113 Test Bank for Financial Accounting 1st Edition

True-False Questions
The income statement details how cash changed over an
accounting period or cycle.

1. True
2. False

Market value and historical cost (value) are the same concept.

1. True
2. False

Generally Accepted Accounting Principles (GAAP) are the rules

and guidelines governing accounting.

1. True
2. False

The definition of the business entity concept includes the

requirement that personal assets must be separated from
business assets.

1. True
2. False

To manage a business effectively, an owner or manager would

benefit greatly from having some knowledge of accounting.

1. True
2. False
Financial statements are prepared primarily for internal
company use.

1. True
2. False

Financial statements are historical reports of what has taken

place financially in a business.

1. True
2. False

Wal-Mart and Target would be examples of corporate

merchandising businesses.

1. True
2. False

A transaction is a business event that does NOT have an impact

on the finances of a company.

1. True
2. False

The main role of accounting is to compile reports to determine

the profit made by a company over a period of time.

1. True
2. False

The Financial Accounting Standards Board (FASB) established

the standards for managerial accounting.

1. True
2. False
Assets consist of revenues, expenses, and dividends.

1. True
2. False

The balance sheet is dated as of a period of time.

1. True
2. False

A limited liability company (LLC) is a legal entity like a

corporation, but the income is taxed like a sole proprietorship or
partnership.

1. True
2. False

The knowledge gained from studying accounting will aid you in

making decisions about a business to enhance its profitability.

1. True
2. False

The fundamental accounting equation is Assets plus Liabilities

equals Stockholders’ Equity.

1. True
2. False

Being unethical is the same thing as being unlawful.

1. True
2. False

The Income Statement is the first financial statement prepared.

1. True
2. False
Liabilities are those obligations that are owed to third parties.

1. True
2. False

A business with one owner is called a sole proprietorship and it

must be a service business.

1. True
2. False

Ethics refers to the principles of right behavior in making

decisions.

1. True
2. False

Financial statements can help the managers of a business in

making decisions regarding the business.

1. True
2. False

In a corporation, taxes are paid on the dividends earned by the

shareholders.

1. True
2. False

By taking accounting classes, the student is learning the

“language of business.”

1. True
2. False

Many law and accounting firms are set up as partnerships.

1. True
 2. False

Financial information that is verifiable violates the principle of

objectivity.

1. True
2. False

Stockholders’ equity consists of Retained earnings and

Common stock.

1. True
2. False

Accounting is important because the process “keeps score” of

the financial aspects of a business.

1. True
2. False

The Statement of Retained Earnings is prepared to determine

the final amount of retained earnings to show on the balance
sheet.

1. True
2. False
Multiple Choice Questions-Page 1
Which type of business organization is owned by its
stockholders?

1. A. Corporation
2. B. Partnership
3. C. Limited liability company
4. D. Sole proprietorship

Which statement is FALSE about ethics?

1. A. Ethics are rules.

2. B. Ethics are guidelines of how we perceive right and wrong.
3. C. Ethics are a vital part of the accounting profession.
4. D. Things may be unethical but still be legal.

When a person combines separate business accounts, what

concept or principle of accounting is being violated?

1. A. Going concern
2. B. Objectivity
3. C. Entity
4. D. Cost

To take an inventory of goods to be sold would be

representative of what accounting concept or principle?

1. A. Going concern
2. B. Objectivity
3. C. Entity
4. D. Cost

Home Depot would primarily be considered a:

1. A. manufacturing business.
2. B. merchandising business.
 3. C. service business.
4. D. not-for-profit business.

Rick owns a sporting goods store. In his initial accounting

records, he included his personal computer and all of his
personal sporting gear. Rick is violating what principle of
accounting?

1. A. Going concern
2. B. Cost
3. C. Reliability
4. D. Entity

Revenues, expenses and dividends are all a part of:

1. A. assets.
2. B. retained earnings.
3. C. liabilities.
4. D. common stock.

Which of the following business forms is similar to a

corporation in regard to owner liability?

1. A. Limited liability corporation

2. B. Limited liability company
3. C. Sole proprietorship
4. D. Partnership

Which of the following is considered an asset?

1. A. Accounts payable
2. B. Sales
3. C. Accounts receivable
4. D. Common stock
Financial statements are prepared based on which of the
following?

1. A. Generally accepted accounting principles

2. B. State and local laws
3. C. Internal revenue service rules
4. D. Generally accepted auditing standards

A business pays off a note payable. What effect does this have
on the accounting equation?

1. A. Assets go up, liabilities go down, and stockholders’ equity remains the same.
2. B. Assets go down, liabilities remain the same, and stockholders’ equity goes up.
3. C. Assets go down, liabilities go down, and stockholders’ equity remains the same.
4. D. Assets go up, liabilities remain the same, and stockholders’ equity goes up.

A tax service is primarily a:

1. A. merchandising operation.
2. B. service operation.
3. C. not-for-profit operation.
4. D. manufacturing operation.

Which accounting concept or principle specifically states that

we should record transactions that can be verified?

1. A. Going-concern concept
2. B. Cost principle
3. C. Reliability principle
4. D. Entity concept

Ethical dilemmas may be created by all of the following

EXCEPT:

1. A. individual actions contradicting the goals of the business.

2. B. the culture of the organization clashing with ethical principles.
 3. C. personal beliefs being different than organizational beliefs.
4. D. all of the employees having the same belief systems.

The guidelines that describe the rules of accounting are called:

1. A. GAAS.
2. B. GAAP.
3. C. FASB.
4. D. SEC.

A company has liabilities of $23,500 and stockholders’ equity of

$56,500. How much does the company have in assets?

1. A. $56,500
2. B. $33,000
3. C. $80,000
4. D. $23,500

Which of the following is a written promise to pay?

1. A. Accounts receivable
2. B. Accounts payable
3. C. Notes payable
4. D. Dividends payable

What is the purpose of financial accounting information?

1. A. To provide biased information to the markets for trading

2. B. To help investors, creditors, and others to make decisions
3. C. To help managers plan and to control business operations
4. D. To comply with SEC and IRS rules

Miranda opens her business by investing $12,000. How does

this affect the accounting equation?

1. A. Increase in assets; increase in stockholders’ equity.

 2. B. Increase in liabilities; increase in stockholders’ equity.
3. C. Decrease in assets; increase in stockholders’ equity.
4. D. Increase in assets; decrease in stockholders’ equity.

Which of the following is a disadvantage of the corporate form

of business?

1. A. Ease of raising capital

2. B. Double taxation
3. C. Limited resources
4. D. Limited liability

The accounting principle that best defines a business is:

1. A. entity.
2. B. cost.
3. C. reliability.
4. D. going concern.

Which of the following types of organizations would produce

goods?

1. A. Merchandising operation
2. B. Service operation
3. C. Not-for-profit operation
4. D. Manufacturing operation

One of the newer forms of business discussed in the text is a:

1. A. corporation.
2. B. sole proprietorship.
3. C. partnership.
4. D. limited liability company.
Rick is negotiating with friends who may buy some camping
equipment in the near future. He records this information as
possible sales. What principle is Rick violating?

1. A. Going concern
2. B. Cost
3. C. Reliability
4. D. Entity

Revenues would have which of the following effects on the

accounting equation?

1. A. Decrease stockholders’ equity

2. B. Increase common stock
3. C. Increase liabilities
4. D. Increase stockholders’ equity

A company has $123,000 in assets and $65,000 in liabilities.

How much does the company have in stockholders’ equity?

1. A. $188,000
2. B. $123,000
3. C. $ 65,000
4. D. $ 58,000

The __________ issues pronouncements that are guidelines for

accounting practice.

1. A. GAAP
2. B. SEC
3. C. FASB
4. D. IRS
Rick lists his building at current replacement value, rather than
the price he paid for the building. What principle is Rick
violating?

1. A. Going concern
2. B. Cost
3. C. Reliability
4. D. Entity

Words such as sales, expenses, financial statements, etc. are all

part of the:

1. A. rule of ethics.
2. B. rules of accounting.
3. C. language of business
4. D. language of profitability

Most assets should be listed at:

1. A. current replacement cost.

2. B. current market value.
3. C. historical cost.
4. D. inflation-adjusted cost.

Which of the following concepts would NOT be considered if

you were to compare the price of a Camaro in 1979 to the price
of a Camaro in 2009?

1. A. Reliability of the price in 1979

2. B. Objectivity of the price in 1979
3. C. Market price in 1979
4. D. Current cost in 2009

Which of the following types of organization would probably sell

goods?

1. A. Merchandising operation
 2. B. Service operation
3. C. Not-for-profit operation
4. D. Manufacturing operation

If total assets remain the same and total stockholders’ equity

increases, liabilities will:

1. A. increase by the same amount.

2. B. decrease by the same amount.
3. C. remain the same.
4. D. increase by a different amount.

By definition, which type of organization has stockholders?

1. A. Partnerships
2. B. Sole proprietorships
3. C. Corporations
4. D. Limited liability companies

Which type of company is best described as having ownership

by stock and double taxation of earnings?

1. A. Limited liability company

2. B. Proprietorship
3. C. Corporation
4. D. Partnership

Brandon borrowed money for his business from a local bank.

What accounts will be affected?

1. A. Cash and accounts payable

2. B. Cash and notes payable
3. C. Accounts payable and revenue
4. D. Accounts receivable and revenue
Which of the following is NOT a reason to study accounting?

1. A. A student will become aware of ethics in business.

2. B. A student will learn the language of business.
3. C. A student will better their math skills.
4. D. A student will learn to analyze financial information.

Liabilities represent:

1. A. items owned by the company.

2. B. future economic benefits of the company.
3. C. earnings kept in the business
4. D. monies owed to third parties.

Cash and Accounts receivable are both a part of:

1. A. assets.
2. B. retained earnings.
3. C. liabilities.
4. D. common stock.

Which of the following may create an ethical dilemma?

1. A. A company takes an order in November for delivery in December.

2. B. A person sees another employee stealing and reports it.
3. C. A company underestimates its expenses.
4. D. All employee evaluations follow identical procedures.

To ensure that the guidelines for right behavior are followed, a

corporation should follow:

1. A. ethical principles.
2. B. accounting law.
3. C. the corporate culture.
4. D. the leaders in their category of business.
Which of the following do NOT pay taxes through their
individual owners?

1. A. S-corporation
2. B. Sole proprietorship
3. C. Partnership
4. D. Corporation

Accountants who ignore the effect of inflation on prices may be

violating which accounting principle?

1. A. Going concern
2. B. Entity
3. C. Reliability
4. D. Something other than what is listed

FASB is made up of ___________ members.

1. A. 3
2. B. 5
3. C. 7
4. D. 9

GAAP is the acronym for generally accepted _______________

principles.

1. A. auditing
2. B. accounting
3. C. averaging
4. D. associated

Ethical behavior is encouraged because:

1. A. our society expects ethical behavior.

2. B. ethics and legality are the same things.
3. C. laws are the same as ethics.
 4. D. it makes the world a better place.

The main goal of understanding the process of accounting is to

help ensure that the business is:

1. A. profitable.
2. B. ethical.
3. C. competitive.
4. D. admired by the customer.

A business purchases a computer for cash. What effect does

this have on the accounting equation?

1. A. Stockholders’ equity and assets go up.

2. B. There is no change in total assets.
3. C. Assets go up and liabilities go down.
4. D. Stockholders’ equity and liabilities go up.

84 Free Test Bank for Financial Accounting 1st Edition by

Waybright Multiple Choice Questions-Page 2
Of the financial statements, which is dated as of a specific
date?

1. A. Statement of cash flows

2. B. Income statement
3. C. Balance sheet
4. D. Statement of retained earnings

A company purchases merchandise (inventory) for cash. What

is the net result on the accounting equation?

1. A. Total assets will go up and total liabilities will go down.

2. B. Total assets will go up and stockholders’ equity will go up.
3. C. Total assets will not change.
4. D. Total liabilities will go up.
The balance sheet is used to report:

1. A. results of operations for a specific date.

2. B. the financial position on a specific date.
3. C. results of operations for a specific period.
4. D. the financial position for a specific period.

Beginning retained earnings are $31,000; sales are $46,800;

expenses are $43,500 and dividends paid are $2,800. How much
is the net income or loss for the company?

1. A. $3,300
2. B. $ 500
3. C. $34,300
4. D. ($3,300)

Beginning retained earnings for the period would be shown on

the:

1. A. Statement of retained earnings.

2. B. Income statement.
3. C. Balance sheets.
4. D. Statement of cash flows.

Payables are categorized as:

1. A. liabilities.
2. B. assets.
3. C. retained earnings.
4. D. common stock.

Lauren purchased a computer on account for her business. How

will this transaction affect the accounting equation?

1. A. Assets increase; liabilities decrease.

2. B. Assets increase; stockholder equity increases.
 3. C. Assets increase; liabilities increase.
4. D. Assets decrease; liabilities increase.

Celia buys a new machine for her shop on credit. The effect on
the accounting equation is:

1. A. increase liabilities, increase assets.

2. B. decrease liabilities, increase assets.
3. C. increase assets, increase stockholders’ equity.
4. D. increase liabilities, decrease stockholders’ equity.

ABC purchased office supplies on account for $50,000. How

would this transaction affect ABC’s accounting equation?

1. A. Increase assets and stockholders’ equity by $50,000.

2. B. Increase liabilities and stockholders’ equity by $50,000.
3. C. Increase assets by $50,000 and decrease liabilities by $50,000.
4. D. Increase assets by $50,000 and increase liabilities by $50,000.

A net income or loss is originally shown on the:

1. A. statement of cash flows.

2. B. balance sheet.
3. C. statement of retained earnings.
4. D. income statement.

Dividends are shown on the:

1. A. income statement.
2. B. statement of retained earnings.
3. C. balance sheet.
4. D. statement of cash flows.

Having a net loss will:

1. A. decrease retained earnings.

 2. B. increase retained earnings.
3. C. force the company into bankruptcy.
4. D. force the company to pay dividends.

The net income figure is needed to prepare:

1. A. a balance sheet.
2. B. a statement of retained earnings.
3. C. a statement of liabilities.
4. D. some other report.

Which of the financial statements includes a listing of assets

owned by the company?

1. A. Statement of cash flows

2. B. Income statement
3. C. Balance sheet
4. D. Statement of retained earnings

The first financial statement that is prepared is the:

1. A. Statement of Cash Flows.

2. B. Income Statement.
3. C. Statement of Retained Earnings.
4. D. Balance Sheet.

Items such as revenue, expenses and dividends are classified

as:

1. A. stockholders’ equity.
2. B. retained earnings.
3. C. liabilities.
4. D. assets.
Which of the following is a TRUE statement?

1. A. Purchasing office equipment for cash is a shift of assets.

2. B. Buying something on account decreases total liabilities.
3. C. Retained earnings do not include payments of dividends.
4. D. Paying off an account increases the total of assets.

Casey invested $5,000 into his business. He would:

1. A. increase cash and increase stockholders’ equity.

2. B. decrease cash and increase stockholders’ equity.
3. C. increase liabilities and increase stockholders’ equity.
4. D. increase cash only.

Assets are defined as:

1. A. earnings retained in the business.

2. B. amounts owed to others.
3. C. stockholders’ claims to assets.
4. D. future economic benefits of a company.

Payables are classified as:

1. A. stockholders’ equity.
2. B. retained earnings.
3. C. liabilities.
4. D. assets.

ABC Company sold $34,000 worth of merchandise for cash.

Which of the following best describes the effect on the
expanded accounting equation?

1. A. Total assets and total liabilities will increase.

2. B. Total assets and total revenue will increase.
3. C. Total liabilities will increase and total revenue will decrease.
4. D. Total assets will decrease and total liabilities will increase.
The income statement is used to report:

1. A. results of operations for a specific date.

2. B. the financial position on a specific date.
3. C. results of operations for a specific period.
4. D. the financial position for a specific period.

A statement of cash flows is usually prepared:

1. A. first.
2. B. second.
3. C. third.
4. D. last.

Dividends are part of:

1. A. sales.
2. B. expenses.
3. C. retained earnings.
4. D. assets.

The correct order for the preparation of financial statements is:

1. Statement of cash flows 2. Income statement 3. Balance sheet
4. Statement of retained earnings

1. A. 4, 3, 2, 1
2. B. 1, 2, 3, 4
3. C. 2, 3, 4, 1
4. D. 2, 4, 3, 1

Casey’s is famous for their submarine sandwiches. At the end

of 2009, Casey’s total assets were $345,000, and total liabilities
were $129,500. How much was Casey’s stockholders’ equity?

1. A. $474,500
2. B. $345,000
 3. C. $215,500
4. D. Some other number

Beginning retained earnings are $65,000; sales are $29,500;

expenses are $33,000 and dividends paid are $3,500. How much
is the amount in ending retained earnings?

1. A. $58,000
2. B. $61,500
3. C. $68,500
4. D. $65,000

Which of the following is a FALSE statement?

1. A. Revenues provide inward flows of assets.

2. B. Revenue is categorized as an asset.
3. C. Revenue is categorized as part of retained earnings.
4. D. Revenues are generated from the sale of goods and services.

Beginning retained earnings are $31,000; sales are $46,800;

expenses are $43,500 and dividends paid are $2,800. How much
is the amount in ending retained earnings?

1. A. $34,400
2. B. $28,200
3. C. $34,300
4. D. $31,500

Which of the following financial statements illustrates the

accounting equation?

1. A. Statement of retained earnings

2. B. Income statement
3. C. Balance sheet
4. D. Statement of cash flows
Beginning retained earnings are $65,000; sales are $29,500;
expenses were $33,000 and dividends paid are $3,500. How
much is the net income or loss for the company?

1. A. $26,000
2. B. ($3,500)
3. C. ($7,000)
4. D. $0

Monies owed to a company by customers are classified as:

1. A. payables.
2. B. dividends.
3. C. cash.
4. D. receivables.

Liabilities are defined as:

1. A. earnings retained in the business.

2. B. amounts owed to third parties.
3. C. stockholders’ claims to assets.
4. D. future economic benefits of a company.

Payment of expenses would have which of the following effects

on the accounting equation?

1. A. Increase liabilities
2. B. Decrease stockholders’ equity
3. C. Increase assets
4. D. Increase stockholders’ equity

In the expanded accounting equation, revenues minus expenses

are part of:

1. A. assets.
2. B. retained earnings.
 3. C. liabilities.
4. D. dividends.

The payment of cash dividends would have which of the

following effects on the accounting equation?

1. A. Increase liabilities
2. B. Decrease stockholders’ equity
3. C. Increase assets
4. D. Increase stockholders’ equity