Question 1

Which of the following is not a generally accepted accounting principle relating to the valuation of assets?
A)The cost principle - in general,assets are valued at cost,rather than at estimated market values.
B)The objectivity principle - accountants prefer to use objective,rather than subjective,information as the basis for accounting information.
C)The safety principle - assets are valued at no more than the value for which they are insured.
D)The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

Accepted Answer

The safety principle is not a generally accepted accounting principle when it comes to the valuation of assets. Assets should be valued based on their historical cost or fair market value, not based on insurance values. The other principles mentioned in the answer choices (cost principle, objectivity principle, and going-concern assumption) are commonly accepted principles in accounting.

Question 2

The accounting principle that assumes that a company will operate in the foreseeable future is:
A)Going concern.
B)Objectivity.
C)Liquidity.
D)Disclosure.

Accepted Answer

The going concern principle assumes that a company will continue to operate into the foreseeable future. This principle is important in financial reporting because it allows for the use of historical cost accounting, which assumes that assets will continue to be used in the business and not sold off at liquidation prices.

Question 3

Window dressing occurs when management attempts to make a company look financially stronger than it actually is.

Accepted Answer

Window dressing involves manipulating financial statements to improve the appearance of a company's financial performance or position, often by hiding unfavorable information or emphasizing positive information. This can mislead investors and stakeholders into thinking the company is healthier than it truly is.

Question 4

Which of the following best defines an asset?
A)Something with physical form that is valued at cost in the accounting records.
B)An economic resource owned by a business and expected to benefit future operations.
C)An economic resource representing cash or the right to receive cash in the near future.
D)Something owned by a business that has a ready market value.

Accepted Answer

An asset is an economic resource owned by a business that is expected to benefit future operations. This definition includes both tangible and intangible assets, and values them at either cost or fair market value in the accounting records. Options A, C, and D are all partial definitions of assets, but do not fully capture the concept.

Question 5

Which of the following describes the proper form of a balance sheet?
A)Owners' equity is always the first section listed because it is the most important to external users.
B)Cash is always the first asset listed,followed by permanent assets (such as land and buildings),and finally by assets such as receivables and supplies.
C)Liabilities are listed before owners' equity.
D)A subtotal for total assets plus total liabilities is shown.

Accepted Answer

Liabilities are listed before owners' equity on a balance sheet to show the claims of creditors before the claims of the owners. This follows the accounting equation: Assets = Liabilities + Owners' Equity. Additionally, A and B are incorrect because there is no universally agreed-upon order for listing the sections of a balance sheet, and D is incorrect because a balance sheet should show the total assets and total liabilities separately, with the difference representing the owners' equity.

Question 6

Decision makers outside the organization base their credit decisions on weekly,or even daily,financial statements.

Accepted Answer

Decision makers outside the organization, such as creditors or investors, typically base their credit decisions on quarterly or annual financial statements, not on weekly or daily financial statements, as these shorter-term statements do not provide a comprehensive view of the company's financial health over time.

Question 7

In a business organized as a corporation,it is not necessary to list the equity of each stockholder on the balance sheet.

Accepted Answer

In a corporation, the equity of each stockholder is not listed on the balance sheet. The total equity of the corporation is listed on the balance sheet under the stockholders' equity section, but the individual equity of each stockholder is not shown.

Question 8

Blue Wholesale Shirt Co.sold shirts to Pink Retail Shoppe.The owner of Pink Retail said she would pay Blue at a later date,which Blue Wholesale agreed to.Blue Wholesale Shirt Co.is considered to be a:
A)borrower.
B)liability.
C)creditor.
D)debtor.

Accepted Answer

Blue Wholesale Shirt Co. is considered to be a creditor because they have sold shirts to Pink Retail Shoppe and are waiting to be paid at a later date. As a creditor, they have extended credit to Pink Retail Shoppe and are owed payment for the goods sold.

Question 9

The owner of a sole proprietorship is personally liable for the debts of the business,whereas the stockholders of a corporation are not personally liable for the debts of the business.

Accepted Answer

This is a key difference between a sole proprietorship and a corporation. As a sole proprietor, the owner is responsible for all debts and obligations of the business. In a corporation, the stockholders are not personally liable for the debts of the business due to the limited liability protection provided by the corporate structure.

Question 10

Which of the following is the primary objective of an income statement?
A)Providing managers with detailed information about where the enterprise stands at a specific date.
B)Providing users outside the business organization with information about the company's operating results for a period of time.
C)Reporting to the Internal Revenue Service the company's taxable income.
D)Indicating to investors in a particular company the current market values of their investments.

Accepted Answer

The primary objective of an income statement is to provide users outside the business organization with information about the company's operating results for a period of time. This includes revenues earned and expenses incurred to generate those revenues, and ultimately whether the company has made a profit or incurred a loss. The income statement is a key financial statement that helps investors and other stakeholders assess the financial performance of a company.

Question 11

From an accounting viewpoint,when is a business considered as an entity separate from its owner(s)?
A)Only when organized as a sole proprietorship.
B)Only when organized as a partnership.
C)Only when organized as a corporation.
D)A business is always considered as an accounting entity separate from the activities of the owner(s).

Accepted Answer

In accounting, a business is always considered a separate entity from its owners, regardless of its organizational structure. This principle is known as the business entity concept, which states that the business and its owners are separate entities for accounting purposes, allowing for clearer financial reporting and analysis.

Question 12

Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information.

Accepted Answer

Articulation between financial statements refers to the connection and consistency between different financial statements based on the same underlying transaction information. This ensures that the information presented in the financial statements is accurate and reliable.

Question 13

The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990s was the passage of the Securities and Exchange Act.

Accepted Answer

The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990s was the passage of the Sarbanes-Oxley Act, not the Securities and Exchange Act.

Question 14

A statement of cash flows reports revenue and expense activities for a specific time period such as one month or one year.

Accepted Answer

A statement of cash flows reports the cash inflows and outflows from operating, investing, and financing activities, not the revenue and expense activities which are reported on the income statement.

Question 15

The valuation of assets in the balance sheet is based primarily upon:
A)What it would cost to replace the assets.
B)Cost,because cost is usually factual and verifiable.
C)Current fair market value as established by independent appraisers.
D)Cost,because in the event of liquidation,the assets would be sold at an amount equal to their original cost.

Accepted Answer

The valuation of assets in the balance sheet is based primarily upon cost because it is usually factual and verifiable. While current fair market value and replacement costs may influence the valuation, the cost is the most objective measure and is the basis for the historical cost principle of accounting. The fact that assets may be sold at a lower or higher price in the event of liquidation does not affect the initial valuation of the asset.

Question 16

The statement of cash flows provides a link between two balance sheets by showing how net income (or loss)has changed owners' equity from one balance sheet date to the next.

Accepted Answer

The statement of cash flows provides information on how a company's cash position has changed over a period due to operating, investing, and financing activities, not directly how net income has changed owners' equity. The statement that links two balance sheets by showing how net income and other items have changed owners' equity is the statement of retained earnings or the statement of changes in equity.

Question 17

It is not unusual for an entity to report a significant increase in cash from operating activities,but a decrease in the total amount of cash.

Accepted Answer

This is possible if the entity has also had significant cash outflows from investing or financing activities. The increase in cash flows from operating activities may not be enough to offset the outflows from other activities, resulting in a net decrease in total cash.

Question 18

A net profit results from having more revenues than liabilities.

Accepted Answer

Net profit results from having more revenues than expenses, not liabilities. Liabilities are debts or obligations a company owes, not the costs incurred in the operation of the business.

Question 19

A balance sheet is designed to show:
A)How much a business is worth.
B)The profitability of the business during the current year.
C)The assets,liabilities,and owners' equity of a business as of a particular date.
D)The cost of replacing the assets and of paying off the liabilities at December 31.

Accepted Answer

A balance sheet is a financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time. It provides a snapshot of a company's financial position, showing what it owns (assets), what it owes (liabilities), and what is left over for the owners (shareholders' equity) at a particular date. It is not designed to show profitability or the costs of replacing assets or paying off liabilities.

Question 20

Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.

Accepted Answer

Limited liability means that owners of a business are only liable for the debts of the business up to the amount they have invested in the business, not just up to the amounts they can afford.

Quiz 2: Basic Financial Statements

Which of the following is not a generally accepted accounting principle relating to the valuation of assets?

The accounting principle that assumes that a company will operate in the foreseeable future is:

Window dressing occurs when management attempts to make a company look financially stronger than it actually is.

Which of the following best defines an asset?

Which of the following describes the proper form of a balance sheet?

Decision makers outside the organization base their credit decisions on weekly,or even daily,financial statements.

In a business organized as a corporation,it is not necessary to list the equity of each stockholder on the balance sheet.

Blue Wholesale Shirt Co.sold shirts to Pink Retail Shoppe.The owner of Pink Retail said she would pay Blue at a later date,which Blue Wholesale agreed to.Blue Wholesale Shirt Co.is considered to be a:

The owner of a sole proprietorship is personally liable for the debts of the business,whereas the stockholders of a corporation are not personally liable for the debts of the business.

Which of the following is the primary objective of an income statement?

From an accounting viewpoint,when is a business considered as an entity separate from its owner(s) ?