Accounting Fundamentals

Question 1

What is the difference between cash basis accounting and accrual basis accounting?

Answer 1

Cash basis accounting is what we do in our everyday life. We get paid (revenue) and have expenses (bills). Revenue is realized when your paycheck hits your bank account. Expenses are paid as you pay them.

Accrual basis accounting is what most of the business world uses to prepare financial statements. Revenues are realized when the job is done, not when you get paid. Expenses are recorded when the expense occurs, not when the bill is paid.

Question 2

Which of the following has the legal authority to determine financial reporting in the United States?

a) Financial Accounting Standards Board.
b) American Accounting Association.
c) Securities and Exchange Commission.
d) Public Company Accounting Oversight Board.

Answer 2

c) Securities and Exchange Commission.

Question 3

The accounting equation states:
Assets = Liabilities + Stockholders’ Equity.

T/F?

Answer 3

True

Question 4

Under accrual accounting, rent expense for February 2019 would be recognized on the income statement in February 2019 even though it had been paid for in January of 2019. T/F?

Answer 4

True

In accrual accounting, expenses are recognized in the same period in which they are incurred to generate revenue.

Question 5

Which of the following is not considered to be a recordable transaction?

a) Signing a contract to have an outside cleaning service clean offices nightly.
b) Paying employees their wages.
c) Selling stock to investors.
d) Buying equipment and agreeing to pay a note payable and interest at the end of a year.

Answer 5

a) Signing a contract to have an outside cleaning service clean offices nightly.

Signing a contract is an exchange of promises. The recordable event is when assets and/or liabilities are exchanged.

Question 6

Business managers utilize managerial accounting reports to plan and manage the daily operations. T/F?

Answer 6

True

Managerial accounting reports are for internal use to assist managers with day-to-day operations. Unlike financial accounting reports, managerial reports are for internal use.

Question 7

Which of the following statements pertaining to the audit function is incorrect?

a) The primary responsibility for the information in the financial statements lies with the auditors.
b) The audit report describes the auditor’s opinion of the fairness of the financial statements.
c) An audit ensures that the financial statements conform to generally accepted accounting principles.
d) The auditor is a person who is independent of the reporting company.

Answer 7

a) The primary responsibility for the information in the financial statements lies with the auditors.

The primary responsibility for the information in the financial statements lies with management.

Question 8

In the United States, generally accepted accounting principles are published in the FASB Accounting Standards Codification. T/F?

Answer 8

True

The official literature of GAAP is found in the FASB Accounting Standards Codification®.

Question 9

The Financial Accounting Standards Board (FASB) has been given the authority by the Securities and Exchange Commission (SEC) to develop generally accepted accounting principles. T/F?

Answer 9

True

Previously the Securities and Exchange Commission worked with organizations of professional accountants to develop generally accepted accounting principles; today this is a responsibility of the Financial Accounting Standards Board.

Question 10

One of the advantages of a corporation when compared to a partnership is the limited liability of the owners. T/F?

Answer 10

True

In a partnership each partner has unlimited liability; in a corporation the stockholders have limited liability.

Question 11

A decision maker who wants to understand a company’s financial statements must carefully read the notes to the financial statements because these disclosures provide useful supplemental information. T/F?

Answer 11

True

The notes provide supplemental information necessary to fully understand the financial statements.

Question 12

The primary responsibility for the content of the financial statements lies with the external auditor. T/F?

Answer 12

False

Primary responsibility for the information in the financial statements lies with management.

Question 13

A retail store would likely have a shorter operating cycle than an automobile manufacturer. T/F?

Answer 13

True

The operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers. The length of time for completion of the operating cycle depends on the nature of the business. Companies with lower-priced products that sell quickly and in high volume generally have shorter operating cycles than companies with low volume of sales and higher-priced items.

Question 14

Why does a company hire independent auditors?

a) To guarantee the accuracy of both annual and quarterly financial statements.
b) To verify the accounting accuracy of every transaction entered into.
c) To report on the fairness of financial statement presentation.
d) The auditors are responsible for the content of the financial statements.

Answer 14

c) To report on the fairness of financial statement presentation.

The role of auditors is to review the financial statements and issue an opinion on the fairness of these statements.

Question 15

The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years. T/F?

Answer 15

True

A company’s operating cycle repeats itself continuously. The time period assumption indicates that the long life of a company can be reported in shorter time periods.

Question 16

An examination of the financial statements of a business to ensure that they conform to generally accepted accounting principles is called:

a) a certification.
b) an audit.
c) a verification.
d) a validation.

Answer 16

b) an audit.

The technical term for the examination of the financial statements to ensure that they represent what they claim to, and conform with generally accepted accounting principles, is an audit.

Question 17

Which of the following assumptions implies that a business can continue to remain in operation into the foreseeable future?

a) Historical cost principle.
b) Monetary unit assumption.
c) Continuity assumption.
d) Separate-entity assumption.

Answer 17

c) Continuity assumption.

The continuity assumption, also known as the going-concern assumption, states that a business will continue operating long enough to meet its contractual commitments and plans.

Question 18

Which of the following has primary responsibility to develop Generally Accepted Accounting Principles?

a) Financial Accounting Standards Board.
b) Company Executives.
c) Securities and Exchange Commission.
d) Public Company Accounting Oversight Board.

Answer 18

a) Financial Accounting Standards Board.

The Securities and Exchange Commission has charged the Financial Accounting Standards Board with developing Generally Accepted Accounting Principles.

Question 19

The revenue recognition principle recognizes revenue when the goods or services are transferred to customers, regardless of the timing of the cash collection from customers. T/F?

Answer 19

True

Under the accrual basis of accounting, the revenue recognition principle states that revenues are recognized when goods or services are transferred to customers.

Question 20

A journal entry is a written expression of the effects of a transaction on accounts. T/F?

Answer 20

True

Question 21

Which of the following describes the primary objective of financial accounting?

a) To provide useful financial information only to stockholders.
b) To provide information about a business’ future business strategies.
c) To provide useful financial information about a business to help external parties make informed decisions.
d) To provide useful financial information about a business to help internal parties make informed decisions.

Answer 21

c) To provide useful financial information about a business to help external parties make informed decisions.

The primary objective of external financial reporting is to provide useful financial information about a business to help external parties, primarily investors and creditors, make sound investing and financing decisions.

Question 22

The auditor can be held liable for malpractice in situations where the investors suffered losses while relying on the financial statements. T/F?

Answer 22

True

If it is determined that the independent CPA committed malpractice, the CPA may be held liable for losses suffered by investors who relied on the financial statements.

Question 23

According to the revenue recognition principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future. T/F?

Answer 23

False

Revenue is recognized when the company transfers promised goods or services to its customer in the amounts it expects to receive.

Question 24

Which of the following assumptions implies that the assets and liabilities of the business are accounted for separately from the assets and liabilities of the owners?

a) Monetary unit assumption.
b) Continuity assumption.
c) Historical cost principle.
d) Separate entity assumption.

Answer 24

d) Separate entity assumption.

The separate entity assumption states that each business’s activities must be accounted for separately from the activities of its owners, all other persons, and other entities.

Question 25

Which of the following statements is correct?

a) Revenues are reported on the income statement regardless of whether the customer has paid for the goods or services.
b) Expenses are reported on the income statement during the period they are paid for.
c) Net income includes a deduction for dividend payments made to stockholders.
d) Net income normally equals the net cash generated by operations.

Answer 25

a) Revenues are reported on the income statement regardless of whether the customer has paid for the goods or services.

Accrual accounting requires revenues to be reported in the period of delivering goods or services, whether or not the customer has paid for the goods or services.

Question 26

The operating cycle is the time that elapses between a company’s cash payment to suppliers for inventory purchases and the collection of cash from sale of inventory to customers. T/F?

Answer 26

True

Question 27

According to the expense recognition principle, wages expense is recognized on the income statement when the wages are paid rather than when the employee provides the work. T/F?

Answer 27

False

Expenses are recognized when incurred. The expense for wages is recognized when the employee provides the services.