Deck 1: Accounting and the Business Environment

Question 1

Which of the following is an external user of a business' financial information?

A) customers
B) cost accountant
C) company manager
D) the board of directors

Answer 1

A

Question 2

Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers.

Answer 2

True

Question 3

The field of accounting that focuses on providing information for external decision makers is:

A) managerial accounting.
B) financial accounting.
C) cost accounting.
D) nonmonetary accounting.

Answer 3

B

Question 4

As per the economic entity assumption, an organization and its owner should be seen as the same entity.

Question 5

Business owners use accounting information to set goals, evaluate progress toward those goals, and make adjustments when needed.

Question 6

Any person or business to whom a business owes money is called the business's creditor.

Question 7

Outside investors would ordinarily use managerial accounting information to decide whether or not to invest in a business.

Question 8

Which of the following statements best defines financial statements?

A) Financial statements are the information systems that record monetary and nonmonetary business transactions.
B) Financial statements are the verbal statements made to business news organizations by chief financial officers.
C) Financial statements are documents that report on a business in monetary terms, providing information to help people make informed business decisions.
D) Financial statements are plans and forecasts for future time periods based on information from past financial periods.

Question 9

A creditor is a person who owes money to the business.

Question 10

Managerial accounting focuses on information for external decision makers.

Question 11

Accounting is referred to as the language of business because it is the method of communicating business information to stakeholders.

Question 12

Managerial accounting provides information to:

A) internal decision makers.
B) outside investors and lenders.
C) auditors.
D) taxing authorities.

Question 13

Which of the following users would rely on management accounting information for decision-making purposes?

A) potential investors
B) creditors
C) customers
D) company managers

Question 14

Financial accounting focuses on information for decision makers outside of the business, such as creditors and taxing authorities.

Question 15

A creditor is any person who has an ownership interest in a business.

Question 16

The field of accounting that focuses on providing information for internal decision makers is:

A) managerial accounting.
B) financial accounting.
C) nonmonetary accounting.
D) governmental accounting.

Question 17

Stockholders primarily use managerial accounting information for decision-making purposes.

Question 18

Local, state, and federal governments use accounting information to calculate income tax.

Question 19

________ are professional accountants who serve the general public, not one particular company.

A) Certified public accountants
B) Certified management accountants
C) Cost accountants
D) Controllers

Question 20

Different users of financial statements focus on the different parts of the financial statements for the information they need.

Question 21

IFRS is the main U.S. accounting rule book and is currently created and governed by the FASB.

Question 22

Which of the following organizations requires publicly owned companies to be audited by independent accountants (CPAs)?

A) Securities and Exchange Commission (SEC)
B) Public Company Accounting Oversight Board (PCAOB)
C) Financial Accounting Standards Board (FASB)
D) American Institute of Certified Public Accountants (AICPA)

Question 23

The Sarbanes-Oxley Act (SOX) requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

Question 24

The Sarbanes-Oxley Act (SOX) made it a criminal offense to:

A) transfer shares of stock.
B) issue debentures.
C) declare bankruptcy.
D) falsify financial information.

Question 25

In a sole proprietorship, the owner is personally liable for the debts of the business.

Question 26

Which of the following is a characteristic of a corporation?

A) A corporation is owned by stockholders.
B) Lenders of a corporation do not have the right to claim the corporation's assets to satisfy their obligations.
C) All shares of a corporation must be held by a single individual.
D) Each stockholder has the authority to commit the corporation to a binding contract through his actions.

Question 27

An examination of a company's financial statements and records is called an audit.

Question 28

A business can be organized as a sole proprietorship, partnership, corporation, or limited-liability company (LLC).

Question 29

Which of the following organizations is responsible for the creation and governance of accounting standards in the United States?

A) Financial Accounting Standards Board
B) Institute of Management Accountants
C) American Institute of Certified Public Accountants
D) Securities and Exchange Commission

Question 30

GAAP are the rules that govern accounting in the United States. The acronym GAAP in this statement refers to:

A) Globally Accepted and Accurate Policies.
B) Global Accommodation Accounting Principles.
C) Generally Accredited Accounting Policies.
D) Generally Accepted Accounting Principles.

Question 31

International Financial Reporting Standards (IFRS) are the international accounting rules that U.S. companies must follow for their international operations.

Question 32

A publicly traded company in the United States does not come under SEC regulations as long as it follows the rules of GAAP.

Question 33

Members of a limited-liability company (LLC) are not personally liable for the debts of the business.

Question 34

The formation of a partnership firm requires a minimum of:

A) four partners.
B) three partners.
C) one partner.
D) two partners.

Question 35

The guidelines for accounting information are called Generally Accepted Accounting Principles (GAAP).

Question 36

In a limited-liability company (LLC), the members are personally liable for the debts of the business.

Question 37

IFRS are comparatively more specific and more rule based than U.S. GAAP.

Question 38

The Public Company Accounting Oversight Board is a watchdog agency that monitors the work of independent accountants who audit public companies.

Question 39

The most that the owner of a sole proprietorship can lose, as a result of business debts or lawsuits, is the amount he/she has invested in the business.

Question 40

Corporate ownership is a very popular type of ownership in the United States. Which of the following is a major reason that corporate ownership is popular?

A) Stockholders have limited liability for the debts of the corporation.
B) Most corporations are small or medium-sized.
C) The life of a corporation is limited by the death of the owner.
D) A corporation is usually managed by the owners.

Question 41

Gunnie Inc., located in Texas, records business transactions in dollars and disregards changes in the value of a dollar over time. Which of the following accounting assumptions does this represent?

A) economic entity assumption
B) going concern assumption
C) accounting period assumption
D) monetary unit assumption

Question 42

Equity decreases with expenses and revenues.

Question 43

Which of the following is a characteristic of a limited-liability company (LLC)?

A) An LLC's life is terminated at any member's choice or death.
B) Each member of an LLC is liable only for his or her own actions.
C) An LLC must have more than five members.
D) The income of members from an LLC is not taxed.

Question 44

Joshua Thomas is the owner of Nexus Inc., a manufacturer and retailer of computer hardware. Joshua recently bought a new car as a gift for his daughter. Since Joshua paid for the car from the earnings of the business, he recorded it in the books of Nexus as an asset. Which of the following concepts or principles of accounting is Joshua violating?

A) monetary unit assumption
B) economic entity assumption
C) cost principle
D) going concern assumption

Question 45

As per the ________, the entity will remain in operation for the foreseeable future.

A) economic entity concept
B) monetary unit assumption
C) going concern assumption
D) cost principle

Question 46

The total of amount of assets that a business possesses, may or may not equal the total of liabilities and equity of the business.

Question 47

The left side of the accounting equation measures the amount that the business owes to creditors and to the owner.

Question 48

Which of the following statements is true of a sole proprietorship?

A) A sole proprietorship joins two or more individuals as co-owners.
B) The sole proprietor is personally liable for the liabilities of the business.
C) A sole proprietorship is taxed separately from the owner.
D) A sole proprietorship does not terminate at the choice or death of the owner.

Question 49

30 years ago, Star Grocer Corporation had purchased a building for its grocery store by paying $30,000. Based on inflation estimates, the amount of the building has been adjusted in the accounting records. The building is now reported at $75,000 in the financial statements of Star Grocer. Which of the following concepts or principles of accounting is being violated?

A) going concern assumption
B) monetary unit assumption
C) economic entity assumption
D) cost principle

Question 50

Caleb Brown is the sole owner of a bicycle sales and repair shop from several years. Which of the following business types would limit Caleb's personal liability exposure to the entity's debts?

A) Partnership
B) Limited-liability company
C) Sole proprietorship
D) Limited-liability partnership

Question 51

The taxable income of a sole proprietorship is:

A) combined with the personal income of the proprietor.
B) not combined with the proprietor's personal income.
C) not taxable.
D) handled similarly to that of a corporation.

Question 52

David has decided to open an auto-detailing business. He will pick up an automobile from the client, take it to his parents' garage, detail it, and return it to the client. If he does all of the work himself and takes no legal steps to form a special organization, which type of business organization, in effect, has he chosen?

A) Limited-liability company
B) Partnership
C) Corporation
D) Sole proprietorship

Question 53

From a legal perspective, a sole proprietorship:

A) is an entity separate from its proprietor.
B) must have at least two owners.
C) is not a distinct entity from its proprietor.
D) is subject to strict regulation of the SEC.

Question 54

Liabilities represent creditors' claims on the business's assets.

Question 55

According to the ________, the acquired assets should be recorded at the amount actually paid rather than at the estimated market value.

A) going concern assumption
B) economic entity concept
C) cost principle
D) monetary unit assumption

Question 56

In a limited-liability company:

A) the members are personally liable to pay the entity's debts.
B) tax on earnings is paid by the business.
C) the members are liable for each other's actions.
D) the members pay tax on their share of earnings.

Question 57

The Public Company Accounting Oversight Board (PCAOB) was created by the:

A) Sarbanes-Oxley Act (SOX)
B) International Accounting Standards Board (IASB)
C) Institute of Management Accountants (IMA)
D) American Institute of Certified Public Accountants (AICPA)

Question 58

Owner's withdrawals are the expenses of a business.

Question 59

Lorna Smith decided to start her own CPA practice as a professional corporation, Smith CPA PC. Her corporation purchased an office building for $35,000 that her real estate agent said was worth $50,000 in the current market. The corporation records the building as a $50,000 asset because Lorna believes that is the real value of the building. Which of the following concepts or principles of accounting is being violated?

A) cost principle
B) economic entity assumption
C) monetary unit assumption
D) going concern assumption

Question 60

Equity increases when revenues are earned.

Question 61

The economic resources of a business such as furniture, building, and land are its:

A) liabilities.
B) revenues.
C) assets.
D) withdrawals.

Question 62

Viva Inc. produces and sells coffee beans. This month it earned $500 by selling coffee beans to Jeffery Inc. The $500 received by Viva is its:

A) revenue.
B) equity.
C) gain.
D) debt.

Question 63

Hamilton Lawn Service incurred $500 as labor expense and promised to pay the labor agency within 30 days. Which of the following accounts would increase as a result of this transaction?

A) Accounts Receivable
B) Cash
C) Accounts Payable
D) Owner's Capital

Question 64

Martin Supply Service paid $350 cash to a materials supplier that it owed from the previous month. Which of the following accounts decreases?

A) Accounts Receivable
B) Accounts Payable
C) Owner's Capital
D) Office Supplies

Question 65

Scott's Camera Shop started the year with total assets of $80,000 and total liabilities of $40,000. During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott made no additional capital contributions during the year, but did make withdrawals of $60,000. What is the amount of owner's equity at the end of the year?

A) $70,000
B) $120,000
C) $30,000
D) $60,000

Question 66

Scott's Camera Shop started the year with total assets of $100,000 and total liabilities of $50,000. During the year, the business earned revenues of $200,000 and incurred expenses of $60,000. Scott made no capital contributions during the year, but did make withdrawals of $75,000. Calculate the amount of increase/decrease in Scott's equity for the year.

A) $65,000 increase
B) $115,000 increase
C) $50,000 decrease
D) $75,000 increase

Question 67

The owner's claim to the assets of the business is called:

A) return on assets.
B) expenses.
C) equity.
D) debt.

Question 68

Lush Lawns incurred $1,500 labor expense and promised to pay the labor agency within 30 days. Which of the following would decrease as a result of this transaction?

A) Assets
B) Owner's Capital
C) Liabilities
D) Revenues

Question 69

Lush Lawns earned $1,000 for lawn mowing services rendered. The customer promised to pay at a later time. Which of the following accounts increased as a result of this transaction?

A) Accounts payable
B) Supplies
C) Cash
D) Accounts receivable

Question 70

John contributes cash in exchange for capital for his business, Bubble Wraps Inc. The two accounts involved in this transaction are:

A) Bubble Wraps, Capital account and the Cash account.
B) the Cash account and John, Capital account.
C) John, Payables account and the Capital account.
D) Bubble Wraps, Capital account and John, Payables account.

Question 71

Martin Supply Service received $1,000 cash from a customer which was owed to the business from the previous month. What is the effect of the cash receipt on the accounts of the business?

A) Accounts Receivable decreases; Martin, Capital decreases.
B) Cash account increases; Accounts receivable decreases.
C) Accounts Payable increases; Martin, Capital decreases.
D) Cash increases; Accounts Payable decreases.

Question 72

For an accounting equation to balance, a transaction must affect both the sides of the equation.

Question 73

A business owner starts a new business and invests $6,000 of capital. This transaction results in an increase in the assets of the business.

Question 74

A sole proprietor makes a cash withdrawal from his company. How does this transaction affect the accounting equation?

A) Assets, liabilities, and equity remain the same.
B) Assets decrease; equity decreases.
C) Assets increase; liabilities decrease.
D) Assets decrease; equity increases.

Question 75

Hamilton Lawn Service incurred $800 as repair expense and paid the repair company in cash. This will:

A) decrease the Owner's capital.
B) increase the assets of the business.
C) increase the liabilities of the business.
D) decrease the liabilities of the business.

Question 76

A debt that a business owes to an outside party is called:

A) an asset.
B) a liability.
C) stockholders' equity.
D) revenue.

Question 77

Which of the following is the correct accounting equation?

A) Assets + Liabilities = Equity
B) Assets = Liabilities + Equity
C) Assets + Revenues = Equity
D) Assets + Revenues = Liabilities + Expenses

Question 78

Glorious Gloria, a florist, had the following transactions in August: Earned $2,000 as revenues on account; collected $4,000 from a customer for goods sold last month; incurred $600 of repair expense and paid cash; paid $200 to a supplier that it owed from the previous month. What is the net income in August?

A) $500
B) $5,700
C) $2,700
D) $1,400

Question 79

The net income of a business is $29,000. The beginning and ending capital balances were $34,000 and $55,000, respectively. No capital contributions were made by the owner during the year. Calculate the amount of owner's withdrawals.

A) $18,000
B) $8,000
C) $5,000
D) $60,000

Question 80

Scott's Camera Shop started the year with total assets of $80,000 and total liabilities of $40,000. During the year, the business earned revenues of $120,000 and incurred expenses of $70,000. Scott made no additional capital contributions during the year, but did make withdrawals of $60,000. Calculate Scott's net income for the year.

A) $50,000
B) $120,000
C) $70,000
D) $80,000