Chapter 15 The Role of Accountants and Accounting Information
1) Which of the following terms refers to the comprehensive system for collecting, analyzing, and communicating financial information?
A) Bookkeeping
B) Accounting
C) Controlling
D) Auditing
E) Budgeting
Answer: B
Explanation: B) Accounting is the practice of making financial information useful to internal and external parties.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
2) Which of the following refers to the rules and procedures governing the content and form of financial reports?
A) National bookkeeping standards
B) Core competencies for accounting
C) Accounting and financial rules
D) National guidelines of accounting principles
E) Generally accepted accounting principles
Answer: E
Explanation: E) GAAP is formulated by the Financial Accounting Standards Board (FASB) of the AICPA and should be used to determine whether a firm has controls to prevent errors and fraud.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
3) Which of the following terms refers to the recording of financial transactions?
A) Bookkeeping
B) Accounting
C) Controlling
D) Budgeting
E) Auditing
Answer: A
Explanation: A) Bookkeeping is the accurate recording of transactions, which accountants use to generate useful information.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
4) Which of the following terms refers to the examination of a company's accounting system to determine whether its financial reports fairly represent its operations?
A) Company-wide analysis
B) Forensic accounting
C) Portfolio analysis
D) Audit
E) Preliminary investigation
Answer: D
Explanation: D) An audit is an examination by an external party to ensure that a company's financial reports are faithful and accurate.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
5) Which are the two major fields of accounting?
A) Managerial and forensic
B) Financial and managerial
C) Bookkeeping and advisory
D) Corporate and individual
E) Public and private
Answer: B
Explanation: B) The two fields of accounting can be classified according to the users they serve. It is convenient and accurate to classify users as those outside the company and those inside the company.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
6) Which of the following bodies formulates the generally accepted accounting principles (GAAP)?
A) Accounting Disclosure Board
B) Financial Accounting Standards Board
C) Association of Certified Fraud Examiners
D) Securities and Exchange Commission
E) American Institute of Certified Public Accountants
Answer: B
Explanation: B) GAAPs are formulated by the Financial Accounting Standards Board (FASB) of the AICPA and should be used to determine whether a firm has controls to prevent errors and fraud.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
7) Which of the following bodies enforces accounting and auditing rules and procedures?
A) Accounting Disclosure Board
B) Financial Accounting Standards Board
C) Association of Certified Fraud Examiners
D) Securities and Exchange Commission
E) American Institute of Certified Public Accountants
Answer: D
Explanation: D) The Securities and Exchange Commission, a government regulatory agency, requires firms to file such disclosures so that potential investors have valid information about their financial status.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
8) Which of the following BEST describes a certified fraud examiner?
A) A specialized managerial accountant concerned with issues of fraud
B) A specialized certified public accountant concerned with issues of fraud
C) A specialized forensic accountant concerned with issues of fraud
D) An accounting agent for the Securities and Exchange Commission concerned with issues of fraud
E) An accounting agent provided by the Sarbanes-Oxley Act of 2002 concerned with issues of fraud
Answer: C
Explanation: C) The CFE's activities focus specifically on fraud-related issues: fraud detection, evaluating accounting systems for weaknesses and fraud risks, investigating white collar crime on behalf of law enforcement agencies, evaluating internal organizational controls for fraud prevention, and expert witnessing.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
9) Which of the following areas of the Certified Fraud Examiner (CFE) exam includes theories of fraud prevention?
A) Criminology and ethics
B) Financial transactions
C) Fraud investigation
D) Fraud litigation
E) Legal elements of fraud
Answer: A
Explanation: A) The criminology and ethics section includes theories of fraud prevention and ethical situations.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
10) What do businesses use to identify, record, and retain financial information, and includes the people, reports, procedures and other resources needed to compile transactions?
A) Accounting information systems
B) Financial accounting
C) Bookkeeping
D) Accounting
E) Managerial accounting
Answer: A
Explanation: A) Accounting information systems are organized procedures for identifying, measuring, recording, and retaining financial information so it can be used in accounting statements and management reports. The system includes all of the people, reports, computers, procedures, and resources that are needed to compile financial transactions.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
11) How do certified public accountants ensure a company's financial reports really represent its operations?
A) By reviewing GAAP standards
B) By conducting an audit
C) Through the filing of tax information
D) By acting as consultants to noncertified accountants
E) By acting as advisory to senior management
Answer: B
Explanation: B) An audit examines a company's AIS to determine whether financial reports reliably represent its operations. Independent auditors who do not work for the company must ensure that clients' accounting systems follow generally accepted accounting principles (GAAP).
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
12) What is the goal of the CPA Vision Project?
A) To eradicate fraud in public companies
B) To increase the role of CPAs in providing consulting services to corporate managers
C) To better identify core competencies needed for noncertified public accountants in the public sector
D) To better define the role of accountants in the world economy
E) To lobby for laws that better support the accounting field and eliminate fraud
Answer: D
Explanation: D) With grassroots participation from CPAs, educators, and industry leaders, the AICPA, through its CPA Vision Project, is redefining the role of the accountant for today's world economy. The Vision Project identifies a unique combination of skills, technology, and knowledge, called core competencies for accounting that will be necessary for the future CPA.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
13) Which type of accountant uses audits to assist in the investigation of companies, and as litigation support in crimes against companies?
A) Management accountants
B) Private accountants
C) Forensic accountants
D) Financial accountants
E) Controllers
Answer: C
Explanation: C) Forensic accounting is the use of accounting for legal purposes. Forensic accountants assist in the investigation of business and financial issues that may have application to a court of law.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
14) Which of the following requires auditor rotation by prohibiting the same person from being the lead auditor for more than five consecutive years?
A) The Association of Certified Fraud Examiners
B) The Securities and Exchange Commission
C) The American Institute of Certified Public Accountants
D) The Financial Accounting Standards Board
E) Sarbanes-Oxley Act of 2002
Answer: E
Explanation: E) Federal regulations, in particular the Sarbanes-Oxley Act of 2002, have been enacted to restore and maintain public trust in corporate accounting practices. A CPA firm can help design a client's financial information system, but not if it also does the client's auditing.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
15) Which of the following encourages accounting professionals to create quality internal controls and financial practices within their organizations?
A) Certified management accountant (CMA)
B) Certified public accountant (CPA)
C) Controller
D) Private accountant
E) Forensic accountant
Answer: A
Explanation: A) A certified management accountant (CMA) designation recognizes qualifications of professionals who have passed IMA's experience and examination requirements. IMA is dedicated to supporting accounting professionals to create quality internal controls and financial practices in their companies.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
16) Who is responsible for ensuring the accounting information system provides the reports and statements needed for management planning and decision making?
A) Auditors
B) Controller
C) Fraud examiners
D) Managerial accountant
E) Bookkeepers
Answer: B
Explanation: B) The controller or chief accounting officer, manages a firm's accounting activities by ensuring the accounting information system provides the reports and statements needed for planning, decision making, and other management activities.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
17) Those accountants who are hired by firms as salaried employees, and who specialize in areas such as financial planning, internal auditing, and taxation are called
A) forensic accountants.
B) certified management accountants.
C) private accountants.
D) certified public accountants.
E) fraud examiners.
Answer: C
Explanation: C) Large businesses employ specialized private accountants in such areas as budgeting, financial planning, internal auditing, payroll, and taxation. In small businesses, a single person may handle all accounting tasks.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
18) In addition to help preparing tax returns, what benefit can a tax service offer a business?
A) Tax planning
B) Litigation advice
C) State certification
D) Personal financial planning
E) Advice on corporate mergers
Answer: A
Explanation: A) Tax services include assistance not only with tax-return preparation but also with tax planning. A CPA's advice can help a business structure (or restructure) operations and investments and perhaps save millions of dollars in taxes.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
19) An audit examines whether a firm's financial statement conforms to generally accepted accounting principles.
Answer: TRUE
Explanation: An audit examines a company's accounting information system to determine whether financial reports reliably represent its operations. Independent auditors who do not work for the company must ensure that clients' accounting systems follow generally accepted accounting principles (GAAP).
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
20) Bookkeeping is a comprehensive system for collecting, analyzing, and communicating financial information.
Answer: FALSE
Explanation: Accounting is a comprehensive system for collecting, analyzing, and communicating financial information.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
21) Due to current concerns over accounting fraud, certified public accountants are now licensed by the Securities and Exchange Commission.
Answer: FALSE
Explanation: Certified public accountants are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
22) In order to increase the quality of current accountants, the CPA Vision Project has re-asserted the ability to use and calculate large amounts of numerical data as a primary competency for accountants.
Answer: FALSE
Explanation: The core competencies in accounting identified in the CPA Vision Project go beyond the ability to crunch numbers. They include certain communications skills, along with skills in critical thinking and leadership.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
23) It is currently very common that a CPA who is hired to audit a firm's finances will also be hired to help design a more efficient financial information system.
Answer: FALSE
Explanation: This is illegal under the Sarbanes-Oxley Act of 2002.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
24) A key component of the Sarbanes-Oxley Act of 2002 was increased government oversight over the certification examinations given by the accounting professional organizations such as the Institute of Management Accountants.
Answer: FALSE
Explanation: More or less, the professional organizations were left alone by this act.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
25) In the private accounting field, certified management accountants use accounting to investigate and support litigation in crimes against companies.
Answer: FALSE
Explanation: Among private accountants, certified management accountants have passed the profession's experience and examination requirements for proficiency to provide internal accounting services that support managers in various activities (such as marketing, production, and engineering).
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
26) A firm's controller is often the firm's chief accounting officer.
Answer: TRUE
Explanation: A controller is the person who manages all of a firm's accounting activities, and is the chief accounting officer.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
27) A tax service can provide management advisory services ranging from personal financial planning to planning corporate mergers.
Answer: FALSE
Explanation: Tax services include assistance not only with tax-return preparation but also with tax planning. As consultants, accounting firms provide management advisory services ranging from personal financial planning to planning corporate mergers.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
28) Give three examples of management advisory services.
Answer: Management advisory services include production scheduling, computer feasibility studies, and accounting information system design. As consultants, accounting firms provide a range of management advisory services. The staffs of the largest CPA firms include engineers, architects, mathematicians, and psychologists, all of whom are available for consulting.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
29) For what types of organizations do forensic accountants work?
Answer: Forensic accountants may be called on by law enforcement agencies, insurance companies, law firms, and business firms. Forensic accountants may be called upon for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
30) Identify the potential users of accounting information.
Answer: The potential users of accounting information include business managers, employees, unions, investors, creditors, tax authorities, and government regulatory agencies. Users of accounting information have varied needs. Business managers, for example, use accounting information to develop goals and plans, set budgets, and evaluate future prospects, whereas tax authorities use it to plan for tax inflows, determine the tax liabilities of individual and businesses, and ensure that correct amounts are paid on time.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
31) Discuss the role of a private accountant within large and small firms.
Answer: Private accountants perform day-to-day activities within a firm. Large businesses employ specialized accountants in such areas as budgeting, financial planning, internal auditing, payroll, and taxation. In small businesses, a single person may handle all accounting tasks.
Although private accountants may be either CPAs or non-CPAs, most are management accountants who provide services to support managers in various activities (marketing, production, engineering, and so forth). Many hold the certified management accountant (CMA) designation, awarded by the Institute of Management Accountants (IMA).
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.1: Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.
32) Which of the following terms refers to any economic resource that is expected to benefit a firm or individual who owns it?
A) Asset
B) Liability
C) Equity
D) Account
E) Deposit
Answer: A
Explanation: A) An asset counts as something of value for accounting purposes.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.2: Explain how the accounting equation is used.
33) Which of the following terms refers to the amount of money that owners would receive if they sold all of a company's assets and paid all of its liabilities?
A) Asset
B) Owners' equity
C) Inventory
D) Liability
E) Credit
Answer: B
Explanation: B) Owners' equity is that value that represents the financial stake in a company by the owners.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.2: Explain how the accounting equation is used.
34) Which of the following describes a liability?
A) The potential profit from selling a firm's assets and settling all of its debts
B) A debt owed by a firm to an outside organization or individual
C) Any economic resource expected to benefit a firm or an individual who owns it
D) Any economic deficit expected to cost a firm or an individual who owns it
E) The amount of money originally invested in a business by its owners
Answer: B
Explanation: B) All debts owed to others are liabilities.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.2: Explain how the accounting equation is used.
35) A company has an assets-to-liabilities ratio of 3:2 and total assets worth $6 million. What is its owners' equity?
A) $1 million
B) $2 million
C) $3 million
D) $9 million
E) $12 million
Answer: B
Explanation: B) assets/(assets - owners' equity) = 3/2
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
36) How much profit does a company which has a total of $5 million invested by its owners and $4 million in liabilities need to make in order to have an assets-to-liabilities ratio of 2:1?
A) $2 million
B) $3 million
C) $5 million
D) $7 million
E) $8 million
Answer: D
Explanation: D) We are given that assets/liabilities = 2, and liabilities = $4 million, so assets must be $8 million. From this, we can use the accounting equation to solve for the total owners' equity: assets = liabilities + owners' equity, so owners' equity = $8 million + $4 million = $12 million. Owners' equity has two sources, profits + investment, so solve to find the portion that comes from profits: $12 million = $5 million + profit, and profit = $7 million.
Difficulty: Difficult
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
37) Which of the following represents the accounting equation?
A) Assets = Liabilities + Owners' Equity
B) Owners' Equity = Assets + Liability
C) Liability = Assets + Owners' Equity
D) Assets = Liabilities - Owners' Equity
E) Assets = Liabilities × Owners' Equity
Answer: A
Explanation: A) All accountants rely on record keeping to enter and track transactions. Underlying all record-keeping procedures is the most basic tool of accounting, the accounting equation: Assets = Liabilities + Owners' Equity.
Difficulty: Difficult
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
38) Why is a company's owners' equity important for investors and lenders?
A) Owners' equity indicates potential profit.
B) Owners' equity determines how quickly liabilities will increase.
C) Owners' equity determines how much will be paid out as dividends.
D) Owners' equity indicates how much the owner has invested in the company
E) Owners' equity indicates the level of security.
Answer: E
Explanation: E) Before lending money to owners, for example, lenders want to know the amount of owners' equity in a business. A larger owners' equity indicates greater security for lenders.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
39) A company with a very high amount of liabilities will always find it more difficult to secure loans than a company with a very low amount of liabilities.
Answer: FALSE
Explanation: Securing of loans is a function of net worth, not necessarily the amount of liabilities. Net worth may be high in spite of high liabilities.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
40) The percentage of liabilities in a company's assets plus the percentage of owners' equity in its assets is always equal to 100.
Answer: TRUE
Explanation: By definition, assets equal liabilities plus owners' equity.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
41) Owners' equity is net worth minus liabilities.
Answer: FALSE
Explanation: Owners' equity is the amount of invested ownership in a company that the owners have. Owners' equity is equal to assets minus liabilities.
Difficulty: Easy
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
42) If a company's assets exceed its liabilities, owners' equity is negative.
Answer: FALSE
Explanation: If a company's assets exceed its liabilities, owners' equity is positive; this is based on the accounting equation.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.2: Explain how the accounting equation is used.
43) What two sources of capital make up owners' equity?
Answer: Owners' equity includes the amount that the owners originally invested and any profits earned by and reinvested in the company. Owners' equity is the amount of money that owners would receive if they sold all of a company's assets and paid all of its liabilities.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.2: Explain how the accounting equation is used.
44) What is the accounting equation?
Answer: assets = liabilities + owners' equity. The accounting equation underlies all record-keeping procedures and is the most basic tool of accounting.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.2: Explain how the accounting equation is used.
45) What distinguishes the two most commonly used categories of owners' equity?
A) The amount of equity within each type of asset—current versus fixed and intangible
B) The financial form of the equity—cash investments versus stock and bond investments
C) The source of the equity—investments versus earnings
D) The use of the equity—invested versus saved
E) The age of the equity—older investments and earnings versus newer investments and earnings
Answer: C
Explanation: C) Paid-in capital is additional money invested by owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
46) What are the major categories within an income statement?
A) Operating costs and profits, investing costs and profits, and financing costs and profits
B) Current revenue, long-term revenue, and net revenue
C) Revenue, sales, and income
D) Assets, liabilities, and owners' equity
E) Revenues, cost of revenues, operating expenses, and net income
Answer: E
Explanation: E) An income statement shows the financial results that occurred during a period of time, such as a month or a quarter or a year.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
47) Which of the following is the difference between revenues and the cost of revenues?
A) Net income
B) Gross profit
C) Accounts payable
D) Interest expense
E) Cash flow
Answer: B
Explanation: B) Managers are often interested in gross profit, a preliminary profit figure that considers revenues and cost of revenues from the income statement.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
48) Which of the following BEST demonstrates cash flow from operations?
A) Transactions involved in buying and selling goods and services
B) Net cash used in or provided by investment
C) Cash flow from borrowing or issuing stock
D) Outflows for payments of dividends
E) Inflows of cash that will be used to repay borrowed money
Answer: A
Explanation: A) Cash flow from operations concerns main operating activities, and cash transactions involved in buying and selling goods and services.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
49) Which of the following documents would MOST likely come from a planning strategy meeting?
A) Income statement
B) Flow of cash statement
C) Balance sheet
D) Budget
E) Statement of projected earnings
Answer: D
Explanation: D) A budget is the most important internal financial statement.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
50) Which of the following statements BEST describes the difference between current and long-term liabilities?
A) Current liabilities are debts that need to be paid immediately, whereas long-term liabilities do not.
B) Current liabilities are those which will cost less in debt interest than long-term liabilities.
C) Current liabilities are debts that are settled sooner than long-term debts.
D) Current liabilities are debts on tangible assets, whereas long-term liabilities are debts on intangible assets.
E) Current liabilities are debts on current assets, whereas long-term liabilities are debts on fixed and intangible assets.
Answer: C
Explanation: C) Current liabilities include accounts payable: unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
51) Which of the following refers to the financial statement detailing a firm's assets, liabilities, and owners' equity?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Expense report
E) Annual budget
Answer: C
Explanation: C) A balance sheet uses the accounting equation to show the current value of a company.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
52) Which of the following describes assets such as land, building, and equipment?
A) Liquid assets
B) Fixed assets
C) Intangible assets
D) Current assets
E) Limited assets
Answer: B
Explanation: B) Fixed assets are tangible things of value.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
53) Which of the following BEST describes depreciation?
A) The process of increasing the value of fixed assets over time
B) The process of deducting operating expenses from the value of fixed assets
C) The process of reducing the value of fixed assets over time
D) The process of distributing the cost of liabilities over time
E) The process of distributing the cost of intangible assets over time
Answer: C
Explanation: C) Depreciation is the natural reduction of value of certain assets over time.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
54) Which of the following describes assets such as patents and trademarks?
A) Liquid assets
B) Fixed assets
C) Intangible assets
D) Current assets
E) Limited assets
Answer: C
Explanation: C) Intangible assets are nonphysical items that still have monetary value attached to them.
Difficulty: Easy
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
55) Which of the following terms refers to the amount paid for an existing business beyond the value of its other assets?
A) Goodwill
B) Excess compensation
C) Licensing
D) Asset promotion
E) Liability deduction
Answer: A
Explanation: A) Goodwill is the intangible value of the expectation that a company will continue to do business wisely.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
56) Which of the following terms refers to the difference calculated by subtracting income taxes from the operating income of an organization?
A) Gross revenue
B) Net income
C) Gross profit
D) Cash flow
E) Leverage
Answer: B
Explanation: B) Net income is operating income minus taxes.
Difficulty: Moderate
AACSB: Application of knowledge
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
57) What does a statement of cash flow describe?
A) Gross profit compared to operating expenses
B) Value of revenues compared to cost of revenues
C) Yearly receipts and cash payments
D) Cost of obtaining materials needed to produce products
E) Funds that flow into the business from the sale of the goods or services provided
Answer: C
Explanation: C) The statement of cash flows describes yearly cash receipts and cash payments. It provides the most detail about how the company generates and uses cash, and some investors and creditors consider it one of the most important statements of all.
Difficulty: Moderate
AACSB: Analytical thinking
Objective: 15.3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.
58) Which of the following best describes the revenues of an organization?
A) Gross profit compared to operating expenses
B) Value of revenues compared to cost of revenues
C) Yearly receipts and cash payments
D) Cost of obtaining materials needed to produce products
E) Funds that flow into the business from the sale of the goods or services provided
Answer: E
Explanation: E) Revenues are the funds that flow into a business from the sale of goods or services.
Difficulty: Moderate
AACSB: Analytical thinking