Chapter 1 -12 true and false

Chapter 1

True and false

1, Financial accounting information is designed primarily to assist investors and creditors in deciding how to allocate scarce resources.

2, Return on investment is the same as return of investment.

3, The IRS tax return is one of the primary financial statements.

4, Management accounting refers to the preparation and use of accounting information designed to meet the needs of decision makers inside the business organization.

5, The content of management accounting reports need not be presented in conformity with generally accepted accounting principles.

6, The tailoring of an accounting report to meet the needs of a specific decision maker is more characteristic of financial accounting reports than of management accounting reports.

7, The annual financial statements of large corporations such as Microsoft or Pepsico are audited by independent certified public accountants, even though these firms maintain large accounting departments as part of their organizations.

8, Generally accepted accounting principles were established by Congress in 1933 and are updated annually by the American Accounting Association.

9, One purpose of generally accepted accounting principles is to make accounting information prepared by different companies more comparable.

10, Today the most authoritative source of generally accepted accounting principles is the Internal Revenue Service.

Answer : T, F, F, T, T, F, T, F, T, F

Chapter 2

True and false

1, A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation.

2, Assets must always have physical characteristics such as buildings, machinery or inventory.

3, The going concern principle assumes that the business will not continue indefinitely.

4, Notes Payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts

payable do not.

5, A net loss results from having more liabilities than revenues.

6, The sale of additional shares of capital stock will cause net income to increase.

7, Articulation between the financial statements mean that they relate closely to each other.

8, Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.

9, In a business organized as a corporation, it is necessary to list the equity of each stockholder on the Statement of Cash Flows.

10, Total assets always equal total liabilities plus total owners' equity.

Answer: T, F, F, T, F, F, T, F, F, T

Chapter 3

True and false

1.The debit side of an account is the right side while the credit side is the wrong side.

2.In a computerized accounting system journalizing may be done automatically but posting must be done by someone with an understanding of recording transactions.

3.The running balance form or the T account form is typically used in the trial balance to display the accounts and their amounts.

4.Dividends are an expense of a corporation and reduce both total assets and stockholders' equity.

5.Dividends reduce owners' equity and therefore should be deducted from net income.

6.Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement account.

7.Earning revenue increases owners' equity; therefore revenues are recorded with credit entries. Expenses reduce owners' equity and are recorded with debit entries.

8.It is not unusual for a company to distribute a trial balance to its stockholders in lieu of a balance sheet.

9.Accounts are usually arranged in the ledger in financial statement order, that is, assets first, followed by liabilities, owners' equity, revenue, and expenses.

10.A debit to a ledger account refers to the entry of an amount on the right side of an account.

Answer: F F F F F F T F T F

Chapter 4

1. Adjusting entries are needed whenever transactions affect the revenue or

expenses of more than one accounting period.

Answer: True

2.The market value of a depreciable asset can be determined by its book value at a particular time.

3.The adjusting entry to record estimated income taxes in a profitable period consists of a debit to income tax expense and a credit to income tax payable.

4.The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated.

5.The need for adjusting entries results from timing differences between the receipt or disbursement of cash and the dates on the financial statements.

6.The adjusted trial balance may be used in place of the balance sheet.

7.The book value of an asset may also be called the carrying value of the asset.

8.The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life.

9.The unadjusted trial balance combines the trial balance items with the adjusting entries to determine the adjusted balances.

10.When a company receives cash in advance and it is obligated to provide a service or a product in the future, the entry would be a debit to a liability account and a credit to revenue.

Answer:1. T; 2. F; 3. T ; 4. F ; 5. F ; 6. F ; 7. T; 8. T ; 9. F; 10 F

Chapter 5

1.The report form of the balance sheet lists liabilities under assets on the left and owners' equity on the right.

2.A current asset may be cash or must be capable of being converted into cash with a relatively short period of time, usually less than five years.

3.Real accounts can only be closed at the end of the year with a single compound entry.

4.The purpose of the after-closing trial balance is to give assurance that the

accounts are in balance and ready for the new accounting period.

5.Working capital equals current assets divided by current liabilities.

6.At year end all accounts must be closed.

7.The income summary account appears, as stated, on the statement of retained earnings.

8.Interim financial statements usually report on a period of time less than one year.

9.Closing entries do not affect the cash account.

10.An after-closing trial balance consists only of asset, liability, and owners' equity accounts.

11.Financial statements are usually prepared before the closing entries.

12.Publicly owned companies are owned and managed by the government.

ANSWER: F, F, F, T, F, F, F, T, T, T, T, F

Chapter 6

1.The accounting cycle of a merchandising company consists of (1) purchases

of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.

2.Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft and sales of inventory.

3.In a periodic inventory system when merchandise is purchased it is debited to an account called purchases.

4.Purchase Discounts Lost is shown as a reduction of Cost of Goods Sold in the Income Statement.

5.The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by debiting these accounts and crediting Income Summary.

6.The operating cycle of a merchandising business is the length of time covered by the company's income statement.

7.Inventory is purchased for resale.

8.In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts receivable subsidiary ledger, rather than the general ledger.

9.A perpetual inventory system requires the capability of recording the cost of

goods sold relating to individual sales transactions.

10.Wholesalers sell to the general public.

ANSWER: F, F, T, F, F, T, T, T, T, F

Chapter 7

1.Showing marketable securities on the balance sheet at current market values violates the consistency principle.

2.A line of credit creates a liability for the borrower when it is granted by the bank.

3.The first step in a bank reconciliation is to update the depositor's accounting records for any unrecorded cash transactions.

4.To \"write-off\" an account receivable is to reduce the balance of the customer's account by the amount deemed uncollectible.

5.The balance shown on a bank statement is always equal to the month-end balance of a company's cash account in the general ledger.

6.Deposits-in-transit would not appear on a company's bank statement but would appear on the company's bank reconciliation.

7.Entries made in the journal after preparing a bank reconciliation are called closing entries.

8.Cash equivalents are the most liquid of assets.

9.A credit memoranda from a bank indicates that they have increased the depositor's cash balance.

10.The amount of cash that should appear on the balance sheet is equal to the amount of cash on deposit, plus currency, coin, and customers' checks on hand, minus the balance of the Cash Over and Short account.

11.An unrealized gain on available-for-sale securities will increase shareholders' equity.

ANSWER: F, F, F, T, F, T, F, T, T, F, T

Chapter 8

1.When goods for sale are not homogeneous in nature it is necessary to use the specific identification method of accounting for inventory.

2.An advantage to the FIFO method of accounting for inventory is that it values the balance sheet inventory at current replacement costs.

3.A write down of inventory due to obsolescence reduces the amount in the

Inventory account and in the Cost of Goods Sold account.

4.Merchandise that has been sold but not yet recorded in the accounts should be included in the physical inventory at year-end.

5.Merchandise sold F.O.B. Destination belongs to the buyer while in transit.

6.In a periodic system the only account in regard to inventory that is kept up-to-date is the purchases account.

7.Any business that sells numerous units of identical products may determine its cost of goods sold using a flow assumption rather than the specific identification method.

ANSWER: T, T, F, F, F, T, T,

Chapter 9

1.Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure will be used up in the current period.

2.To capitalize an expenditure means charging it to Owner's Capital.

3.The journal entry to record depreciation expense consists of a debit to Depreciation Expense and a credit to the asset being depreciated.

4.Depreciation is a process of asset valuation.

5.Book value represents the cost of an asset that has yet to be allocated to expense.

6.The half-year convention allows us to take six months depreciation in the first year on assets even if they were purchased on December 25.

7.The book value of an asset is equal to its undepreciated cost.

8.The formula for the double-declining balance method of depreciation is: Remaining book value times the straight line rate is equal to depreciation expense.

9.The term plant assets refers to long-lived assets acquired for use in business operations, rather than for resale to customers.

10.Any reasonable and necessary expenditures to place a newly acquired plant asset in service should be included in the cost of that plant asset.

11.Sales tax on equipment is not part of the acquisition cost, but merely a company liability

ANSWER: T, F, F, F, T, T, F, F T, T, F

Chapter 10

1.A liability that is known to exist but the precise dollar mount is not known is called an accrued liability.

2.Bonds secured by a pledge of specific assets are called debenture bonds.

3.When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date.

4.The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond.

5.A loss contingency is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known.

6.A commitment, such as a contract to pay a baseball player $5,000,000 a year for five years, should be listed as a long-term liability.

7.If a lease transfers ownership of the property to the lessee at the end of the lease term, it should be regarded as an operating lease

8.There is a distinct tax advantage for a company to issue bonds in lieu of stocks.

9.The withholding of taxes from an employee's pay is a liability to the company.

10.Liabilities that do not fall due within one year or within the operating cycle are classified as long-term liabilities

11.Convertible bonds can be exchanged for common stock at the option of the company.

ANSWER: F, F, T, T, F, F, F, T, T, T, F.

Chapter 11

1.When a stockholder sends in a proxy statement to a corporation he or she owns stock in, they relinquish their voting rights to the officers of the corporation.

2.A stockholders' subsidiary ledger will have entries made for each stockholder showing the number of shares held rather than the amounts paid for the shares.

3.The number of shares a corporation may issue is specified in the articles of Incorporation and approved by the Securities and Exchange Commission.

4.The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors.

5.When a state authorizes the sale of stock to stockholders, the Corporation will debit cash for the par value of the stock.

6.A stock split will normally decrease the market price of the stock and increase the number of shares on the market.

7.Treasury stock is stock that is authorized and issued but not outstanding.

8.Contributed capital is equivalent to paid-in capital.

9.The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased not par value.

10.The par value of a stock is considered the legal capital of the corporation.

ANSWER: F, T, F, T, F, T, T, T, F, T

Chapter 12

1.The rule of consistency says that a change in an accounting estimate is permitted but a change in an accounting method violates the rule and is never allowed.

2.Earnings per share is equal to total dividends declared divided by the number of shares outstanding.

3.In determining earnings per share when a preferred stock has dividends in arrears, only the current years dividend is deducted to arrive at earnings per share

4.The price earnings ratio is based on expected future earnings while the Earnings per share ratio is based on historical earnings .

5.In order to receive a dividend a stockholder must have owned the stock as of the ex-dividend date.

6.A stock dividend provides a stockholder with more shares of stock thus increasing his or her percentage of ownership in the company.

7.When a small (under 10%) stock dividend is declared the market value of the stock is transferred from Retained Earnings into other stockholder equity accounts.

8.A stock split changes the par value of a stock as does a stock dividend.

9.Comprehensive income differs from net income in that it includes events that are recognized but not realized

10.Comprehensive income is a component of net income

ANSWER: F, F, T, F, T, F, T, F, T, F