Chapter 001: the Role of Accounting in Starting a Business

Chapter 001: The Role of Accounting in Starting a Business

True / False Questions

1.Companies which do not make or sell goods are known as service companies.
TrueFalse

2.Southwest Airlines would be an example of a manufacturer.
TrueFalse

3.Wal-Mart is an example of a retailer.
TrueFalse

4.A business owned by one individual is known as a corporation.
TrueFalse

5.One disadvantage of a sole proprietorship and a partnership is unlimited liability.
TrueFalse

6.A business that has one owner is a partnership.
TrueFalse

7.One advantage of a corporation over the other forms of business is ease of formation.
TrueFalse

8.An accounting system is a system of financial recordkeeping.
TrueFalse

9.An accountant who charges a fee to businesses for their services works in private accounting.
TrueFalse

10.Assets - Owner's Equity = Liabilities represents the fundamental accounting equation.
TrueFalse

11.Resources a business owns are called revenues.
TrueFalse

12.Accounts payable are claims a business owes to creditors.
TrueFalse

13.An owner has a claim to a business for the amounts invested in the business.
TrueFalse

14.The difference between assets and liabilities is called profit.
TrueFalse

15.Expenses are resources used to earn revenue.
TrueFalse

16.Prepaid expenses are an example of an asset.
TrueFalse

17.Interest payable is an example of an expense.
TrueFalse

18.The correct order to prepare the financial statements is: 1) Balance Sheet, 2) Income Statement, 3) Statement of Cash Flows, and 4) Statement of Owner's Equity.
TrueFalse

19.The statement of owner's equity links together the income statement and the balance sheet.
TrueFalse

20.Financial statements are only prepared at the end of the year.
TrueFalse

21.If net income is equal to $10,000 then the company's cash has increased by $10,000.
TrueFalse

22.The balance sheet reports a company's financial position at a particular point in time.
TrueFalse

23.The regulatory body responsible for setting the rules of accounting is the Financial Accounting Standards Board (FASB).
TrueFalse

24.One objective of external users of financial information is to assess the ability of a company to pay its liabilities.
TrueFalse

25.The high cost of computers has made it more difficult for business owners to do their own bookkeeping.
TrueFalse

26.Managerial accounting reports produced by the accounting system are made available for external users of accounting.
TrueFalse

27.A manager who is considering whether to continue or discontinue a particular product would refer to financial accounting information.
TrueFalse

28.Creditors and investors are examples of external users of accounting information.
TrueFalse

29.Financial information that is unbiased and verifiable is said to be relevant.
TrueFalse

30.A company's managers have the primary responsibility for following Generally Accepted Accounting Principles (GAAP) and for preparing fair financial statements.
TrueFalse

Multiple Choice Questions

31.The ______outlines how the profits (or losses) are shared.
A.Stock certificate
B.Partnership agreement
C.Corporate charter
D.Financial statements

32.Which of the following would not be considered an external user of accounting information?
A.Bank
B.Supplier
C.Manager
D.Investor

33.All of the following include activities of external users of accounting information except:
A.Evaluating the risk of lending money to a business.
B.Determining the amount of supplies on hand.
C.Deciding whether to buy, sell or hold stock in a company.
D.Assessing whether the company has paid the correct amount of taxes.

34.Which of the following is considered an internal user of accounting information?
A.Production manager
B.Supplier
C.Investor
D.Customer

35.Which of the following is considered an external user of accounting information?
A.Production manager
B.CEO
C.IRS
D.Controller

36.A bank is most likely a(n) ______user of accounting information.
A.external
B.internal
C.governmental
D.managerial

37.Which of the following represents the fundamental accounting equation?
A.A + L = OE
B.A - L = OE
C.OE + A = L
D.L - OE = A

38.An example of a claim to resources of a business is:
A.Cash.
B.Land.
C.Accounts payable.
D.Accounts receivable.

39.Resources a business owns are called:
A.Liabilities.
B.Owner's equity.
C.Revenues.
D.Assets.

40.Claims a business owes are called owners' equity when they are held by:
A.Creditors.
B.Suppliers.
C.Employees.
D.Investors.

41.An example of an asset is:
A.Wages expense.
B.Revenue.
C.Supplies.
D.Accounts payable.

42.Which of the following is not a characteristic of an asset?
A.It is a resource controlled by the business.
B.It has measurable value.
C.It is incurred to generate revenue.
D.It is expected to provide future benefits.

43.Land is an example of a(n):
A.Liability.
B.Asset.
C.Revenue.
D.Expense.

44.Unearned revenue is an example of a(n):
A.Liability.
B.Revenue.
C.Asset.
D.Expense.

45.Inventory is an example of a(n):
A.Liability.
B.Revenue.
C.Expense.
D.Asset.

46.Which of the following is not one of the four basic financial statements?
A.Income statement
B.Statement of cash flows
C.Accounting equation
D.Balance sheet

47.Which of the four basic financial statements provides a snapshot of the business on a particular day?
A.Balance sheet
B.Income statement
C.Statement of cash Flows
D.Statement of owner's equity

48.Which financial statement should be prepared first?
A.Balance sheet
B.Statement of cash flows
C.Income statement
D.Statement of owner's equity

49.Which financial statement links together the Income Statement and the Balance Sheet?
A.Statement of cash flows
B.Statement of owner's equity
C.Statement of operations
D.Statement of financial position

50.Which financial statement includes only those activities that result in cash changing hands during the period?
A.Income statement
B.Balance sheet
C.Statement of cash flows
D.Statement of owner's equity

51.Which of the following is not one of the types of business activities included on the statement of cash flows?
A.Investing
B.Operating
C.Financing
D.Reporting

52.The governmental agency that supervises the work of the Financial Accounting Standards Board (FASB) is known as the:
A.Generally Accepted Accounting Principles (GAA).
B.Securities and Exchange Commission (SEC).
C.Public Company Accounting Oversight Board (PCAOB).
D.American Institute of CPAs (AICPA).

53.Financial information that is ______ensures that it is unbiased and verifiable.
A.relevant
B.comparable
C.reliable
D.consistent

54.The primary responsibility for setting the rules of accounting rests with the:
A.Financial Accounting Standards Board (FASB).
B.Generally Accepted Accounting Principles (GAAP).
C.Security and Exchange Commission (SEC).
D.American Institute of CPAs (AICPA).

55.The rules of accounting are known as:
A.Security and Exchange Commission (SEC).
B.Financial Accounting Standards Board (FASB).
C.American Institute of CPAs (AICPA).
D.Generally Accepted Accounting Principles (GAAP).

56.In a business, who has the primary responsibility for following GAAP and preparing fair financial statements?
A.Management
B.The accountants
C.The CPA
D.The SEC

57.The Sarbanes-Oxley Act of 2002 requires that top managers maintain an audited system of:
A.Accounting.
B.Reporting.
C.Internal control.
D.Financing.

58.______are the standards of conduct for judging right from wrong.
A.Ethics
B.Rules
C.Internal controls
D.Conducts

59.Which of the following is not a required element of the title on a financial statement?
A.The company's name
B.The reporting date or period
C.The name of the financial statement
D.The preparer's name

60.The income statement reports:
A.Revenues, assets and expenses.
B.Net income or loss for the period.
C.Only sales amounts paid in cash.
D.The financial position on a particular date.

61.Which of the following would not be an objective of an external user analyzing a company's financial statements?
A.Assessing the company's ability to pay its debts.
B.Predicting the future profitability of the company.
C.Determining whether the company should drop an unprofitable product line.
D.Understanding the financial position of the company.

62.A company reported assets of $12,000 and liabilities of $2,500, what amount would be reported for owner's equity?
A.$14.500
B.$9,500
C.$12,000
D.$2,000

63.A company reported revenue of $100,000 and a net loss of $12,000. What amount was reported as expenses?
A.$112,000
B.$12,000
C.$88,000
D.$100,000

64.What business type has two or more owners and unlimited liability?
A.Corporation
B.Sole proprietorship
C.Partnership
D.Retailer

65.Which of the following is an example of a service company?
A.Wal-Mart
B.Home Depot
C.American Airlines
D.Ford Motor Company

66.Which of the following is not a merchandiser?
A.Target
B.Best Western
C.Staples
D.Macy's

67.Companies which make products from raw inputs are known as:
A.Service Companies.
B.Wholesalers.
C.Retailers.
D.Manufacturers.

68.Boeing would be an example of what business type?
A.Service company
B.Merchandiser
C.Manufacturer
D.Retailer

69.Which of the following is not one of the three major ways that a business can be organized?
A.Partnership
B.Sole Proprietorship
C.Corporation
D.Wholesaler

70.One advantage of the corporate form of business over the other forms of business is:
A.Limited liability.
B.Ease of formation.
C.Separate taxation.
D.Lower legal fees.

71.Accounting is an information system designed to:
A.Provide information to external users only.
B.Provide information to internal users only.
C.Capture a business's activities and communicate results to all decision makers.
D.Handle the record keeping of a business but other functions must be performed by a CPA.

72.Accountants who are employed by a single business or nonprofit organization work in:
A.Public accounting.
B.Private accounting.
C.A CPA firm.
D.Governmental accounting only.

73.Technology and the low cost of computers have resulted in:
A.Increased complexity in accounting systems.
B.Higher fees charged by public accountants.
C.Small businesses handling their own bookkeeping.
D.An abundance of accounting reports.

74.The area of accounting which primarily serves the decision making needs of internal users is:
A.Financial accounting.
B.Bookkeeping.
C.Auditing.
D.Managerial Accounting.

75.On December 31 of the current year, a company reported the following items on its balance sheet: Cash $10,500; Accounts receivable $5,200; Inventory $2,300; Equipment $102,400; Accounts payable $12,000; Notes payable $56,000. What amount should be reported as owner's equity?
A.$108,400
B.$52,400
C.$120,400
D.$188,400

76.Assets should originally be recorded at:
A.Market value.
B.Replacement cost.
C.Historical cost.
D.Amount owed on the asset.

77.If owners contribute $50,000 to start a new business what is the effect on the accounting equation?
A.Assets increase $50,000; no effect on liabilities; equity increases $50,000.
B.Assets decrease $50,000; liabilities decrease $50,000; no effect on equity.
C.Assets decrease $50,000; no effect on liabilities; equity decreases $50,000.
D.Assets increase $50,000; liabilities increase $50,000; no effect on equity.

78.How would the accounting equation be affected if a company obtains a loan for $100,000 from a bank?
A.Assets increase $100,000; no effect on liabilities; equity increases $100,000.
B.Assets decrease $100,000; liabilities decrease $100,000; no effect on equity.
C.Assets decrease $100,000; no effect on liabilities; equity decreases $100,000.
D.Assets increase $100,000; liabilities increase $100,000; no effect on equity.

79.A company purchases equipment for $45,000 cash. What is the effect on the accounting equation?
A.Assets increase $45,000; no effect on liabilities; equity increases $45,000.
B.Assets decrease $45,000; liabilities decrease $45,000; no effect on equity.
C.No effect on the accounting equation because assets increase and decrease by the same amount.
D.Assets increase $45,000; liabilities increase $45,000; no effect on equity.

80.What is the effect on the accounting equation if a company earns revenues of $23,000 on account?
A.Assets increase $23,000; no effect on liabilities; equity increases $23,000.
B.Assets decrease $23,000; liabilities decrease $23,000; no effect on equity.
C.Assets decrease $23,000; no effect on liabilities; equity decreases $23,000.
D.Assets increase $23,000; liabilities increase $23,000; no effect on equity.

81.A company pays $3,400 for the current month utilities. What is the effect on the accounting equation?
A.Assets increase $3,400; no effect on liabilities; equity increases $3,400.
B.Assets decrease $3,400; liabilities decrease $3,400; no effect on equity.
C.Assets decrease $3,400; no effect on liabilities; equity decreases $3,400.
D.Assets increase $3,400; liabilities increase $3,400; no effect on equity.

82.If a company purchases supplies on account for $5,000, what is the effect on the accounting equation?
A.Assets increase $5,000; no effect on liabilities; equity increases $5,000.
B.Assets decrease $5,000; liabilities decrease $5,000; no effect on equity.
C.Assets decrease $5,000; no effect on liabilities; equity increases $5,000.
D.Assets increase $5,000; liabilities increase $5,000; no effect on equity.

83.When a company distributes profits to its owners the result is a(n):
A.Decrease in profits.
B.Decrease in assets and owner's equity.
C.Increase in owner's equity.
D.Increase in assets.

84.The following information is reported for Manco Company for the month of March. Determine net income.

A.$(21,500)
B.$144,500
C.$21,500
D.$73,000

85.A company reported total equity of $82,000 on its December 31, 2009 balance sheet. The following information is available for the year ended December 31, 2010:

What are the total assets of the company as of December 31, 2010?
A.$167,000
B.$202,000
C.$85,000
D.$132,000

Essay Questions

86.For each of the following financial statement items, indicate which type of financial statement element it is. Use the following codes:
A - Asset
L - Liability
OE - Owner's equity
R - Revenue
E - Expense

87.For each account listed indicate the type of account and what financial statement it would appear on using the codes provided. The first account had been completed as an example.

88.Given the following partially complete financial statements for CiCi Company, fill in the missing (?) items.

89.For each of user of accounting information listed below indicate whether the user is an internal or external of accounting information by placing an X in the appropriate box.

90.For each of the following transactions indicate the effect on the accounting equation by placing a + or a - under the appropriate element and including the amount. The first transaction has been provided as an example.

91.For each of the following independent cases determine the missing amounts. Assume that it is the end of 2010, the first full year of operations for the company.

92.Use the information from Fairbank Company to answer the following questions. The accountant for Fairbank Company prepared the following information from the company's accounting records for the year ended December 31, 2010:

Determine the following amounts for Fairbank Company:
A. Total assets at the end of 2010.
B. Total Liabilities at the end of 2010.
C. Owner's equity at the end of 2010.
D. Total revenue for 2010.
E. Total expenses for 2010.
F. Is Fairbank profitable? Explain

93.The following information was taken from a company's most recent cash flow statement for. Indicate whether each cash flow is from operating (O), investing (I), or financing (F) and also whether the item is a cash inflow (+) or outflow (-).

94.List at least three characteristics of a corporation. What advantages does the corporate form of business offer over other forms of business? What is one disadvantage of a corporation over the other forms of business?