Exam 1 Flashcards
1
Q
General-purpose financial statements are the product of
a. financial accounting.
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
A
financial accounting.
2
Q
Which of the following is not a user of financial reports?
a. Creditors.
b. Government agencies.
c. Unions.
d. All of these are users.
A
All of these are users.
3
Q
The financial statements most frequently provided include all of the following except the
a. balance sheet.
b. income statement.
c. statement of cash flows.
d. statement of retained earnings.
A
statement of retained earnings.
4
Q
The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries.
A
individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers.
5
Q
All the following are differences between financial and managerial accounting in how accounting information is used except to
a. plan and control company’s operations.
b. decide whether to invest in the company.
c. evaluate borrowing capacity to determine the extent of a loan to grant.
d. All the answer choices are correct.
A
All the answer choices are correct.
6
Q
Which of the following represents a form of communication through financial reporting but not through financial statements?
a. Balance sheet.
b. President’s letter.
c. Income statement.
d. Notes to financial statements.
A
President’s letter.
7
Q
The process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operations is called
a. financial accounting.
b. managerial accounting.
c. tax accounting.
d. auditing.
A
How does accounting help the capital allocation process attract investment capital?
a. By providing timely, relevant information.
b. By encouraging innovation.
c. By promoting productivity.
d. By providing timely, relevant information and by encouraging innovation.
8
Q
How does accounting help the capital allocation process attract investment capital?
a. By providing timely, relevant information.
b. By encouraging innovation.
c. By promoting productivity.
d. By providing timely, relevant information and by encouraging innovation.
A
By providing timely, relevant information.
9
Q
Which of the following helps in determining whether a business thrives?
a. Markets.
b. Free enterprise.
c. Competition.
d. All of these answer choices are correct.
A
All of these answer choices are correct.
10
Q
Which of the following is related to an effective capital allocation?
a. Promoting productivity.
b. Encouraging innovation.
c. Providing an efficient market for buying and selling securities.
d. All of these answer choices are correct.
A
All of these answer choices are correct.
11
Q
Financial statements in the early 2000s provide information related to
a. nonfinancial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. None of these answer choices are correct.
A
hard assets (inventory and plant assets).
12
Q
Which of the following is not a major challenge facing the accounting profession?
a. Nonfinancial measurements.
b. Timeliness.
c. Accounting for hard assets.
d. Forward-looking information.
A
Accounting for hard assets.
13
Q
What is the objective of financial reporting?
a. Provide information that is useful to management in making decisions.
b. Provide information that clearly portrays nonfinancial transactions.
c. Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.
d. Provide information that excludes claims to the resources.
A
Provide information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.
14
Q
Primary users for general-purpose financial statements include
a. creditors.
b. employees.
c. investors.
d. both creditors and investors.
A
both creditors and investors.
15
Q
Which of the following will be of interest to investors in decision-making?
a. Assessing the company’s ability to generate net cash inflows.
b. Assessing management’s ability to protect and enhance the capital providers’ investments.
c. Both assessing the company’s ability to generate net cash inflows and assessing management’s ability to protect and enhance the capital provider’s investments.
d. Assessing the company’s ability to collect debts.
A
Both assessing the company’s ability to generate net cash inflows and assessing management’s ability to protect and enhance the capital provider’s investments.
16
Q
Accrual accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of a company’s ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. None of the answer choices are correct.
A
it provides a better indication of a company’s ability to generate cash flows than the cash basis.
17
Q
Which perspective is adopted as a part of the objective of general-purpose financial reporting?
a. A decision-usefulness perspective.
b. A proprietary perspective.
c. An entity perspective.
d. A financial reporting perspective.
A
An entity perspective.
18
Q
Which of the following is a requirement for an accounting principle to be called “generally accepted”?
a. An authoritative accounting rule-making body has established it in an official pronouncement.
b. The principle has been accepted as appropriate because of its universal application.
c. An authoritative accounting rule-making body has established it and it has been accepted because of its universal application.
d. None of the answer choices are correct.
A
An authoritative accounting rule-making body has established it and it has been accepted because of its universal application.
19
Q
A common set of accounting standards and procedures are called
a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.
A
generally accepted accounting principles.
20
Q
Which of the following is a general limitation of “general purpose financial statements”?
a. General purpose financial statements may not be the most informative for a specific enterprise.
b. General purpose financial statements are not comparable.
c. General purpose financial statements do not fairly present a company’s financial operations.
d. None of the answer choices are correct.
A
General purpose financial statements may not be the most informative for a specific enterprise.
21
Q
What is the relationship between the Securities and Exchange Commission and accounting standard setting in the United States?
a. The SEC requires all companies listed on an exchange to submit their financial statements to the SEC.
b. The SEC coordinates with the AICPA in establishing accounting standards.
c. The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.
d. The SEC reviews financial statements for compliance.
A
The SEC has a mandate to establish accounting standards for enterprises under its jurisdiction.
22
Q
What is due process in the context of standard setting at the FASB?
a. The FASB operates in full view of the public.
b. Public hearings are held on proposed accounting standards.
c. Interested parties can make their views known.
d. All of the answer choices are correct.
A
All of the answer choices are correct.
23
Q
Which of the following organizations has been responsible for setting U.S. accounting standards?
a. The Accounting Principles Board.
b. The Committee on Accounting Procedure.
c. The Financial Accounting Standards Board.
d. All of the answer choices are correct.
A
All of the answer choices are correct.
24
Q
Why did the AICPA create the Accounting Principles Board?
a. The SEC disbanded the previous standard setting organization.
b. The previous standard setting organization did not provide a structured set of accounting principles.
c. No such organization existed in the past.
d. None of the answer choices are correct.
A
The previous standard setting organization did not provide a structured set of accounting principles.
25
Which organization was responsible for issuing Accounting Research Bulletins?
a. The Accounting Principles Board.
b. The Committee on Accounting Procedure.
c. The SEC.
d. The FASB.
The Committee on Accounting Procedure.
26
A characteristic of generally accepted accounting principles include:
a. a common set of standards and principles.
b. standards and principles are based a federal statutes.
c. acceptance requires an affirmative vote of Certified Public Accountants.
d. practices that become accepted for at least a year by all industry members.
a common set of standards and principles.
27
Characteristics of generally accepted accounting principles include all of the following except
a. authoritative accounting that the rule-making body has established as a principle of reporting.
b. standards are considered useful by the profession.
c. each principle is approved by the SEC.
d. practice has become universally accepted over time.
each principle is approved by the SEC.
28
Why was it believed that accounting standards that were issued by the Financial Accounting Standards Board would carry more weight?
a. Smaller membership.
b. The FASB board members were well-paid.
c. The FASB board members were CPAs.
d. Due process.
Due process.
29
The passage of a new FASB Accounting Standards Update requires the support of
a. seven Board members.
b. three Board members.
c. four Board members.
d. five Board members.
four Board members.
30
What is the purpose of Emerging Issues Task Force?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
Provide a consensus on how to account for new and unusual financial transactions.
31
Which organization is responsible for issuing Emerging Issues Task Force Statements?
a. The FASB
b. The CAP
c. The APB
d. The SEC
The FASB
32
The role of the Securities and Exchange Commission in the formulation of accounting principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
sometimes primary and sometimes secondary.
33
The body that has the power to prescribe the accounting practices and standards to be employed by companies that fall under its jurisdiction is the
a. FASB.
b. AICPA.
c. SEC.
d. APB.
SEC.
34
Companies that are listed on a stock exchange are required to submit their financial statements to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
SEC.
35
The Financial Accounting Standards Board (FASB) was proposed by the
a. American Institute of Certified Public Accountants.
b. Accounting Principles Board.
c. Study Group on the Objectives of Financial Statements.
d. Study Group on establishment of Accounting Principles (Wheat Committee).
Study Group on establishment of Accounting Principles (Wheat Committee).
36
Which of the following is true of the Financial Accounting Standards Board
a. It has issued a series of pronouncements entitled Auditing Standards Updates.
b. It was the forerunner of the current Accounting Principles Board.
c. It is the arm of the Securities and Exchange Commission responsible for setting financial accounting standards.
d. The members of the FASB are appointed by the Financial Accounting Foundation.
The members of the FASB are appointed by the Financial Accounting Foundation.
37
The Financial Accounting Foundation
a. oversees the operations of the FASB.
b. oversees the operations of the AICPA.
c. provides information to interested parties on financial reporting issues.
d. works with the Financial Accounting Standards Advisory Council to provide informa-tion to interested parties on financial reporting issues.
oversees the operations of the FASB.
38
The major distinction between the Financial Accounting Standards Board (FASB) and its predecessor, the Accounting Principles Board (APB), is
a. the FASB issues exposure drafts of proposed standards.
b. all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.
c. all members of the FASB possess extensive experience in financial reporting.
d. a majority of the members of the FASB are CPAs drawn from public practice.
all members of the FASB are fully remunerated, serve full time, and are independent of any companies or institutions.
39
The Financial Accounting Standards Board employs a "due process" system which
a. is an efficient system for collecting dues from members.
b. enables interested parties to express their views on issues under consideration.
c. identifies the accounting issues that are the most important.
d. requires that all accountants must receive a copy of financial standards.
enables interested parties to express their views on issues under consideration.
40
Which of the following is not a publication of the FASB?
a. Statements of Financial Accounting Concepts
b. Accounting Research Bulletins
c. Interpretations
d. Technical Bulletins
Accounting Research Bulletins
41
FASB Technical Bulletins
a. are similar to FASB Interpretations in that they establish enforceable standards under the AICPA's Code of Professional Ethics.
b. are issued monthly by the FASB to deal with current topics.
c. are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle.
d. were recently discontinued by the FASB because they dealt with specialized topics having little impact on financial reporting in general.
are not expected to have a significant impact on financial reporting in general and provide guidance when it does not conflict with any broad fundamental accounting principle.
42
The purpose of the Emerging Issues Task Force is to
a. develop a conceptual framework as a frame of reference for the solution of future problems.
b. lobby the FASB on issues that affect a particular industry.
c. do research on issues that relate to long-term accounting problems.
d. issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly.
issue statements which reflect a consensus on how to account for new and unusual financial transactions that need to be resolved quickly.
43
The American Institute of Certified Public Accountants (AICPA) continues to be involved in all of the following except
a. developing and enforcing professional ethics.
b. developing auditing standards for public companies.
c. providing professional education programs.
d. All of the answer choices are correct.
developing auditing standards for public companies.
44
Which of the following pronouncements were issued by the Accounting Principles Board?
a. Accounting Research Bulletins
b. APB Opinions
c. APB Statements of Position
d. Statements of Financial Accounting Concepts
APB Opinions
45
Which of the following organizations has not been instrumental in the development of financial accounting standards in the United States?
a. AICPA
b. FASB
c. IASB
d. SEC
IASB
46
Which of the following organizations has not published accounting standards?
a. American Institute of Certified Public Accountants.
b. Securities and Exchange Commission.
c. Financial Accounting Standards Board.
d. All of these have published accounting standards.
All of these have published accounting standards.
47
The purpose of Statements of Financial Accounting Concepts is to
a. establish GAAP.
b. modify or extend an existing FASB Accounting Standards Update.
c. form a conceptual framework for solving existing and emerging problems.
d. determine the need for FASB involvement in an emerging issue.
form a conceptual framework for solving existing and emerging problems.
48
Members of the Financial Accounting Standards Board are
a. employed by the American Institute of Certified Public Accountants (AICPA).
b. part-time employees.
c. required to hold a CPA certificate.
d. independent of any other organization.
independent of any other organization.
49
```
The following are part of the "due process" system used by the FASB in the evolution of a typical FASB Accounting Standards Update:
1. Exposure Draft
2. FASB Accounting Standards Update
3. Preliminary Views
The chronological order in which these items are released is as follows:
a. 1, 2, 3.
b. 1, 3, 2.
c. 2, 3, 1.
d. 3, 1, 2.
```
3, 1, 2.
50
Which of the following is true of generally accepted accounting principles?
a. GAAP includes detailed practices and procedures as well as broad guidelines of general application.
b. GAAP is influenced by pronouncements of the SEC and IRS.
c. GAAP changes over time as the nature of the business environment changes.
d. All of these answer choices are correct.
All of these answer choices are correct.
51
The most significant current source of generally accepted accounting principles is the
a. AICPA.
b. SEC.
c. APB.
d. FASB.
FASB.
52
Which of the following is not a part of generally accepted accounting principles?
a. The FASB Interpretations
b. The CAP Accounting Research Bulletins
c. The APB Opinions
d. All of these are part of generally accepted accounting principles.
All of these are part of generally accepted accounting principles.
53
Which of the following publications does not qualify as a statement of generally accepted accounting principles?
a. Statements of financial standards issued by the FASB
b. Accounting interpretations issued by the FASB
c. APB Opinions
d. Accounting research studies issued by the AICPA
Accounting research studies issued by the AICPA
54
Rule 203 of the Code of Professional Conduct addresses:
a. ethical requirements.
b. financial statements being based on generally accepted accounting principles.
c. advertising to obtain clients.
d. auditing financial statements.
financial statements being based on generally accepted accounting principles.
55
What is the purpose of a FASB Staff Position?
a. Provide interpretation of existing standards.
b. Provide a consensus on how to account for new and unusual financial transactions.
c. Provide interpretive guidance.
d. Provide timely guidance on select issues.
Provide interpretive guidance
56
Which of the following is not considered a component of generally accepted accounting principles?
a. FASB Implementation Guides.
b. Widely recognized industry practices.
c. Articles published in CPA journals.
d. AICPA Accounting Interpretations.
Articles published in CPA journals.
57
Financial accounting standard-setting in the United States
a. can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.
b. is based solely on research and empirical findings.
c. is a legalistic process based on rules promulgated by governmental agencies.
d. is democratic in the sense that a majority of accountants must agree with a standard before it becomes enforceable.
can be described as a social process which reflects political actions of various interested user groups as well as a product of research and logic.
58
The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of companies through-out the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international companies.
promote uniform accounting standards among countries of the world.
59
Which of the following is a source of pressure that may influence the accounting standard setting process?
a. Congress.
b. Lobbyist.
c. CPA firms.
d. All of these answers are correct.
All of these answers are correct.
60
What is a possible danger if politics plays too big a role in accounting standard setting?
a. Accounting standards that are not truly generally accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The FASB delegates its authority to elected officials.
Accounting standards that are not truly generally accepted.
61
What is the "expectations gap"?
a. The difference between what the public thinks the accountant should not do and what the accountant knows they should do.
b. The difference between what the public thinks the accountant is doing and what Congress says the accountant is doing.
c. The difference between what the public thinks the accountant should do and what the accountant thinks they can do.
d. The difference between what the accountant is doing and what the Courts say the accountant should be doing.
The difference between what the public thinks the accountant should do and what the accountant thinks they can do.
62
What is not a reason that accounting standards may differ across countries?
a. Governments.
b. Language.
c. Culture.
d. Past practice.
Language.
63
What would be an advantage of having all countries adopt and follow the same accounting standards?
a. Agreement.
b. Comparability.
c. Lower preparation costs.
d. Comparability and lower preparation costs.
Comparability and lower preparation costs.
64
Which of the following is an ethical concern of accountants?
a. Earnings manipulation.
b. Conservative accounting.
c. Industry practices.
d. None of these answers are correct.
Earnings manipulation.
65
21. Generally accepted accounting principles
a. are fundamental truths or axioms that can be derived from laws of nature.
b. derive their authority from legal court proceedings.
c. derive their credibility and authority from general recognition and acceptance by the accounting profession.
d. have been specified in detail in the FASB conceptual framework.
derive their credibility and authority from general recognition and acceptance by the accounting profession.
66
A soundly developed conceptual framework of concepts and objectives should
a. increase financial statement users' understanding of and confidence in financial reporting.
b. enhance comparability among companies' financial statements.
c. allow new and emerging practical problems to be more quickly solved.
d. All of these answer choices are correct.
All of these answer choices are correct.
67
Which of the following is not true concerning a conceptual framework in accounting?
a. It should be a basis for standard-setting.
b. It should allow practical problems to be solved more quickly by reference to it.
c. It should be based on fundamental truths that are derived from the laws of nature.
d. All of these answer choices are true.
It should be based on fundamental truths that are derived from the laws of nature.
68
What is a purpose of having a conceptual framework?
a. To enable the profession to more quickly solve emerging practical problems.
b. To provide a foundation from which to build more useful standards.
c. Neither a nor b.
d. To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.
To enable the profession to more quickly solve emerging practical problems and to provide a foundation from which to build more useful standards.
69
Which of the following is not a benefit associated with the FASB Conceptual Framework Project?
a. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting.
b. Practical problems should be more quickly solvable by reference to an existing conceptual framework.
c. A coherent set of accounting standards and rules should result.
d. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.
70
In the conceptual framework for financial reporting, what provides "the why"--the purpose of accounting?
a. Recognition, measurement, and disclosure concepts such as assumptions, principles, and constraints
b. Qualitative characteristics of accounting information
c. Elements of financial statements
d. Objective of financial reporting
Objective of financial reporting
71
The underlying theme of the conceptual framework is
a. decision usefulness.
b. understandability.
c. faithful representation.
d. comparability.
decision usefulness.
72
The objective of general-purpose financial reporting is to provide financial information about a reporting entity to each of the following except
a. potential equity investors.
b. potential lenders.
c. present investors.
d. All of these answers are correct.
All of these answers are correct.
73
What is the primary objective of financial reporting as indicated in the conceptual framework?
a. Provide information that is useful to those making investing and credit decisions.
b. Provide information that is useful to management.
c. Provide information about those investing in the entity.
d. All of these answer choices are correct.
Provide information that is useful to those making investing and credit decisions.
74
If the LIFO inventory method was used last period, it should be used for the current and following periods because of
a. comparability.
b. materiality.
c. timeliness.
d. verifiability.
comparability.
75
What is the following is a characteristic describing the primary quality of relevance?
a. Predictive value.
b. Materiality.
c. Verifiability.
d. Understandability.
Predictive value.
76
Which of the following is a fundamental quality of useful accounting information?
a. Comparability.
b. Relevance.
c. Neutrality.
d. Materiality.
Relevance.
77
Which of the following is a primary quality of useful accounting information?
a. Conservatism.
b. Comparability.
c. Faithful representation.
d. Consistency.
Faithful representation.
78
What is meant by comparability when discussing financial accounting information?
a. Information has predictive or confirmatory value.
b. Information is reasonably free from error.
c. Information that is measured and reported in a similar fashion across companies.
d. Information is timely.
Information that is measured and reported in a similar fashion across companies.
79
What is meant by consistency when discussing financial accounting information?
a. Information that is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.
Information that is measured and reported in a similar fashion across points in time.
80
Which of the following is an ingredient of relevance?
a. Verifiability.
b. Neutrality.
c. Timeliness.
d. Materiality.
Materiality.
81
Which of the following is an ingredient of faithful representation?
a. Predictive value.
b. Materiality.
c. Neutrality.
d. Confirmatory value.
Neutrality.
82
Changing the method of inventory valuation should be reported in the financial statements under what qualitative characteristic of accounting information?
a. Consistency.
b. Verifiability.
c. Timeliness.
d. Comparability.
Consistency.
83
Company A issuing its annual financial reports within one month of the end of the year is an example of which enhancing quality of accounting information?
a. Comparability.
b. Timeliness.
c. Understandability.
d. Verifiability.
Timeliness.
84
What is the quality of information that is capable of making a difference in a decision?
a. Faithful representation.
b. Materiality.
c. Timeliness.
d. Relevance.
Relevance.
85
Neutrality is an ingredient of which fundamental quality of information?
a. Faithful representation.
b. Comparability.
c. Relevance.
d. Understandability.
Faithful representation.
86
If the FIFO inventory method was used last period, it should be used for the current and following periods because of
a. relevance.
b. neutrality.
c. understandability.
d. consistency.
consistency.
87
The pervasive criterion by which accounting information can be judged is that of
a. decision usefulness.
b. freedom from bias.
c. timeliness.
d. comparability.
decision usefulness.
88
The two fundamental qualities that make accounting information useful for decision making are
a. comparability and timeliness.
b. materiality and neutrality.
c. relevance and faithful representation.
d. faithful representation and comparability.
relevance and faithful representation.
89
Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
is capable of making a difference in a decision.
90
The quality of information that means the numbers and descriptions match what really existed or happened is
a. relevance.
b. faithful representation.
c. completeness.
d. neutrality.
faithful representation.
91
Which of the following does not relate to relevance?
a. Materiality
b. Predictive value
c. Confirmatory value
d. All of these answer choices relate to relevance.
All of these answer choices relate to relevance.
92
```
According to Statement of Financial Accounting Concepts No. 2, materiality is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No
```
Yes No
93
```
According to Statement of Financial Accounting Concepts No. 2, completeness is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No No
d. No Yes
```
No Yes
94
```
According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes Yes
b. No Yes
c. Yes No
d. No No
```
No Yes
95
Neutrality means that information
a. provides benefits which are at least equal to the costs of its preparation.
b. can be compared with similar information about an enterprise at other points in time.
c. would have no impact on a decision maker.
d. cannot favor one set of interested parties over another.
cannot favor one set of interested parties over another.
96
The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is
a. relevance.
b. faithful representation.
c. verifiability.
d. neutrality.
verifiability.
97
```
According to Statement of Financial Accounting Concepts No. 2, predictive value is an ingredient of the fundamental quality of
Relevance Faithful Representation
a. Yes No
b. Yes Yes
c. No No
d. No Yes
```
Yes No
98
```
Under Statement of Financial Accounting Concepts No. 2, free from error is an ingredient of the fundamental quality of
Faithful Representation Relevance
a. Yes Yes
b. No Yes
c. Yes No
d. No No
```
Yes No
99
Financial information demonstrates consistency when
a. firms in the same industry use different accounting methods to account for the same type of transaction.
b. a company changes its estimate of the salvage value of a fixed asset.
c. a company fails to adjust its financial statements for changes in the value of the measuring unit.
d. None of these answer choices are correct.
None of these answer choices are correct.
100
Financial information exhibits the characteristic of consistency when
a. expenses are reported as charges against revenue in the period in which they are paid.
b. a company applies the same accounting treatment to similar events, from period to period.
c. extraordinary gains and losses are not included on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.
a company applies the same accounting treatment to similar events, from period to period.
101
```
Information about different companies and about different periods of the same company can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?
Comparability Consistency
a. Companies Companies
b. Companies Periods
c. Periods Companies
```
Companies Periods
102
When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of
a. relevance.
b. faithful representation.
c. consistency.
d. None of these answer choices are correct.
None of these answer choices are correct.
103
The elements of financial statements include investments by owners. These are increases in an entity's net assets resulting from owners'
a. transfers of assets to the entity.
b. rendering services to the entity.
c. satisfaction of liabilities of the entity.
d. All of these answer choices are correct.
All of these answer choices are correct.
104
In classifying the elements of financial statements, the primary distinction between revenues and gains is
a. the materiality of the amounts involved.
b. the likelihood that the transactions involved will recur in the future.
c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the transactions involved.
the nature of the activities that gave rise to the transactions involved.
105
A decrease in net assets arising from peripheral or incidental transactions is called a(n)
a. capital expenditure.
b. cost.
c. loss.
d. expense.
loss.
106
One of the elements of financial statements is comprehensive income. As described in Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to
a. revenues minus expenses plus gains minus losses.
b. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners.
c. revenues minus expenses plus gains minus losses plus investments by owners minus distributions to owners plus assets minus liabilities.
d. None of these answer choices are correct.
None of these answer choices are correct.
107
Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues
b. Distributions to owners
c. Losses
d. Expenses
Distributions to owners
108
The calculation of comprehensive income includes which of the following?
Operating Income Distributions to Owners
a. Yes Yes
b. No No
c. No Yes
d. Yes No
Yes No
109
According to the FASB conceptual framework, which of the following elements describes transactions or events that affect a company during a period of time?
a. Assets.
b. Expenses.
c. Equity.
d. Liabilities.
Expenses.
110
```
According to the FASB Conceptual Framework, the elementsassets, liabilities, and equitydescribe amounts of resources and claims to resources at/during a
Moment in Time Period of Time
a. Yes No
b. Yes Yes
c. No Yes
d. No No
```
Yes No
111
Which of the following is not a basic element of financial statements?
a. Assets.
b. Balance sheet.
c. Losses.
d. Revenue.
Balance sheet.
112
Which of the following basic elements of financial statements is more associated with the balance sheet than the income statement?
a. Equity.
b. Revenue.
c. Gains.
d. Expenses.
Equity.
113
Issuance of common stock for cash affects which basic element of financial statements?
a. Revenues.
b. Losses.
c. Liabilities.
d. Equity
Equity.
114
Which basic element of financial statements arises from peripheral or incidental transactions?
a. Assets.
b. Liabilities.
c. Gains.
d. Expenses.
Gains.
115
Which of the following is not a basic assumption underlying the financial accounting structure?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Historical cost assumption.
Historical cost assumption.
116
Which basic assumption is illustrated when a firm reports financial results on an annual basis?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Monetary unit assumption.
Periodicity assumption.
117
Which basic assumption may not be followed when a firm in bankruptcy reports financial results?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Monetary unit assumption.
Going concern assumption.
118
Which accounting assumption or principle is being violated if a company provides financial reports only when it introduces a new product?
a. Economic entity.
b. Periodicity.
c. Revenue recognition.
d. Full disclosure.
Periodicity.
119
Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?
a. Monetary unit assumption.
b. Periodicity assumption.
c. Going-concern assumption.
d. Economic entity assumption.
Monetary unit assumption.
120
```
During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of
Relevance Periodicity
a. No No
b. Yes No
c. No Yes
d. Yes Yes
```
No Yes
121
Under current GAAP, inflation is ignored in accounting due to the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. periodicity assumption.
monetary unit assumption.
122
The economic entity assumption
a. is inapplicable to unincorporated businesses.
b. recognizes the legal aspects of business organizations.
c. requires periodic income measurement.
d. is applicable to all forms of business organizations.
is applicable to all forms of business organizations.
123
Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the
a. economic entity assumption.
b. relevance characteristic.
c. comparability characteristic.
d. neutrality characteristic.
economic entity assumption.
124
During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept?
a. Cost constraint
b. Periodicity assumption
c. Conservatism constraint
d. Expense recognition principle
Periodicity assumption
125
What accounting concept justifies the usage of depreciation and amortization policies?
a. Going concern assumption
b. Fair value principle
c. Full disclosure principle
d. Monetary unit assumption
Going concern assumption
126
The assumption that a company will not be sold or liquidated in the near future is known as the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. None of these answer choices are correct.
None of these answer choices are correct.
127
Which of the following is an implication of the going concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and significant.
d. All of these.
All of these.
128
Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more
a. verifiable.
b. relevant.
c. indicative of the entity's purchasing power.
d. conservative.
verifiable.
129
Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. periodicity assumption.
b. expense recognition principle.
c. materiality constraint.
d. historical cost principle.
historical cost principle.
130
Revenue is recognized in the accounting period in which the performance obligation is satisfied. This statement describes the
a. consistency characteristic.
b. expense recognition principle.
c. revenue recognition principle.
d. relevance characteristic.
revenue recognition principle.
131
Generally, revenue from sales should be recognized at a point when
a. management decides it is appropriate to do so.
b. the product is available for sale to the ultimate consumer.
c. the entire amount receivable has been collected from the customer and there remains no further warranty liability.
d. None of these answer choices are correct.
None of these answer choices are correct.
132
Revenue generally should be recognized
a. at the end of production.
b. at the time of cash collection.
c. when realized.
d. when the performance obligation is satisfied.
when the performance obligation is satisfied.
133
The measurement principle includes the
a. fair value principle only.
b. historical cost principle only.
c. revenue recognition principle and expense recognition principle.
d. historical cost principle and the fair value principle.
historical cost principle and the fair value principle.
134
Which of the following is commonly referred to as the matching principle?
a. Revenue recognition principle
b. Measurement principle
c. Expense recognition principle
d. Full disclosure principle
Expense recognition principle
135
Product costs include each of the following except
a. overhead.
b. officer’s salaries.
c. material.
d. labor.
officer’s salaries.
136
The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the
a. consistency characteristic.
b. expense recognition principle.
c. materiality quality.
d. revenue recognition principle.
expense recognition principle.
137
The accounting principle of expense recognition is best demonstrated by
a. not recognizing any expense unless some revenue is realized.
b. associating effort (expense) with accomplishment (revenue).
c. recognizing prepaid rent received as revenue.
d. establishing an Appropriation for Contingencies account.
associating effort (expense) with accomplishment (revenue).
138
Which of the following serves as the justification for the periodic recording of depreciation expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
Systematic and rational allocation of cost over the periods benefited
139
Application of the full disclosure principle
a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.
b. is violated when important financial information is buried in the notes to the financial statements.
c. is demonstrated by the use of supplementary information explaining the effects of financing arrangements.
d. requires that the financial statements be consistent and comparable.
is demonstrated by the use of supplementary information explaining the effects of financing arrangements.
140
Which of the following is an argument against using historical cost in accounting?
a. Fair values are more relevant.
b. Historical costs are based on an exchange transaction.
c. Historical costs are reliable.
d. Fair values are subjective.
Fair values are more relevant.
141
When is revenue generally recognized?
a. When cash is received.
b. When the warranty expires.
c. When production is completed.
d. When the company satisfies the performance obligation.
When the company satisfies the performance obligation.
142
Which of the following is a component of the revenue recognition principle?
a. Cash is received and the amount is material.
b. Recognition occurs when the performance obligation is satisfied.
c. Production is complete and there is an active market for the product.
d. Cash is realized or realizable and production is complete.
Recognition occurs when the performance obligation is satisfied.
143
A company has a performance obligation when it agrees to
a. perform a service for a customer and receives cash payment.
b. sell a product to a customer after receiving payment.
c. perform a service or sell a product to a customer.
d. None of the answer choices are correct.
perform a service or sell a product to a customer.
144
Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles?
a. President's letter to shareholders.
b. Balance sheet.
c. Income statement.
d. Notes to financial statements.
President's letter to shareholders.
145
What is the general approach as to when product costs are recognized as expenses?
a. In the period when the expenses are paid.
b. In the period when the expenses are incurred.
c. In the period when the vendor invoice is received.
d. In the period when the related revenue is recognized.
In the period when the related revenue is recognized.
146
Not adjusting the amounts reported in the financial statements for inflation is an example of which basic principle of accounting?
a. Economic entity.
b. Going concern.
c. Historical cost.
d. Full disclosure.
Historical cost.
147
Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting?
a. Expense recognition.
b. Full disclosure.
c. Revenue recognition.
d. Historical cost.
Expense recognition.
148
When should an expenditure be recorded as an asset rather than an expense?
a. Never.
b. Always.
c. If the amount is material.
d. When future benefit exists.
When future benefit exists.
149
Which accounting assumption or principle is being violated if a company reports its corporate headquarter building at its fair value on the balance sheet?
a. Going concern.
b. Monetary unit.
c. Historical cost.
d. Full disclosure.
Historical cost.
150
Which accounting assumption or principle is being violated if a company is a party to major litigation that it may lose and decides not to include the information in the financial statements because it may have a negative impact on the company's stock price?
a. Full disclosure.
b. Going concern.
c. Historical cost.
d. Expense recognition
Full disclosure.
151
Which assumption or principle requires that all information significant enough to affect a decision of reasonably informed users should be reported in the financial statements?
a. Matching.
b. Going concern.
c. Historical cost.
d. Full disclosure.
Full disclosure.
152
A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the difference as a gain. The write-up would represent a violation of which accounting assumption or principle?
a. Revenue recognition.
b. Going concern.
c. Historical cost.
d. Monetary unit.
Historical cost.
153
Which of the following is a constraint in presenting financial information?
a. Cost-benefit relationship.
b. Full disclosure.
c. Relevance.
d. Consistency.
Cost-benefit relationship.
154
All of the following represent costs of providing financial information except
a. preparing.
b. disseminating.
c. accessing capital.
d. auditing.
accessing capital.
155
Which of the following is a benefit of providing financial information?
a. Potential litigation.
b. Auditing.
c. Disclosure to competition.
d. Improved allocation of resources.
Improved allocation of resources
156
Where is materiality not used in providing financial information?
a. Applying the revenue recognition principle.
b. Determining what items to include in the financial statements.
c. Applying the going concern assumption.
d. Determining the level of disclosure.
Applying the going concern assumption.
157
What is prudence or conservatism?
a. Understating assets and net income.
b. When in doubt, recognizing the option that is least likely to overstate assets and income.
c. Recognizing the option that is least likely to overstate assets and income.
d. Recognizing revenue when earned and realized.
When in doubt, recognizing the option that is least likely to overstate assets and income.
158
Expensing the cost of copy paper when the paper is acquired is an example
a. materiality.
b. expense recognition.
c. conservatism.
d. industry practices.
materiality.
159
Which of the following statements concerning the cost-benefit relationship is not true?
a. Business reporting should exclude information outside of management's expertise.
b. Management should not be required to report information that would significantly harm the company's competitive position.
c. Management should not be required to provide forecasted financial information.
d. If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.
If needed by financial statement users, management should gather information not included in the financial statements that would not otherwise be gathered for internal use.
160
Which of the following relates to both relevance and faithful representation?
a. Cost constraint
b. Predictive value
c. Verifiability
d. Neutrality
Cost constraint
161
Charging off the cost of a wastebasket with an estimated useful life of 10 years as an expense of the period when purchased is an example of the application of the
a. consistency characteristic.
b. expense recognition principle.
c. materiality quality.
d. historical cost principle.
materiality quality.
162
Which of the following statements about materiality is correct?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
d. All of these answers are correct.
All of these answers are correct.
163
Which of the following is considered a pervasive constraint by Statement of Financial Accounting Concepts No. 8?
a. Conservatism
b. Timeliness
c. Verifiability
d. Cost-constraint
Cost-constraint
164
The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as
a. prudence or conservatism.
b. the materiality concept.
c. the substance over form principle.
d. the industry practices concept.
prudence or conservatism.
165
The second level of the conceptual framework includes each of the following except
a. elements.
b. principles.
c. enhancing qualities.
d. fundamental qualities.
principles.
166
Trade-offs between the characteristics that make information useful may be necessary or beneficial. Issuance of interim financial statements is an example of a trade-off between
a. relevance and faithful representation.
b. faithful representation and periodicity.
c. timeliness and materiality.
d. understandability and timeliness.
relevance and faithful representation.
167
Allowing firms to estimate rather than physically count inventory at interim (quarterly) periods is an example of a trade-off between
a. verifiability and faithful representation.
b. faithful representation and comparability.
c. timeliness and verifiability.
d. neutrality and consistency.
timeliness and verifiability.
168
In matters of doubt and great uncertainty, accounting issues should be resolved by choosing the alternative that has the least favorable effect on net income, assets, and owners' equity. This guidance comes from
a. the cost constraint.
b. the industry practices constraint.
c. prudence or conservatism.
d. the full disclosure principle.
prudence or conservatism.
169
Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. All of these answer choices are correct.
All of these answer choices are correct.
170
The process of transferring figures from the book of original entry to the ledger accounts is called
a. adjusting.
b. balancing.
c. ledgering.
d. posting.
posting.
171
Debit always means
a. the right side of an account.
b. an increase.
c. a decrease.
d. None of these answer choices are correct.
None of these answer choices are correct.
172
An accounting record into which the essential facts and figures in connection with all transactions are first recorded is called the
a. ledger.
b. account.
c. trial balance.
d. None of these answer choices are correct.
None of these answer choices are correct.
173
A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial statements.
c. is normally prepared three times in the accounting cycle.
d. All of these answer choices are correct.
All of these answer choices are correct.
174
Which of the following is a real (permanent) account?
a. Goodwill
b. Service Revenue
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable
Both Goodwill and Accounts Receivable
175
Which of the following is a nominal (temporary) account?
a. Unearned Service Revenue
b. Salaries and Wages Expense
c. Inventory
d. Retained Earnings
Salaries and Wages Expense
176
Nominal accounts are also called
a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. None of these answer choices are correct.
temporary accounts.
177
The double-entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. None of these answer choices are correct.
None of these answer choices are correct.
178
When a corporation pays a note payable and interest,
a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.
they will debit notes payable and interest expense.
179
Stockholders’ equity is not affected by all
a. cash receipts.
b. dividends.
c. revenues.
d. expenses.
cash receipts.
180
The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at the end of the accounting cycle.
before an entry is recorded in a journal.
181
The accounting equation must remain in balance
a. throughout each step in the accounting cycle.
b. only when journal entries are recorded.
c. only at the time the trial balance is prepared.
d. only when formal financial statements are prepared.
throughout each step in the accounting cycle.
182
The difference between the accounting process and the accounting cycle is
a. the accounting process results in the preparation of financial statements, whereas the accounting cycle is concerned with recording business transactions.
b. the accounting cycle represents the steps taken to accomplish the accounting process.
c. the accounting process represents the steps taken to accomplish the accounting cycle.
d. merely semantic, because both concepts refer to the same thing.
the accounting cycle represents the steps taken to accomplish the accounting process.
183
An optional step in the accounting cycle is the preparation of
a. adjusting entries.
b. closing entries.
c. a statement of cash flows.
d. a post-closing trial balance.
a post-closing trial balance.
184
Which of the following criteria must be met before an event or item should be recorded for accounting purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.
All of these must be met.
185
Which of the following is a recordable event or item?
a. Changes in managerial policy
b. The value of human resources
c. Changes in personnel
d. None of these answer choices are correct.
None of these answer choices are correct.
186
Which of the following is not an internal event?
a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.
Dividend declaration and subsequent payment
187
External events do not include
a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.
using buildings and machinery in operations.
188
A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. All of these answer choices are correct
All of these answer choices are correct.
189
A general journal
a. chronologically lists transactions and other events, expressed in terms of debits and credits.
b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.
chronologically lists transactions and other events, expressed in terms of debits and credits.
190
A journal entry to record the sale of inventory on account will include a
a. debit to Inventory.
b. debit to Accounts Receivable.
c. debit to Sales Revenue.
d. credit to Cost of Goods Sold.
debit to Accounts Receivable.
191
A journal entry to record a payment on account will include a
a. debit to Accounts Receivable.
b. credit to Accounts Receivable.
c. debit to Accounts Payable.
d. credit to Accounts Payable.
debit to Accounts Payable.
192
A journal entry to record a receipt of rent in advance will include a
a. debit to Rent Revenue.
b. credit to Rent Revenue.
c. credit to Cash.
d. credit to Unearned Revenue
credit to Unearned Revenue.
193
Which of the following errors will cause an imbalance in the trial balance?
a. Omission of a transaction in the journal.
b. Posting an entire journal entry twice to the ledger.
c. Posting a credit of $720 to Accounts Payable as a credit of $720 to Accounts Receivable.
d. Listing the balance of an account with a debit balance in the credit column of the trial balance.
Listing the balance of an account with a debit balance in the credit column of the trial balance.
194
Which of the following is not a principal purpose of an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.
It proves that debits and credits were properly entered in the ledger accounts.
195
An adjusting entry should never include
a. a debit to an expense account and a credit to a liability account.
b. a debit to an expense account and a credit to a revenue account.
c. a debit to a liability account and a credit to revenue account.
d. a debit to a revenue account and a credit to a liability account.
a debit to an expense account and a credit to a revenue account.
196
Which of the following is an example of an accrued expense?
a. Office supplies purchased at the beginning of the year and debited to an expense account.
b. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.
c. Depreciation expense
d. Rent recognized during the period, to be received at the end of the year
Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.
197
Which of the following statements is true about the accrual basis of accounting?
a. The timing of cash receipts and disbursements is emphasized.
b. A minimal amount of record keeping is required in accrual basis accounting compared to cash basis.
c. This method is used less frequently by businesses than the cash method of accounting.
d. Revenues are recognized in the period the performance obligation is satisfied, regardless of the time period the cash is received.
Revenues are recognized in the period the performance obligation is satisfied, regardless of the time period the cash is received.
198
An adjusting entry to record an accrued expense involves a debit to a(an)
a. expense account and a credit to a prepaid account.
b. expense account and a credit to Cash.
c. expense account and a credit to a liability account.
d. liability account and a credit to an expense account.
expense account and a credit to a liability account
199
The failure to properly record an adjusting entry to accrue an expense will result in an
a. understatement of expenses and an understatement of liabilities.
b. understatement of expenses and an overstatement of liabilities.
c. understatement of expenses and an overstatement of assets.
d. overstatement of expenses and an understatement of assets.
v
understatement of expenses and an understatement of liabilities.
200
Which of the following properly describes a deferral?
a. Cash is received after revenue is recognized.
b. Cash is received before revenue is recognized.
c. Cash is paid after expense is incurred.
d. Cash is paid in the same time period that an expense is incurred.
Cash is received before revenue is recognized.
201
The failure to properly record an adjusting entry to accrue a revenue item will result in an
a. understatement of revenues and an understatement of liabilities.
b. overstatement of revenues and an overstatement of liabilities.
c. overstatement of revenues and an overstatement of assets.
d. understatement of revenues and an understatement of assets.
understatement of revenues and an understatement of assets.
202
The omission of the adjusting entry to record depreciation expense will result in an
a. overstatement of assets and an overstatement of owners' equity.
b. understatement of assets and an understatement of owner's equity.
c. overstatement of assets and an overstatement of liabilities.
d. overstatement of liabilities and an understatement of owners' equity.
overstatement of assets and an overstatement of owners' equity.
203
Adjustments are often prepared
a. after the balance sheet date, but dated as of the balance sheet date.
b. after the balance sheet date, and dated after the balance sheet date.
c. before the balance sheet date, and dated before the balance sheet date.
d. before the balance sheet date, and dated after the balance sheet date.
after the balance sheet date, but dated as of the balance sheet date.
204
At the time a company prepays a cost
a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues recognized.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. it credits an asset account and debits an expense account.
it debits an asset account to show the service or benefit it will receive in the future.
205
How do these prepaid expenses expire?
Rent Supplies
a. With the passage of time Through use and consumption
b. With the passage of time With the passage of time
c. Through use and consumption Through use and consumption
d. Through use and consumption With the passage of time
With the passage of time Through use and consumption
206
Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for
a. an unearned revenue.
b. a prepaid expense.
c. an accrued revenue.
d. an accrued expense.
a prepaid expense.
207
Unearned revenue on the books of one company is likely to be
a. a prepaid expense on the books of the company that made the advance payment.
b. an unearned revenue on the books of the company that made the advance payment.
c. an accrued expense on the books of the company that made the advance payment.
d. an accrued revenue on the books of the company that made the advance payment.
a prepaid expense on the books of the company that made the advance payment.
208
To compute interest expense on a note for an adjusting entry, the formula is (principal × annual rate × a fraction). The numerator and denominator of the fraction are:
Numerator Denominator
a. Length of time note has been outstanding 12 months
b. Total length of note 12 months
c. Length of time until note matures Total length of note
d. Length of time note has been outstanding Total length of note
Length of time note has been outstanding 12 months
209
Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2
1 and 2
210
Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?
a. To reduce the federal income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as recognized
d. To adhere to the accounting constraint of conservatism
To match the costs of production with revenues as recognized
211
When an expense is paid in cash before it is used, it is called a(n)
a. prepaid expense.
b. accrued expense.
c. estimated expense.
d. cash expense.
prepaid expense.
212
When revenue or expense has been recognized or incurred but not yet collected or paid, it is normally called a(n) ____________ revenue or expense.
a. deferred
b. adjusted
c. estimated
d. None of these answer choices are correct.
None of these answer choices are correct.
213
When a revenue is collected and recorded in advance, it is normally accounted for as a(n) ___________ revenue.
a. accrued
b. prepaid
c. unearned
d. cash
unearned
214
An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.
not paid and currently matched with earnings.
215
During an accounting period, if an expense has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.
a liability account and an expense account.
216
Which of the following must be considered in estimating depreciation on an asset for an accounting period?
a. The original cost of the asset
b. Its useful life
c. The decline of its fair value
d. Both the original cost of the asset and its useful life.
Both the original cost of the asset and its useful life.
217
Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
A debit to an asset and a credit to a liability
218
Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance
b. Depreciation of fixed assets
c. Use of supplies
d. All of these answer choices are correct.
All of these answer choices are correct.
219
A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
paid and not currently matched with revenues.
220
An accrued revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
not collected and currently matched with expenses.
221
An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
collected and not currently matched with expenses.
222
An adjusted trial balance
a. is prepared after the financial statements are completed.
b. proves the equality of the debit balances and credit balances of ledger accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.
proves the equality of the debit balances and credit balances of ledger accounts after all adjustments have been made.
223
Which type of account is always debited during the closing process?
a. Dividends
b. Expense
c. Revenue
d. Retained earnings
Revenue
224
Which of the following statements best describes the purpose of closing entries?
a. To faciliate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the following period.
c. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.
d. To complete the record of various transactions that were started in a prior period.
To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.
225
If ending accounts receivable exceeds the beginning accounts receivable
a. cash collections during the period exceed the amount of revenue recognized.
b. net income for the period is less than the amount of cash-basis income.
c. no cash was collected during the period.
d. cash collections during the year are less than the amount of revenue recognized.
cash collections during the year are less than the amount of revenue recognized.
226
Under the cash-basis of accounting, revenues are recorded
a. when they are recognized and realized.
b. when they are recognized and realizable.
c. when they are recognized.
d. when they are realized.
when they are realized.
227
When converting from cash-basis to accrual-basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual-basis service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service revenue.
c. Add ending accounts receivable.
d. Add cash sales.
Add ending accounts receivable.
228
When converting from cash-basis to accrual-basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual-basis operating expenses?
a. Add beginning accrued liabilities.
b. Subtract beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.
Subtract ending prepaid expense.
229
Reversing entries are
1. normally prepared for prepaid, accrued, and estimated items.
2. necessary to achieve a proper matching of revenue and expense.
3. useful in simplifying the recording of transactions in the next accounting period.
a. 1
b. 2
c. 3
d. 1 and 2
3
230
Adjusting entries that should be reversed include those for prepaid or unearned items that
a. create an asset or a liability account.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account.
d. create an asset or a liability account and were originally entered in a revenue or expense account.
create an asset or a liability account and were originally entered in a revenue or expense account.
231
Adjusting entries that should be reversed include
a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a liability.
d. All of these answer choices are correct.
All of these answer choices are correct.
232
A reversing entry should never be made for an adjusting entry that
a. accrues unrecorded revenue.
b. adjusts expired costs from an asset account to an expense account.
c. accrues unrecorded expenses.
d. adjusts unexpired costs from an expense account to an asset account.
adjusts expired costs from an asset account to an expense account.
233
The worksheet for Sharko Co. consisted of five pairs of debit and credit columns. The dollar amount of one item appeared in both the credit column of the income statement section and the debit column of the balance sheet section. That item is
a. net income for the period.
b. beginning inventory.
c. cost of goods sold.
d. net loss for the period.
net loss for the period.
234
The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.
revenues, expenses, gains, and losses.
235
Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. all of these.
all of these.
236
Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.
income numbers are affected by the accounting methods employed.
237
The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company
c. Estimate future cash flows
d. Estimate future financial flexibility
Estimate future cash flows
238
Which of the following is an example of managing earnings down?
a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.
Revising the estimated life of equipment from 10 years to 8 years.
239
Which of the following is an example of managing earnings up?
a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.
Underestimating warranty claims.
240
What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.
Relax credit policies for customers.
241
Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in determining net income
Including prior period adjustments in determining net income
242
The occurrence which most likely would have no effect on 2012 net income (assuming that all amounts involved are material) is the
a. sale in 2012 of an office building contributed by a stockholder in 1983.
b. collection in 2012 of a receivable from a customer whose account was written off in 2011 by a charge to the allowance account.
c. settlement based on litigation in 2012 of previously unrecognized damages from a serious accident which occurred in 2010.
d. worthlessness determined in 2012 of stock purchased on a speculative basis in 2008.
collection in 2012 of a receivable from a customer whose account was written off in 2011 by a charge to the allowance account.
243
In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.
unusual in nature, infrequent, and material in amount.
244
Classification as an extraordinary item on the income statement would be appropriate for the
a. gain or loss on disposal of a component of the business.
b. substantial write-off of obsolete inventories.
c. loss from a strike.
d. none of these.
none of these.
245
Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?
a. Only if floods in the geographical area are unusual in nature and occur infrequently.
b. Only if the flood damage is material in amount and could have been reduced by prudent management.
c. Under any circumstances as an extraordinary item.
d. Flood damage should never be classified as an extraordinary item.
Only if floods in the geographical area are unusual in nature and occur infrequently.
246
How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a separate item.
c. Shown net of income tax after ordinary net earnings but before extraordinary items.
d. Shown net of income tax after extraordinary items but before net earnings.
Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate.
247
Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
a. The gain or loss on disposal should be reported as an extraordinary item.
b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.
Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
248
When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations and before extraordinary items.
d. a bulk sale of plant assets included in income from continuing operations.
an amount after continuing operations and before extraordinary items.
249
```
A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement
Net of Tax Disclosed Separately
a. No No
b. Yes Yes
c. No Yes
d. Yes No
```
No Yes
250
Companies use intraperiod tax allocation for all of the following items except
a. Discontinued operations.
b. Extraordinary items.
c. Changes in accounting estimates.
d. Income from continuing operations.
Changes in accounting estimates.
251
Which of the following earnings per share figures must be disclosed on the face of the income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
EPS for income from continuing operations.
252
```
A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes
```
No Yes
253
Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
Discontinued operations
254
Which one of the following types of losses is excluded from the determination of net income in income statements?
a. Material losses resulting from transactions in the company's investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write-off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.
Material losses resulting from correction of errors related to prior periods.
255
Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c. an extraordinary item for the year in which the error was made.
d. a prior period adjustment.
a prior period adjustment.
256
Which of the following is included in comprehensive income?
a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.
Unrealized gains on available-for-sale securities.
257
Which of the following is not an acceptable way of displaying the components of other comprehensive income?
a. Combined statement of retained earnings
b. Second income statement
c. Combined statement of comprehensive income
d. As part of the statement of stockholders' equity
Combined statement of retained earnings
258
Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
investments by owners.
259
Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
All of these
260
Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows
analyze cash inflows and outflows for the period
261
The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. cash, accounts receivable, inventories, prepaid items.
c. cash, inventories, accounts receivable, prepaid items.
d. cash, inventories, prepaid items, accounts receivable.
cash, accounts receivable, inventories, prepaid items.
262
The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
the operating cycle or one year, whichever is longer
263
Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the beneficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
Trade installment receivables normally collectible in 18 months.
264
Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president.
The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president.
265
Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.
long-term investments.
266
When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to noncurrent assets.
the fact should be disclosed but the amount of current assets should not be affected.
267
Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund
Franchise
268
A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2
1 and 2
269
Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable
Stock dividends distributable
270
Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.
none of these.
271
An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
goodwill.
272
Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.
all of these.
273
Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these
None of these
None of these
274
Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders' equity.
reduction of stockholders' equity.
275
Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these
All of these
276
Which of the following would be classified in a different major section of a balance sheet from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
Stock investment in affiliate
277
The stockholders' equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings
Capital stock, additional paid-in capital, retained earnings
278
Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges
Deferred charges
279
Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation
Accumulated depreciation
280
The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.
statement of cash flows.
281
The statement of cash flows provides answers to all of the following questions except
a. where did the cash come from during the period?
b. what was the cash used for during the period?
c. what is the impact of inflation on the cash balance at the end of the year?
d. what was the change in the cash balance during the period?
what is the impact of inflation on the cash balance at the end of the year?
282
If common stock was issued to acquire an $8,000 machine, how would the transaction appear on the statement of cash flows?
a. It would depend on whether you are using the direct or the indirect method.
b. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section.
c. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section.
d. It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.
It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.
283
In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.
financing activity.
284
In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.
can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
285
In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount
Sale of equipment at book value
286
Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.
cash collections from customers during the period.
287
The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
liquidity.
288
Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.
capital expenditures and dividends.
289
One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
c. The firm's ability to pay its debts as they mature.
d. The firm's ability to invest in a number of projects with different objectives and costs.
The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
290
Net cash provided by operating activities divided by average total liabilities equals the
a. current cash debt coverage ratio.
b. cash debt coverage ratio.
c. free cash flow.
d. current ratio.
cash debt coverage ratio.
291
The presentation of long-term liabilities in the balance sheet should disclose
a. maturity dates.
b. interest rates.
c. conversion rights.
d. All of the above.
All of the above.
292
Typical contractual situations that are disclosed in the notes to the balance sheet include all of the following except
a. debt covenants
b. lease obligations
c. advertising contracts
d. pension obligations
advertising contracts
293
Accounting policies disclosed in the notes to the financial statements typically include all of the following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. significant inventory purchasing policies
significant inventory purchasing policies
294
Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?
a. Losses from potential future lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit
Estimated loss from an ongoing lawsuit
295
Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.
All of these are methods of disclosing pertinent information.
