Accounting Questions and Answers Essay

accounting quiz 1 [pic] 1 The primary purpose of accounting is to determine whether the business entity is profitable or unprofitable in its operations. A) True B) False This is the correct answer. Feedback: The primary purpose of accounting is to provide information that is useful for decision-making purposes. Accounting is ‘not an end’, but rather it is a ‘means to an end. ‘ LO 1 2 Costs, prices, sales volume, profits, and return on investment are all accounting measurements. A) True This is the correct answer.

B) False Feedback: A clear understanding of accounting terms and concepts is required of those who have a financial interest in an enterprise if they are to understand and communicate about the enterprise. Accounting is sometimes referred to as the ‘language of business. ‘ LO 1 3 The types of accounting information are limited. A) True B) False This is the correct answer. Feedback: There are many types of accounting information, including financial accounting, managerial accounting, and tax accounting. Accountants use the term financial position to describe an entity’s activities during the year. A) True B) False This is the correct answer. Feedback: Financial position refers to an entity’s financial resources and obligations at one point in time. The term ‘results of operations’ is used to describe an entity’s financial activities during the year. 5 Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. This is the correct answer. A) True This is the correct answer.

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B) False Feedback: Such decisions are important to society, as they determine which companies and industries will receive the financial resources necessary for growth, and which will not. 6 Management accounting involves the development and interpretation of accounting information intended specifically to aid management in acquiring investment resources. A) True B) False This is the correct answer. Feedback: Management accounting involves the development and interpretation of accounting information intended specifically to aid management in running the business.

Management accounting information is used in virtually all types of managerial decisions. 7 The most challenging aspect of tax accounting is in the preparation of the many forms required for an entity’s tax return. A) True B) False This is the correct answer. Feedback: Tax planning is the most challenging aspect of tax accounting. The fields of financial, management, and tax accounting are closely related. Decisions affecting financial and/or management accounting will most likely have an affect on tax accounting. An accounting system consists of personnel, procedures, devices, and records used by an organization to develop accounting information and to communicate this information to decision makers. A) True This is the correct answer. B) False Feedback: The design and capabilities of accounting systems vary greatly from one organization to the next, but in every case the basic purpose of the accounting system remains the same: to meet the organization’s needs for accounting information as efficiently as possible. 9 The cost of producing the types of accounting reports required by law is always cost-effective.

A) True B) False This is the correct answer. Feedback: Accounting systems should be cost-effective. The value of the information produced should exceed the cost of producing it. The cost of producing accounting reports required by law is not always cost-effective since the information is not always of value to the entity. 10 External users of financial accounting information are the same users of management accounting information. A) True B) False This is the correct answer. Feedback: Management accounting information is usually not available to external users.

External users of financial accounting information include owners, creditors, government agencies, customers, vendors, and the general public. Note that owners are external users. LO 3 11 Return of investment and return on investment refer to the same thing–the amount returned at the end of the investment period. A) True B) False This is the correct answer. Feedback: Return of investment refers to a return of the initial investment at the end of the investment period. Return on investment refers to receiving an excess over the initial investment at the end of the investment period.

LO 3 12 If you invest $50,000 and receive $52,500 at the end of the investment period, the return on your investment is 5 percent. A) True This is the correct answer. B) False Feedback: $2,500 / $50,000 = 0. 05 = 5%. 13 The primary financial statements are an income statement and a balance sheet. A) True B) False This is the correct answer. Feedback: The primary financial statements include: (1) a balance sheet, (2) an income statement, and (3) a statement of cash flows. LO 3 14 One financial statement that covers a specific period of time is the balance sheet.

A) True B) False This is the correct answer. Feedback: The balance sheet is a position statement that shows where the company stands in financial terms at a specific date, not for a specific time period. LO 3 15 Externally reported financial information and financial statements are primarily historical in nature. A) True This is the correct answer. B) False Feedback: One of the weaknesses of external reports is timing. Such reports show what has happened in the past and do not address current issues or anticipated future events.

LO 3 16 Management accounting is the preparation and use of accounting information systems to achieve the organization’s objectives by supporting decision makers outside the enterprise. A) True B) False This is the correct answer. Feedback: Management accounting is the preparation and use of accounting information systems to achieve the organization’s objectives by supporting decision makers inside the enterprise. LO 4 17 Plant managers are internal users of accounting information systems. A) True This is the correct answer. B) False

Feedback: Internal users of accounting information systems include boards of directors, chief executive officers, business unit managers, plant managers, store managers, and line supervisors. LO 4 18 The management accounting information created and used primarily by internal users is intended above all for planning and control decisions. A) True This is the correct answer. B) False Feedback: Managerial accounting is oriented towards the future, measures efficiency and effectiveness, and is a means to end, not an end in itself.

LO 4 19 One of the specific purposes of management accounting system is to provide information useful to help the enterprise achieve its goals, objectives, and mission. A) True This is the correct answer. B) False Feedback: The specific purpose of management accounting is to provide information for decision-making authority, for decision-making support, and evaluating and rewarding decision-making performance. LO 4 20 Standards adopted and used as a guide in measuring, recording, and reporting the financial affairs and activities of a business are known as accounting concepts. A) True

B) False This is the correct answer. Feedback: These standards are called generally accepted accounting principles (GAAP) that include detailed rules that are used by professional accountants in preparing accounting information and reports. LO 5 21 Today, the most authoritative source of generally accepted accounting principles is the Financial Accounting Standards Board (FASB). A) True This is the correct answer. B) False Feedback: The FASB is an independent rule-making body, consisting of seven members from the accounting profession, industry, government, and accounting education.

The FASB is supported with an advisory council and a large research staff. LO 5 22 The primary purpose of the conceptual framework for financial reporting is to provide guidance to the FASB in developing new accounting standards. A) True This is the correct answer. B) False Feedback: The conceptual framework sets forth FASB’s views as to the objectives of financial reporting, desired characteristics of accounting information, elements of financial statements, criteria for deciding what information to include in financial statements, and valuation concepts relating to financial statement amounts.

LO 5 23 The Securities and Exchange Commission is a governmental agency with the legal power to establish accounting principles and financial reporting requirements for publicly owned corporations. A) True This is the correct answer. B) False Feedback: In the past, the SEC has generally adopted the recommendations of the FASB, rather than develop its own set of accounting principles. Accounting principles developed in the private sector are given the force of law when adopted by the SEC.

LO 5 24 The main purpose of the internal control structure is to detect fraud. A) True B) False This is the correct answer. Feedback: The internal control structure includes all measures used by an organization to guard against errors, waste, and fraud; to assure the reliability of accounting information; to promote compliance with management policies; and to evaluate the level of performance in all divisions of the company. LO 5 25 Uncovering fraud is the primary purpose of an audit. A) True

B) False This is the correct answer. Feedback: The primary purpose of an audit is to determine whether the financial statements are a ‘fair’ representation of the financial condition of the firm, and that they are reliable and complete, conform to generally accepted accounting principles, and are not misleading. 26 The major purpose of an audit is to uncover theft and fraud so that the users of the financial statements can have a high level of assurance that all money is accounted for properly. A) True

B) False This is the correct answer. Feedback: An audit is designed to determine whether the statements fairly reflect the company’s financial position and operating results in accordance with generally accepted accounting principles (GAAP); and to add credibility to the information in the statements. 27 The American Institute of Certified Public Accountants licenses certified public accountants. A) True B) False This is the correct answer. Feedback: The various states license certified public accountants.

The AICPA participates in the establishment of auditing standards, conducts research and works closely with the FASB in the establishment and interpretation of generally accepted accounting principles. 28 Whichever career in accounting you choose, public, management, financial forecasting, cost accounting, internal auditing, government accounting, or accounting education, it is your obligation as a professional to serve the public’s best interest, even at the sacrifice of personal advantage. A) True This is the correct answer. B) False

Feedback: Integrity is of utmost importance to the accounting professional, in every aspect of job performance. 29 The American Institute of Certified Public Accountants issues the Certificate of Management Accounting (CMA). A) True B) False This is the correct answer. Feedback: The Institute of Management Accountants issues the CMA. 30 The code of ethics of the Institute of Management Accountants (IMA) includes the requirements of competency, confidentiality, integrity, and subjectivity. A) True B) False This is the correct answer.

Feedback: The code of ethics of the Institute of Management Accountants (IMA) includes the requirements of competency, confidentiality, integrity, and OBJECTIVITY. 31 Which of the following provides information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers? A) Financial accounting This is the correct answer. B) Management accounting C) Tax accounting D) Cost accounting E) Bookkeeping Feedback: Cost accounting is used to determine the cost of certain business activities and interpreting cost information. 2 Which of the following provides information that is intended primarily for use by internal management in decision making required to run the business? A) Financial accounting B) Management accounting This is the correct answer. C) Tax accounting D) Cost accounting E) Bookkeeping Feedback: Financial accounting provides information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers-investors and creditors. 3 Which of the following involves the preparation of income tax returns and anticipating the tax effects of business transactions and structuring them in such a way as to minimize the income tax burden? A) Financial accounting B) Management accounting C) Tax accounting This is the correct answer. D) Cost accounting E) Bookkeeping Feedback: Financial accounting provides information about the financial resources, obligations, and activities of an economic entity that is intended for use primarily by external decision makers-investors and creditors. 4 Which of the following involves determining the cost of certain business activities and interpreting cost information? A) Financial accounting B) Management accounting C) Tax accounting D) Cost accounting This is the correct answer. E) Bookkeeping Feedback: Bookkeeping is the clerical dimension of accounting. 35 Which of the following refers to recording the routine transactions and day-to-day record keeping of an enterprise? A) Financial accounting B) Management accounting C) Tax accounting D) Cost accounting E) Bookkeeping This is the correct answer.

Feedback: Bookkeeping is the clerical dimension of accounting. 36 An accounting system is cost-effective when it does which of the following? A) Produces useful information B) Produces reports required by law C) Uses computers to replace manual activities D) All of the above E) None of the above This is the correct answer. Feedback: To be cost-effective, the value of the information generated by the accounting system will be greater than the cost to generate the information. 37 The basic functions of an accounting system include which of the following?

A) Interpreting and recording the effects of business transactions B) Classifying the effects of similar transactions C) Summarizing and communicating the information contained in the system D) Only A and B E) A, B, and C This is the correct answer. Feedback: An accounting system should perform the three functions shown, in a cost-effective and timely manner. 38 Which of the following financial statements is also known as a statement of financial position? A) Balance sheet This is the correct answer. B) Income statement C) Statement of cash flows D) Bank statement E) None of the above

Feedback: A bank statement is a document sent to depositors in which the activities of the depositor’s account are detailed. 39 The personnel, procedures, devices, and records used by an organization to develop accounting information and communicate that information to decision makers are called which of the following? A) Audits B) Accounting systems This is the correct answer. C) Personnel systems D) Internal control structures E) None of the above Feedback: Audits are investigations of financial statements designed to determine their fairness in relation to generally accepted accounting principles. 0 The two things that make up cash flow prospects are which of the following? A) Return of investment and return on investment This is the correct answer. B) Return on investment and timing of investment C) Return of investment and timing of investment D) Periodic interest and dividends E) None of the above Feedback: The likelihood that an enterprise will be able to provide an investor with both a return on the investor’s investment and the return of the investment are called cash flow prospects. 41 Which of the following shows details and results of the company’s profit-related activities for a period of time?

A) Balance sheet B) Income statement This is the correct answer. C) Statement of cash flows D) Statement of financial position E) None of the above Feedback: A balance sheet is a position statement that shows where the company stands in financial terms at a specific date. It is also called the statement of financial position. 42 Which of the following shows the details of the company’s activities involving cash during a period of time? A) Income statement B) Statement of financial position C) Balance sheet D) Revenue – Costs = Profits

E) None of the above This is the correct answer. Feedback: A statement of cash flows is an activity statement that shows the details of the company’s activities involving cash during a period of time. 43 Which of the following would be considered an external user? A) Owner This is the correct answer. B) Store manager C) Plant manager D) Board of directors E) All of the above Feedback: External users are individuals and other enterprises that have a financial interest in the reporting enterprise but that are not involved in the day-to-day operations of that enterprise.

Owners, creditors, labor unions, suppliers, and interest in the reporting enterprise but that are not involved in the day-to-day operations of that enterprise. 44 You made a $10,000 loan to your cousin’s company. At the end of one year, the company returned to you $10,850. The $850 is called which one of the following? A) Return of investment B) Return on investment C) An 8. 5% return on investment D) B and C This is the correct answer. E) A and C Feedback: The return OF investment is $10,000. The excess over $10,000 is the return ON investment which is 8. 5% ($850 / $10,000 = 0. 085 = 8. %. 45 A characteristic of externally reported information is that it is which of the following? A) Largely historical in nature B) May be inexact and contain approximations C) Is general-purpose in nature D) Its usefulness is enhanced by explanation E) All of the above This is the correct answer. Feedback: In addition to the characteristics listed above, externally reported information is a means to an end, not an end in and of itself. 46 Which of the following would be considered an internal user? A) Owner B) Creditor C) Chief financial officer This is the correct answer. D) Labor union

E) None of the above Feedback: Internal users are individuals who use accounting information from within an organization. Boards of directors, chief financial officers, plant managers, and store managers are internal users. 47 Which of the following is not a characteristic of management accounting information? A) Timeliness is of importance B) Decision-making authority is identified C) Historically oriented This is the correct answer. D) Measures efficiency and effectiveness E) A means to an end, not an end in and of itself Feedback: Management accounting information is oriented toward the future.

While some of the information, like financial information, is historical in nature, the objective is to motivate management to make future decisions that are in the best interest of the enterprise. 48 Which of the following provides the framework for determining what information is to be included in financial statements and how that information is to be presented? A) Generally accepted auditing standards B) Generally accepted amortization standards C) Accounting standards and practices D) Securities and Exchange Commission E) Generally accepted accounting principles This is the correct answer.

Feedback: The most authoritative source of generally accepted accounting principles (GAAP) is the Financial Accounting Standards Board (FASB). LO 5 49 Measures used by an organization to guard against errors, waste, and fraud; to assure the reliability of accounting information; to promote compliance with management policies; and to evaluate the level of performance of all divisions of the company, are called which of the following? A) Audits B) Internal control structure This is the correct answer. C) Internal auditing D) Integrity E) None of the above

Feedback: Internal control structure includes measures used by an organization to guard against errors, waste, and fraud; to assure the reliability of accounting information; to promote compliance with management policies; and to evaluate the level of performance of all divisions of the company. 50 Which of the following enhances the integrity of accounting information? A) Institutional features can add significantly to the integrity B) Professional accounting organizations play a significant role C) Personal competence, judgment, and ethical behavior play a role D) All of the above This is the correct answer.

E) Only A and C Feedback: The integrity of accounting information is enhanced in three primary ways: (1) institutional features, (2) professional organizations, and, perhaps most important, (3) personal competence, judgment, and ethical behavior. 51 Which of the following is a professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing? A) Institute of Internal Auditors This is the correct answer. B) Institute of Management Accountants C) American Institute of CPAs D) Financial Accounting Standards Board (FASB)

E) American Accounting Association Feedback: The Institute of Internal Auditors (IIA) is a professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing. 52 Which of the following is a professional accounting organization that intends to influence the concepts and ethical practice of management accounting and financial management? A) Institute of Internal Auditors B) Institute of Management Accountants This is the correct answer. C) American Institute of CPAs D) Financial Accounting Standards Board (FASB) E) American Accounting Association

Feedback: The American Institute of Certified Public Accountants (AICPA) is a professional accounting organization that engages in a variety of professional activities, including establishing auditing standards, conducting research, and working closely with the FASB in establishing financial reporting standards. 53 Which of the following is a professional accounting organization of certified public accountants that engages in a variety of professional activities, including establishing auditing standards, conducting research, and working closely with the FASB in establishing financial reporting standards?

A) Institute of Internal Auditors B) Institute of Management Accountants C) American Institute of CPAs This is the correct answer. D) Financial Accounting Standards Board (FASB) E) American Accounting Association Feedback: The Institute of Internal Auditors (IIA) is a professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing. 54 The membership of which of the following consists primarily of accounting educators? A) Institute of Internal Auditors B) Institute of Management Accountants C) American Institute of CPAs

D) Financial Accounting Standards Board (FASB) E) American Accounting Association This is the correct answer. Feedback: The Institute of Internal Auditors (IIA) is a professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing. 55 An investigation of financial statements designed to determine their fairness in relation to generally accepted accounting principles is called which of the following? A) Internal control structure B) External control structure C) Audit This is the correct answer. D) Bookkeeping E) Management accounting

Feedback: An audit is an investigation of financial statements designed to determine their fairness in relation to generally accepted accounting principles. 56 Which of the following issues a Certificate in Internal Auditing? A) Institute of Internal Auditors This is the correct answer. B) Institute of Management Accountants C) American Institute of CPAs D) Financial Accounting Standards Board (FASB) E) American Accounting Association Feedback: The Institute of Management Accountants issues the certificate of management accountant. 57 Which of the following issues a Certificate in Management Accounting?

A) Institute of Internal Auditors B) Institute of Management Accountants This is the correct answer. C) American Institute of CPAs D) Financial Accounting Standards Board (FASB) E) American Accounting Association Feedback: The FASB is a PRIVATE-SECTOR organization that is responsible for determining generally accepted accounting principles in the United States. 58 Which of the following issues licenses to practice as a Certified Public Accountant? A) Institute of Management Accountants B) American Institute of CPAs C) Financial Accounting Standards Board (FASB) D) American Accounting Association

E) None of the above This is the correct answer. Feedback: A Certified Public Accountant is an accountant who is licensed by a STATE after meeting rigorous education, experience, and examination requirements. 59 Expectations of ethical conduct are important for accountants. For management accountants, the code of ethics includes which of the following requirements? A) Competence B) Confidentiality C) Integrity D) Objectivity E) All of the above This is the correct answer. Feedback: Competence, confidentiality, integrity, and objectivity are requirements included in the code of ethics of the Institute of Management Accountants (IMA). 0 Which of the following is not a government agency? A) Internal Revenue Service (IRS) B) Security and Exchange Commission (SEC) C) General Accounting Office (GAO) D) American Accounting Association (AAA) This is the correct answer. E) Federal Deposit Insurance Corporation# Feedback: The American Accounting Association (AAA) is a professional accounting organization consisting primarily of accounting educators that is dedicated to improving accounting education, research, and practice

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