Chapter 1-4

TRUE-FALSE—Conceptual (1 POINT EACH) 1. Financial accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organiza-tion’s operations. False 2. Financial statements are the principal means through which financial information is communicated to those outside an enterprise. True 3. Users of the financial information provided by a company use that information to make capital allocation decisions. True 4.

An effective process of capital allocation promotes productivity and provides an efficient market for buying and selling securities and obtaining and granting credit. True 5. Financial reports in the early 21st century did not provide any information about a company’s soft assets. False 6. The conceptual framework for accounting has been discovered through empirical research. False 7. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards. True 8.

The first level of the conceptual framework identifies the recognition and measurement concepts used in establishing accounting standards. False 9. The IASB has issued a conceptual framework that is broadly consistent with that of the United States. True 10. Although the FASB intends to develop a conceptual framework, no Statements of Financial Accounting Concepts have been issued to date. False 11. A ledger is where the company initially records transactions and selected other events. False 12. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically closed. True 13.

All liability and stockholders’ equity accounts are increased on the credit side and decreased on the debit side. False 14. The first step in the accounting cycle is the journalizing of transactions and selected other events. False 15. A general journal chronologically lists transactions and other events, expressed in terms of debits and credits to accounts. True 16. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows. True 17. A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement.

False 18. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows. True 19. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period. True 20. Companies frequently report income tax expense as the last item before net income on a single-step income statement. True MULTIPLE CHOICE—Conceptual (2 POINTS EACH) 21. General-purpose financial statements are the product of a. financial accounting. b. managerial accounting. c. both financial and managerial accounting. d. either financial nor managerial accounting. Answer: A 22. Users of financial reports include all of the following except a. creditors. b. government agencies. c. unions. d. All of these are users. Answer: D 23. 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. Answer: D 24. 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. usiness 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. Answer: A 25. 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.

Answer: B 26. Whether a business is successful and thrives is determined by a. markets. b. free enterprise. c. competition. d. all of these. Answer: D 27. An effective capital allocation process a. promotes productivity. b. encourages innovation. c. provides an efficient market for buying and selling securities. d. all of these. Answer: D 28. Financial statements in the early 2000s provide information related to a. non-financial measurements. b. forward-looking data. c. hard assets (inventory and plant assets). d. none of these. Answer: C 29. Which of the following statements is not an objective of financial reporting? a.

Provide information that is useful in investment and credit decisions. b. Provide information about enterprise resources, claims to those resources, and changes to them. c. Provide information on the liquidation value of an enterprise. d. Provide information that is useful in assessing cash flow prospects. Answer: c 30. Accrual accounting is used because a. cash flows are considered less important. b. it provides a better indication of 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 above. Answer: D 31. Generally accepted accounting principles . 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. Answer: C 32. 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 soluble. . all of these. Answer: D 33. Which of the following (a-c) are not true concerning a conceptual framework in account-ing? 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 the above (a-c) are true. Answer: D 34. 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. . 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. Answer: D 35. In the conceptual framework for financial reporting, what provides “the why”–the goals and purposes of accounting? a. Measurement and recognition concepts such as assumptions, principles, and constraints b. Qualitative characteristics of accounting information c.

Elements of financial statements d. Objectives of financial reporting Answer: A 36. The underlying theme of the conceptual framework is a. decision usefulness. b. understandability. c. reliability. d. comparability. Answer: C 37. Which of the following is not an objective of financial reporting? a. To provide information about economic resources, the claims to those resources, and the changes in them. b. To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows. c.

To provide information that is useful to those making investment and credit decisions. d. All of these are objectives of financial reporting. Answer: D 38. The objectives of financial reporting include all of the following except to provide information that a. is useful to the Internal Revenue Service in allocating the tax burden to the business community. b. is useful to those making investment and credit decisions. c. is helpful in assessing future cash flows. d. identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.

Answer: D 39. Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is a. relevance. b. reliability. c. understandability. d. materiality. Answer: C 40. The overriding criterion by which accounting information can be judged is that of a. usefulness for decision making. b. freedom from bias. c. timeliness. . comparability. Answer: A 41. 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: D 42. Maintaining a set of accounting records is a. optional. b. required by the Internal Revenue Service. c. required by the Foreign Corrupt Practices Act. d. required by the Internal Revenue Service and the Foreign Corrupt Practices Act. Answer: D 43. Debit always means a. right side of an account. b. increase. c. decrease. d. none of these. Answer: D 44. 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. More than one of the above. Answer: D 45. 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. Answer:C 46. Stockholders’ equity is not affected by all a. cash receipts. b. dividends. c. revenues. d. expenses. Answer: A 47.

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. Answer: A 48. 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: A 49. 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 . All of these are internal transactions. Answer: B 50. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the a. ledger. b. account. c. trial balance. d. none of these. Answer: D 51. 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. Answer: C 52. Information in the income statement helps users to a. valuate 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. Answer: D 53. 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. Answer: C 54. Which of the following would represent the least likely use of an income statement prepared for a business enterprise? . Use by customers to determine a company’s ability to provide needed goods and services. b. Use by labor unions to examine earnings closely as a basis for salary discussions. c. Use by government agencies to formulate tax and economic policy. d. Use by investors interested in the financial position of the entity. Answer: B 55. The income statement reveals a. resources and equities of a firm at a point in time. b. resources and equities of a firm for a period of time. c. net earnings (net income) of a firm at a point in time. d. net earnings (net income) of a firm for a period of time. Answer: D 56.

The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement. d. the various components of income from continuing operations. Answer: B 57. Which of the following is an acceptable method of presenting the income statement? a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these Answer: D 58. 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 Answer: A 59. The occurrence which most likely would have no effect on 2007 net income (assuming that all amounts involved are material) is the a. sale in 2007 of an office building contributed by a stockholder in 1983. b. collection in 2007 of a receivable from a customer whose account was written off in 2006 by a charge to the allowance account. . settlement based on litigation in 2007 of previously unrecognized damages from a serious accident which occurred in 2005. d. worthlessness determined in 2007 of stock purchased on a speculative basis in 2003. Answer: B 60. The occurrence that most likely would have no effect on 2007 net income is the a. sale in 2007 of an office building contributed by a stockholder in 1961. b. collection in 2007 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. d. stock purchased in 1993 deemed worthless in 2007. Answer: A