173 Test Bank for Financial Accounting 10th Edition by
Harrison

True - False Questions
The accounting equation shows the relationship among assets,
liabilities and net income.
1.

True

2.

False

Accounting is often called the language of business.
1.

True

2.

False

The balance sheet is also called the statement of financial
position.
1.

True

2.




The Clarke Company had beginning retained earnings of $20,000,
net income of $5,000, and declared and paid dividends of
$1,000. Therefore, the ending retained earnings is $25,000.
1.

True

2.

False

The fundamental qualitative characteristics of accounting
information are relevance and reliability.
1.

True

2.

False

Habitat for Humanity does not use accounting information since
they are not concerned about making a profit.
1.

True

2.


The basic component of paid-in capital is common stock.
1.

True

2.

False

The SEC establishes international financial reporting standards.
1.

True


2.

False

The accounting process begins and ends with people making
decisions.
1.

True

2.

False


A balance sheet reports the company's financial position over a
period of time.
1.

True

2.

False

Generally accepted accounting principles, or GAAP, are the rules
and procedures established by the Securities and
Exchange Commission.
1.

True

2.

False

Every corporation must pay dividends every year.
1.

True


2.

False


Bookkeeping is the mechanical part of accounting.
1.

True

2.

False

Revenues are cash distributions to the stockholders.
1.

True

2.

False

Stockholders' equity is the stockholders' interest in the assets of
the corporation.
1.

True

2.

False

Long-term debt is a liability that is payable beyond one year from

information about a business entity.
1.

True

2.

False

David Company has total assets of $500,000 and total liabilities
of $180,000. David Company's stockholders' equity must
therefore be $680,000.
1.

True

2.

False

The calculation of ending retained earnings considers beginning
retained earnings, current year net income or net loss, and
stockholders' equity.
1.

True

2.

False


B) Members have limited liability for the debts of the business.

3.

C) Only the limited partners have limited liability for the debts of the business.

4.

D) The general partner has unlimited liability for the debts of the business.

Decision makers who use accounting information include:
1.

A) creditors.

2.

B) the Internal Revenue Service.

3.

C) the Securities and Exchange Commission.

4.

D) all of the above.

Federal income taxes are paid by ________ in a limited liability
company.

partnership's profits.

4.

D) Only the members pay federal income taxes on their shares of the partnership's
profits.


Characteristics of faithfully representative information do NOT
include:
1.

A) complete.

2.

B) neutral.

3.

C) accurate.

4.

D) relevant.

To be useful, accounting information must have the fundamental
qualitative characteristics of:
1.


D) The limited partners have unlimited liability for the debts of the partnership.

Owners of an LLC are called:
1.

A) partners.

2.

B) proprietors.

3.

C) members.

4.

D) stockholders.

Which of the following is a TRUE statement about the
characteristics of partnerships?
1.

A) Limited partners have mutual agency and unlimited liability for the partnership's
debts.

2.

B) General partners have mutual agency and limited liability for the partnership's debts.



2.

B) the amount of cash paid plus the dollar value of noncash consideration given in
exchange for the plant asset at acquisition.

3.

C) the amount of cash paid plus the loan taken out to finance the purchase of the plant
asset.

4.

D) the amount a company can receive for the asset when sold in order to go out of
business.

A disadvantage of general partnerships is:
1.

A) double taxation of distributed profits.

2.

B) the partnership's assets are commingled with each partner's personal assets.

3.

C) state rules and regulations must be followed.

4.


B) A partnership has one capital account.

3.

C) For accounting purposes, a partnership is separate from the partners.

4.

D) For accounting purposes, a partnership is not separate from the partners.

Which type of business organization transacts the most
business and is the largest in terms of assets, income, and
number of employees?
1.

A) Proprietorship

2.

B) Partnership

3.

C) Limited-liability company

4.

D) Corporation


C) Generally Accepted Accounting Principles used in the United States.

4.

D) International Financial Reporting Standards.

Which of the following have unlimited liability for a company's
debts?
1.

A) owners of a corporation

2.

B) members of a limited liability company

3.

C) limited partners in a limited liability partnership

4.

D) general partner in a limited liability partnership


Accounting:
1.

A) measures business activities.



D) $1,000,000

Information must be sufficiently transparent so that it makes
sense to reasonably informed users of the financial
statements, such as creditors. This qualitative
characteristic of information is called:
1.

A) verifiability.

2.

B) faithful representative.

3.

C) relevant.

4.

D) understandability.

All of the following are true statements about the entity
assumption EXCEPT for:
1.

A) the entity assumption draws a sharp boundary around each entity.

2.


D) For many years, U.S. Generally Accepted Accounting Principles were considered to
be the superior set of accounting standards in the world.

The entity assumption does NOT apply to a:
1.

A) proprietorship.

2.

B) limited liability partnership.

3.

C) limited-liability company.

4.

D) The entity assumption applies to all the above.

In order to compare the financial statements of Toyota
Corporation to the financial statements of General Motors,
it would be preferable to use _________.
1.

A) U.S. Generally Accepted Accounting Principles for General Motors and International
Financial Reporting Standards for Toyota.

2.


The ________ is elected by the stockholders and is responsible
for setting policy and appointing officers.
1.

A) board of directors

2.

B) chief executive officer (CEO)

3.

C) chief financial officer (CFO)

4.

D) advisory council

Which of the following statements is TRUE for a proprietorship?
1.

A) Legally, a proprietorship is separate from the proprietor.

2.

B) For accounting purposes, a proprietorship is separate from the proprietor.

3.


B) have unlimited liability for the corporation's debts.

3.

C) have unlimited liability for the actions of other stockholders.

4.

D) receive dividends from the corporation without having to pay tax on the distribution.

Which of the following statements is FALSE?
1.

A) The Securities and Exchange Commission is investigating whether all U.S. public
companies should adopt International Financial Reporting Standards.

2.

B) The advantage of a uniform set of global accounting standards is that financial
statements from a U.S. company will be comparable to those of a foreign company.

3.

C) In the long run, a uniform set of global accounting standards will reduce the costs of
doing business globally.


4.

D) With a uniform set of global accounting standards, companies will have to produce


3.

C) verifiability.

4.

D) consistency.

Which of the following entities pays federal income taxes?
1.

A) limited liability partnership

2.

B) general partnership

3.

C) limited liability company

4.

D) corporation

138 Free Test Bank for Financial Accounting 10th Edition
by Harrison Multiple Choice Questions - Page 2
The accounting equation can be stated as:
1.


D) patent.

The stable monetary unit assumption:
1.

A) ensures that accounting records and statements are based on the most reliable data
available.

2.

B) holds that the entity will remain in operation for the foreseeable future.

3.

C) maintains that each organization or section of an organization stands apart from other
organizations and individuals.

4.

D) enables accountants to ignore the effect of inflation on the accounting records.

The principle stating that assets acquired by the business
should be recorded at their actual cost on the date of
purchase is the:
1.

A) historical cost principle.

2.

4.

D) Decrease of $30,000

Historical cost:
1.

A) is determined for each asset on a yearly basis.


2.

B) is equal to the amount of cash paid less the dollar value of all non-cash consideration
given in the exchange.

3.

C) is a verifiable measure that is relatively free from bias.

4.

D) is the amount that the business could sell the asset for.

Another way to state the accounting equation is:
1.

A) Assets = Liabilities + Paid-in Capital - Common Stock.

2.


A) Cost of Goods Sold.

2.

B) Depreciation Expense.

3.

C) Salary Expense.

4.

D) Dividends.

Census Company had the following accounts and balances at
the end of the year. What are total liabilities at the end of
the year?Cash $74,000; Accounts Payable $12,000;
Common Stock $21,000; Cost of Goods Sold $85,000;
Dividends Declared and Paid $12,000; Operating Expenses
$12,000; Accounts Receivable $50,000; Inventory $40,000;
Long-term Notes Payable $33,000; Revenues $90,000;
Salaries Payable $24,000
1.

A) $12,000.

2.

B) $45,000.



2.

B) assets and liabilities.

3.

C) revenues, expenses, and dividends.

4.

D) revenues and liabilities.

Which of the following must be added to beginning Retained
Earnings to compute ending Retained Earnings?
1.

A) Net income

2.

B) Expenses

3.

C) Dividends

4.

D) All of the above


4.

D) include short-term investments and notes payable.


Expenses of a business include:
1.

A) sales and cash equivalents.

2.

B) common stock and rent expense.

3.

C) cost of goods sold and salaries expense.

4.

D) retained earnings and utilities expense.

At the end of the current accounting period, account balances
were as follows: Cash, $25,000; Accounts Receivable,
$40,000; Common Stock, $18,000; Retained Earnings,
$14,000. Liabilities for the period were:
1.

A) $13,000.


D) Neither the vacation home in Hawaii nor the factory in Detroit

Revenues are:
1.

A) decreases in assets resulting from delivering goods or services to customers.

2.

B) increases in liabilities resulting from delivering goods or services to customers.

3.

C) increases in retained earnings resulting from delivering goods or services to
customers.

4.

D) decreases in retained earnings resulting from delivering goods or services to
customers.


Which of the following statements is TRUE?
1.

A) Dividends are expenses of a business.

2.


A) increases in earnings.

2.

B) decreases in earnings.

3.

C) liabilities.

4.

D) assets.

When total expenses exceed total revenues, the result is:
1.

A) a net profit.

2.

B) a net loss.

3.

C) a dividend.

4.

D) excess cash.


2.

B) timeliness.

3.

C) verifiability.

4.

D) materiality.

Examples of liabilities include:
1.

A) accounts payable and dividends.

2.

B) accounts payable and common stock.

3.

C) investments and note payable.

4.

D) accounts payable and note payable.



C) Expenses

4.

D) Dividends

An entity's equity consists of two accounts, Amy Jones, Capital,
and Mindy Lenz, Capital. This indicates the entity is a:
1.

A) proprietorship.


2.

B) corporation.

3.

C) not-for-profit.

4.

D) partnership.

Net income:
1.

A) is calculated by subtracting total expenses and total dividends from total revenues.

C) $124,000

4.

D) $164,000

The accounting assumption that states that the business, rather
than its owners, is the reporting unit is the:
1.

A) entity assumption.

2.

B) going concern assumption.

3.

C) stable-monetary-unit assumption.

4.

D) historical cost assumption.

The relevant measure of the value of the assets of a company
that is going out of business is the:
1.

A) liquidating value.


D) statement of financial position.

Which financial statement reports cash payments and cash
receipts over a period of time?
1.

A) statement of retained earnings

2.

B) income statement

3.

C) balance sheet

4.

D) statement of cash flows

Seidner Company had the following account balances at the end
of the first year of operations:Revenues $99,000; Cost of
Goods Sold $40,000; Salaries Expense $13,000; Dividends
Declared and Paid $12,000; Utilities Expense $11,000;
Advertising Expense $10,000; Short-term Investments
$20,000; Cash $30,000; Land $50,000; Common Stock
$50,000. What is the amount of net income or net loss for
the year?
1.



3.

C) $62,000

4.

D) $100,000

A net loss occurs when:
1.

A) not enough cash exists.

2.

B) total revenues exceed total expenses.

3.

C) total expenses and losses exceed total revenues and gains.

4.

D) total revenues and dividends exceed total expenses and losses.

When analyzing a company's income statement, a fact to
remember is that:
1.



D) Statement of cash flows


The portion of net income that the company has kept over a
period of years and not used for dividends is called:
1.

A) common stock.

2.

B) retained earnings.

3.

C) revenue.

4.

D) gross profit.

Lorna Company has the following account balances at the end of
the first year of operations:Accounts Payable $37,000;
Revenues $99,000; Cost of Goods Sold $40,000; Salaries
Expense $13,000; Dividends Declared and Paid $12,000;
Utilities; Expense $11,000; Advertising Expense $10,000;
Short-term Investments $20,000; Cash $30,000; Land
$50,000; Common Stock $50,000. What is the ending
balance in Retained Earnings?


D) reports the results of operations since the inception of the business.

What is an accounts payable?
1.

A) It is a liability for goods or services purchased on credit and supported by a written
agreement.

2.

B) It is a liability for goods or services purchased on credit and supported by the credit
standing of the purchaser.

3.

C) It is an amount of money to be received from a supplier.

4.

D) It is an asset arising from the sale of goods or services on credit.


The net income shown on the income statement also appears on
the:
1.

A) balance sheet and operations statement.

2.

is:
1.

A) statement of retained earnings, income statement, balance sheet, statement of cash
flows.

2.

B) balance sheet, statement of retained earnings, income statement, statement of cash
flows.

3.

C) statement of retained earnings, income statement, statement of cash flows, balance
sheet.

4.

D) income statement, statement of retained earnings, balance sheet, statement of cash
flows.

Which is the CORRECT order for items to appear on the income
statement?
1.

A) Revenues, operating expenses, net income

2.

B) Cost of goods sold, revenues, net income