payable account by $13,000. B) increase the equipm ent account by $19,000, decrease the cash account by $6,000, and decrease the notes receivable by $13,000. C) increase the equipment account by $6,000, and decrease the cash account by $6,000. D) increase the equipment account by $6,000, decrease the cash account by $6,000, and increase the notes payable account by $13,000. E) increase the equipment account by $19,000, and increase the notes payable account by $6,000. Answer: A Diff: 2 Objective: L.O. 1 - 3 10) Zeus Greek Foods purchased a $21,000 van for use in the business. The company made a $15,000 cash down payment, and signed a note for the balance. The effect of this transaction on Zeus Greek Foods would be to A) increase the van account by $21,000, decrease the cash account by $15,000, and decrease the notes receivable account by $6,000. B) increase the van account by $21,000, decrease the cash account by $15,000, and decrease the notes payable account by $6,000. C) increase the van account by $15,000 and decrease the cash account by $15,000. D) incr ease the van account by $21,000, decrease the cash account by $15,000, and increase the notes payable account by $6,000. E) decrease the van account by $15,000 and increase the cash account by $15,000. Answer: D Diff: 2 Objective: L.O. 1 - 3 11 Copyright © 2014 Pearson Education, Inc. 11) Payton Co rporation, acquired some office equipment, including a desk costing $900. The owner of the business next door said that he had been searching for a desk just like that one, so Payton Corporation, sold the desk to its business neighbor at cost, receiving $4 00 in cash, with the remainder to be paid in 30 days. The effect of this transaction on Payton Corporation, would be to A) increase the cash account by $400, increase the capital account by $500, and decrease the equipment account by $900. B) increase the cash account by $400, increase the accounts payable account by $500, and decrease the equipment account by $900. C) increase the cash account by $400, decrease the accounts payable account by $500, and decrease the equipment account by $900. D) increase th e cash account by $400, increase the accounts receivable account by $500, and decrease the equipment account by $900. E) increase the cash account by $400, decrease the accounts receivable account by $500, and decrease the equipment account by $900. Answer : D Diff: 2 Objective: L.O. 1 - 3 12) Home Theater Advantage sells audio equipment. Home Theater Advantage acquired 50 speakers from a manufacturer at a cost of $200 per speaker and purchased the speakers on account. The effect of this transaction on Home Theater Advantage would be to A) increase inventory by $10,000 and increase capital by $10,000. B) increase inventory by $10,000 and decrease capital by $10,000. C) increase inventory by $10,000 and decrease cash by $10,000. D) increase inventory by $10,0 00 and increase accounts payable by $10,000. E) increase inventory by $10,000 and decrease accounts payable by $10,000. Answer: D Diff: 2 Objective: L.O. 1 - 3 13) Iacofano Pizza Place acquired equipment costing $11,000 on account. The effect of this tran saction on Iacofano Pizza Place would be to A) increase equipment by $11,000 and decrease capital by $11,000. B) increase equipment by $11,000 and increase capital by $11,000. C) increase equipment by $11,000 and increase accounts payable by $11,000. D) in crease equipment by $11,000 and decrease accounts payable by $11,000. E) No transaction is recorded since no cash has been paid. Answer: C Diff: 2 Objective: L.O. 1 - 3 12 Copyright © 2014 Pearson Education, Inc. 14) Manziel Inc. is a sole proprietorship owned by Chris Herold. Chris acquired $9,000 worth of equipment for use in his store. He will pay for the equipment in 30 days. The effect of this transaction on Manziel would be to A) increase the equipment account by $9,000 and increase the accounts payable account by $9,000. B) increase the equip ment account by $9,000 and decrease the accounts payable account by $9,000. C) increase the equipment account by $9,000 and increase the capital account by $9,000. D) This would not change any account because the equipment has not been paid for. E) This wo uld not change any account because this transaction does not affect Manziel Inc. Answer: A Diff: 2 Objective: L.O. 1 - 3 15) Jakey Technologies has 1,000 folders in inventory that cost $2.00 each. The company's supplier announced that, effective immediate ly, all future folders will cost $2.20 each. Jakey Technologies should A) increase the inventory account by $200 and increase the capital account by $200. B) increase the inventory account by $200 and decrease the capital account by $200. C) increase the i nventory account by $200 and increase the accounts payable account by $200. D) increase the inventory account by $200 and decrease the accounts payable account by $200. E) There is no effect from the price change on the accounts of Jakey Technologies. Answ er: E Diff: 2 Objective: L.O. 1 - 3 16) Sounds Good Entertainment acquired office equipment valued at $4,000 and office supplies valued at $600 by paying cash of $1,300 with the balance on account. The effect of this transaction on Sounds Good Entertainme nt would be to A) increase the cash account by $1,300, increase the accounts payable account by $3,300, and increase the office equipment account by $4,600. B) increase the office equipment account by $4,600, decrease the cash account by $1,300, and decrea se the accounts payable account by $3,300. C) decrease the cash account by $1,300, increase the accounts payable account by $3,300, increase the office equipment account by $4,000, and increase the office supplies by $600. D) increase the cash account by $ 1,300, increase the capital account by $3,300, decrease the equipment account by $4,000, and increase the office supplies account by $600. E) increase the office supplies account by $600, decrease the office equipment account by $4,000, increase the accoun ts payable account by $4,000, and decrease the cash account by $600. Answer: C Diff: 2 Objective: L.O. 1 - 3 13 Copyright © 2014 Pearson Education, Inc. 17) Kitty Clips acquired $2,800 worth of merchandise inventory on account. Upon inspection, the company discovered that $400 worth of the merchand ise inventory was defective. Kitty Clips returned the defective merchandise inventory and received full credit. The effect of the return transaction on Kitty Clips would be to A) decrease the merchandise inventory account by $400 and increase the accounts payable account by $400. B) decrease the merchandise inventory account by $400 and decrease the accounts payable account by $400. C) decrease the merchandise inventory account by $400 and increase the accounts receivable account by $400. D) decrease the me rchandise inventory account by $400 and decrease the accounts receivable account by $400. E) Because the merchandise inventory was never used, Kitty Clips would not record the return of the merchandise inventory. Answer: B Diff: 2 Objective: L.O. 1 - 3 18 ) Stockholders' equity at the beginning and end of the period amounts to $16,000 and $19,000, respectively. Assets at the beginning and end of the period amount to $26,000 and $21,000, respectively. Liabilities at the beginning of the period were $10,000. Liabilities at the end of the period amount to A) $8,000. B) $6,000. C) $2,000. D) $5,000. E) $3,000. Answer: C Diff: 2 Objective: L.O. 1 - 3 19) What effect does the purchase of store equipment on account have on the balance sheet equation? A) Assets inc rease and liabilities decrease B) Assets increase and liabilities increase C) Assets decrease and liabilities decrease D) Assets decrease and liabilities increase E) There is no effect on the accounting equation. Answer: B Diff: 2 Objective: L.O. 1 - 3 20 ) What accounts are affected by an initial investment of cash by an owner into his business? A) Cash and Owner payable B) Cash and Long - term debt payable C) Owner payable and Accounts payable D) Cash and Capital E) Cash and Retained earnings Answer: D Dif f: 2 Objective: L.O. 1 - 3 14 Copyright © 2014 Pearson Education, Inc. 21) An owner's investment into a business will increase assets and decrease liabilities. Answer: FALSE Diff: 2 Objective: L.O. 1 - 3 22) An account is a summary record of the changes in a particular asset, liability, or owners' e quity. Answer: TRUE Diff: 1 Objective: L.O. 1 - 3 23) A transaction affects the financial position of an entity and can be reliably recorded in terms of money. Answer: TRUE Diff: 2 Objective: L.O. 1 - 3 24) A transaction does not require counterbalancing entries so that the total assets are equal to the total liabilities plus owner's equity. Answer: FALSE Diff: 2 Objective: L.O. 1 - 3 25) A loan from a financial institution will increase assets and increase liabilities. Answer: TRUE Diff: 2 Objective: L.O. 1 - 3 26) The purchase of inventory on credit will increase liabilities and equity. Answer: FALSE Diff: 2 Objective: L.O. 1 - 3 27) Buying on credit creates an account receivable. Answer: FALSE Diff: 1 Objective: L.O. 1 - 3 28) A creditor is one to w hom money is owed. Answer: TRUE Diff: 2 Objective: L.O. 1 - 3 29) A payment to a creditor will decrease assets and increase liabilities. Answer: FALSE Diff: 2 Objective: L.O. 1 - 3 15 Copyright © 2014 Pearson Education, Inc. 30) If assets increase $80,000 during a period and liabilities decrease $40,000, then owners' equity must have decreased $40,000. Answer: FALSE Diff: 2 Objective: L.O. 1 - 3 31) Analyze the following transactions in the balance sheet equation using the following worksheet. 1. Initial investment of $300,000 by the owner 2. Acqu ire equipment for $25,000 cash 3. Acquire inventory for $6,000 on credit 4. Obtain loan of $15,000 from the bank 5. Returned $600 of inventory to supplier 6. Payment to creditor for amount of inventory purchase less amount returned Note Accounts Transact ion Cash Inventory Equipment Payable Payable Capital 1 2 3 4 5 6 Answer: Note Accounts Transaction Cash Inventory Equipment Payable Payable Capital 1 +300,00 +300,000 2 - 25,000 +25,000 3 +6,000 +6, 000 4 +15,000 +15,000 5 - 600 - 600 6 - 5,400 - 5,400 Diff: 3 Objective: L.O. 1 - 3