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Chapter 1 Through 8
CHAPTER 1
ACCOUNTING IN
ACTION
CHAPTER LEARNING OBJECTIVES
1. Explain
what accounting is.
2. Identify
the users and uses of accounting.
3. Understand
why ethics is a fundamental business concept.
4. Explain
generally accepted accounting principles.
5. Explain
the monetary unit assumption and the economic entity assumption.
6. State
the accounting equation, and define its components
7. Analyze
the effects of business transactions on the accounting equation.
8. Understand
the four financial statements and how they are prepared.
a9. Explain
the career opportunities in accounting.
TRUE-FALSE STATEMENTS
1. Owners
of business firms are the only people who need accounting information.
2. Transactions
that can be measured in dollars and cents are recorded in the financial
information system.
3. The
hiring of a new company president is an economic event recorded by the
financial information system.
4. Management
of a business enterprise is the major external user of information.
5. Accounting
communicates financial information about a business enterprise to both internal
and external users.
6. Accounting
information is used only by external users with a financial interest in a
business enterprise.
7. Financial
statements are the major means of communicating accounting information to
interested parties.
8. Bookkeeping
and accounting are one and the same because the bookkeeping function includes
the accounting process.
9. The
origins of accounting are attributed to Luca Pacioli, a famous mathematician.
10. The
study of accounting will be useful only if a student is interested in working
for a profit-oriented business firm.
11. Private
accountants are accountants who are not employees of business enterprises.
12. The
study of accounting is not useful for a business career unless your career
objective is to become an accountant.
13. A
working knowledge of accounting is not relevant to a lawyer or an architect.
14. Expressing
an opinion as to the fairness of the information presented in financial
statements is a service performed by CPAs.
15. Accountants
rely on a fundamental business concept—ethical behavior—in reporting financial
information.
16. The
primary accounting standard-setting body in the United States is the
International Accounting Standards Board.
17. The
Financial Accounting Standards Board is a part of the Securities and Exchange
Commission.
18. The
Securities and Exchange Commission oversees U.S. financial markets and
accounting standard-setting bodies.
19. The
cost and fair value of an asset are the same at the time of acquisition and in
all subsequent periods.
20. Even
though a partnership is not a separate legal entity, for accounting purposes
the partnership affairs should be kept separate from the personal activities of
the owners.
21. A
partnership must have more than one owner.
22. The
economic entity assumption requires that the activities of an entity be kept
separate and distinct from the activities of its owner and all other economic
entities.
23. The
monetary unit assumption states that transactions that can be measured in terms
of money should be recorded in the accounting records.
24. In
order to possess future service potential, an asset must have physical
substance.
25. Owners'
claims to total business assets take precedence over the claims of creditors
because owners invest assets in the business and are liable for losses.
26. The
basic accounting equation states that Assets = Liabilities.
27. Accountants
record both internal and external transactions.
28. Internal
transactions do not affect the basic accounting equation because they are
economic events that occur entirely within one company.
29. The
purchase of store equipment for cash reduces stockholders’ equity by an equal
amount.
30. The
purchase of office equipment on credit increases total assets and total
liabilities.
31. The
primary purpose of the statement of cash flows is to provide information about
the cash receipts and cash payments of a company during a period.
32. Net
income for the period is determined by subtracting total expenses and drawings
from total revenues.
33. The income statement is sometimes referred
to as the statement of operations.
34. A balance sheet reports the assets and
liabilities of a company for a specific period of time.
35. The ending retained earnings balance is
reported on both the retained earnings statement and the balance sheet.
36. Identifying is the process of keeping a
chronological diary of events measured in dollars and cents.
37. Management consulting includes examining the financial
statements of companies and expressing an opinion as to the fairness of their
presentation.
38. Accountants do not have to worry about
issues of ethics.
39. At the time an asset is acquired,
cost and fair value should be the same.
40. The monetary unit assumption
requires that all dollar amounts be rounded to the nearest dollar.
41. The basic accounting equation is
in balance when the creditor and ownership claims against the business equal
the assets.
42. External transactions involve
economic events between the company and some other enterprise or party.
43. In the retained earnings
statement, revenues are listed first, followed by expenses, and net income (or
net loss).
MULTIPLE CHOICE QUESTIONS
44. Accountants
refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
45. The
process of recording transactions has become more efficient because
a. fewer events can be
quantified in financial terms.
b. computers are used
in processing business events.
c. more people have
been hired to record business transactions.
d. business events are recorded
only at the end of the year.
46. Communication
of economic events is the part of the accounting process that involves
a. identifying economic
events.
b. quantifying
transactions into dollars and cents.
c. preparing accounting
reports.
d. recording and
classifying information.
47. Which
of the following events cannot be
quantified into dollars and cents and recorded as an accounting transaction?
a. The appointment of a
new CPA firm to perform an audit.
b. The purchase of a
new computer.
c. The sale of store
equipment.
d. Payment of income
taxes.
48. The
use of computers in recording business events
a. has made the
recording process more efficient.
b. does not use the
same principles as manual accounting systems.
c. has greatly impacted
the identification stage of the accounting process.
d. is economical only
for large businesses.
49. The
accounting process involves all of the following except
a. identifying economic
transactions that are relevant to the business.
b. communicating financial
information to users by preparing financial reports.
c. recording
nonquantifiable economic events.
d. analyzing and
interpreting financial reports.
50. The
accounting process is correctly sequenced as
a. identification,
communication, recording.
b. recording,
communication, identification.
c. identification,
recording, communication.
d. communication,
recording, identification.
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