Question 1

The private sector organization involved in developing accounting principles is the
A) Feasible Accounting Standards Body.
B) Financial Accounting Studies Board.
C) Financial Accounting Standards Board.
D) Financial Auditors' Standards Body.

Accepted Answer

The private sector organization involved in developing accounting principles is the Financial Accounting Standards Board (FASB). The FASB is a non-profit organization that establishes and improves financial accounting and reporting standards in the United States.

Question 2

The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that
A) they are both governmental agencies.
B) the SEC is a private organization of accountants.
C) the SEC often mandates guidelines when no accounting principles exist.
D) the SEC and FASB rarely cooperate in developing accounting standards.

Accepted Answer

The SEC is a governmental agency while the FASB is a private organization. The SEC does mandate guidelines when no accounting principles exist, such as with the Sarbanes-Oxley Act of 2002, which required public companies to maintain adequate internal controls over financial reporting. The SEC and FASB do work together in developing accounting standards.

Question 3

The cost principle requires that when assets are acquired, they be recorded at
A) appraisal value.
B) historical cost.
C) market price.
D) exchange price paid.

Accepted Answer

The cost principle states that assets should be recorded at their historical cost, which is the actual cost paid to acquire them. This ensures that financial statements accurately reflect the resources that the company has invested in its operations. Appraisal value, market price, and exchange price paid may be relevant in certain circumstances but are not the primary basis for recording asset values according to the cost principle.

Question 4

GAAP stands for
A) Generally Accepted Auditing Procedures.
B) Generally Accepted Accounting Principles.
C) Generally Accepted Auditing Principles.
D) Generally Accepted Accounting Procedures.

Accepted Answer

GAAP stands for Generally Accepted Accounting Principles, which are the standard guidelines and principles that all companies in the United States must follow when preparing their financial statements. GAAP helps ensure that financial statements are reliable, comparable, and understandable to investors and other stakeholders.

Question 5

Which of the following is not a characteristic of the cost principle?
A) Reliability
B) Subjectivity
C) Objectivity
D) Verifiability

Accepted Answer

The cost principle emphasizes the use of objective and verifiable data to determine the value of assets and expenses, which increases the reliability of financial information. However, it does not consider subjective factors such as sentimental value when determining the value of an asset, thereby making choice B incorrect.

Question 6

The final step in solving an ethical dilemma is to
A) identify and analyze the principal elements in the situation.
B) recognize an ethical situation.
C) identify the alternatives and weigh the impact of each alternative on stakeholders.
D) recognize the ethical issues involved.

Accepted Answer

The final step in solving an ethical dilemma involves identifying the alternatives and weighing the impact of each alternative on stakeholders. This step comes after recognizing an ethical situation and the ethical issues involved, and analyzing the principal elements in the situation. It is crucial for making an informed decision that considers the consequences for all involved.

Question 7

A small neighborhood barber shop that is operated by its owner would likely be organized as a
A) joint venture.
B) partnership.
C) corporation.
D) proprietorship.

Accepted Answer

A proprietorship is a business owned and operated by a single person, which would be the most likely structure for a small neighborhood barber shop operated by its owner. A joint venture and partnership involve multiple owners, while a corporation is a separate legal entity from its owners.

Question 8

All of the following are advantages cost has over other valuations except that it
A) is reliable.
B) can be objectively measured.
C) can be verified.
D) is relevant.

Accepted Answer

While cost is reliable, objectively measurable, and verifiable, its disadvantage is that it may not always be relevant in determining the value of a product or service. Other valuations, such as market value or sentimental value, may be more relevant in certain situations.

Question 9

The cost of an asset and its fair market value are
A) never the same.
B) the same when the asset is sold.
C) irrelevant when the asset is used by the business in its operations.
D) the same on the date of acquisition.

Accepted Answer

The cost of an asset and its fair market value are typically the same on the date of acquisition, as the purchase price reflects the market value at that time.

Question 10

The first step in solving an ethical dilemma is to
A) identify and analyze the principal elements in the situation.
B) identify the alternatives.
C) recognize an ethical situation and the ethical issues involved.
D) weigh the impact of each alternative on various stakeholders.

Accepted Answer

The first step in solving an ethical dilemma is to recognize that there is an ethical situation and to identify the ethical issues involved. Without this recognition, it is impossible to move forward with identifying alternatives or analyzing the situation. Therefore, option C is the best choice.

Question 11

Generally accepted accounting principles are
A) income tax regulations of the Internal Revenue Service.
B) standards that indicate how to report economic events.
C) theories that are based on physical laws of the universe.
D) principles that have been proven correct by academic researchers.

Accepted Answer

Generally accepted accounting principles (GAAP) are standards that indicate how to report economic events. They are not income tax regulations, theories based on physical laws, or principles proven by academic researchers, although they may be influenced by these factors.

Question 12

John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a
A) joint venture.
B) partnership.
C) corporation.
D) proprietorship.

Accepted Answer

A partnership is a business model in which two or more individuals share ownership of a company. In this scenario, John and Sam met and agreed to start a small law practice, which is a business that falls under the partnership model. They agreed to split revenues and expenses evenly, which indicates that they have equal shares in the company. Joint venture is a type of partnership, but it is typically formed for a specific project or a limited time period. Corporation and proprietorship are other types of business models, but they are not appropriate for this scenario.

Question 13

The partnership form of business organization
A) is a separate legal entity.
B) is a common form of organization for service-type businesses.
C) enjoys an unlimited life.
D) has limited liability.

Accepted Answer

The partnership form of business organization is a common form of organization for service-type businesses.

Question 14

The economic entity assumption requires that the activities
A) of different entities can be combined if all the entities are corporations.
B) must be reported to the Securities and Exchange Commission.
C) of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
D) of an entity be kept separate from the activities of its owner.

Accepted Answer

The economic entity assumption requires that the activities of an entity be kept separate from the activities of its owner. This means that a sole proprietorship must distinguish between its business activities and the personal economic events of its owners.

Question 15

The proprietorship form of business organization
A) must have at least three owners in most states.
B) represents the largest number of businesses in the United States.
C) combines the records of the business with the personal records of the owner.
D) is characterized by a legal distinction between the business as an economic unit and the owner.

Accepted Answer

The proprietorship form of business organization represents the largest number of businesses in the United States. It is a type of business where there is a single owner who is responsible for all the profits and losses of the business. It does not require a minimum number of owners and there is no legal distinction between the business and the owner, meaning that the business records are combined with the personal records of the owner.

Question 16

The Duce Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at
A) $100 million.
B) $600 million.
C) $400 million.
D) $500 million.

Accepted Answer

According to the historical cost principle in accounting, assets are recorded at their original purchase cost, which is $100 million in this case.

Question 17

Ethics are the standards of conduct by which one's actions are judged as
A) right or wrong.
B) honest or dishonest.
C) fair or unfair.
D) all of these.

Accepted Answer

Ethics encompass all of these aspects - right or wrong, honest or dishonest, fair or unfair. It is a comprehensive framework for making moral and ethical decisions in personal and professional settings.

Question 18

The body of theory underlying accounting is not based on
A) physical laws of nature.
B) concepts.
C) principles.
D) definitions.

Accepted Answer

The body of theory underlying accounting is not based on physical laws of nature, as accounting deals with the measurement and communication of financial information, which is not governed by physical laws. Rather, it is based on concepts, principles, and definitions that have been developed and agreed upon by accounting professionals and organizations.

Question 19

A business organized as a corporation
A) is not a separate legal entity in most states.
B) requires that stockholders be personally liable for the debts of the business.
C) is owned by its stockholders.
D) terminates when one of its original stockholders dies.

Accepted Answer

A corporation is owned by its stockholders, who have limited liability for the debts and obligations of the corporation. The corporation exists as a separate legal entity from its owners. The death of a single stockholder does not terminate the corporation.

Question 20

Which of the following is not an advantage of the corporate form of business organization?
A) Limited liability of stockholders
B) Transferability of ownership
C) Unlimited personal liability for stockholders
D) Unlimited life

Accepted Answer

The statement "Unlimited personal liability for stockholders" is not an advantage of the corporate form of business organization. In fact, one of the main advantages of a corporation is limited liability, which means that the personal assets of the stockholders are protected from the liabilities of the corporation. This is not the case in other forms of businesses such as partnerships, where the partners have unlimited personal liability for the debts and obligations of the business. The other choices, limited liability of stockholders, transferability of ownership, and unlimited life, are all advantages of the corporate form of business organization.

Quiz 1: Accounting in Action

The private sector organization involved in developing accounting principles is the

The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that

The cost principle requires that when assets are acquired, they be recorded at

GAAP stands for

Which of the following is not a characteristic of the cost principle?

The final step in solving an ethical dilemma is to

A small neighborhood barber shop that is operated by its owner would likely be organized as a

All of the following are advantages cost has over other valuations except that it

The cost of an asset and its fair market value are

The first step in solving an ethical dilemma is to

Generally accepted accounting principles are

John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a

The partnership form of business organization

The economic entity assumption requires that the activities

The proprietorship form of business organization

The Duce Company has five plants nationwide that cost $100 million. The current market value of the plants is $500 million. The plants will be recorded and reported as assets at

Ethics are the standards of conduct by which one's actions are judged as

The body of theory underlying accounting is not based on

A business organized as a corporation

Which of the following is not an advantage of the corporate form of business organization?