Test Bank for Financial Accounting, 16th Edition, Carl Warren, Christine Jonick, Jennifer Schneider

True / False

1.  A merchandising business buys products from other businesses to sell to customers.

 TEST BANK FOR FINANCIAL ACCOUNTING All chapters

2.  The role of accounting is to provide many different users with financial information to make economic decisions.

3.  Accounting information users need reports about the economic activities and condition of businesses.

4.  Managerial accounting information is used by external and internal users equally.

5.  Senior executives cannot be criminally prosecuted for the wrongdoings they commit on behalf of the companies where they work.

6.  Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to the management.

7.  Proper ethical conduct implies that you only consider what's in your best interest.

8.  Some of the major fraudulent acts committed by senior executives started as what they considered to be small ethical lapses that grew out of control.

9.  A business is an organization in which basic resources or inputs, such as materials and labor, are assembled and processed to provide outputs in the form of goods or services to customers.

10. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information.

11. Financial accounting reports are relevant only to users within the business.

12. The Sarbanes-Oxley Act established standards for corporate responsibility and disclosure.

13. The main objective for all business is to maximize unrealized profits.

14. The primary role of accounting is to determine the amount of taxes a business will be required to pay to taxing entities.

15. The basic difference between manufacturing and merchandising companies is the completion level of the products they purchase for resale to customers.

16. An example of an external user of accounting information is the federal government.

17. Proprietorships are owned by one owner and provide only services to their customers.

18. About 90% of the businesses in the United States are organized as corporations.

19. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles.

20. The cost concept is the basis for entering the purchase price into the accounting records.

21. The unit of measurement concept requires that economic data be recorded in dollars.

22. If a building is appraised for $85,000, it is offered for sale at $90,000, and the buyer pays $80,000 cash for it, the buyer would record the building at $85,000.

23. The financial statements of a proprietorship should include the owner's personal assets and liabilities.

24. No significant differences exist between the accounting standards issued by the FASB and the IASB.

25. Generally accepted accounting principles regulate how and what financial information is reported by businesses.

26. The IASB maintains an electronic database, called the Accounting Standards Codification, which contains all of the accounting standards that make up GAAP.

27. The accounting equation can be expressed as Assets – Liabilities = Owner's Equity.

28. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners.

29. The owner’s rights to the assets rank ahead of the creditors' rights to the assets.

30. If the liabilities owed by a business total $300,000 and owner's equity is equal to $300,000, then the assets also total

$300,000.

31. If total assets decreased by $30,000 during a specific period and owner's equity decreased by $35,000 during the same period, the period's change in total liabilities was a $65,000 increase.

32. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the same period, the period's change in total owner's equity was a $200,000 increase.

33. If net income for a proprietorship was $50,000, the owner withdrew $20,000 in cash, and the owner invested $10,000 in cash, the capital of the owner increased by $40,000.

34. An account receivable is typically classified as a revenue.

35. An account receivable is a claim against a customer resulting from a sale on account.

36. Paying an account payable increases liabilities and decreases assets.

37. Receiving payments on an account receivable increases both equity and assets.

38. Cash withdrawals by owners decrease assets and increase equity.

39. Purchasing supplies on account increases liabilities and decreases equity.

40. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid.

41. Revenue is earned only when money is received.

42. Assets that are used up during the process of earning revenue are called expenses.

43. The excess of revenue over the expenses incurred in earning the revenue is called capital.

44. There are four primary financial statements of a proprietorship: the income statement, the statement of owner's equity, the balance sheet, and the statement of cash flows.

45. An income statement is a summary of the revenues and expenses of a business as of a specific date.

46. A statement of owner's equity reports the changes in the owner's equity for a period of time.

47. The statement of cash flows consists of three sections: Cash Flows from (Used for) Operating Activities, Cash Flows from (Used for) Income Activities, and Cash Flows from (Used for) Equity Activities.

48. The balance sheet represents the accounting equation.

49. Net income and net profit do not mean the same thing.

50. The higher the ratio of liabilities to owner’s equity, the better able a company is to withstand poor business conditions and to pay its obligations to creditors.

Multiple Choice

51. Profit is the difference between

52. Two common areas of accounting that respectively provide information to internal and external users are

53. Which of the following best describes accounting?

54. Which type of accountant typically practices as an individual or as a member of a public accounting firm?

55. Financial reports are used by

56. Which of the following is a manufacturing business?

57.   Which of the following is a service business?

58. Which of the following groups of companies includes examples of merchandising businesses?

59. Which of the following groups is considered to be internal users of accounting information?

60. The following are examples of external users of accounting information except

61. Which of the following is the best description of accounting’s role in business?

62. Managerial accountants would be responsible for providing information regarding

63. Which of the following is not a certification for accountants?

64. Which of the following is not a role of accounting in business?

65. Which of the following is a guideline for behaving ethically?

66. Which of the following would not normally operate as a service business?

67. Most businesses in the United States are

68. Which of the following is not a business entity?

69. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a

70. Which of the following is true regarding a limited liability company?

71. On May 20, White Repair Service extended an offer of $108,000 for land that had been priced for sale at $140,000. On May 30, White Repair Service accepted the seller’s counteroffer of $115,000. On June 20, the land was assessed at a value of $95,000 for property tax purposes. On July 4, White Repair Service was offered $150,000 for the land by a national retail chain. At what value should the land be recorded in White Repair Service’s records?

72. Which of the following is most likely to obtain large amounts of resources by issuing stock?

73. Which of the following is not a characteristic of a corporation?

74. The initials GAAP stand for

75. Within the United States, the dominant body in the primary development of accounting principles is the

76. The business entity concept means that

77. For accounting purposes, the business entity should be considered separate from its owners if the entity is

78. The objectivity concept requires that

79. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be recorded on the accounting records of which of the following entities?

80. Equipment with an estimated market value of $30,000 is offered for sale at $45,000. The equipment is acquired for

$15,000 in cash and a note payable of $20,000 due in 30 days. The amount used in the buyer's accounting records to record this acquisition is

81. Which of the following is the authoritative body in the United States that has the primary responsibility for developing accounting principles?

82. Which of the following concepts relates to separating the reporting of business and personal economic transactions?

83. Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $220,000. Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company?

84. Many countries outside the United States use financial accounting standards issued by the

85. The unit of measure concept

86. Which of the following is not true of accounting principles?

87. The           concept requires a company to report its economic activities on a regular basis for a specific period.

88. The annual accounting period adopted by a company is called its

89. The natural business year for most retail businesses ends on

90. Which of the following is not a characteristic of a corporation?

91. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15, Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what value should the land be recorded in Carpet Barn Company’s records?

92. Donner Company is selling a piece of land adjacent to its business. An appraisal reported the market value of the land to be $120,000. Focus Company initially offered to buy the land for $107,000. The companies settled on a purchase price of $115,000. On the same day, another piece of land on the same block sold for $122,000. Under the cost concept, what amount will be used to record this transaction in Focus Company’s accounting records?

93. Assets are

94. Debts owed by a business are referred to as

95. The accounting equation may be expressed as

96. Which of the following is not an asset?

97. The assets and liabilities of a company are $128,000 and $84,000, respectively. Owner’s equity should equal

98. If total liabilities decreased by $46,000 during a period of time and owner's equity increased by $60,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets would be a

99. Which of the following is not a business transaction?

100. A business paid $7,000 to a creditor in payment of an amount owed. The effect of the transaction on the accounting equation was to

101. Earning revenue

102. The monetary value charged to customers for the performance of services sold is called a(n)

103. Revenues are reported when

104. Expenses are recorded when

105. Goods purchased on account for future use in the business, such as supplies, are called

106. The asset created by a business when it makes a sale on account is termed

107. The debt created by a business when it makes a purchase on account is referred to as an

108. If total assets decreased by $88,000 during a period of time and owner's equity increased by $71,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities would be a(n)

109. Owner's withdrawals

110. How does paying a liability in cash affect the accounting equation?

111. How does receiving a bill to be paid next month for services received affect the accounting equation?

112. How does the purchase of equipment by signing a note affect the accounting equation?

113. Land originally purchased for $30,000 is sold for $62,000 in cash. What is the effect of the sale on the accounting equation?

114. Which of the following accounts is a liability?

115. Abbie Marson is the sole owner and operator of Great Plains Company. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and liabilities of $300,000. During Year 2, Marson invested an additional $73,000 and withdrew $33,000 from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $270,000?

116. Which of the following asset accounts is increased when a receivable is collected?

117. Transactions affecting owner's equity include

118. Michael Anderson is starting a computer programming business and has deposited an initial investment of $15,000 into the business cash account.  Identify how the accounting equation will be affected.

119. Gomez Service Company paid its first installment on a note payable of $2,000. How will this transaction affect the accounting equation?

120. Ramon Ramos has withdrawn $750 from Ramos Repair Company’s cash account to deposit in his personal account. How does this transaction affect Ramos Repair Company’s accounting equation?

121. Which of the following is not a business transaction?

122. Which of the following is a business transaction?

123. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n)

124. Which of the following financial statements reports information as of a specific date?

125. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared?

126. Liabilities are reported on the

127. Cash investments made by the owner to the business are reported on the statement of cash flows in the

128. The year-end balance of the owner's capital account appears on

129. A financial statement user would determine if a company was profitable or not during a specific period of time by reviewing the

130. If an owner wanted to know how money flowed into and out of the company, which financial statement would the owner use?

131. The Assets section of the balance sheet normally presents assets in

132. All of the following are general-purpose financial statements except a(n)

133. All of the following statements regarding the ratio of liabilities to owner’s equity are true except

134. Given the following data:

 Dec. 31,Year 2    Dec. 31,Year 1 Total liabilities                     $128,250                                      $120,000

Total owner’s equity     95,000                  80,000

Compute the ratio of liabilities to owner’s equity for each year. Round to two decimal places.

Matching

Match each of the following businesses with the type of business that best describes it. Each letter may be used more than once.

135. A hospital

136. A dressmaking company

137. A supermarket

138. A modular homebuilder

139. A health club and spa

140. A tax preparation firm

141. A law firm

142. A men’s clothing store

143. A book publisher

144. An automobile dealer

Match each of the following companies with the type of business that best describes it. Each letter may be used more than once.

145. Dillard's

146. Time Warner Cable

147. General Motors

148. Redbox

149. American Airlines

150. Sony

151. Best Buy

152. Banana Republic

153. H&R Block

Match each of the following users of accounting information to the type of user: internal or external. Each letter may be used more than once.

154. Payroll manager

155. Bank

156. President’s secretary

157. Internal Revenue Service

158. Raw material vendors

159. Social Security Administration

160. Health insurance provider

161. Managerial accountant

Match each of the following characteristics with the form of business entity that it best describes. Each letter may be used more than once.

162. Comprises 70% of business entities in the United States

163. Generates 90% of business revenues

164. Owned by two or more individuals

165. Organized as a separate legal taxable entity

166. Easy and cheap to organize

167. Often used as an alternative to a partnership

168. Used by large business

169. Has the ability to obtain large amounts of resources

170. Offers tax and legal liability advantages for owners

Match each of the following accounts with the account type that best describes it. Each letter may be used more than once.

171. Accounts payable

172. Wages expense

173. Joan Smith, Capital

174. Accounts Receivable

175. Joan Smith, Drawing

176. Land

Match each transaction with its effect on the accounting equation. Each letter may be used more than once.

177. Received cash for services provided

178. Paid the utility bill

179. Investment of land by owner

180. Paid part of an amount owed to a creditor

181. Paid cash for the purchase of a one-year insurance policy

182. Received payment from a customer on account

183. Cash withdrawal by owner

184. Provided a service to a customer on account

185. Purchased supplies on credit

186. Paid wages

187. Cash investment by owner

188. Borrowed money from a bank

189. Purchased equipment for cash

190. Received cash for providing services to customers

191. Used up supplies that were already on hand

Match each of the following items to its effect on owner’s equity. Each letter may be used more than once.

192. Fees earned

193. Wages expense

194. Withdrawals

195. Lawn care revenue

196. Additional investment in the business

197. Supplies expense

Match each of the following characteristics with the financial statement that it best describes. Each letter may be used more than once.

198. Reports as of a specific date

199. The first statement prepared

200. Has three sections: operating, investing, and financing

201. Reports only revenues and expenses

202. The second statement prepared

203. A formal presentation of the accounting equation

204. The connecting link between the income statement and balance sheet

Match each of the following items to the financial statement(s) where it can be found. Each letter may be used more than once.

205. Increase in owner's equity

206. Revenues

207. Supplies

208. Land

209. Accounts payable

210. Accounts receivable

211. Operating activities

212. Wages expense

213. Fees earned

214. Net increase in cash

Match each of the following activities to the section in which it would be reported on the statement of cash flows. Each letter may be used more than once.

215. Cash paid for building

216. Cash paid to suppliers

217. Cash paid to owner for personal use

218. Cash received from customers

219. Cash received from owner as additional investment in the business

220. Cash received from sale of a building

221. Borrowed cash from a bank

Subjective Short Answer

222. Discuss internal and external users of accounting information. What areas of accounting provide them with information? Give an example of the type of report each type of user might use.

223. Companies like Enron, WorldCom, and Tyco International, Ltd. have been caught in the midst of ethical lapses that led to fines, firings, and criminal and/or civil prosecution. List and briefly describe three factors that are responsible for what went wrong in these companies.

224. List the five steps in the process by which accounting provides information to users.

225. What is the major difference between the objective of financial accounting and the objective of managerial accounting?

226. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions.

227. Explain the meaning of the business entity concept.

228. Darnell Company purchased $88,000 of computer equipment from Joseph Company. Darnell Company paid for the equipment using cash that had been obtained from the initial investment by Donnie Darnell.

Which entity or entities (Darnell Company, Joseph Company, and Donnie Darnell) should record the transaction involving the computer equipment on their accounting records?

229. Bob Johnson is the sole owner of Johnson’s Carpet Cleaning Service. Bob purchased a personal automobile for

$10,000 cash plus he took out a loan for $20,000 in his name. Describe how this transaction is related to the business entity concept.

230. Discuss the characteristics of a limited liability company (LLC).

231. Explain the meaning of:

(a)  the objectivity concept

(b)  the unit of measure concept

232. Dave Ryan is the owner and operator of Ryan's Arcade. At the end of its accounting period, December 31, Ryan’s Arcade has assets of $450,000 and liabilities of $125,000. Using the accounting equation, determine the following amounts:

233. Krammer Company has liabilities equal to one-fourth of the total assets. Krammer’s owner’s equity is $45,000. Using the accounting equation, what is the amount of liabilities for Krammer?

234.

ANS

235. Determine the missing amount designated with an “X” for each of the following:

236. Use the accounting equation to answer each of the following independent questions.

(a) At the beginning of the year, Norton Company's assets were $75,000 and its owner’s equity was $38,000. During the year, assets increased by $18,000 and liabilities increased by $4,000. What was the owner’s equity at the

end of the year?

(b)  At the beginning of the year, Turpin Industries had liabilities of $44,000 and owner’s equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner’s equity at the end of the year?

The accountant for Scott Industries prepared the following list of accounting equation element balances from the company’s records for the year ended December 31:

237. Determine the total assets at the end of the current year for Scott Industries.

238. Determine the total liabilities at the end of the current year for Scott Industries.

239. Based on the information for Scott Industries, is it profitable? Explain your answer.

240. On July 1 of the current year, the assets and liabilities of John Wong, DVM, are as follows: Cash, $27,000; Accounts Receivable, $12,300; Supplies, $3,100; Land, $35,000; Accounts Payable, $13,900. What is the amount of owner's equity (John Wong’s capital) as of July 1 of the current year?

241. Ting Hsu is the owner of Hsu’s Financial Services. At the end of its accounting period, December 31, of Year 1, Hsu’s has assets of $575,000 and owner’s equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts:

(a)  Hsu’s liabilities as of December 31 of Year 1.

(b)Hsu’s liabilities as of December 31 of Year 2, assuming that assets increased by $56,000 and owner’s equity decreased by $32,000.

(c)  Net income or net loss during Year 2, assuming that as of December 31, Year 2, assets were $592,000,

liabilities were $450,000, and there were no additional investments or withdrawals.

242. Martin Blair is the owner and operator of Martin Consultants. At December 31 of the current year, Martin Consultants has assets of $430,000 and liabilities of $205,000. Using the accounting equation and considering each case independently, determine the following:

(a)  Martin Blair, capital, as of December 31.

(b)  Martin Blair, capital, as of December 31 of the next year, assuming that assets increased by $12,000 and liabilities increased by $15,000.

(c)  Martin Blair, capital, as of December 31 of the next year, assuming that assets decreased by $8,000 and liabilities increased by $14,000.

243. Daniels Company is owned and operated by Thomas Daniels. The following selected transactions were completed by Daniels Company during May:

Note: Each transaction has two entries.

244. Collins Landscape Company purchased various landscaping supplies on account to be used for landscape designs for its customers. How will this business transaction affect the accounting equation?

245. Shiny Kar Company had the following transactions. For each transaction, show the effect on the accounting equation by putting the amount and direction (+, –, or NC for no change) in each box of the following table.

246. Ramirez Company received its first electric bill in the amount of $60 which will be paid next month. How will this transaction affect the accounting equation?

247. Simpson Auto Body Repair purchased $20,000 of machinery. The company paid $8,000 in cash at the time of the purchase and signed a promissory note for the remainder to be paid in four monthly installments.

(a)  How will the purchase affect the accounting equation?

(b)  How will the payment of the first monthly installment affect the accounting equation (ignore interest)?

248. Indicate how the following transactions affect the accounting equation.

(a)  The purchase of supplies on account

(b)  The purchase of supplies for cash

(c)  A withdrawal by the owner to pay personal expenses

(d)  Revenues received in cash

(e)  Sale made on account

249. (a) A vacant lot acquired for $83,000 cash is sold for $127,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity?

(b) Assume that the seller owes $52,000 for the land. After receiving the $127,000 cash in (a), the

seller pays the $52,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets,

(2) liabilities, and (3) owner’s equity?

250. Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, Austin Land Company paid off the loan. Explain the effect of the sale and the payoff of the loan on the accounting equation.

251. There are four transactions that affect owner’s equity.

(a)  What are the two types of transactions that increase owner’s equity?

(b)  What are the two types of transactions that decrease owner’s equity?

252. Given the following:

Determine net income or net loss.

253. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

254. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

255. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

256. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column.

257.

A

The assets and liabilities of Thompson Computer Services at March 31, the end of the current year, and its revenue and expenses for the year follow. The capital of the owner was $180,000 at April 1, the beginning of the current year. Mr. Thompson invested an additional $25,000 in the business during the year.