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Financial Accounting: A Business Process Approach, 3e (Reimers)
Chapter 2 Qualities of Accounting Information
Learning Objective 2-1
2.1-1) Net income equals ______.
A) the gross profit on a sale
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
Answer: D
Diff: 1
Objective: LO 2-1
2.1-2) Gross profit equals ______.
A) sales minus cost of goods sold
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
Answer: A
Diff: 2
Objective: LO 2-1
2.1-3) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100, and interest expense of $25. Net income was ______.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
Answer: A
Diff: 1
Skill: Analytic skills
Objective: LO 2-1
2.1-4) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100, and interest expense of $25. Gross profit was ______.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
Answer: D
Diff: 2
Skill: Analytic skills
Objective: LO 2-1
2.1-5) Generally accepted accounting principles (GAAP) ______.
A) are a set of rules that a U.S. company must follow when preparing its financial statements
B) are accounting rules determined by the IRS
C) are accounting rules required by the U.S. government for all businesses to follow
D) are issued by the International Accounting Standards Board
Answer: A
Diff: 3
Objective: LO 2-1
2.1-6) The set of rules that a U.S. company must follow when preparing its financial statements is called ______.
A) AICPA
B) FASB
C) GAAP
D) SOX
Answer: C
Diff: 1
Objective: LO 2-1
2.1-7) The set of rules that a U.S. company must follow when preparing its financial statements is called ______.
A) generally accepted accounting principles
B) internal revenue code
C) internal control procedures
D) internally accepted accounting principles
Answer: A
Diff: 1
Objective: LO 2-1
2.1-8) Which of the following statements is TRUE?
A) The IASB is the current standards setting body for the U.S. accounting profession.
B) The FASB determines U.S. generally accepted accounting principles.
C) Applying IFRS will require much less judgment and interpretation than following U.S. GAAP.
D) The IRS determines generally accepted accounting principles.
Answer: B
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-9) U.S. generally accepted accounting principles (GAAP) are determined by the ______.
A) IFRS
B) IASB
C) FASB
D) U.S. Congress
Answer: C
Diff: 2
Objective: LO 2-1
2.1-10) It requires more judgment to use ______than to use ______.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer: A
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-11) ______have more detailed rules than ______.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer: B
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-12) ______are more concept-based than ______.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer: A
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-13) ______is more rule-based than ______.
A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer: B
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-14) The SEC has ______.
A) ordered all U.S. companies to begin using IFRS immediately
B) ruled that U.S. companies may never use IFRS for financial reporting
C) established a time table for the convergence of U.S. GAAP and IFRS
D) established an International Accounting Standards Board to create international accounting rules
Answer: C
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-15) The IRS developed GAAP, or generally accepted accounting principles, for the accounting profession.
Answer: FALSE
Diff: 2
Objective: LO 2-1
2.1-16) The FASB, or Financial Accounting Standards Board, is currently the standards-setting body for rules that U.S. publicly-held companies must use in preparing financial statements.
Answer: TRUE
Diff: 2
Objective: LO 2-1
2.1-17) GAAP, or generally accepted accounting principles, are the rules for preparing financial statements followed by the accounting profession in the United States.
Answer: TRUE
Diff: 1
Objective: LO 2-1
2.1-18) Revenue minus expenses equals net income.
Answer: TRUE
Diff: 1
Objective: LO 2-1
2.1-19) Revenue minus expenses equals gross profit.
Answer: FALSE
Diff: 2
Objective: LO 2-1
2.1-20) The Financial Accounting Standards Board sets international financial reporting standards (IFRS).
Answer: FALSE
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-21) IFRS and U.S. GAAP are the same in all respects.
Answer: FALSE
Diff: 1
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-22) IFRS have fewer detailed rules than U.S. GAAP.
Answer: TRUE
Diff: 2
Skill: Dynamics of the global economy
Objective: LO 2-1
2.1-23) What is profit?
Answer: Profit is the amount remaining after all the expenses of doing business are deducted from all the revenues for a specific period.
Diff: 1
Skill: Communication abilities
Objective: LO 2-1
2.1-24) What is the purpose of generally accepted accounting principles (GAAP)?
Answer: The purpose of financial reporting is to provide information for decision making. In order for financial information to be useful for evaluating the performance of a business, reporting rules must be uniform and applied in a consistent manner. Generally accepted accounting principles, or GAAP, are the set of rules that accountants and companies must follow when preparing financial statements.
Diff: 1
Skill: Communication abilities
Objective: LO 2-1
2.1-25) What are IFRS? How do they compare and contrast with U.S. GAAP?
Answer: IFRS are International Financial Reporting Standards, rules that have been set by the International Accounting Standards Board. Many countries have adopted IFRS already. The SEC has set forth a timetable for convergence of U.S. GAAP and IFRS. IFRS and U.S. GAAP have similar general and qualitative characteristics of accounting information. However, U.S. GAAP have more detailed rules, while IFRS are considered to be more concept-based and require more judgment to apply.
Diff: 2
Skill: Communication abilities
Objective: LO 2-1
Learning Objective 2-2
2.2-1) A financial statement provides information that ______.
A) is specific to a business enterprise
B) is industry-wide information
C) is economy-wide information
D) includes the owner's personal financial records
Answer: A
Diff: 1
Objective: LO 2-2
2.2-2) Characteristics of useful information include ______.
A) rationality and reliability
B) comparability and consistency
C) materiality and conservatism
D) comprehensive and complete
Answer: B
Diff: 2
Objective: LO 2-2
2.2-3) Relevant information ______.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
Answer: A
Diff: 2
Objective: LO 2-2
2.2-4) Comparable information ______.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
Answer: C
Diff: 2
Objective: LO 2-2
2.2-5) Reliable information ______.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
Answer: B
Diff: 2
Objective: LO 2-2
2.2-6) Consistent information ______.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period
Answer: D
Diff: 2
Objective: LO 2-2
2.2-7) Assets are recorded at their original cost to the company at the time of purchase. This is the ______principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition
Answer: A
Diff: 1
Objective: LO 2-2
2.2-8) Expenses are reported on the income statement when the related revenue is recognized. This is the ______principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition
Answer: C
Diff: 1
Objective: LO 2-2
2.2-9) Ace Electronics bought a new factory for $5,000,000. The factory was originally offered for sale for $5,200,000, but Ace successfully negotiated a lower price. Acme, Inc. was also trying to buy the factory and offered to pay $4,900,000. Ace should record the factory on its books at ______.
A) $5,200,000
B) $5,000,000
C) $4,500,000
D) $4,900,000
Answer: B
Diff: 2
Skill: Analytic skills
Objective: LO 2-2
2.2-10) For June, Team Shirts had a beginning balance in its Retained earnings account of $500. Net income for the month was $875. Team Shirts paid dividends of $200. The ending balance in Retained earnings was ______.
A) $675
B) $1,575
C) $1,175
D) $1,375
Answer: C
Diff: 3
Skill: Analytic skills
Objective: LO 2-2
2.2-11) Accounts receivable represents ______.
A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) revenue
D) shareholders' equity
Answer: B
Diff: 2
Objective: LO 2-2
2.2-12) Accounts payable represents ______.
A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) expenses
D) shareholders' equity
Answer: A
Diff: 2
Objective: LO 2-2
2.2-13) The monetary-unit assumption refers to ______.
A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized
Answer: C
Diff: 1
Objective: LO 2-2
2.2-14) The historical-cost principle refers to ______.
A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) using monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized
Answer: A
Diff: 1
Objective: LO 2-2
2.2-15) The going-concern assumption refers to ______.
A) measuring the financial statement items at their cost at the time of the transaction
B) an assumption is made that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized
Answer: B
Diff: 1
Objective: LO 2-2
2.2-16) The accounting rule which requires that only the business transactions of Team Shirts be shown on the balance sheet is the ______.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
Answer: A
Diff: 2
Objective: LO 2-2
2.2-17) The accounting rule which assumes that Team Shirts is continuing in business for an indefinite period of time is the ______.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
Answer: B
Diff: 2
Objective: LO 2-2
2.2-18) Which of the following is an example of using the materiality concept?
A) recording significant purchases as assets even though technically they are considered expenses
B) recording insignificant purchases as expenses even though technically they are considered assets
C) not recording insignificant purchases at all
D) recording insignificant liabilities as assets
Answer: B
Diff: 3
Objective: LO 2-2
2.2-19) All of Team Shirts' financial statements are presented in U.S. dollars. The accounting rule that applies is the ______.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle
Answer: C
Diff: 2
Objective: LO 2-2
2.2-20) The revenue reported on the Team Shirts' income statement has been earned during the accounting period. The accounting rule that applies is the ______.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle
Answer: C
Diff: 2
Objective: LO 2-2
2.2-21) Supplies expense on the Team Shirts' income statement represents only supplies that were used to earn revenue during the accounting period. The accounting rule that applies is the ______.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle
Answer: D
Diff: 2
Objective: LO 2-2
2.2-22) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost $100,000, was worth $120,000. How should Twisted Pretzel show this information on its financial statements prepared under U.S. GAAP?
A) Report a gain of $20,000 on its income statement.
B) Report land at $100,000 on its income statement.
C) Report land at $120,000 on its income statement.
D) Continue showing the land at its cost of $100,000.
Answer: D
Diff: 2
Skill: Analytic skills
Objective: LO 2-2
2.2-23) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost $100,000, was worth $120,000. Under IFRS, Twisted Pretzel would be allowed to: show the land on its financial statements as ______.
A) an expense of $100,000 on the income statement
B) an expense of $120,000 on the balance sheet
C) an asset of $120,000 on the income statement
D) an asset of $120,000 on the balance sheet
Answer: D
Diff: 3
Skill: Analytic skills, Dynamics of the global economy
Objective: LO 2-2
2.2-24) For information to be useful, it must be relevant and reliable.
Answer: TRUE
Diff: 1
Objective: LO 2-2
2.2-25) The owner of a sole proprietorship should not include personal financial records as part of the financial records and statements of the business.
Answer: TRUE
Diff: 2
Objective: LO 2-2
2.2-26) The separate-entity concept means that a company and its owners should keep separate records.
Answer: TRUE
Diff: 1
Objective: LO 2-2
2.2-27) Two characteristics of useful information are comparability and consistency.
Answer: TRUE
Diff: 2
Objective: LO 2-2
2.2-28) Comparability means that companies should use the same accounting rules from period to period.
Answer: FALSE
Diff: 3
Objective: LO 2-2
2.2-29) Reliable information can be verified.
Answer: TRUE
Diff: 2
Objective: LO 2-2
2.2-30) If a company spends $25 on copy paper, the amount is not material compared with the total office supplies budget of $250,000.
Answer: TRUE
Diff: 2
Objective: LO 2-2
2.2-31) Information that is relevant is both timely and useful in predicting the future.
Answer: TRUE
Diff: 1
Objective: LO 2-2
2.2-32) State the most applicable accounting rule for each of the following situations. An accounting rule can be a principle, assumption, constraint, or information characteristic.
1. All purchases and expenses are recorded at the amount paid.
2. South Seas records items imported from Tahiti in U.S. dollars.
3. The owner intends to run South Seas for an indefinite period of time.
4. Jem's Jewelers sold a $5,000 diamond engagement ring on account and recorded it as a sale.
5. Inventory purchased last month and sold this month was deducted as a cost on this month's income statement.
Answer: 1. Historical-cost principle; 2. Monetary-unit assumption; 3. Going-concern assumption;
4. Revenue-recognition principle; 5. Matching principle
Diff: 2
Objective: LO 2-2
2.2-33) State the most applicable accounting rule for each of the following situations. Each rule can be used more than once. An accounting rule can be a principle, assumption, constraint, or information characteristic.
1. Maids-R-Us recorded using supplies in the same period the supplies were used instead of expensing them in the period when they were purchased.
2. Clean Sweep cleaned an office building in October and was paid in November. Revenue was reported in October.
3. Team Shirts sends a set of financial statements prepared in accordance with GAAP to First Bank every month.
4. Mary Ellis, owner of Clean Sweep, has a bank account for her business separate from her personal bank account.
5. Jem's Jewelers purchased a three-month insurance policy on its diamond inventory. The cost of the policy was recorded as an asset. Later one-third of the asset was expensed each month over the three-month policy.
Answer: 1. Matching principle, 2. Revenue-recognition principle, 3. Consistency,
4. Separate-entity assumption, 5. Matching principle.
Diff: 2
Objective: LO 2-2
2.2-34) State the most applicable accounting rule for each of the following situations. An accounting rule can be a principle, assumption, constraint, or information characteristic.
1. A $15 wastebasket was expensed when purchased even though it will be used for more than one year.
2. The owner of the business paid for private school tuition and did not list the amount on the books of his business.
3. Team Shirts prepares financial statements in the same manner each year.
4. South Sea's financial statements are prepared within the first week after the close of each accounting period.
5. An external auditor found receipts documenting the purchase of a computerized information system for Team Shirts.
Answer: 1. Materiality; 2. Separate-entity assumption; 3. Consistency; 4. Relevance;
5. Reliability
Diff: 2
Objective: LO 2-2
2.2-35) Busy Beaver, Inc. purchased land ten years ago for $30,000. At December 31, 2012, similar land has been appraised at $50,000. Answer the following questions:
1. At what amount should land be reported on the balance sheet under U.S. GAAP?
2. Which basis is more reliable, historical cost, $30,000, or fair market value, $50,000?
3. Which basis is more relevant, historical cost, $30,000, or fair market value, $50,000?
4. How might the land be reported using IFRS?
Answer: 1. $30,000; 2. historical cost; 3. fair market value; 4. IFRS allows (but does not require) the land to be reported at its fair value, $50,000.
Diff: 2
Objective: LO 2-2
2.2-36) Explain the objectives of financial reporting.
Answer: The most important objective of financial reporting is to provide useful information for decision makers. In order to be useful, the information has to be relevant, reliable, comparable and consistent.
Diff: 2
Skill: Communication abilities
Objective: LO 2-2
2.2-37) Discuss the qualities of accounting information.
Answer: Usefulness is the most important characteristic of accounting information. Useful information is relevant to the decision maker. In other words, it makes a difference in making decisions. Information must be reliable. This means that it must be verifiable or based on some sort of documentation. The information must be accurate and truthful. Useful information must be comparable across different companies. Therefore, accountants and companies follow GAAP reporting rules. When all companies follow the same reporting rules, then information can be compared among companies and industries. Useful information should be consistent. This means that accountants and companies have to follow the same reporting rules across time.
Diff: 2
Skill: Communication abilities
Objective: LO 2-2
2.2-38) Match each of the following terms with the appropriate definition. Each term should be used only once.
a.Generally Accepted Accounting Principles (GAAP)
b.Financial Accounting Standards Board (FASB)
c.Separate-entity assumption
d.Time-period assumption
e.Usefulness
f.Relevant
g.Consistency
h.Materiality
i.Accounts payable
j.On account
_____ 1. Amounts that a company owes its vendors
_____ 2. The significance of an amount or item on the financial statements