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Chapter 11 Understanding Accounting Issues MULTIPLE CHOICE QUESTIONS. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is correct with regard to the opening case entitled “What's the Latest on Pension Accounting"? A) Historically, pension plans have been of the defied contribution type B) During the recession of 2008, private pension plans declined in value, but the Canada Pension Plan did not C) The crisis in defined benefit pension plans has motivated employers to move toward defined contribution pension plans D) Canadian pension plans cannot use “smoothing” E) All of these are correct Answer: C 2) What is bookkeeping? A) The same as accounting B) The recording of accounting transactions C) The financial statements of a company D) A system for measuring business performance E) Internal procedures that alert managers to problems Answer: B 3) ________ is a system for measuring business performance and translating those measures into information for management decisions. A) Accounting B) Auditing C) Budgeting D) Bookkeeping E) Controlling Answer: A 4) ________ is the recording of financial transactions. A) Controlling B) Auditing C) Accounting D) Bookkeeping E) Budgeting Answer: D 5) Which one of the following is not one of the users of accounting information? A) Business managers B) Customers C) Government regulatory agencies D) Investors and creditors E) Employees and unions Answer: B 6) Employees and unions use accounting information A) to plan for tax inflows. B) to set goals, develop plans, set budgets and evaluate future prospects. C) to estimate returns. D) to decide if the company is a good credit risk. E) to plan for benefits. Answer: E 7) Which of the following is not a potential user of accounting information? A) Unions B) Managers C) Investors D) Employees E) All are potential users of accounting information. Answer: E 8) _____ is a comprehensive system for collecting, analyzing, and communicating financial information. A) Bookkeeping B) Accounting C) Controlling D) Auditing E) Forensic accounting Answer: B 9) Janice is a bookkeeper. Her primary function would be to A) generate financial statements. B) measure business performance. C) record accounting transactions. D) complete the same tasks as accountants do. E) determine the value of the firm to investors. Answer: C 10) What is a primary purpose of accounting? A) To determine when to sell the company B) To determine the most effective plan to avoid a hostile takeover C) To determine the value of the company before it is sold D) To summarize the results of business transactions so that the resulting reports can be used in the decision-making process E) To provide information for tax authorities Answer: D 11) The recording of financial transactions is known as A) bookkeeping. B) accounting. C) controlling. D) budgeting. E) none of these. Answer: A 12) The field of accounting that is concerned with external users of a company's financial information is called A) managerial accounting. B) bookkeeping. C) public accounting. D) financial accounting. E) auditing. Answer: D 13) The field of accounting that serves internal users of a company's financial information is A) financial accounting. B) auditing. C) public accounting. D) bookkeeping. E) managerial accounting. Answer: E 14) The process of informing interested groups both inside and outside the firm about the financial condition of the firm is known as A) budgeting. B) financial accounting. C) managerial accounting. D) generally accepted accounting principles. E) auditing. Answer: B 15) Which of the following is correct with regard to the box entitled “The Green Revolution Hits Accounting”? A) At present, there are no real incentives for companies to engage in environmentally friendly practices like saving paper B) Employee resistance to change that is based on technical issues can be dealt with, but emotional resistance to change cannot be dealt with C) Being technically and digitally connected increases convenience, but not productivity D) It is anticipated that accounting firms will increasingly train their clients to perform more of the initial data entry work that allows for the electronic exchange of information E) None of these are correct Answer: D 16) Laura is preparing annual income statements and balance sheets for her company as a whole. The field of accounting in which she is engaged is A) auditing. B) bookkeeping. C) financial accounting. D) public accounting. E) managerial accounting. Answer: C 17) David is preparing a statement of estimated profits and losses for a new product that has just been introduced by his company. The field of accounting that David is working in is A) managerial accounting. B) auditing. C) public accounting. D) financial accounting. E) bookkeeping. Answer: A 18) ________ calls attention to problems and helps managers carry out the planning, decision making, and controlling functions. A) Budgeting B) Financial accounting C) Auditing D) Managerial accounting E) Generally accepted accounting principles Answer: D 19) Who manages the entire firm's accounting activities? A) Venture capitalist B) Private accountant C) Controller D) Public (not certified) accountant E) Auditor Answer: C 20) The ________ is a company's chief accounting officer. A) controller B) budget manager C) financier D) auditor E) bookkeeper Answer: A 21) ________ is concerned with external users of information: consumer groups, unions, stockholders, and government agencies. A) Stock market accounting B) Government accounting C) Managerial accounting D) Financial accounting E) Minor accounting Answer: D 22) Financial accounting is A) the field of accounting concerned with external users of a company's financial information. B) the rules and procedures governing the content and form of financial reports. C) a systematic examination of a company's accounting system to determine whether its financial reports fairly represent its operations. D) a bookkeeping system that balances the accounting equation by recording the dual effects of every financial transaction. E) a field of accounting that serves internal users of a company's financial information. Answer: A 23) ________ is concerned with reporting the operations of the company as a whole to shareholders and the public. A) Stock market accounting B) Financial accounting C) Managerial accounting D) Minor accounting E) Government accounting Answer: B 24) ________ is the field of accounting that serves internal users of a company's financial information. A) Managerial accounting B) Government accounting C) Financial accounting D) Minor accounting E) Stock market accounting Answer: A 25) Managerial accounting is A) a field of accounting that serves internal users of a company's financial information. B) the rules and procedures governing the content and form of financial reports. C) the field of accounting concerned with external users of a company's financial information. D) a systematic examination of a company's accounting system to determine whether its financial reports fairly represent its operations. E) a bookkeeping system that balances the accounting equation by recording the dual effects of every financial transaction. Answer: A 26) ________ provides cost information for engineers making product or process improvements. A) Government accounting B) Minor accounting C) Stock market accounting D) Managerial accounting E) Financial accounting Answer: D 27) The two major fields of accounting are A) auditing and managerial accounting. B) public and practice accounting. C) bookkeeping and accounting. D) managerial and cost accounting. E) financial accounting and managerial accounting. Answer: E 28) Which of the following is not a professional accounting organization in Canada? A) C.G.A. B) Certified Industrial Accountant C) C.A. D) C.M.A. E) Certified General Accountant Answer: B 29) LJD is a CA firm. What three services will it likely provide? A) Ratio analysis, journal preparation, and ledger preparation B) Tax services, budget preparation, and ratio analysis C) Audit services, ratio analysis and tax collection D) Tax services, audit services, and management services E) Owners' equity analysis, journal and ledger preparation, and tax collection Answer: D 30) An examination of a company's accounting system to determine whether its financial reports fairly present its operations is best described as A) public accounting. B) bookkeeping. C) managerial accounting. D) financial accounting. E) auditing. Answer: E 31) Rose is reviewing a company's accounting system, checking the ledgers and journals, and tracking some transactions to see how they were handled. Rose is engaged in A) financial accounting. B) managerial accounting. C) auditing. D) public accounting. E) bookkeeping. Answer: C 32) What is an auditor's primary responsibility? A) Preparing budgets for the forthcoming year B) Collecting taxes C) Ensuring that the firm's accounting practices adhere to generally accepted accounting principles D) Publishing the audit report results in The Financial Post E) Preparing tax returns Answer: C 33) A(n) ________ examines a company's accounting system to determine whether its financial reports fairly present its operations. A) tax deduction B) preliminary examination C) company-wide analysis D) portfolio analysis E) audit Answer: E 34) Which of the following is correct with regard to the box entitled “Opportunities in Forensic Accounting”? A) Forensic accountants investigate the financial transactions of companies in order to determine if something fishy is going on B) Forensic accountants are called in after suspicions are raised, but they do not try to prevent fraud from occurring C) At the present time, there are no official accounting designations for people who want to become forensic accountants, but they are being developed D) Forensic accountants are not legally allowed to testify as expert witnesses at financial fraud trials E) All of these are correct Answer: A 35) ________ are rules and procedures governing the content and form of financial reports. A) Accounting society rules B) Generally Accepted Accounting Principles (GAAP) C) National guidelines D) The Auditor's Bible E) The Rules of the Road Answer: B 36) Generally Accepted Accounting Principles are formulated by the A) Canadian Institute of Chartered Accountants (CICA). B) The U.S. Congress. C) Canadian Consumer Protection Service. D) Federal Trade Commission. E) Securities and Exchange Commission. Answer: A 37) The tax services of a CA firm include assistance not only with tax return preparation, but also with A) tax evasion. B) tax categories. C) tax calculation. D) tax planning. E) all of these. Answer: D 38) A(n) ________ is a salaried accountant hired by a business to carry out its day-to-day financial activities. A) public accountant B) auditor C) controller D) private accountant E) advisor Answer: D 39) Management consulting services may include all but one of the following services A) executive recruitment. B) design of accounting systems. C) brokerage services. D) production scheduling. E) marketing studies. Answer: C 40) Forensic accountants are sometimes used to A) ensure the accounting system adheres to GAAP. B) track down hidden funds in business firms. C) ensure auditors follow auditing standards. D) ensure businesses remain profitable. E) all of these. Answer: B 41) ____________ is the comprehensive information system for collecting, analyzing, and communicating financial information, while _____________ is the recording of financial transactions. A) Financial accounting; managerial accounting B) Managerial accounting; financial accounting C) Bookkeeping; accounting D) Accounting; bookkeeping E) Controlling; accounting Answer: D 42) Tom is in charge of the entire accounting system. His job title is most likely A) budget analyst. B) controller. C) top accounting manager. D) chief accountant. E) chief bookkeeper. Answer: B 43) Government agencies would be most interested in the output of ___________ accountants, while company salespeople would be most interested in the output of ______________ accountants. A) public; private B) private; public C) managerial; financial D) financial; managerial E) financial; financial Answer: D 44) __________ accounting serves internal users, while __________ accounting serves external users. A) Public; private B) Private; public C) Managerial; financial D) Financial; managerial E) Financial; financial Answer: C 45) Todd is preparing a statement of estimated profits and losses for a new product which has just been introduced by his company. The field of accounting that he is working in is A) managerial accounting. B) bookkeeping. C) auditing. D) public accounting. E) financial accounting. Answer: A 46) Which of the following is true regarding CAs, CGAs, and CMAs? A) There are more CGAs than there are CGAs or CMAs B) CAs work almost exclusively in public accounting firms C) Only CAs can audit the financial statements of publicly held companies D) Most CGAs work in public accounting firms E) CMAs analyze both financial and non-financial statements Answer: E 47) Which of the following is true regarding CAs, CGAs, and CMAs? A) Formerly, CGAs were not allowed to audit the financial statements of publicly held companies, but now they have the right to audit such companies in most provinces B) There are more CMAs than there are CAs or CGAs C) CGAs place more emphasis on strategic management than either CAs or CMAs D) CGAs are not allowed to work in CA firms E) The federal government feels that accounting designations no longer have any significance Answer: A 48) Jeremy identifies problems and helps managers carry out planning, decision making, and controlling functions. Jeremy is using A) managerial accounting. B) generally accepted accounting principles. C) financial accounting. D) budgeting. E) auditing. Answer: A 49) Which of the following is correct with regard to auditing? A) An audit focuses specifically on whether the inventory the company claims it has is actually there B) Companies do not normally have to supply audited financial statements when they apply for loans or when selling stock C) Audits determine if the firm has controls in place to prevent errors or fraud from going undetected D) Auditors generally do not have to examine documents such as cancelled cheques, payroll record, and cash receipts in order to conduct their audit E) Auditors ensures that the financial state of the company will be accurately reported Answer: C 50) Arthur's primary responsibility as an auditor is A) publishing the audit report results in The Financial Post. B) preparing budgets for the forthcoming year. C) ensuring the firm's accounting practices adhere to generally accepted accounting principles. D) collecting taxes. E) determining that the company actually has the inventory that it says it has. Answer: C 51) Al Rosen is working as a private investigator of white-collar crimes. He is considered A) a GAAP accountant. B) a financial scanner. C) a whistleblower. D) an auditor. E) a forensic accountant. Answer: E 52) Which of the following is correct with regard to private accountants? A) They are hired by business firms who do not want to use the services of CAs or CGAs B) They are employed by business firms in areas such as marketing research, law, and production technology C) They are becoming less common as CAs, CGAs, and CMAs become more prominent and skilled D) They are almost exclusively found at the head office of business firms E) They are hired to deal with companies’ day-to-day accounting needs Answer: E 53) The accounting equation is A) owners' equity - assets = liabilities. B) owners' equity - liabilities = assets. C) assets + liabilities = owners' equity. D) assets + owners' equity = liabilities. E) assets = liabilities + owners' equity. Answer: E 54) A(n) ________ is any economic resource expected to benefit a firm or the individual who owns it. A) owners' equity B) asset C) debit D) liability E) credit Answer: B 55) A(n) ________ is a debt owed by a firm to an outside organization or individual. A) liability B) owners' equity C) debit D) asset E) credit Answer: A 56) ________ is the amount of money owners would theoretically receive if they sold all of a firm's assets and paid all of its liabilities. A) Asset B) Debit C) Credit D) Liability E) Owners' equity Answer: E 57) What is the accounting equation? A) Assets = liabilities plus accounts receivable B) Assets = liabilities plus owner's equity C) Gross profits minus dividends = net profit D) Net income divided by total owner's equity = return on investment E) Revenues less expenses = profit Answer: B 58) Anything of value which is owned by the firm is known as A) a liability. B) a debit. C) owner's equity. D) an asset. E) a credit. Answer: D 59) What is the accounting term used to describe anything of value that is owned by the firm? A) A liability B) A contra-asset C) An asset D) Owner's equity E) A credit Answer: C 60) What is a liability? A) A debt owed by the business firm B) A decrease in owners' equity C) Anything owned by the firm D) Amount which the owners would receive if the entire company was liquidated and all expenses were paid E) An increase in owners' equity Answer: A 61) Which of the following would be classified as an asset? A) Goodwill B) Accounts receivable C) Land D) Inventory E) All of these Answer: E 62) Which of the following is not classified as an asset? A) Inventory B) Debts C) Buildings D) Land E) Equipment Answer: B 63) An asset is A) the amount of money originally invested in a business by its owners. B) the amount of money that owners would receive if they sold all of a firm's assets and paid all of its liabilities. C) the profits earned by and reinvested in the company. D) any economic resource expected to benefit a firm or an individual who owns it. E) a debt owed by a firm to an outside organization or individual. Answer: D 64) A(n) ________ is a debt owed by a firm to an outside organization or individual. A) equity B) account C) asset D) liability E) none of the above Answer: D 65) Money owed to creditors is a(n) A) asset. B) equity. C) account. D) liability. E) none of these. Answer: D 66) A liability is A) the amount of money originally invested in a business by its owners. B) any economic resource expected to benefit a firm or an individual who owns it. C) the profits earned by and reinvested in the company. D) the amount of money that owners would receive if they sold all of a firm's assets and paid all of its debts. E) a debt owed by a firm to an outside organization or individual. Answer: E 67) ________ is the amount of money that owners would receive if they sold all of a company's assets and paid all of its liabilities. A) Inventory B) Goodwill C) Debits D) Residual assets E) None of these Answer: E 68) Owners' Equity is A) the profits earned by and reinvested in the company. B) the amount of money that owners would receive if they sold all of a firm's assets and paid all of its liabilities. C) the amount of money originally invested in a business by its owners. D) a debt owed by a firm to an outside organization or individual. E) any economic resource expected to benefit a firm or an individual who owns it. Answer: B 69) ________ consists of money originally invested by owners and profits earned and reinvested in the company. A) Owners' equity B) Remaining liabilities C) Assets D) Inventory E) Debits Answer: A 70) Under which condition is owners' equity positive? A) Assets are greater than liabilities B) Assets and liabilities are equal C) Credits exceed debits D) Liabilities are greater than assets E) Debits exceed credits Answer: A 71) Under which condition is owners' equity negative? A) Credits exceed debits B) Assets are greater than liabilities C) Assets and liabilities are equal D) Debits exceed credits E) Liabilities are greater than assets Answer: E 72) What happens to owners' equity when liabilities outweigh assets? A) It is not influenced by the increase in liabilities B) The stock value will increase C) It shrinks D) It increases E) None of these Answer: C 73) According to the accounting equation, if assets equal $4,000 and liabilities equal $1,500 then owner's equity would equal A) $5,500. B) $2,500. C) $3,500. D) $8,000. E) it is not possible to tell with the information given. Answer: B 74) Jerry's Harley-Davidson Specialty Shop owes money to Johnson's Bookkeeping Services. This money is a(n) ________ to Jerry's business. A) liability B) debit C) owners' equity D) asset E) credit Answer: A 75) Which of the following is correct with respect to the issue of owners’ equity? A) It is the amount of cash listed on the balance sheet B) It is the amount of money the owners would receive if they sold all of a company’s assets and paid all of its liabilities C) If a company’s assets exceed its liabilities, owners’ equity equals $10,000 for each dollar of assets D) If a company’s liabilities exceed its assets, owners’ equity equals minus $10,000 for each dollar of liabilities E) All of these are correct Answer: B 76) Which of the following is correct with respect to the issue of owners’ equity? A) Owners’ equity is meaningful for investors, but not for lenders B) If a company’s assets exceed its liabilities, owners’ equity will be negative C) Owners’ equity consists of two sources of capital: the amount the owners originally invested and the amount of government loans the company has received D) Even if a company operates profitably, its liabilities may increase faster than its assets E) The basic accounting equation can be rewritten as follows: owners’ equity equals assets minus liabilities Answer: E 77) Owners’ equity consists of which two sources of capital? A) Government loans and business profits B) The owners’ original investment and stock market profits C) Assets and liabilities D) Profits reinvested in the business and the owners’ original investment E) Cash from the sale of marketable securities and government loans Answer: D 78) ________ is a source of owner's equity. A) Any money borrowed from a bank B) Assets such as cash C) Profits the owner takes out of the firm D) Reinvested profits E) None of these Answer: D 79) Two major categories of financial statements are A) debits and credits. B) income statements and T-accounts. C) balance sheets and income statements. D) owners’ equity and statements of cash flows. E) T-accounts and debits. Answer: C 80) To record the dual effects of financial transactions, accountants use A) automated calculators. B) liabilities and equities. C) debits and debts. D) double-entry accounting. E) all of these. Answer: D 81) Which of the following ensures that the accounting equation is always kept in balance? A) Credits B) Debits C) Double-entry accounting D) Balance sheet E) T-accounts Answer: C 82) What does an accountant use when he/she enters every transaction in the journal to reflect its impact on assets and its impact on liabilities and owners' equity? A) A financial ratio B) A double entry accounting system C) A balance sheet D) An income statement E) A statement of cash flows Answer: B 83) Peter, an accountant, enters every transaction in the journal to reflect its impact on assets and its impact on liabilities and owners' equity. He is using A) a double entry accounting system. B) a balance sheet. C) a financial ratio. D) breakeven analysis. E) a financial statement. Answer: A 84) The balance sheet, income statement, and statement of cash flows are ________ statements. A) accounting B) profit C) overview D) financial E) summary Answer: D 85) The financial statement detailing a firm's assets, liabilities, and owners' equity is the A) income statement. B) statement of cash flows. C) balance sheet. D) manufacturing statement. E) statement of retained earnings. Answer: C 86) What are the three types of assets that will be found on a balance sheet? A) Local, national, and international B) Positive, negative, and neutral C) Land, buildings, and equipment D) Current, fixed, and intangible E) Short-term, long-term, and medium-term Answer: D 87) Cash and other assets that can be converted into cash within the following year are referred to as A) long-term assets. B) depleted assets. C) equity assets. D) current assets. E) liquid assets. Answer: D 88) A current asset is A) an expense, such as rent, that is paid before the upcoming period in which it is due. B) a nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit. C) an amount due from a customer who has purchased goods on credit. D) an asset with long-term use or value, such as land, buildings, and equipment. E) an asset that can or will be converted to cash within the following year. Answer: E 89) Current assets are listed in order of ________ on the balance sheet. A) dollar value B) age C) the alphabet D) liquidity E) cost Answer: D 90) ________ are purchased as short-term investments and are only slightly less liquid than cash. A) Prepaid expenses B) Patents C) Accounts receivable D) Marketable securities E) Futures Answer: D 91) Stephen is looking at a financial statement that shows detailed information about the accounting equation factors. He is looking at the company's A) T-accounts. B) income statement. C) balance sheet. D) double entry accounting system. E) profit and loss statement. Answer: C 92) The financial statement that changes with every accounting transaction is the A) solvency ratio. B) the profitability ratio. C) the balance sheet. D) the activity ratio. E) the income statement. Answer: C 93) What purpose does the balance sheet serve? A) It shows the stock price of the firm during the last year and how much fluctuations there have been in the stock price B) It shows short- and long-term liquidity ratios, profitability ratios, and activity ratios C) It shows a firm's financial condition on a particular date in terms of its assets, liabilities, and owners' equity D) It shows investors how much profit the firm made during the last year E) It shows a firm's sources and uses of cash Answer: C 94) Which of the following is a category of financial statements? A) Balance sheets B) Asset category C) Liability category D) Double entry category E) Ratio analysis Answer: A 95) What is another name for balance sheets? A) Statements of cash flow B) Profit and loss statements C) Inventory on hand records D) Statements of financial position E) Income statement Answer: D 96) Which term is used to identify how quickly assets can be converted into cash? A) Acid test ratio B) Activity C) Accounts receivable D) Current ratio E) Liquidity Answer: E 97) Which term is used to identify the assets that can be or will be converted into cash in the following year? A) Quick ratio B) Current assets C) Current liabilities D) Intangible assets E) Depreciation Answer: B 98) ________ are amounts due from customers who have purchased goods on credit. A) Accounts owed B) Accounts receivable C) Accounts forwarded D) Accounts payable E) Account balances Answer: B 99) ________ is an asset that represents the cost of merchandise which was made or bought for sale to customers and that is still on hand. A) Accounts payable B) Prepaid expenses C) Cost of goods sold D) Merchandise inventory E) Accounts receivable Answer: D 100) Which of the following is the normal listing order for assets on the balance sheet? A) Cash, merchandise inventory, accounts receivable, prepaid expenses, marketable securities B) Cash, prepaid expenses, merchandise inventory, accounts receivable, marketable securities C) Cash, marketable securities, accounts receivable, merchandise inventory, prepaid expenses D) Cash, merchandise inventory, marketable securities, accounts receivable, prepaid expenses E) Cash, accounts receivable, merchandise inventory, marketable securities, prepaid expenses Answer: C 101) ________ are debts that must be paid within one year. A) Long term liabilities B) Liabilities C) Intermediate liabilities D) Current liabilities E) Short term liabilities Answer: D 102) Which of the following is an intangible asset? A) An inventory level of 1 000 copies of a book B) The copyright for a textbook C) A printing press used in the publication of a book D) A $1 000 Canada Savings Bond E) The building in which a book was printed Answer: B 103) What is the accounting term that describes an amount paid for an existing business above the value of its other assets? A) A patent B) A copyright C) Goodwill D) A franchise fee E) Reputation Answer: C 104) Which of the following intangible assets can be recorded only when the business firm is being purchased? A) A patent B) A copyright C) Trademark D) Goodwill E) A franchise fee Answer: D 105) ________ are non-physical assets, such as a patent or trademark, that have economic value in the form of expected benefits. A) Intangible assets B) Fixed assets C) Prepaid assets D) Current assets E) Long-term assets Answer: A 106) Which one of the following items doesn't belong? A) Patents B) Copyrights C) Trademarks D) Goodwill E) Depreciation Answer: E 107) ________ is the amount paid for an existing business over and above the value of its other assets. A) Excess equity B) Retained earnings C) Premium D) Goodwill E) Appreciation Answer: D 108) Additional money, above proceeds from stock, paid directly to a firm by its owners is A) owners' stock. B) retained earnings. C) goodwill. D) paid-in capital. E) incremental investment. Answer: D 109) An account receivable represents A) an asset with long-term use or value, such as land, buildings, and equipment. B) an amount due from a customer who has purchased goods on credit. C) an expense, such as rent, that is paid before the upcoming period in which it is due. D) a nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit. E) an asset that can or will be converted to cash within the following year. Answer: B 110) An expense, such as rent, that is paid before the upcoming period in which it is due is referred to as ________ on the balance sheet. A) merchandise inventory B) marketable securities C) futures D) prepaid expenses E) accounts receivable Answer: D 111) A prepaid expense is A) an expense, such as rent, that is paid before the upcoming period in which it is due. B) a nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit. C) an amount due from a customer who has purchased goods on credit. D) an asset that can or will be converted to cash within the following year. E) an asset with long-term use or value, such as land, buildings, and equipment. Answer: A 112) Land, building, and equipment are A) current assets. B) depleted assets. C) quick assets. D) liquid assets. E) fixed assets. Answer: E 113) A fixed asset is A) an amount due from a customer who has purchased goods on credit. B) an asset with long-term use or value, such as land, buildings, and equipment. C) an expense, such as rent, that is paid before the upcoming period in which it is due. D) an asset that can or will be converted to cash within the following year. E) a nonphysical asset, such as a patent or trademark, that has economic value in the form of expected benefit. Answer: B 114) As buildings and equipment wear out or become obsolete, their value decreases. To reflect decreasing value, accountants use A) prepaid expenses. B) licensing. C) subtracting methods. D) depreciation. E) all of these. Answer: D 115) The process of distributing the cost of an asset over its life is known as A) licensing. B) subtracting methods. C) cost averaging. D) prepaid expenses. E) depreciation. Answer: E 116) Owners Equity may include A) a loan given by owners to the company. B) additional money, above proceeds from a stock sale, paid directly to a firm by its owners. C) investments in marketable securities. D) a debt that must be paid within the year. E) a debt that is not due for at least one year. Answer: B 117) Goodwill is A) additional money, above proceeds from a stock sale, paid directly to a firm by its owners. B) the process of distributing the cost of an asset over its useful life. C) a debt that is not due for at least one year. D) a debt that must be paid within the year. E) the amount paid for an existing business above the value of its other assets. Answer: E 118) A current liability is A) additional money, above proceeds from a stock sale, paid directly to a firm by its owners. B) the process of distributing the cost of an asset over its useful life. C) the amount paid for an existing business above the value of its other assets. D) a debt that is not due for at least one year. E) a debt that must be paid within the year. Answer: E 119) A long-term liability is A) additional money, above proceeds from a stock sale, paid directly to a firm by its owners. B) a debt that must be paid within the year. C) the amount paid for an existing business above the value of its other assets. D) the process of distributing the cost of an asset over its useful life. E) a debt that is not due for at least one year. Answer: E 120) Paid-in capital is A) a debt that must be paid within the year. B) the process of distributing the cost of an asset over its useful life. C) the amount paid for an existing business above the value of its other assets. D) a debt that is not due for at least one year. E) additional money, above proceeds from a stock sale, paid directly to a firm by its owners. Answer: E 121) Net profits less dividend payments to shareholders are called A) the bottom line. B) gross profit from operations. C) retained earnings. D) operating income. E) incremental owners' equity. Answer: C 122) If a firm has $1 000 000 in retained earnings, what does this mean? A) That the firm paid out $1 000 000 this year in dividends B) That the company is owed $1 000 000 by its creditors but has not yet collected the money C) That the firm has $1 000 000 in the bank D) That the company's net profits less its dividend payments equals $1 000 000 E) That the company has saved $1 000 000 during the period since the last balance sheet was made up Answer: D 123) The amount of profit or loss will be reflected in the A) balance sheet. B) cost of goods sold. C) quick ratio. D) income statement. E) statement of cash flow. Answer: D 124) The ________ is the financial statement that lists a firm's annual revenues, expenses, and profit or loss. A) bottom line statement B) revenue-expense statement C) balance sheet D) earnings statement E) income statement Answer: E 125) The basic formula used for profit-and-loss statements is A) profit plus revenues equals expenses. B) revenue minus expenses equals profit. C) expenses plus profit equals revenue. D) expenses plus revenues equals profit. E) revenue minus profits equals expenses. Answer: B 126) Which financial statement shows the cost of obtaining materials to make products that were sold during the year? A) Income statement B) Balance sheet C) Statement of cash flows D) Operating expenses statement E) Statement of retained earnings Answer: A 127) Which of the following accurately calculates the cost of goods sold during the period? A) Beginning inventory plus purchases minus ending inventory B) Ending inventory minus beginning inventory plus purchases C) Purchases minus beginning inventory plus ending inventory D) Beginning inventory plus ending inventory minus purchases E) (Ending inventory plus beginning inventory) divided by two Answer: A 128) The total cost of obtaining materials for making products sold by a firm during the year is A) cost of goods sold. B) operating expense. C) merchandise inventory. D) net merchandise inventory. E) administrative expense. Answer: A 129) The funds that flow into a business from the sales of goods or services is A) accounts receivable. B) operating income. C) operating profit. D) gross profit. E) revenues. Answer: E 130) How is gross profit calculated? A) Revenues minus cost of goods sold minus operating expenses B) Revenues minus cost of goods sold C) Revenues minus cost of goods sold minus selling expenses D) Revenues minus all expenses except income taxes E) Revenues minus selling expenses Answer: B 131) Which of the formulas below will calculate net income? A) Gross profit minus operating expenses minus income taxes B) Gross profit minus income taxes C) Revenues minus operating expenses D) Gross profit minus administrative expenses minus income taxes E) Gross profit minus operating expenses Answer: A 132) Which of the following financial statements is designed primarily for internal use of the corporation managers (e.g., the production manager) ? A) Income statements B) Statement of retained earnings C) Budget D) Balance sheets E) Statements of cash flow Answer: C 133) What is a budget? A) The estimated number of people required to complete a manufacturing project B) An estimate of costs submitted to a buyer in order to make a sale C) An estimate of the cash balance for the year D) A detailed estimate of receipts and expenditures for a given period of time E) An estimate of research and development costs Answer: D 134) What is shown on the balance sheet? A) The cost of goods sold B) The accounting equation factors C) The quick test ratio D) Operating expenses E) Net profit Answer: B 135) If you wanted to see how much Mega Computer owed your company, where would be the best place to look? A) Income statement B) Balance sheet C) Cash flow statement D) Budget E) Net income statement Answer: B 136) Cash is ________. A) a long term asset B) the same thing as marketable securities C) a current asset D) represented as “goodwill” on the balance sheet E) the prime determinant of net income Answer: C 137) Due to a downturn in the local economy, Bob is concerned about converting his assets to cash quickly. In accounting terms, he is apprehensive about A) current assets. B) liquidity. C) turnover. D) net income. E) marketable securities. Answer: B 138) ________ is (are) amounts due from customers who have purchased goods on credit. A) Current assets B) Fixed assets C) Prepaid expenses D) Accounts receivable E) Accounts payable Answer: D 139) Land, buildings, and equipment are placed in which asset category? A) Fixed B) Permanent C) Intangible D) Intermediate E) Current Answer: A 140) Rent for the period to come is included in which account on the balance sheet? A) Inventory B) Cost of goods sold C) Merchandise inventory D) Accounts payable E) Prepaid expenses Answer: E 141) Andy's line of credit with a local bank is likely a(n) A) intangible asset. B) prepaid expense. C) current liability. D) account receivable. E) long-term liability. Answer: C 142) Current liabilities consisting of bills owed to suppliers, plus wages and taxes due within the upcoming year are known as A) accounts receivable. B) accounts payable. C) prepaid expenses. D) marketable securities. E) net liabilities. Answer: B 143) Alexandra paid $40,000 more than the value of the assets for her new quilting business. She was paying for A) a franchise fee. B) a patent. C) a copyright. D) goodwill. E) software rights. Answer: D 144) If Eric wants to know the cost of obtaining materials to make products that were sold during the year, he would look at the A) income statement. B) statement of cash flows. C) operating expenses statement. D) balance sheet. E) none of these. Answer: A 145) The financial statement that lists a firm's annual revenues, expenses, and profit or loss is the A) balance sheet. B) statement of cash flows. C) owners’ equity statement. D) income statement. E) earnings statement. Answer: D 146) What factor explains the difference between operating income and net income? A) The cost of goods sold B) Line of credit expenses C) Income taxes paid D) Goodwill E) Reinvested profits Answer: C 147) Maggie's Antiques and Collectibles opened her store with $14,000 beginning inventory. Maggie purchased an additional $5,500 in antiques and sold all but $7,500. What is Maggie's cost of goods sold? A) $27,000 B) $12,000 C) $19,500 D) $13,000 E) none of these Answer: B 148) What is the difference between “profit” and “cash flow”? A) Profit refers to what is left after expenses have been subtracted from revenues, while cash flow refers to cash receipts and cash payments B) A firm cannot make a profit unless its cash flow is positive C) A firm can maximize its profit only at the expense of cash flow D) A firm can maximize its cash flow only at the expense of its profit E) There is no real difference between profit and cash flow Answer: A 149) Cash flow from operations refers to A) money received from borrowing or issuing stock. B) cash transactions from buying and selling goods and services. C) cash used in, or provided by, investing. D) the cash outflow required to pay dividends. E) all of these. Answer: E 150) A(n) ______________ is a detailed statement of estimated receipts and expenditures for a period of time in the future. A) statement of cash flows B) balance sheet C) budget D) income statement E) profitability ratio Answer: C 151) Revenue recognition is the formal recording and reporting of revenues in the financial statements. Earnings are not reported until A) the earnings cycle is completed. B) the end of the refund period. C) the money is in the bank. D) the sale has been agreed upon. E) the auditors have approved the sale. Answer: A 152) The matching principle states that A) expenses will be matched with revenues to determine net income for an accounting period. B) the costs of goods sold must match the total expenses of the firm. C) the firm needs to match the assets and liabilities in order to record the transaction in its journal. D) revenue recognition occurs before the earnings cycle is completed. E) the total receipts must match the expenditures for a given period of time. Answer: A 153) ________ is the formal recording and reporting of revenues in financial statements. A) Compliance B) Materiality C) Full disclosure D) Matching E) Revenue recognition Answer: E 154) ________ requires that expenses will be matched with revenues to determine net income for the accounting period. A) Full disclosure B) Compliance C) Materiality D) Revenue recognition E) Matching Answer: E 155) ________ allows financial statement users to see how much net gain results from the assets that had to be given up in order to generate revenues during a given period. A) Materiality B) Revenue recognition C) Compliance D) Full disclosure E) Matching Answer: E 156) To compute the current ratio, current assets are divided by A) debt. B) current liabilities. C) long-term assets. D) owners' equity. E) quick assets. Answer: B 157) Another name for the current ratio is the A) cash ratio. B) banker's ratio. C) credit ratio. D) risk ratio. E) acid ratio. Answer: B 158) The current ratio measures a firm's ability to meet A) interest payments. B) long-term liabilities. C) short-term liabilities. D) all liabilities. E) dividend payments. Answer: C 159) What is the purpose of computing the current ratio? A) To provide investors with some measurement of the returns they can expect from their investment B) To measure the extent to which a firm is financed through borrowed money C) To measure how much cash the firm has D) To measure the firm's ability to meet emergency demands for cash E) To measure the firm's ability to meet its current obligations out of its current assets Answer: E 160) Which of the following will calculate the current ratio? A) Current liabilities divided by current assets B) Current assets divided by current liabilities C) Current assets minus current liabilities D) Current assets divided by total liabilities E) Current liabilities minus current assets Answer: B 161) As a rule of thumb the current ratio should be about A) 1.0. B) 2.0. C) 2.5. D) 3.0. E) 1.5. Answer: B 162) Which of the following is not a financial ratio normally prepared from the accounting system? A) Employee turnover rate B) Return on equity C) Debt ratio D) Inventory turnover ratio E) Current ratio Answer: A 163) Another name for long-term solvency ratios is A) debt ratios. B) long-term debt ratios. C) liquidation ratios. D) debt-risk ratios. E) long-term risk ratios. Answer: A 164) The debt-to-owners' equity ratio measures a firm's ability to meet A) dividend payments. B) long-term liabilities. C) interest payments. D) short-term liabilities. E) all liabilities. Answer: E 165) Which of the following calculates the debt-to-owners' equity ratio? A) Long-term liabilities divided by owners' equity B) Current liabilities divided by owners' equity C) Long-term liabilities divided by retained earnings D) Total liabilities divided by retained earnings E) Total liabilities divided by owners' equity Answer: E 166) How is the debt-to-owners'-equity ratio used? A) To describe the extent to which the firm is financed through borrowed money B) To determine how much net income the business earns for each dollar invested C) To determine how readily the firm can meet unexpected demands for cash D) To indicate the percentage of revenue which will be profit E) To determine the percentage of profits paid out to debtholders Answer: A 167) ________ ratios give investors an idea of what returns they can expect on their investment; dividing ________ by total owners' equity is one such ratio. A) Profitability; earnings per share B) Long-term liquidity; net income C) Activity; average inventory D) Short-term liquidity; earnings per share E) Profitability; net income Answer: E 168) What is the purpose of computing profitability ratios? A) To determine liquidity B) To determine the most efficient use of resources C) To determine the liquidity of the firm D) To determine the potential risk of business activity E) To determine the potential returns investors can expect Answer: E 169) How can the owner of a business determine how much net income the business earns for each dollar invested by the owner? A) Compute earnings per share ratio B) Compute an acid test ratio C) Compute the current ratio D) Compute return on equity ratio E) Compute return on sales ratio Answer: D 170) Don wants to compute the earnings per share for SFX Ltd. How does he do it? A) Divide sales by the number of common shares outstanding B) Divide cost of goods sold by the number of common shares C) Divide net income by the number of common shares outstanding D) Divide cost of goods sold by average inventory E) Divide net income by sales Answer: C 171) What is the purpose of computing the earnings per share ratio? A) To determine which firm gets the most out of its resources B) To determine the net profit margin C) To measure a firm's ability to meet its current liabilities D) To attract investors E) To measure the net income earned by a business for each dollar invested Answer: E 172) The return on equity ratio is calculated by which formula? A) Operation income divided by retained earnings B) Net income divided by retained earnings C) Net income divided by total owners' equity D) Operating income divided by total owners' equity E) Net income divided by common stock Answer: C 173) What does return on equity measure? A) The amount of pre-tax profit earned for each dollar invested B) The amount of profit earned for each share of stock C) The amount of profit earned for each dollar of previous profit retained in the business D) The amount of profit earned for each dollar invested E) The amount of pre-tax profit earned for each share of stock Answer: D 174) What does the earnings per share ratio measure? A) The dollar earnings for the value invested by a preferred shareholder B) The dollar earnings for each share of common and preferred stock C) The dollar earnings for the value invested by common and preferred shareholders D) The size of the dividend that a company could pay its common shareholders E) The size of the dividend that a company could pay its preferred shareholders Answer: D 175) An activity ratio measures a firm's A) sales per employee. B) frequency of purchases. C) level of inventory. D) efficiency in using its assets. E) sales per selling expense dollar. Answer: D 176) The inventory turnover ratio is calculated by A) dividing cost of goods sold by revenues. B) dividing average inventory by cost of goods sold. C) dividing revenues by cost of goods sold. D) dividing cost of goods sold by average inventory. E) dividing revenues by average inventory. Answer: D 177) Historically, it was thought that the current ratio should be _________, but more recently, many firms that are financially strong operate with current ratios of ___________. A) at least 10:1; less than 5:0 B) more than 7:1; 2.0 C) less than 5:1; more than 10:1 D) 2:1; less than 2:1 E) 3:1; less than 5:1 Answer: D 178) Which of the following is the most commonly used liquidity ratio? A) Return on equity B) Return on sales C) Current ratio D) Quick ratio E) They are all equally used Answer: C 179) The formula for the ___________ is current assets divided by current liabilities. A) acid test ratio B) current ratio C) profit margin D) return on equity E) activity ratio Answer: B 180) _________ is the ability of a firm to finance an investment through borrowed funds. A) Liquidity B) Leverage C) Solvency D) Profitability E) Activity Answer: B 181) Earnings per share are classified as which of the following ratios? A) Balance sheet convention B) Activity C) Solvency D) Profitability E) None of these Answer: D 182) With fixed assets of $4 billion and current assets of $1.7 billion, Realm Company has fixed liabilities of $2 billion and current liabilities of $0.34 billion. What is Realm’s current ratio? A) 2 B) 5 C) 5.88 D) 5.1 E) 6.33 Answer: B 183) ABC Company has net income of $5 million. ABC’s number of outstanding shares of stock is 3,870,000 shares. What is the company’s earnings per share? A) $1.29 B) $.77 C) $1.25 D) $.80 E) it cannot be determined from the information given Answer: A 184) Firm A enjoys a better activity ratio than Firm B. What might this mean? A) Firm A likely generates greater profits or sales. B) Firm A uses its resources more efficiently than Firm B. C) Firm A has more customers than Firm B. D) Firm A generates greater profits on sales and uses its resources more efficiently than B E) It might not mean anything Answer: D 185) A(n) _____ ratio estimates the risk associated with investing in a firm. A) financial B) solvency C) managerial D) activity E) none of these Answer: B 186) A(n) _____ ratio evaluates management’s use of assets. A) financial B) solvency C) activity D) profitability E) liability Answer: C 187) The current ratio is an example of ________, while earnings per share is an example of __________: A) a long-term solvency ratio; a leverage ratio B) a short-term solvency ratio; an activity ratio C) a short-term solvency ratio; a profitability ratio D) a leverage ratio; a profitability ratio E) an activity ratio; a profitability ratio Answer: C 188) The debt-to-equity ratio is calculated by dividing A) current liabilities by owners' equity. B) total liabilities by owners' equity. C) long-term liabilities by retained earnings. D) total liabilities by retained earnings. E) long-term liabilities by owners' equity. Answer: B 189) The ______________ ratio is calculated by dividing the cost of goods sold by average inventory. A) inventory turnover B) earnings per share C) current D) debt-to-equity E) none of these Answer: A 190) What is the primary thing the inventory turnover ratio says about a business? A) How profitable it is B) How risky it is C) How much inventory it has D) How much average inventory it has E) How often new merchandise replaces old merchandise Answer: E 191) How are earnings per share computed? A) Cost of goods sold divided by the number of common shares B) Sales divided by the number of common shares C) Cost of goods sold divided by average inventory D) Net income divided by sales E) Net income divided by the number of common shares outstanding Answer: E 192) Jack wants to compare the earnings per share of McDonald's and Burger King. Which formula would Jack use? A) Net income divided by the market value of the common shares B) Net income divided by the market value of the preferred shares C) Total assets divided by number of common and preferred shares outstanding D) Total assets divided by value of common shares outstanding E) Net income divided by number of common shares outstanding Answer: E TRUE/FALSE QUESTIONS. Write 'T' if the statement is true and 'F' if the statement is false. 193) One of the purposes of accounting is to communicate financial information. Answer: True 194) Bookkeeping is a comprehensive system for collecting, analyzing, and communicating financial information. Answer: False 195) Accounting is more comprehensive than bookkeeping because it involves more than merely recording information. Answer: True 196) The various users of accounting information include business managers, employees and unions, regulatory agencies, lenders and the public. Answer: True 197) A firm’s financial accounting system is concerned with external users of information. Answer: True 198) Financial accounting is primarily for people outside the firm while managerial accounting is primarily for people inside the firm. Answer: True 199) A chartered accountant receives an operating license from the federal government that is good for a three-year period. Answer: False 200) The controller is a company’s chief accounting officer. Answer: True 201) An audit involves an examination of a firm's accounting system to determine whether the financial reports fairly present its financial operations. Answer: True 202) The standard rules and methods used by accountants in preparing financial reports are called generally accepted accounting principles. Answer: True 203) A forensic accountant is a special type of accountant who audits companies which have gone bankrupt. Answer: False 204) A private accountant deals with a company's day to day activities. Answer: True 205) Tax services only prepare tax returns. Answer: False 206) Certified Management Accountants focus more on strategic management, while Chartered Accountants emphasize external financial reporting. Answer: True 207) The accounting equation is shown as: assets = liabilities + owners' equity. Answer: True 208) An asset is anything of economic value owned by the business firm. Answer: True 209) Cash is the most liquid asset. Answer: True 210) Depreciation is used to recognize the cost of an asset in the year in which it is purchased. Answer: False 211) Intangible assets include patents, trademarks, and copyrights. Answer: True 212) The income statement explains a firm's yearly cash receipts and cash payments. Answer: False 213) The financial statement that shows the status of assets, liabilities, and owners' equity at a particular point in time is the balance sheet. Answer: True 214) Liquidity is the term used to describe the ease with which an asset can be converted into cash. Answer: True 215) Liabilities reflected on the balance sheet are divided into two general categories: current (debts to be paid within one year) and long term (due more than a year into the future). Answer: True 216) Items such as patents and trademarks are a part of owners' equity. Answer: False 217) A business firm's profit or loss is computed through the use of the cost of goods sold statement. Answer: False 218) The three major categories of items shown on an income statement are revenues, cost of goods sold, and operating expenses. Answer: True 219) Cash flows from financing are concerned with the cash transactions involved with the buying and selling of goods and services. Answer: False 220) Perhaps the most crucial internal financial document prepared by the accounting department is the budget, which is prepared for a five-year time period. Answer: False 221) A budget is a detailed financial plan of estimated receipts and expenditures for the future. Answer: True 222) Owners’ equity consists of two sources: the amount that the owners originally invested, and profits earned by and reinvested in the company. Answer: True 223) Retained earnings are net profits minus dividend payments to stockholders. Answer: True 224) All firms must issue a statement of cash flows. Answer: False 225) Goodwill is the amount paid for an existing business beyond the value of its assets. Answer: True 226) Operating income includes the impact of interest and taxes on income. Answer: False 227) Gross profit margin is calculated by subtracting the cost of goods sold from revenue. Answer: True 228) Based on the revenue recognition principle, earnings may not be reported until the earnings cycle is completed. Answer: True 229) The matching principle states that expenses will be matched with revenues to determine net income for an accounting period. Answer: True 230) The matching principle takes precedence over the income statement. Answer: False 231) Financial ratios are used to analyze financial statements. Answer: True 232) The most important of all financial ratios is earnings per share. Answer: False 233) Short-term solvency ratios are used to measure the profitability of a business firm. Answer: False 234) The current ratio is used to determine if the firm can meet its current obligations with its current assets. Answer: True 235) A banker or investor will use the balance sheet to compute financial ratios to determine the liquidity, profitability and activity of the business firm. Answer: False 236) Net income divided by total owners' equity shows the return on equity for the owners. Answer: True 237) The return on equity ratio is computed by dividing earnings per share by total owners' equity. Answer: False 238) Activity ratios are used to determine the amount of sales for the year. Answer: False 239) The inventory turnover ratio measures the average number of times that inventory is sold and restocked during the year. Answer: True 240) The current ratio measures a company's ability to meet current obligations out of current assets. Answer: True 241) Financial ratios are used to check the financial health of a company. Answer: True 242) The current ratio is usually satisfactory at 2:1 or higher—that is, if current assets are more than double current liabilities. Answer: True 243) Leverage measures the ability of the firm to pay bills as they come due. Answer: False 244) Earnings per share determines the firm’s ability to pay its long-term debt. Answer: False 245) The most commonly used activity ratio is the debt-to-equity ratio, which is calculated as current assets divided by current liabilities. Answer: False 246) A low inventory turnover ration means efficient operations. Answer: False SHORT ANSWER QUESTIONS. Write the word or phrase that best completes each statement or answers the question. 247) Identify the potential users of accounting information. Answer: The potential users of accounting information include business managers, employees, unions, investors, creditors, tax authorities, and government regulatory agencies. 248) What is a controller? Answer: A controller is the person who manages all of a firm's accounting activities (the chief accounting officer). 249) What is an audit? Answer: An audit is a systematic examination of a company's accounting system to determine whether its financial reports fairly represent its operations. 250) List the three accounting groups in Canada who certify accounting expertise. Answer: Chartered Accountants (CAs) , Certified General Accountants (CGAs) , and Certified Management Accountants (CMAs). 251) What is the difference between financial and managerial accounting? Answer: Financial accounting is concerned with providing information for external users such as consumer groups, stockholders, and government agencies, while managerial accounting is concerned with providing information for internal users like managers. 252) What is the difference between public and private accountants? Answer: Public accountants work in accounting firms and assess the financial statements of other companies, while private accountants work within a given company to deal with the company’s day-to-day accounting needs. 253) What do forensic accountants do? Answer: See the boxed insert entitled "Opportunities in Forensic Accounting." 254) What is the accounting equation? Answer: Assets = Liabilities + Owners' Equity 255) Explain the accounting equation. Answer: The accounting equation is Assets = Liabilities + Owners' Equity. Assets are economic resources that a company owns and from which it can expect to derive some future benefit. Assets are classified as current (e.g., cash, marketable securties, inventory, accounts receivable) and fixed (e.g., land and buildings). Liabilities (current or long-term) are claims on those assets from outside the firm. Owners' equity is the total claims on those assets from within the firm. 256) What is an asset? Answer: Any economic resource that is expected to benefit a firm or an individual who owns it. 257) What is owners' equity? Answer: The amount of money that business owners would receive if they sold all of the company's assets and paid all of its liabilities. 258) Owners' equity consists of two sources of capital. What are they? Answer: The amount that the owners originally invested and prfits earned by and reinvested in the company. 259) What happens to assets, liabilities, and owners' equity when a company is operating profitably? Answer: Assets increase faster than liabilities and owners' equity increases if profits are retained in the business instead of being paid out as dividends. 260) Define the term current assets as found on a balance sheet. Answer: Current assets include cash and assets that can be converted into cash within the following year. 261) What is the difference between current and long-term liabilities? Answer: Current liabilities are debts that must be paid within one year. Long-term liabilities are debts that are not due for at least one year. 262) What is a budget? Answer: A budget is a detailed statement of estimated receipts and expenditures for a period of time in the future. 263) What is an income statement? Answer: An income statement reports revenues and expenses, and results in a figure showing a company’s annual profit or loss. 264) What is a statement of cash flows? Answer: A statement of cash flows describes a company’s yearly cash receipts and cash payments. 265) What does a balance sheet show? Answer: The information on a balance sheet shows a firm's financial condition at one point in time. It focuses on information regarding the three factors in the accounting equation: assets, liabilities, and owners' equity. Looking at balance sheets at various points in time allows for an assessment of how well the company is doing over time. 266) How do accountants define merchandise inventory? Answer: Merchandise inventory is the cost of merchandise that has been acquired for sale for customers and is still on hand. 267) What is goodwill? Answer: Goodwill is the amount paid for an existing business beyond the value of its other assets. 268) How is gross profit calculated? Answer: Revenues minus the cost of goods sold. 269) What is involved in revenue recognition and matching? Answer: Revenue recognition is the formal recording and reporting of revenues in financial statements. The matching principle says that expenses should be matched with revenues to determine net income for an accounting period. Earnings are not rported until the earnings cycle is complete. 270) What is the formula for the current ratio? Answer: (current assets)/(current liabilities). 271) Manhattan Corporation has total assets of $700,000, total liabilities of $200,000, and owners' equity of $500,000. What is Manhattan Corporation's debt ratio? Answer: $200,000/$500,000 =.40 or 40 percent. 272) What is the formula for return on equity? Answer: (net income)/(total owner's equity). 273) Carter Industries had net income of $250,000 for the year 2002. They had 50,000 shares of preferred stock and 200,000 shares of common stock outstanding. What is Carter Industries earnings per share? Answer: $250,000/200,000 = $1.25. 274) What is the formula for inventory turnover? Answer: (cost of goods sold) /(average inventory). 275) What do activity ratios show? Answer: Activity ratios measure the efficiency with which a firm uses resources. 276) What is earnings per share? How do investors use this information? Answer: Earnings per share is defined as net income divided by the number of shares of common stock outstanding. It determines the size of the dividend that a firm can pay shareholders. Investors use this ratio to decide whether to buy or sell a company's stock. ESSAY QUESTIONS. Write your answer in the space provided or on a separate sheet of paper. 277) Who are the users of financial statements? Why would they be interested in these statements? Answer: • business managers: to set goals, develop plans, set budgets, evaluate future prospects • employees and unions: to get paid and to know how the company they work for is doing • investors and creditors: to help decide whether or not the company is a sound one to invest in • taxing authorities: to plan for tax inflows, to determine tax liabilities • government regulatory agencies: to ensure that the companies are providing proper disclosure to the public 278) What is the difference between financial accounting and managerial accounting? Answer: • financial accounting: the process whereby interested groups are kept informed about the financial condition of a firm; is concerned with external users of information • managerial accounting: internal procedures that alert managers to problems and aid them in planning and decision making; serves internal users 279) What services does a CA provide? Provide a brief explanation of each service. Answer: • auditing: examination of a company's financial records to determine if it used proper procedures to prepare its financial reports • tax services: helping a company structure, or restructure its operations and investments • management services: range from personal financial planning to planning corporate mergers to executive recruitment 280) Explain the importance and use of GAAP. Answer: • GAAP are the guidelines that auditors follow to make sure that the client's accounting system is comparable to the rest of the industry • they are monitored by the CICA • at the end of an audit, the auditor will certify whether or not the client's financial reports comply with GAAP 281) Why do business firms have private accountants? What do these individuals do for the company? Answer: • private accountants are hired as salaried employees to deal with a company's day-to-day accounting needs • may be employed in such areas such as budgets, financial planning, internal auditing, payroll and taxation 282) How are international accounting standards relevant for Canadian companies and Canadian accounting activities? Answer: The International Accounting Standards Baord (IASB) has developed International Financial Reporting Standards (IFRS) , which is a sort of "global GAAP." Canadian companies adopted these standards on January 1, 2011, and this required a lot of work on the part of accountants to determine how to present accounting information in a way that satisfies the new standards. 283) Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants. Answer: The role of accountants is to maintain a comprehensive system for collecting, analyzing, and communicating financial information for use by external constituents and within firms for planning and decision-making. The system measures business performance and translates the results into information for management decisions. Professional accountants (CA's, CGA's, and CMA's) provide auditing, tax, and management advisory services for other firms and individuals. Many businesses hire their own employees (private accountants) to perform internal accounting activities such as auditing, taxation, cost analysis, and budgeting. Most private accountants are management accountants who provide services to support managers. Forensic accountants use accounting for legal purposes by providing investigative and litigation support in crimes against companies, crimes by companies, and civil cases. 284) What are the steps in the accounting cycle? Answer: The steps are (1) analyze data that are generated as a result of the company's regular business operations, (2) enter the transactions in a journal, (3) enter the transactions in a ledger, (4) develop a trial balance, (5) prepare financial statements, and (6) analyze the fiancial statements. 285) What is the accounting equation? Provide a brief explanation of the meaning of each part of this equation. Answer: • accounting equation: assets = liabilities + owners' equity • assets are those items that the company owns; liabilities are those amounts that the company owes • owners' equity is any positive difference between a firm's assets and its liabilities; what would remain for a firm's owners if the company were liquidated, all of its assets sold, and all its debts paid 286) What does the term "double-entry" accounting mean? Answer: • double-entry accounting is a system that requires every transaction to be entered in two ways: how it affects assets and how it affects liabilities and owners' equity, so that the accounting equation is always in balance 287) Explain how the accounting equation and double-entry accounting are used in record keeping. Answer: Accountants use the accounting equation to balance the data pertaining to financial transactions: Assets = Liabilities + Owner's equity. An asset is any economic resource that is expected to benefits its owner (building, equipment, inventory, receivables). A liability is a debt that the firm owes to an outside party. Owners equity is the residual interest that the owners would receive if they sold all of the company's assets and paid all of its liabilities. Because every transaction affects two accounts, accountants use a double-entry system to record the dual effects. Because the double-entry system requires at least two bookkeeping entries for each transaction, it keeps the accounting equation in balance. 288) Explain the three basic financial statements and show how they reflect the activity and financial condition of a business. Answer: Accounting summarizes the results of a firm's transactions and issues reports to help internal and external users of financial information to make decisions. The 3 basis forms of financial statements are: 1) Balance Sheet-supplies detailed information about the accounting equation, listing the balances of all assets, liabilities and owner's equity at one point in time; 2) Income Statement-describes revenues and expenses to show a firms profit or loss over a period of time; 3) Statement of Cash flow-reports cash receipts and payments from operating, investing and financing activities over a period of time. 289) What is the purpose of a balance sheet? What are the major types of information shown on the balance sheet? Answer: • a balance sheet is a type of financial statement that summarizes a firm's financial position on a particular date in terms of its assets, liabilities, and owners' equity • balance sheets supply a considerable amount of information including detailed, technical descriptions of complex accounts and transactions • the major types of information on the balance sheet are the components of the accounting equation: assets, liabilities and owners' equity 290) How does a current asset differ from a fixed asset? Answer: • a current asset is cash and other assets that can or will be converted into cash in the following year • fixed assets are those that have a long-term use or value to the firm such as land, and buildings 291) What is the purpose of an income statement? What important information is reflected in this statement? Answer: • an income statement describes a firm's revenues and expenses and indicates whether the firm has earned a profit or suffered a loss during a given period • all forms of revenue are disclosed on the income statement • all forms of expenditures, including taxes and interest are also disclosed on the statement 292) Describe the major elements of an income statement. Answer: • revenues: monies received as a result of selling a good or service or from other sources such as interest, rent, and licensing fees • cost of goods sold: expenses directly involved in producing or selling a good or service • operating expenses: costs other than those included in cost of goods sold 293) What is a budget? Who uses a budget? Answer: • a budget is a detailed financial plan for estimated receipts and expenditures for a period of time in the future ↕ budgets are used by internal accountants and managers as a guide to how much to produce, stock, sell, and pay for items 294) Discuss the accounting principles of revenue recognition and matching. Answer: • revenue recognition: • the formal recording and reporting of revenues in the financial statements • although any firm earns revenues continuously as it makes sales, earnings are not reported until the earnings cycle is completed • this cycle is complete under two conditions: the sale is complete and the product has been delivered; AND the sale price to the customer has been collected or is collectable (accounts receivable) • the completion of the earning cycle determines the timing for revenue recognition in the firm's financial statements • matching: • expenses will be matched with revenues to determine net income for an accounting period 295) What are the three major classifications of ratios that are used to analyze financial statements? What is measured by each of these types of ratios? Answer: • solvency ratios, both short-term and long-term, estimate risk • profitability ratios measure potential earnings • activity ratios reflect management's use of assets 296) Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Answer: Financial statements provide data that can be applied to ratios. Ratios can then be used to analyze the financial health of a company in terms of solvency, profitability, and efficiency in performing activities. Ratios can help creditors, investors, and managers assess a firm's current status and check a firm's progress by comparing current with past statements. Solvency ratios use balance sheet data to measure the firm's ability to meet its debts. The current ratio measures the ability to meet current liabilities out of current assets. Long-term solvency ratios compare the firm's total liabilities against owners' equity. Profitability ratios such as earnings per share measure current and potential earnings. Activity ratios reflect management's use of assets by measuring the efficiency with which a firm uses its resources for a particular activity, such as sales, advertising, or inventory management. 297) Identify the solvency ratios and what they measure. Answer: • solvency ratios measure risk, the ability to meet short-term and long-term obligations • short-term solvency ratios: • current ratio: current assets divided by current liabilities; measures the ability to pay short-term obligations out of current assets • working capital: difference between a firm's current assets and current liabilities; measures ability to pay off short-term debts • quick (acid-test) ratio: quick assets divided by current liabilities; measures the ability to meet emergency demands for cash • long-term solvency ratio: • debt-to-equity ratio: debt divided by owners' equity; measures degree of debt used to fund company operations 298) Identify an activity ratio and what it measures. Answer: Activity ratios measure management's efficiency in using the firm's assets. The inventory turnover rate is calculated by dividing the cost of goods sold by average inventory. It shows the average number of times that inventory is sold and restocked. 299) Identify the profitability ratios and what they measure. Answer: Profitability ratios give investors an idea of the returns they can expect. The return on equity ratio is computed by dividing net income by total onwers' equity. This ratio shows the net income earned in a business for each dollar that has been invested. The return on sales ratio is calculated by dividing net income by sales revenue. This ratio shows how much profit is generated by each dollar of sales. The earnings per share ratio is calculated by dividing net income by the number of shares of common stock outstanding. This ratio shows how much profit has been generated for each share of common stock. Test Bank for Business Essentials Ronald J. Ebert, Ricky W. Griffin, Frederick A. Starke, George Dracopoulos 9780132479769, 9780134384733

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