Question 1

Expenses a firm incurs for insurance, office salaries, and rent are classified as
A) selling expenses on an income statement.
B) general expenses on an income statement.
C) current liabilities on a balance sheet.
D) general expenses on a cash flow statement.

Accepted Answer

Expenses for insurance, office salaries, and rent are classified as general expenses on an income statement as they are not directly related to the production and sale of goods or services. They are also known as overhead expenses.

Question 2

Ivan will graduate from Great State University this year. He has accumulated $39,000 in student loans during his four years at college. An accountant would classify the loans as
A) assets.
B) liabilities.
C) owners' equity.
D) intangibles.

Accepted Answer

Liabilities represent debts or obligations of an individual or a firm.

Question 3

A company's income statement is important to accountants and other stakeholders. It reveals a
A) company's sources of funding.
B) company's ability to distribute goods or services in a timely manner.
C) company's ability to earn a profit over time.
D) company's capitalized value.

Accepted Answer

The income statement contains several elements including revenues, expenses, and net profit or loss.

Question 4

Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of
A) generating revenue.
B) controlling inventory.
C) managing cash flows.
D) balancing assets with liabilities.

Accepted Answer

These firms are generating lots of revenue. Revenues that are tied up in credit sales are not the same as cash. Firms need cash to pay their bills. This shows that even companies that enjoy increased sales and higher profits can suffer greatly from cash flow problems.

Question 5

Many business decisions are made in hopes of improving a firm's bottom line. Which of the following financial statements will reveal a firm's bottom line?
A) income statement
B) balance sheet
C) statement of cash flows
D) trial balance

Accepted Answer

The financial statement that shows the bottom line (profit after expenses and taxes) is the income statement.

Question 6

The balance sheet for Greeley Contracting shows assets totaling $207,000 and liabilities totaling $95,000. Which of the following statements is correct?
A) Owners' equity equals $182,000.
B) Current assets are worth $92,000.
C) Net income for the period is $112,000.
D) Owners' equity equals $112,000.

Accepted Answer

The fundamental accounting equation states: Assets = Liabilities + Owners' equity. By subtracting liabilities from both sides of the equation, we arrive at: Assets - Liabilities = Liabilities - Liabilities + Owners' equity. The Liabilities terms on the right side of the equation cancel out. The equation becomes Assets - Liabilities = Owners' equity. Substituting the information provided, $207,000 - $95,000 = $112,000.

Question 7

Use the fundamental accounting equation to solve the following: Assets minus liabilities equals
A) net income.
B) gross margin.
C) owners' equity.
D) cash reserves.

Accepted Answer

Owners' equity is the residual claim of the owners on the assets of the business. After the creditors have made their claims against the assets of the firm, the remaining assets belong to the owners. In other words, owners' equity is the amount of the business that belongs to the owners minus any liabilities owed by the business.

Question 8

During a period of rising prices, using FIFO (first-in, first-out) inventory valuation method will result in ________ net income figures than would LIFO (last-in, first-out).
A) higher
B) lower
C) the same
D) less accurate

Accepted Answer

During periods of rising prices, using FIFO, the cost of goods sold is based upon older, less expensive merchandise. Using LIFO, the cost of goods sold would reflect the more recent, more expensive merchandise. FIFO, therefore, yields a smaller cost of goods sold figure. Subtracting this smaller cost of goods sold from the sales revenue will produce a higher net income.

Question 9

When creating the income statement, which of the following statements is accurate?
A) revenues, minus general operating expenses = gross profit.
B) revenues, minus tax expense = gross profit.
C) revenues, minus depreciation expense = gross profit.
D) revenues, minus cost of goods sold = gross profit.

Accepted Answer

The first line item on the income statement reports revenues earned over a period of time. The cost of goods sold is subtracted from revenues in order to determine gross profit.

Question 10

Debts owed by a business are called
A) revenues.
B) liabilities.
C) equities.
D) assets.

Accepted Answer

Debts owed by a business are considered as liabilities.

Question 11

The LIFO method of inventory valuation bases the cost of goods sold on the cost of
A) merchandise that has been held in inventory for the longest period of time.
B) most recent merchandise purchased by the firm.
C) actual units customers purchased.
D) merchandise the firm acquired at the lowest cost.

Accepted Answer

LIFO stands for last in, first out. The most recent merchandise is the last in.

Question 12

During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the ________ inventory valuation method.
A) FIFO (first-in, first-out)
B) LIFO (last-in, first-out)
C) sliding scale
D) average cost

Accepted Answer

The cost of goods sold figure will reflect more recent, higher costs when the LIFO method is used. Subtracting this higher cost of goods sold figure from sales revenue will produce a lower gross profit.

Question 13

Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the ________ method of inventory valuation are most consistent with this approach.
A) FIFO (first-in, first-out)
B) LIFO (last-in, first-out)
C) average costing
D) accelerated costing

Accepted Answer

FIFO inventory valuation method bases cost of goods sold on the items that have been in inventory longest (i.e. those units that were "first in"). This is consistent with the behavior of retailers who try to sell older merchandise first.

Question 14

FIFO and LIFO are two common
A) depreciation strategies.
B) ways to structure a balance sheet.
C) inventory valuation methods.
D) current ratios.

Accepted Answer

Generally accepted accounting principles (GAAP) sometimes permit an accountant to use different methods of accounting for a firm's inventory. Two of the most popular treatments are FIFO and LIFO.

Question 15

Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of
A) asset valuation.
B) asset audits.
C) appreciation.
D) depreciation.

Accepted Answer

Accounting recognizes the need to spread the cost of an asset over its useful life, and this is done through depreciation, where a portion of the asset's cost is allocated as an expense each year. This recognizes that assets lose value over time due to wear and tear, obsolescence, or other factors. Asset valuation is the process of determining the value of an asset at a particular point in time, while asset audits are reviews of the physical existence and condition of assets. Appreciation is the opposite of depreciation and refers to an increase in value over time.

Question 16

When reviewing the balance sheet for Portable Pet Care, Inc., a mobile small animal care business, Ricky noted the following information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper, the net worth (owners' equity) for this business =
A) $2.2 million.
B) $4.8 million.
C) $3.5 million.
D) $0.2 million.

Accepted Answer

As noted in the fundamental accounting equation, Assets - Liabilities = Owners' equity. On the balance sheet, owners' equity is the same as net worth.

Question 17

Which of the following would be classified as a general expense on an income statement?
A) salaries paid to salespeople
B) dividends paid to stockholders
C) payments made for insurance
D) costs associated with an advertising campaign

Accepted Answer

Operating expenses are usually divided into two categories. Selling expenses include things like salaries for salespeople and advertising costs. General expenses include office salaries, insurance, and depreciation.

Question 18

________ is the systematic write-off of the value of a tangible asset over its useful life.
A) Expense structuring
B) Depreciation
C) Capital budgeting
D) Gross margin allocation

Accepted Answer

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. This is done in order to match the expense of the asset to the revenue it generates over time. As a result, the value of the asset is gradually written off until it reaches its salvage value at the end of its useful life.

Question 19

As Jaime was packing to return to college after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a speaker system, and a Blu-ray player. An accountant would list all of these as Jaime's
A) assets.
B) liabilities.
C) owners' equity.
D) intangibles.

Accepted Answer

Assets refer to tangible or intangible resources the firm owns and uses in order to operate the business. This question refers to personal assets the student will use for school purposes and/or for recreation.

Question 20

The ________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time.
A) income statement
B) balance sheet
C) statement of cash flows
D) trial balance

Accepted Answer

A balance sheet reports the firm's assets (what the firm owns), liabilities (debts of the firm), and owners' equity at a specific point in time.

Quiz 17: Understanding Accounting and Financial Information

Expenses a firm incurs for insurance, office salaries, and rent are classified as

Ivan will graduate from Great State University this year. He has accumulated $39,000 in student loans during his four years at college. An accountant would classify the loans as

A company's income statement is important to accountants and other stakeholders. It reveals a

Many business decisions are made in hopes of improving a firm's bottom line. Which of the following financial statements will reveal a firm's bottom line?

The balance sheet for Greeley Contracting shows assets totaling $207,000 and liabilities totaling $95,000. Which of the following statements is correct?

Use the fundamental accounting equation to solve the following: Assets minus liabilities equals

During a period of rising prices, using FIFO (first-in, first-out) inventory valuation method will result in ________ net income figures than would LIFO (last-in, first-out) .

When creating the income statement, which of the following statements is accurate?

Debts owed by a business are called

The LIFO method of inventory valuation bases the cost of goods sold on the cost of

During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the ________ inventory valuation method.

Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the ________ method of inventory valuation are most consistent with this approach.

FIFO and LIFO are two common

Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of

When reviewing the balance sheet for Portable Pet Care, Inc., a mobile small animal care business, Ricky noted the following information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper, the net worth (owners' equity) for this business =

Which of the following would be classified as a general expense on an income statement?

________ is the systematic write-off of the value of a tangible asset over its useful life.

As Jaime was packing to return to college after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a speaker system, and a Blu-ray player. An accountant would list all of these as Jaime's

The ________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time.