Deck 2: Qualities of Accounting Information

Question 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 1

D

Question 2

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 2

A

Question 3

________ 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 3

B

Question 4

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

Question 5

Revenue minus expenses equals net income.

Question 6

S.generally accepted accounting principles (GAAP)are determined by the ________.

A)IFRS
B)IASB
C)FASB
D)U)S.Congress

Question 7

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.

Question 8

The IRS developed GAAP,or generally accepted accounting principles,for the accounting profession.

Question 9

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

Question 10

The Financial Accounting Standards Board sets international financial reporting standards (IFRS).

Question 11

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

Question 12

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

Question 13

Revenue minus expenses equals gross profit.

Question 14

________ 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

Question 15

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.

Question 16

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

Question 17

________ 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

Question 18

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

Question 19

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

Question 20

GAAP,or generally accepted accounting principles,are the rules for preparing financial statements followed by the accounting profession in the United States.

Question 21

IFRS have fewer detailed rules than U.S.GAAP.

Question 22

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

Question 23

What are IFRS? How do they compare and contrast with U.S.GAAP?

Question 24

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

Question 25

Accounts receivable represents ________.

A)amounts owed by the company to suppliers
B)amounts owed to the company by customers
C)revenue
D)shareholders' equity

Question 26

IFRS and U.S.GAAP are the same in all respects.

Question 27

What is the purpose of generally accepted accounting principles (GAAP)?

Question 28

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

Question 29

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

Question 30

What is profit?

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Accounts payable represents ________.

A)amounts owed by the company to suppliers
B)amounts owed to the company by customers
C)expenses
D)shareholders' equity

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

Characteristics of useful information include ________.

A)rationality and reliability
B)comparability and consistency
C)materiality and conservatism
D)comprehensive and complete

Question 41

If a company spends $25 on copy paper,the amount is not material compared with the total office supplies budget of $250,000.

Question 42

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

Question 43

Comparability means that companies should use the same accounting rules from period to period.

Question 44

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.

Question 45

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?

Question 46

The owner of a sole proprietorship should not include personal financial records as part of the financial records and statements of the business.

Question 47

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

Question 48

Reliable information can be verified.

Question 49

For information to be useful,it must be relevant and reliable.

Question 50

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

Question 51

Two characteristics of useful information are comparability and consistency.

Question 52

Information that is relevant is both timely and useful in predicting the future.

Question 53

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

Question 54

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.

Question 55

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.

Question 56

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

Question 57

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.

Question 58

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

Question 59

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

Question 60

The separate-entity concept means that a company and its owners should keep separate records.

Question 61

Explain the objectives of financial reporting.

Question 62

Discuss the qualities of accounting information.

Question 63

On July 1,Team Shirts paid $600 for three months' worth of advertising beginning on July 1.What is the balance in the Prepaid advertising account at August 31?

A)$0
B)$200
C)$400
D)$600

Question 64

Team Shirts has $200 in its Prepaid insurance account on June 30.This amount is for insurance for July and August.It represents a ________.

A)current asset
B)long-term asset
C)current liability
D)long-term liability

Question 65

Adjusting the books is done ________.

A)every time a sale is made
B)every time an asset is purchased
C)as expenses are used up
D)at the end of every accounting period

Question 66

Liabilities are ________.

A)amounts that the business owes
B)amounts that the business owns
C)Shareholder claims on the assets of the business
D)matched with revenues to calculate income

Question 67

Team Shirts purchased six months' worth of insurance for $900.The insurance would initially be recorded as ________.

A)an account receivable
B)an account payable
C)prepaid insurance
D)insurance expense

Question 68

Financial statements may be prepared ________.

A)weekly
B)monthly
C)quarterly
D)All of these are correct.

Question 69

On January 1,Team Shirts paid $600 for three months' worth of advertising beginning on February 1.What should the balance be in the Prepaid advertising account on April 1?

A)$0
B)$100
C)$200
D)$300

Question 70

During its first year of business,Mega,Inc.earned revenues of $400,000,of which it collected only $310,000 in cash.Which of the following statements is CORRECT?

A)The income statement will show Cash collected from customers of $310,000.
B)The balance sheet will show Accounts receivable of $310,000.
C)The income statement will show Revenues of $310,000.
D)The income statement will show Revenues of $400,000.

Question 71

On July 1,Team Shirts paid $600 for three months' worth of advertising beginning on July 1.What is the balance in the Prepaid advertising account at July 31?

A)$0
B)$200
C)$400
D)$600

Question 72

The four basic financial statements are the ________.

A)income statement,balance sheet,statement of changes in shareholders' equity,and cash budget
B)income statement,balance sheet,cash budget,and statement of cash flows
C)income statement,balance sheet,statement of changes in shareholders' equity,and statement of cash flows
D)balance sheet,shareholders' equity,statement of cash flows,and cash budget

Question 73

Team Shirts sold $125 worth of T-shirts to a customer on credit.This transaction includes ________.

A)an account receivable
B)an account payable
C)a prepaid sale
D)T-shirt expense

Question 74

The first financial statement to be prepared at the end of each accounting period is the ________.

A)balance sheet
B)income statement
C)statement of changes in shareholders' equity
D)statement of cash flows

Question 75

On May 31,Team Shirts pays a $600 dividend to its shareholders.The dividend ________.

A)increases assets by $600
B)reduces retained earnings by $600
C)is classified as dividend expense of $600
D)increases net income by $600

Question 76

On July 1,Team Shirts paid $600 for three months' worth of advertising beginning on July 1.What is Advertising expense for the MONTH ended August 31?

A)$0
B)$200
C)$400
D)$600

Question 77

The economic resources of a company resulting from past transactions are called ________.

A)assets
B)revenues
C)retained earnings
D)contributed capital

Question 78

Team Shirts purchased $2,000 worth of T-shirts from a company in Guatemala.Team Shirts recorded the value of the transaction in U.S.dollars.Which accounting rule applies to this situation?

A)monetary-unit assumption
B)consistency
C)relevance
D)full-disclosure principle

Question 79

In June,Team Shirts collected $2,250 from customers,paid $600 for T-shirts,and paid $500 for rent.Net cash from operations was ________.

A)$1,950
B)$1,650
C)$1,150
D)$2,250

Question 80

Cash is ________.

A)part of retained earnings
B)found on the income statement
C)equal to net income on the income statement
D)found on the balance sheet