Chapter 01 Introduction to Accounting

Chapter 01 Introduction to Accounting True / False Questions 1. Accounting is an information and measurement system that identifies, records, and communicates financial information to users. 2. Bookkeeping is the same as accounting. 3. Bookkeeping is the recording of transactions and events and is only part of accounting. 4. Accounting is one way important information about businesses is reported to decision makers. 5. Internal reports are subject to the same rules as external reports as consistency is important and makes information more useful to the user. 6. Accounting software packages reduce the time, effort and cost of recordkeeping. 7. Internal auditors assess an employer's procedures and controls over recordkeeping activities and physical control of a firm's assets. 1-1

8. Internal controls are procedures designed to protect company property, ensure reliable reports, promote efficiency and ensure employees follow company policies. 9. Accounting information systems collect, process and report information to decision makers. 10. Managerial accounting is an area of accounting that provides internal reports to assist in the decision-making needs of internal users. 11. The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities. 12. Opportunities in accounting include auditing, management consulting, and tax planning. 13. The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles. 14. Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements. 1-2

15. Generally accepted accounting principles were established to improve conformity in financial reporting by making information relevant, reliable and comparable. 16. US accounting practices are viewed as rule-based as financial statements are prepared using technical, specific and detailed rules. 17. External auditors examine financial statements to determine if they are prepared according to generally accepted accounting principles. 18. External users include lenders, shareholders, customers, and regulators. 19. Internal users include lenders, shareholders, brokers and managers. 20. Identifying the proper ethical path is easy. 21. Ethics are not important to decision making in accounting. 22. Guidelines for ethical decision making requires recognition of an ethical concern and consideration of good and bad consequences. 1-3

23. Good ethics are good business. 24. State ethics codes require CPAs who audit financial statements to disclose areas where those statements fail to comply with GAAP. 25. Public accounting provides the majority of the career opportunities. 26. The majority of accounting career opportunities are in the private sector. 27. Understanding generally accepted accounting principles is not necessary to use and interpret financial statements. 28. The Sarbanes-Oxley Act requires issuers of securities to disclose the adoption of an ethics code. 29. The Securities and Exchange Commission (SEC) is an arm of the federal government that establishes reporting requirements for companies that issue stock to the public. 30. The Financial Accounting Board is the group that establishes reporting requirements for companies that issue stock to the public. 1-4

31. A limited liability company is treated like a corporation for liability and tax purposes. 32. Separate legal status means that a corporation can conduct business with the rights, duties and responsibilities as a person. 33. Separate legal status means that owners, called shareholders are not personally liable for corporate acts and debts. 34. Three forms of business include service providers, wholesalers and retailers. Multiple Choice Questions 35. 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. 36. External users of accounting information include: A. Shareholders. B. Customers. C. Creditors. D. Government regulators. 1-5

37. Career opportunities in accounting include: A. Auditing. B. Management consulting. C. Tax accounting. D. Cost accounting. 38. Internal users of accounting information include: A. Shareholders. B. Managers. C. Lenders. D. Suppliers. E. Customers. 39. 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. 40. Accounting software: A. Has replaced the need for accountants. B. Has not changed the work that accountants do. C. Has improved clerical accuracy. D. Has replaced the need for decision makers. E. Is only available to large corporations. 41. 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. 1-6

42. The financial statements prepared for external users is often referred to as A. The books. B. Integrated financial statements. C. Statements of financial position. D. General purpose financial statements. E. Proforma financial statements. 43. The organization responsible for overseeing the work of external auditors is the: A. FASB. B. SEC. C. PCAOB. D. GAAP. E. AICPA. 44. Career opportunities in accounting include: A. Budgeting. B. Auditing. C. Cost accounting. D. Internal Auditing. 45. Accounting certifications include the: A. Certified Public Accountant. B. Certified Management Accountant. C. Certified Internal Auditor. D. Certified Bookkeeper. 46. A Certified Public Accountant. A. Must meet education and experience requirements. B. Must pass an examination. C. Must exhibit ethical character. D. May also be a Certified Management Accountant. 1-7

47. Ethical behavior: A. Requires that auditors' pay not depend on the figures in the client's reports. B. Encourages auditors to invest in businesses they audit. C. Does not affect external users. D. Is rarely an issue in business. 48. The rules adopted by the accounting profession as guides in preparing financial statements are: A. Comprised of both general and specific principles. B. Known as generally accepted accounting principles. C. Abbreviated as GAAP. D. Intended to make information in financial statements relevant, reliable, and comparable. 49. The board of directors report to A. Shareholders. B. Lenders. C. Management. D. SEC. 50. The committee that attempts to create more harmony among the accounting practices of different countries by identifying preferred practices and encouraging their worldwide acceptance is the: A. AICPA. B. FASB. C. CAP. D. SEC. E. IASB. 1-8

51. The private board that currently has the authority to establish generally accepted accounting principles is the: A. APB. B. FASB. C. AAA. D. AICPA. E. SEC. 52. Rules adopted by the accounting profession to make information relevant, reliable and comparable: A. Are comprised of both general and specific principles. B. Are known as generally accepted accounting principles. C. Are abbreviated as GAAP. D. Are established by FASB and SEC. 53. In order to be useful, accounting information must be A. Reliable. B. Relevant. C. Conform to GAAP. D. Both a and b. 54. Generally accepted accounting principles: A. Are practices adopted by accountants to make accounting easier. B. Are only necessary when convenient. C. Can be overruled if approved by the SEC. D. Strive to make information relevant, reliable and comparable. E. None of these. 1-9

55. The International Accounting Standards Board (IASB) A. Hopes to create harmony among accounting practices of different countries. B. Is the government group that establishes reporting requirements for companies that issue stock to the public. C. Has the authority to impose its standards on companies. D. Is the only source of generally accepted accounting principles (GAAP). E. Only applies to companies that are members of the European Union. 56. Accounting A. Is an information and measurement system. B. Identifies, records, and communicates information about business activities. C. Helps people make better decisions. D. Provides information about a company's performance. 57. Examples of social responsibility include: A. Donating computers to a local elementary school. B. Enacting stricter production-pollution standards. C. Sponsoring a summer free-lunch program. D. Improving lighting in a production room. 58. Ethics: A. Are beliefs that separate right from wrong. B. And law often coincide. C. Help to prevent conflicts of interest. D. Are critical in accounting. Essay Questions 1-10

59. What are the author's recommended three steps for making a good ethical decision? 60. What aspects of business involve accounting? 61. Explain why accounting is referred to as "the language of business". 62. What is social responsibility? 1-11

63. What is the purpose of the internal controls in a company? 64. What are some examples of how an organization can act socially responsible? 65. Explain the role of accounting in the information age. 66. Explain the flow of accounting in a business's activities. 1-12

67. What role does technology play in the accounting function? 68. Identify several opportunities in accounting and its related fields. 69. Identify the users and uses of accounting information. 70. What are two questions that an owner might be able to answer by looking at accounting information? 1-13

71. Explain why ethics are an integral part of accounting. 72. Identify the two main groups involved in establishing generally accepted accounting principles. 73. How do the information needs of external users such as lenders differ from an external auditor? Fill in the Blank Questions 74. is the recording of financial transactions and events, either manually or electronically. 75. is the information and measurement system that identifies, records, and communicates relevant information about a company's business activities. 1-14

76. are those that use accounting information for the purpose of managing the organization. 77. are beliefs that separate right from wrong. 78. is the recording of transactions or events, and is just one part of accounting. 79. users of accounting information are not directly involved in running the organization. 80. is the area of accounting aimed at serving external users. 81. Managerial Accounting is the area of accounting mainly aimed at serving the decisionmaking needs of the. 82. is the federal agency that sets reporting rules for organizations that sell ownership shares to the public. 1-15

83. Shareholders are owners of a corporation and typically elect to oversee their interests in the corporation. 84. are procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. 85. A primary purpose of is to make information in financial statements relevant, reliable and comparable. 86. is the independent group of full-time members responsible for setting the rules of accounting. 87. Accounting is an that identifies, records and communicates relevant, reliable and comparable information about an organization's economic activities. 88. International Accounting Standards Board is the group that works to identify and encourages global acceptance. 1-16

Chapter 01 Introduction to Accounting Answer Key True / False Questions 1. Accounting is an information and measurement system that identifies, records, and communicates financial information to users. Learning Objective: 1 2. Bookkeeping is the same as accounting. FALSE Learning Objective: 1 3. Bookkeeping is the recording of transactions and events and is only part of accounting. Learning Objective: 1 1-17

4. Accounting is one way important information about businesses is reported to decision makers. Learning Objective: 1 5. Internal reports are subject to the same rules as external reports as consistency is important and makes information more useful to the user. FALSE Learning Objective: 1 6. Accounting software packages reduce the time, effort and cost of recordkeeping. AACSB: Technology AICPA BB: Technology AICPA FN: Technology Learning Objective: 1 7. Internal auditors assess an employer's procedures and controls over recordkeeping activities and physical control of a firm's assets. Learning Objective: 1 1-18

8. Internal controls are procedures designed to protect company property, ensure reliable reports, promote efficiency and ensure employees follow company policies. AICPA BB: Critical Thinking; Resource Management AICPA FN: Measurement; Risk Analysis Learning Objective: 1 9. Accounting information systems collect, process and report information to decision makers. AACSB: Communication AICPA BB: Critical Thinking; Technology Learning Objective: 1 10. Managerial accounting is an area of accounting that provides internal reports to assist in the decision-making needs of internal users. 11. The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities. 1-19

12. Opportunities in accounting include auditing, management consulting, and tax planning. AICPA BB: Industry Learning Objective: 3 13. The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles. ; Ethics Bloom's Taxonomy: Knowledge Learning Objective: 6 14. Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements. Learning Objective: 5 15. Generally accepted accounting principles were established to improve conformity in financial reporting by making information relevant, reliable and comparable. Learning Objective: 5 1-20

16. US accounting practices are viewed as rule-based as financial statements are prepared using technical, specific and detailed rules. Learning Objective: 6 17. External auditors examine financial statements to determine if they are prepared according to generally accepted accounting principles. 18. External users include lenders, shareholders, customers, and regulators. 19. Internal users include lenders, shareholders, brokers and managers. FALSE 1-21

20. Identifying the proper ethical path is easy. FALSE Learning Objective: 4 21. Ethics are not important to decision making in accounting. FALSE ; Ethics Learning Objective: 4 22. Guidelines for ethical decision making requires recognition of an ethical concern and consideration of good and bad consequences. AACSB: Ethics Learning Objective: 4 23. Good ethics are good business. ; Ethics Learning Objective: 4 1-22

24. State ethics codes require CPAs who audit financial statements to disclose areas where those statements fail to comply with GAAP. ; Ethics Learning Objective: 6 25. Public accounting provides the majority of the career opportunities. FALSE Bloom's Taxonomy: Knowledge Learning Objective: 3 26. The majority of accounting career opportunities are in the private sector. AICPA FN: Measurement Learning Objective: 3 27. Understanding generally accepted accounting principles is not necessary to use and interpret financial statements. FALSE Learning Objective: 5 1-23

28. The Sarbanes-Oxley Act requires issuers of securities to disclose the adoption of an ethics code. Difficulty: Hard Learning Objective: 4 29. The Securities and Exchange Commission (SEC) is an arm of the federal government that establishes reporting requirements for companies that issue stock to the public. ; Legal Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 6 30. The Financial Accounting Board is the group that establishes reporting requirements for companies that issue stock to the public. FALSE ; Ethics ; Legal AICPA BB: Legal Learning Objective: 6 31. A limited liability company is treated like a corporation for liability and tax purposes. FALSE ; Legal Learning Objective: 7 1-24

32. Separate legal status means that a corporation can conduct business with the rights, duties and responsibilities as a person. ; Legal Learning Objective: 7 33. Separate legal status means that owners, called shareholders are not personally liable for corporate acts and debts. ; Legal Learning Objective: 7 34. Three forms of business include service providers, wholesalers and retailers. FALSE Learning Objective: 7 1-25

Multiple Choice Questions 35. 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. 36. External users of accounting information include: A. Shareholders. B. Customers. C. Creditors. D. Government regulators. 37. Career opportunities in accounting include: A. Auditing. B. Management consulting. C. Tax accounting. D. Cost accounting. Learning Objective: 3 1-26

38. Internal users of accounting information include: A. Shareholders. B. Managers. C. Lenders. D. Suppliers. E. Customers. 39. 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. Learning Objective: 1 40. Accounting software: A. Has replaced the need for accountants. B. Has not changed the work that accountants do. C. Has improved clerical accuracy. D. Has replaced the need for decision makers. E. Is only available to large corporations. AICPA BB: Technology; Critical Thinking; Industry AICPA FN: Technology; Measurement; Reporting Learning Objective: 1 1-27

41. 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. 42. The financial statements prepared for external users is often referred to as A. The books. B. Integrated financial statements. C. Statements of financial position. D. General purpose financial statements. E. Proforma financial statements. 43. The organization responsible for overseeing the work of external auditors is the: A. FASB. B. SEC. C. PCAOB. D. GAAP. E. AICPA. ; Legal 1-28

44. Career opportunities in accounting include: A. Budgeting. B. Auditing. C. Cost accounting. D. Internal Auditing. Learning Objective: 3 45. Accounting certifications include the: A. Certified Public Accountant. B. Certified Management Accountant. C. Certified Internal Auditor. D. Certified Bookkeeper. Learning Objective: 3 46. A Certified Public Accountant. A. Must meet education and experience requirements. B. Must pass an examination. C. Must exhibit ethical character. D. May also be a Certified Management Accountant. Learning Objective: 3 1-29

47. Ethical behavior: A. Requires that auditors' pay not depend on the figures in the client's reports. B. Encourages auditors to invest in businesses they audit. C. Does not affect external users. D. Is rarely an issue in business. ; Ethics Learning Objective: 4 48. The rules adopted by the accounting profession as guides in preparing financial statements are: A. Comprised of both general and specific principles. B. Known as generally accepted accounting principles. C. Abbreviated as GAAP. D. Intended to make information in financial statements relevant, reliable, and comparable. ; Legal Learning Objective: 5 49. The board of directors report to A. Shareholders. B. Lenders. C. Management. D. SEC. 1-30

50. The committee that attempts to create more harmony among the accounting practices of different countries by identifying preferred practices and encouraging their worldwide acceptance is the: A. AICPA. B. FASB. C. CAP. D. SEC. E. IASB. ; Diversity ; Global; Legal Learning Objective: 6 51. The private board that currently has the authority to establish generally accepted accounting principles is the: A. APB. B. FASB. C. AAA. D. AICPA. E. SEC. ; Ethics ; Legal Learning Objective: 6 1-31

52. Rules adopted by the accounting profession to make information relevant, reliable and comparable: A. Are comprised of both general and specific principles. B. Are known as generally accepted accounting principles. C. Are abbreviated as GAAP. D. Are established by FASB and SEC. Learning Objective: 5 53. In order to be useful, accounting information must be A. Reliable. B. Relevant. C. Conform to GAAP. D. Both a and b. 54. Generally accepted accounting principles: A. Are practices adopted by accountants to make accounting easier. B. Are only necessary when convenient. C. Can be overruled if approved by the SEC. D. Strive to make information relevant, reliable and comparable. E. None of these. ; Legal Learning Objective: 5 1-32

55. The International Accounting Standards Board (IASB) A. Hopes to create harmony among accounting practices of different countries. B. Is the government group that establishes reporting requirements for companies that issue stock to the public. C. Has the authority to impose its standards on companies. D. Is the only source of generally accepted accounting principles (GAAP). E. Only applies to companies that are members of the European Union. ; Ethics; Diversity ; Global Learning Objective: 6 56. Accounting A. Is an information and measurement system. B. Identifies, records, and communicates information about business activities. C. Helps people make better decisions. D. Provides information about a company's performance. Learning Objective: 1 57. Examples of social responsibility include: A. Donating computers to a local elementary school. B. Enacting stricter production-pollution standards. C. Sponsoring a summer free-lunch program. D. Improving lighting in a production room. ; Ethics ; Global Difficulty: Hard Learning Objective: 4 1-33

58. Ethics: A. Are beliefs that separate right from wrong. B. And law often coincide. C. Help to prevent conflicts of interest. D. Are critical in accounting. ; Ethics ; Legal Difficulty: Hard Learning Objective: 4 Essay Questions 59. What are the author's recommended three steps for making a good ethical decision? 1) Use your personal beliefs about right and wrong to identify any ethical concerns. 2) Look beyond your belief system to consider other influences and all possible consequences. 3) Make a decision that considers all choices and consequences. ; Ethics ; Legal; Global AICPA FN: Decision Making; Measurement; Reporting Bloom's Taxonomy: Analysis Learning Objective: 4 60. What aspects of business involve accounting? All aspects of business involve accounting from buying and selling goods and services to credit approval, checking accounts and payroll. All business functions perform recordkeeping. ; Reflective Thinking ; Global; Technology ; Technology Bloom's Taxonomy: Analysis Learning Objective: 1 1-34

61. Explain why accounting is referred to as "the language of business". Because all types and functions of organizations must use this "language" to communicate necessary decision-making information. ; Application ; Global AICPA FN: Decision Making; Measurement; Reporting 62. What is social responsibility? A company's involvement in and concern for society's well being. Being socially responsible might include acts of charity, measures to increase product safety, or support of public systems such as education. ; Ethics ; Global; Resource Management Learning Objective: 4 63. What is the purpose of the internal controls in a company? Internal controls are necessary to monitor and control a company's activities. Internal control procedures protect, promote reliability, efficiency and adherence to company policies. ; Resource Management ; Risk Analysis 1-35

64. What are some examples of how an organization can act socially responsible? Organizations can make donations to other organizations that focus on social well being, such as hospitals, schools and community programs. They can also become involved in social programs including product and worker safety campaigns. ; Ethics ; Global; Resource Management Learning Objective: 4 65. Explain the role of accounting in the information age. Accounting is an information and measurement system. It identifies, records, and communicates relevant, reliable and comparable information about business activities. Accounting also includes the crucial process of analysis and interpretation. ; Technology ; Technology ; Technology Learning Objective: 1 66. Explain the flow of accounting in a business's activities. Accounting is a process that identifies business related transaction and events to record, measure and classify. This information must then be communicated out in the form of financial statements. Learning Objective: 1 1-36

67. What role does technology play in the accounting function? In today's information age, technology plays a major role in improving efficiency of performing record keeping, as well as reducing frequency of errors. ; Technology ; Technology ; Technology Learning Objective: 1 68. Identify several opportunities in accounting and its related fields. The traditional areas of accounting include financial accounting, managerial accounting, and tax accounting. Work in related fields includes lending, underwriting, market research, and business valuation. Learning Objective: 3 69. Identify the users and uses of accounting information. There are two general types of users of accounting information. (1) Internal users are managers and officers of businesses. They require information about business activities in order to make decisions about planning, monitoring, and control. (2) External users rely on financial statements to make business decisions. These users include lenders, and shareholders. Lenders need information for measuring the risk and return of loans. Shareholders need information for assessing the risk and return in owning shares. Difficulty: Hard 1-37

70. What are two questions that an owner might be able to answer by looking at accounting information? Some possible questions are: 1) How, what, when and how much must be purchased? 2) What are the projected sales and costs? 3) What are the costs and benefits of particular products and service? 4) What were the payroll costs last month? 5) What is the projected number of employees needed in the next month? Many other questions are possible. AACSB: Communication; Application; Analysis; Evaluation Difficulty: Hard 71. Explain why ethics are an integral part of accounting. The purpose of accounting is to provide useful information for decision makers. For information to be useful, it must be trusted. This requires ethical behavior by accountants and managers in all phases of gathering, analyzing and reporting financial information so that good decisions are made. ; Ethics ; Legal Difficulty: Hard Learning Objective: 4 72. Identify the two main groups involved in establishing generally accepted accounting principles. The FASB is the private group that establishes GAAP. The SEC establishes reporting requirements for companies that issue stock to the public. ; Legal Difficulty: Hard Learning Objective: 6 1-38

73. How do the information needs of external users such as lenders differ from an external auditor? Lenders use a company's accounting information to establish credit-worthiness and assess risk involved in loaning money. Whereas, an external auditors may look at the same accounting information to determine compliance with standards and practices (GAAP). Difficulty: Hard Fill in the Blank Questions 74. is the recording of financial transactions and events, either manually or electronically. Recordkeeping or bookkeeping Learning Objective: 1 75. is the information and measurement system that identifies, records, and communicates relevant information about a company's business activities. Accounting Learning Objective: 1 1-39

76. are those that use accounting information for the purpose of managing the organization. Internal Users 77. are beliefs that separate right from wrong. Ethics ; Ethics Learning Objective: 4 78. is the recording of transactions or events, and is just one part of accounting. Recordkeeping (or bookkeeping) Learning Objective: 1 79. users of accounting information are not directly involved in running the organization. External 1-40

80. is the area of accounting aimed at serving external users. Financial accounting 81. Managerial Accounting is the area of accounting mainly aimed at serving the decisionmaking needs of the. internal users 82. is the federal agency that sets reporting rules for organizations that sell ownership shares to the public. SEC (Securities and Exchange Commission) ; Legal Learning Objective: 6 83. Shareholders are owners of a corporation and typically elect to oversee their interests in the corporation. a board of directors 1-41

84. are procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Internal controls 85. A primary purpose of is to make information in financial statements relevant, reliable and comparable. GAAP ; Risk Analysis Learning Objective: 5 86. is the independent group of full-time members responsible for setting the rules of accounting. FASB (Financial Accounting Standards Board) Learning Objective: 6 1-42

87. Accounting is an that identifies, records and communicates relevant, reliable and comparable information about an organization's economic activities. information and measurement system (or information system) Difficulty: Hard Learning Objective: 1 88. International Accounting Standards Board is the group that works to identify and encourages global acceptance. preferred accounting practices ; Global; Diversity Difficulty: Hard Learning Objective: 6 1-43