Multiple Choice: Chapter One

1. The accounting profession can be divided into three major categories; specifically, the practice of public accounting, private accounting, and governmental accounting. A somewhat unique and important service of public accountants is:

a. Financial accounting.
b. Managerial accounting.
c. Auditing.
d. Cost accounting.

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2. The primary private sector agency that oversees external financial reporting standards is the:

a. Financial Accounting Standards Board.
b. Federal Bureau of Investigation.
c. General Accounting Office.
d. Internal Revenue Service.

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3. Which of the following equations properly represents a derivation of the fundamental accounting equation?

a. Assets + liabilities = owner's equity.
b. Assets = owner's equity.
c. Cash = assets.
d. Assets - liabilities = owner's equity.

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4. Wilson Company owns land which cost $100,000. If a "quick sale" of the land was necessary to generate cash, the company feels it would receive only $80,000. The company continues to report the asset on the balance sheet at $100,000. This is justified under which of the following concepts?

a. The historical-cost principle.
b. The value is tied to objective and verifiable past transactions.
c. Neither of the above.
d. Both "a" and "b".

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5. Retained earnings will change over time because of several factors. Which of the following factors would explain an increase in retained earnings?

a. Net loss.
b. Net income.
c. Dividends.
d. Investments by stockholders.

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6. Which of these items would be accounted for as an expense?

a. Repayment of a bank loan.
b. Dividends to stockholders.
c. The purchase of land.
d. Payment of the current period's rent.

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7. Which of the following transactions would have no impact on stockholders' equity?

a. Purchase of land from the proceeds of a bank loan.
b. Dividends to stockholders.
c. Net loss.
d. Investments of cash by stockholders.

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8. Which of the following would not be included on a balance sheet?

a. Accounts receivable.
b. Accounts payable.
c. Sales.
d. Cash.

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9. Remington provided the following information about its balance sheet:

Cash                                     $   100
Accounts receivable                    500
Stockholders' equity                    700
Accounts payable                       200
Bank loans                              1,000

Based on the information provided, how much are Remington's liabilities?

a. $200.
b. $900.
c. $1,200.
d. $1,700.

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10. Gerald had beginning total stockholders' equity of $160,000. During the year, total assets increased by $240,000 and total liabilities increased by $120,000. Gerald's net income was $180,000. No additional investments were made; however, dividends did occur during the year. How much were the dividends?

a. $20,000.
b. $60,000.
c. $140,000.
d. $220,000.

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SOLUTIONS

Multiple choice:

1. c. Auditing, along with income tax and management advisory activities, are the major services offered by public accountants. Managerial and cost accounting are generally regarded as private accounting functions. Public accountants deal with financial accounting issues, but "financial accounting" is more of a concept than a "service."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. a. The Financial Accounting Standards Board is the private sector oversight group for accounting standards. The Federal Bureau of Investigation is a government organization that employs many accountants, but has little to do with accounting rule development. The General Accounting Office and Internal Revenue Service are also government agencies. The GAO serves Congress and the IRS administers tax law.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. d. The normal expression of the accounting equation is: assets = liabilities + owners' equity. The only choice which is a correct mathematical expression is "d." In "d," liabilities are subtracted from both sides of the "normal" accounting equation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. d. Both of these concepts justify the continued reporting at $100,000, as this amount is an objective and verifiable historical-cost measurement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. b. Net income would cause increases in retained earnings. In contrast, losses and dividends are factors that will cause decreases in retained earnings.  Investments by stockholders' would cause an increase in capital stock, not retained earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. d. Payment of rent for the current period would be accounted for as rent expense. The repayment of a bank loan is the reduction of a liability, dividends are a distribution of equity, and the purchase of land establishes an asset.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7. a. The purchase of land would cause assets to increase and liabilities to increase. Dividends and net losses cause reductions in total equity, while investments cause increases.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8. c. Sales is a revenue item for the income statement. Accounts receivable and cash are assets and accounts payable is a liability.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9. c. $1,200. The only liabilities listed are accounts payable ($200) and bank loans ($1,000).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. b. $60,000. Because total assets increased $240,000 and liabilities increased $120,000, the increase in equity must have been $120,000 ($240,000 - $120,000). Net income increases equity ($180,000) and dividends decrease equity. The increase in equity of $120,000 is therefore comprised of $180,000 in income (add) and $60,000 of dividends (subtract).