CH 1TEST
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1 CHAPTER 1 :
True/False :
1.Accounting is an information and measurement system that identifies, records, and communicates financial
information to users.
Answer: True
2.Managerial accounting is an area of accounting that provides internal reports to assist the decision making
needs of internal users.
Answer: True
3.The primary objective of financial accounting is to provide general purpose financial statements to help
external users analyze and interpret an organization's activities.
Answer: True
4.Ethics are not important to the primary functions of accounting.
Answer: False
5.As a general rule, revenues should not be recognized in the accounting records until it is received in cash.
Answer: False
6.According to the cost principle, it is preferable for managers to report an estimate of an asset's value.
Answer: False
7.The three major activities of a business are operating, financing, and investing.
Answer: True
8.Investing activities are the acquiring and selling of resources that an organization uses to acquire and sell its
products or services.
Answer: True
9.Revenues are gross increases in equity from a company's earning activities.
Answer: True
Income occurs when revenues exceed expenses.
Answer: True
11.Expenses decrease equity and are the costs of assets or services used to earn revenues.
Answer: True
12.Liabilities are the owner's claim on assets.
Answer: False
13.The balance sheet is also called the statement of financial position because it shows the financial position of
the business on a particular date.
Answer: True
14.A company might provide a service or product on credit. "On credit" implies that the cash payment will
occur on a later date.
Answer: True
15. Owner's equity is increased when cash is received from customers in payment of previously recorded
accounts receivable.
Answer: False
16.An owner's investment in a business always creates an asset (cash), a liability (note payable), and owner's
equity (investment.)
Answer: False
17.Return on assets is useful to decision makers for evaluating management, analyzing and forecasting profits,
and in planning activities.
Answer: True
18.Return on assets measures the ability of an organization to earn a profit based on the amount of its assets. 2 Answer: True
19.Risk is the amount of uncertainty about the return we expect to earn.
Answer: True
20.Generally the lower the risk, the lower the return that can be expected.
Answer: True
21.The income statement is a financial statement that shows revenues earned and expenses incurred during a
specified period of time.
Answer: True
22.The statement of cash flows shows the net effect of revenues and expenses for a reporting period.
Answer: False
23.The balance sheet is based on the accounting equation.
Answer: True
24.Investing activities involve the buying and selling of assets such as land and equipment that are held for
long-term use in the business.
Answer: True
25.The statement of cash flows reports on cash flows separated into operating, investing, and financing
activities over a period of time.
Answer: True
Multiple Choice :
1.Accounting is an information and measurement system that:
A) Identifies business activities.
B) Records business activities.
C) Communicates business activities.
D) Helps people make better decisions.
E) All of the above. Answer: E
2.The primary objective of financial accounting is:
A) To serve the decision-making needs of internal users.
B) To provide financial statements to help external users analyze an organization's activities.
C) To monitor and control company activities.
D) To provide information on both the costs and benefits of looking after products and services.
E) To know what, when, and how much to produce. Answer: B
3.The area of accounting aimed at serving the decision making needs of internal users is:
A) Financial accounting.
B) Managerial accounting.
C) External auditing.
D) SEC reporting.
E) Bookkeeping. Answer: B
4.The operating functions of a business include:
A) Research and development.
B) Purchasing.
C) Marketing.
D) Distribution.
E) All of the above. Answer: E
5.Ethical behavior requires:
A) That auditors' pay not depend on the figures in the client's reports.
B) Auditors to invest in businesses they audit.
C) Analysts to report information favorable to their companies.
D) Managers to use accounting information to benefit themselves.
E) All of the above. Answer: A
