Chapter 16 Test Bank PDF

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Arbus 101 Test Bank...

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Chapter 16 Student: ___________________________________________________________________________

1. Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping. ฀ ฀ True False 2. It is almost impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements. ฀ ฀ True False 3. The ability to read and understand financial statements is no longer an important skill for managers. ฀ True False

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4. Jeremy operates his own small business, but doesn't want to be bothered with dealing with accounting information. He tells his friends, "All I need accounting for is to prepare my income tax return for my business. I'll hire someone to do that for me." Jeremy's attitude would be disastrous if he managed a large firm, but is a reasonable view for a small business owner. ฀ ฀ True False 5. Accounting provides information about the financial condition and operating performance of a firm. ฀ True False

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6. The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better decisions. ฀ ฀ True False 7. Owners, creditors, suppliers, employees, and the government all are users of accounting information. ฀ True False 8. Accounting provides financial information that can be useful to the owners, creditors, suppliers, employees, and competitors of an organization. ฀ ฀ True False 9. After recording a business' transactions, accountants usually classify the transactions into groups with common characteristics. ฀ ฀ True False 10. In an effort to maintain a competitive advantage, most firms do not share accounting information with people outside of the firm. ฀ ฀ True False 11. The Canadian government is a user of accounting information. ฀ True False

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12. If you know how to keep your customers satisfied, you can successfully manage a business without knowing anything about accounting. ฀ ฀ True False 13. Good decisions are based on good information. That's why an organization needs accounting—to provide good information. ฀ ฀ True False 14. Accounting involves both the recording and the interpreting of financial events. ฀ True False

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15. A firm's financial statements represent a health report regarding the condition of the firm. ฀ True False

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16. Accounting supports the four functions of management and is designed to assist decision makers-both internal and external. ฀ ฀ True False 17. The accounting system happens once a year. ฀ True False

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18. Accounting has been called the language of business. ฀ True False

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19. There are five key working areas in accounting: financial accounting, managerial accounting, auditing, tax accounting, and governmental and not-for-profit accounting. ฀ ฀ True False 20. Accounting information is not relevant for non-profit organizations. ฀ True False

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21. Churches, schools, and charitable organizations all hire accountants. ฀ True False

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22. The accounting profession is divided into two main fields: bookkeeping and auditing. ฀ True False

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23. Accountants do most of the work involved in recording financial events and transactions, but the actual classifying and interpreting of this data is left to financial managers. ฀ ฀ True False 24. Budget preparation is one aspect of managerial accounting. ฀ True False

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25. Activities of managerial accountants include measuring and reporting the costs of production, marketing, and other functions within the organization. ฀ ฀ True False 26. Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization. ฀ ฀ True False 27. Financial accounting involves activities such as preparing budgets and measuring production costs. ฀ True False 28. Financial accounting is used to provide information and analysis that managers within the organization can use to assist them in decision making. ฀ ฀ True False 29. Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization. ฀ ฀ True False 30. Information contained in a firm's annual report largely represents work done by managerial accountants. ฀ ฀ True False 31. A firm's annual report is a yearly statement of the financial condition, progress, and expectations of the organization during one year. ฀ ฀ True False

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32. The job of reviewing and evaluating the records used to prepare a company's financial statements is referred to as compliance. ฀ ฀ True False 33. Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed. ฀ ฀ True False 34. An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements. ฀ ฀ True False 35. In large companies, certified internal auditors are usually responsible for preparing tax returns and developing tax strategies for businesses. ฀ ฀ True False 36. A tax accountant is responsible for preparing tax returns and developing tax strategies. ฀ True False

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37. As the burden of taxes grows in the economy, the role of the auditor becomes increasingly important to the organization. ฀ ฀ True False 38. Citizens and special interest groups often have interest in the information generated by government accounting. ฀ ฀ True False 39. Accounting is not important for non-profit organizations since financial data is generally not critical to their success. ฀ ฀ True False 40. The Canada Revenue Agency (CRA) is responsible for establishing accounting standards used by accountants working in government accounting. ฀ ฀ True False 41. Jamal is an accountant employed by Acctex, Inc. Jamal is an example of a public accountant. ฀ True False

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42. Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm. ฀ ฀ True False 43. Deron has a bachelor's degree in accounting and additional training in tax law. He is responsible for preparing tax returns and developing tax strategies for his employer, Lighting Freight Service, and has done so for the last seven years. Deron is a certified government accountant. ฀ ฀ True False 44. Martha is a member of a conservative political group that wants to identify and publicize examples of wasteful government spending. The type of accounting information that Martha and her group will follow most closely will be provided by certified public accountants. ฀ ฀ True False 45. In Canada, there are three different professional accounting designations. ฀ True False

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46. Accounting and bookkeeping are terms used for essentially the same activity in an organization. ฀ True False

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47. Bookkeeping is part of accounting, but accounting goes far beyond the activities involved in bookkeeping. ฀ ฀ True False 48. A major part of a bookkeeper's job is to interpret financial data and suggest strategies for improving the firm. ฀ ฀ True False 49. A bookkeeper's first task is to record the firm's transactions in a journal. ฀ True False 50. The books where accounting data are first entered are called ledgers. ฀ True False

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51. Double-entry bookkeeping requires that every transaction be recorded in two places. ฀ True False 52. Double-entry bookkeeping can help identify a recording error made by a bookkeeper. ฀ True False 53. A journal is where the initial record of a day's transactions is entered. ฀ True False

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54. The accounting book that provides all the information about a single account in one place is called the ledger. ฀ ฀ True False 55. At present, accounting software packages have proven to be too complex and expensive to be useful for owners of small businesses. ฀ ฀ True False 56. The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements. ฀ ฀ True False 57. Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger. ฀ ฀ True False 58. There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger. ฀ ฀ True False 59. The first step in the accounting cycle is posting information regarding business transactions into the ledgers. ฀ ฀ True False 60. The accounting cycle usually involves the work of both the bookkeeper and the accountant. ฀ True False 61. The purpose of a trial balance is to prepare a practice balance sheet. ฀ True False

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62. To find out details of the maintenance costs, within the accounting system, you should refer to the ledger. ฀ ฀ True False

63. Carol has worked as a bookkeeper for a small clothing store for almost three years. Her old boss recently retired and a new manager took over. The new manager frequently asks her for information and advice about how to interpret the information she records. Carol's experience as a bookkeeper means she is qualified to provide this type of advice. ฀ ฀ True False 64. One advantage of the double-entry method of bookkeeping is that it can help identify mistakes made in recording financial transactions. ฀ ฀ True False 65. Computerized accounting programs have eliminated the need to prepare a trial balance. ฀ True False 66. Computer-based continuous auditing can be used to discover cash flow problems. ฀ True False

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67. Accounting software for small businesses has become so sophisticated that most small business owners will never need to consult with an actual accountant. ฀ ฀ True False 68. Accounting software has proven to be especially helpful for small business owners. ฀ True False

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69. Computers today can actually record and analyze data, in addition to printing financial reports. ฀ True False

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70. In addition to the mechanical tasks of recording and classifying accounting information, the best accounting software programs currently available for small businesses have the ability to make financial decisions, thus eliminating the need for owners of small businesses to consult with accountants. ฀ ฀ True False 71. Juliet has found that her small business needs a better way to maintain accounting records and analyze business opportunities than its current manual system. These days, any off-the-shelf accounting package available at a local software retailer should do an excellent job of meeting her firm's accounting needs. ฀ ฀ True False 72. One of the statements prepared in the accounting cycle is the statement of cash flows. ฀ True False

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73. Felicia is a public accountant. She has been asked to prepare the financial statements for McNick's Auto Body Shop. She is at the stage of the accounting cycle where she wants to summarize all of the data in the accounting ledgers to see whether the figures appear to be correct and balanced. Felicia will need to prepare a statement of cash flows in order to complete this stage of the cycle. ฀ ฀ True False 74. Miko is the head of the accounting department at Microflush. She and her subordinates recently completed a trial balance. They are now likely to be working on the balance sheet, income statement and statement of cash flows. ฀ ฀ True False 75. The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity. ฀ True False

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76. If a firm has $100,000 in assets and liabilities of $62,000, then the owners' equity is equal to $162,000. ฀ ฀ True False 77. The key financial statements are the balance sheet, income statement, and cash flow statement. ฀ True False

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78. Owners' equity can be found by subtracting liabilities from assets. ฀ True False

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79. The income statement reports the difference between a firm's assets and its liabilities as of a certain date. ฀ ฀ True False 80. A firm's balance sheet reports its financial condition on a specific date. ฀ True False

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81. The balance sheet reports revenues and selling costs for a period of time. ฀ True False

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82. An income statement reports what a company owns and owes on a certain day. ฀ True False 83. Assets are reported on the balance sheet. ฀ True False

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84. Liabilities are reported on the income statement. ฀ True False

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85. Assets are economic resources that are owned by a firm. ฀ True False 86. Liabilities are what the firm owes to others. ฀ True False

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87. The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity. ฀ True False 88. A balance sheet is composed of assets, liabilities, and revenues. ฀ True False

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89. The equipment a firm owns and the money it has in its bank account would both be considered among its assets. ฀ ฀ True False 90. Brand names such as Coca-Cola and McDonald's are examples of fixed assets. ฀ True False 91. Assets are listed on the balance sheet according to their liquidity. ฀ True False

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92. The firm's most valuable assets are listed at top of its balance sheet. ฀ True False 93. Patents and copyrights are examples of intangible assets. ฀ True False 94. Liquidity refers to how soon liabilities must be paid. ฀ True False

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95. Liquidity refers to how fast an asset can be converted into cash. ฀ True False

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96. The value of what stockholders own in a firm is called stockholders' equity. ฀ True False 97. Accounts payable are listed as an asset on a firm's balance sheet. ฀ True False

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98. The owners' equity in a firm is listed as an asset on the balance sheet. ฀ True False

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99. The value of things you own minus the amount of money you owe others is called equity. ฀ True False

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100.Revenues, cost of goods, and expenses would all be reported on a firm's income statement. ฀ True False 101.The "bottom line" of an income statement is the net worth of the firm. ฀ True False

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102.An income statement will present the net income (or net loss) of a firm resulting from the operations of the organization over a period of time. ฀ ฀ True False 103.The income statement computes net income by subtracting liabilities from assets. ฀ True False

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104.Revenue represents the dollar amount of what is received for goods sold, services rendered, and from other financial sources. ฀ ฀ True False 105.Net income is simply the difference between revenue and cost of goods sold. ฀ True False

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106.The cost of goods sold reflects the selling price of the merchandise sold over a period of time. ฀ True False

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107.The cost of goods sold includes all the costs of buying and keeping merchandise available for sale. ฀ True False 108.Rent, salaries, insurance, and amortization are all examples of the cost of goods sold. ฀ True False

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109.Gross margin represents the amount a firm earns by buying (or making) and selling merchandise. ฀ True False 110.Rents, salaries, utilities, and insurance are all examples of operating expenses. ฀ True False 111.Expenses are what the business owes to others. ฀ True False

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112.The two major classes of operating expenses are current expenses and long-term expenses. ฀ True False 113.Salaries of salespeople and advertising costs are common examples of general expenses. ฀ True False 114.General expenses would include office salaries, rent, and insurance. ฀ True False

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115.Net income before taxes is found by deducting operating expenses from gross profit. ฀ True False

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116.Many managers are concerned with how their decisions affect the "bottom line" of their company's income statement. These managers are concerned with the impact of their decisions on net income. ฀ True False

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117.Tickets sold for the Rolling Stones concert are considered to be the net income for the concert promoter. ฀ ฀ True False 118.The cash flow statement identifies three sources of cash receipts and disbursements: assets, liabilities, and owners' equities. ฀ ฀ True False 119.A cash flow statement summarizes a company's cash receipts and cash payments over a period of time. ฀ ฀ True False 120.Cash flow difficulties are unlikely for a firm that is growing rapidly. ฀ True False

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121.A cash flow statement reports the receipts and disbursements of cash in a given time period as the result of three types of activities: operations, investments, and financing. ฀ ฀ True False 122.Cash a firm raises from issuing new debt or equity capital would be reported on a statement of cash flows. ฀ ฀ True False 123.The cash flow statement shows a firm's revenues, costs of goods sold, expenses, and net income. ฀ True False

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124.The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales. ฀ True False

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125.Cash provided by the sale of new cars at Joseph's Car Sales would be listed as a cash inflow from operations on Joseph's statement of cash flows. ฀ ฀ True False 126.A loan officer at the Saltwater State Bank is considering a loan application from Lanwell Mills. He is concerned about the ability of the company to make repayments if it grants the loan. The loan officer is likely to be very interested in Lanwell's statement of cash flows. ฀ ฀ True False 127.Financial ratios are used to analyze a firm's financial condition and performance. ฀ True False

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128.Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors. ฀ True False 129.The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations. ฀ ฀ True False 130.The current ratio is used to evaluate a firm's ability to pay its short-term debts. ฀ True False 131.The current ratio is found by dividing the firm's total assets by its total liabilities. ฀ True False

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132.The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations. ฀ ฀ True False 133.The acid-test ratio is found by dividing inventory by cost of goods sold. ฀ True False

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134.Prattville Manufacturing has applied for a short-term loan with CIBC. The loan officers of the bank are likely to look carefully at Prattville's liquidity ratios before they decide to grant the loan. ฀ ฀ True False 135.For firms that sometimes have difficulty selling their inventory of goods, the current ratio is likely to be a better measure of liquidity than the acid-test ratio. ฀ ฀ True False 136.A firm that takes on too much debt could experience problems repaying its lenders or meeting promises made to stockholders. ฀ ฀ True False 137.One weakness of the acid-test ratio is that it puts too much emphasis on the ability to convert inventory quickly into cash. ฀ ฀ True False 138.Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its operations. ฀ ฀ True False 139.The debt to owners' equity ratio is a common type of liquidity ratio. ฀ True False

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140.Profitability ratios are often used to...