Topic 8 The Role of Accountants and Accounting Information

Question 1

Which of the following terms refers to the comprehensive system for collecting, analyzing,
and communicating financial information?
A) Bookkeeping
B) Accounting
C) Controlling
D) Auditing
E) Budgeting

Answer 1

Answer: B

Question 2

Which of the following terms refers to the recording of financial transactions?
A) Bookkeeping
B) Accounting
C) Controlling
D) Budgeting
E) Auditing

Answer 2

Answer: A

Question 3

Which are the two major fields of accounting?
A) Managerial and forensic
B) Financial and managerial
C) Bookkeeping and advisory
D) Corporate and individual
E) Public and private

Answer 3

Answer: B

Question 4

What do businesses use to identify, record, and retain financial information, and includes the
people, reports, procedures and other resources needed to compile transactions?
A) Accounting information systems
B) Financial accounting
C) Bookkeeping
D) Accounting
E) Managerial accounting

Answer 4

Answer: A

Question 5

Bookkeeping is a comprehensive system for collecting, analyzing, and communicating
financial information. (T/F)

Answer 5

F

Question 6

Identify the potential users of accounting information.

Answer 6

The potential users of accounting information include business managers, employees,
unions, investors, creditors, tax authorities, and government regulatory agencies.

Question 7

Which of the following terms refers to any economic resource that is expected to benefit a
firm or individual who owns it?
A) Asset
B) Liability
C) Equity
D) Account
E) Deposit

Answer 7

Answer: A

Question 8

) Which of the following terms refers to the amount of money that owners would receive if
they sold all of a company’s assets and paid all of its liabilities?
A) Asset
B) Owners’ equity
C) Inventory
D) Liability
E) Credit

Answer 8

Answer: B

Question 9

Which of the following describes a liability?
A) The potential profit from selling a firm’s assets and settling all of its debts
B) A debt owed by a firm to an outside organization or individual
C) Any economic resource expected to benefit a firm or an individual who owns it
D) Any economic deficit expected to cost a firm or an individual who owns it
E) The amount of money originally invested in a business by its owners

Answer 9

Answer: B

Question 10

A company has an assets-to-liabilities ratio of 3:2 and total assets worth $6 million. What is
its owners’ equity?
A) $1 million
B) $2 million
C) $3 million
D) $9 million
E) $12 million

Answer 10

Answer: B
Explanation: B) assets/(assets - owners’ equity) = 3/2

Question 11

How much profit does a company which has a total of $5 million invested by its owners and
$4 million in liabilities need to make in order to have an assets-to-liabilities ratio of 2:1?
A) $2 million
B) $3 million
C) $5 million
D) $7 million
E) $8 million

Answer 11

Answer: D
Explanation: D) We are given that assets/liabilities = 2, and liabilities = $4 million, so assets
must be $8 million. From this, we can use the accounting equation to solve for the total owners’
equity: assets = liabilities + owners’ equity, so owners’ equity = $8 million + $4 million = $12
million. Owners’ equity has two sources, profits + investment, so solve to find the portion that
comes from profits: $12 million = $5 million + profit, and profit = $7 million.

Question 12

Which of the following represents the accounting equation?
A) Assets = Liabilities + Owners’ Equity
B) Owners’ Equity = Assets + Liability
C) Liability = Assets + Owners’ Equity
D) Assets = Liabilities - Owners’ Equity
E) Assets = Liabilities × Owners’ Equity

Answer 12

Answer: A

Question 13

Why is a company’s owners’ equity important for investors and lenders?
A) Owners’ equity indicates potential profit.
B) Owners’ equity determines how quickly liabilities will increase.
C) Owners’ equity determines how much will be paid out as dividends.
D) Owners’ equity indicates how much the owner has invested in the company
E) Owners’ equity indicates the level of security.

Answer 13

Answer: E

Question 14

The percentage of liabilities in a company’s assets plus the percentage of owners’ equity in its
assets is always equal to 100. (T/F)

Answer 14

T

Question 15

Owners’ equity is net worth minus liabilities.(T/F)

Answer 15

F

Question 16

What two types of owners’ equity?

Answer 16

Paid-in-Captial and Retained earnings

Question 17

What is the accounting equation?

Answer 17

assets = liabilities + owners’ equity.

Question 18

What distinguishes the two most commonly used categories of owners’ equity?
A) The amount of equity within each type of asset—current versus fixed and intangible
B) The financial form of the equity—cash investments versus stock and bond investments
C) The source of the equity—investments versus earnings
D) The use of the equity—invested versus saved
E) The age of the equity—older investments and earnings versus newer investments and earnings

Answer 18

Answer: C

Question 19

What are the major categories within an income statement?
A) Operating costs and profits, investing costs and profits, and financing costs and profits
B) Current revenue, long-term revenue, and net revenue
C) Revenue, sales, and income
D) Assets, liabilities, and owners’ equity
E) Revenues, cost of revenues, operating expenses, and net income

Answer 19

Answer: E

Question 20

Which of the following is the difference between revenues and the cost of revenues?
A) Net income
B) Gross profit
C) Accounts payable
D) Interest expense
E) Cash flow

Answer 20

Answer: B

Question 21

Which of the following BEST demonstrates cash flow from operations?
A) Transactions involved in buying and selling goods and services
B) Net cash used in or provided by investment
C) Cash flow from borrowing or issuing stock
D) Outflows for payments of dividends
E) Inflows of cash that will be used to repay borrowed money

Answer 21

Answer: A

Question 22

) Which of the following documents would MOST likely come from a planning strategy
meeting?
A) Income statement
B) Flow of cash statement
C) Balance sheet
D) Budget
E) Statement of projected earnings

Answer 22

Answer: D

Question 23

Which of the following statements BEST describes the difference between current and long
term liabilities?
A) Current liabilities are debts that need to be paid immediately, whereas long-term liabilities do
not.
B) Current liabilities are those which will cost less in debt interest than long-term liabilities.
C) Current liabilities are debts that are settled sooner than long-term debts.
D) Current liabilities are debts on tangible assets, whereas long-term liabilities are debts on
intangible assets.
E) Current liabilities are debts on current assets, whereas long-term liabilities are debts on fixed
and intangible assets.

Answer 23

Answer: C

Question 24

Which of the following refers to the financial statement detailing a firm’s assets, liabilities,
and owners’ equity?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Expense report
E) Annual budget

Answer 24

Answer: C

Question 25

Which of the following describes assets such as land, building, and equipment? A) Liquid assets B) Fixed assets C) Intangible assets D) Current assets E) Limited assets

Answer 25

Answer: B

Question 26

Which of the following BEST describes depreciation? A) The process of increasing the value of fixed assets over time B) The process of deducting operating expenses from the value of fixed assets C) The process of reducing the value of fixed assets over time D) The process of distributing the cost of liabilities over time E) The process of distributing the cost of intangible assets over time

Answer 26

Answer: C

Question 27

Which of the following describes assets such as patents and trademarks? A) Liquid assets B) Fixed assets C) Intangible assets D) Current assets E) Limited assets

Answer 27

Answer: C

Question 28

Which of the following terms refers to the amount paid for an existing business beyond the value of its other assets? A) Goodwill B) Excess compensation C) Licensing D) Asset promotion E) Liability deduction

Answer 28

Answer: A

Question 29

Which of the following terms refers to the difference calculated by subtracting income taxes from the operating income of an organization? A) Gross revenue B) Net income C) Gross profit D) Cash flow E) Leverage

Answer 29

Answer: B

Question 30

What does a statement of cash flow describe? A) Gross profit compared to operating expenses B) Value of revenues compared to cost of revenues C) Yearly receipts and cash payments D) Cost of obtaining materials needed to produce products E) Funds that flow into the business from the sale of the goods or services provided

Answer 30

Answer: C

Question 31

Which of the following best describes the revenues of an organization? A) Gross profit compared to operating expenses B) Value of revenues compared to cost of revenues C) Yearly receipts and cash payments D) Cost of obtaining materials needed to produce products E) Funds that flow into the business from the sale of the goods or services provided

Answer 31

Answer: E

Question 32

Which of the following are the three categories on a company's cash flow statement? A) Operating activities, purchase activities, taxes B) Profit inflow, debt outflow, taxes C) Profitable activities, deficit activities, taxes D) Operating activities, investing activities, taxes E) Operating activities, investing activities, financing activities

Answer 32

Answer: E

Question 33

Assets are categorized by the capacity in which they benefit the company. (T/F)

Answer 33

Answer: TRUE Explanation: There are three kinds of assets-current, fixed, and intangible.

Question 34

The most liquid asset for a firm is marketable securities that can be sold very quickly.

Answer 34

Answer: FALSE Explanation: Cash is the most liquid asset.

Question 35

Retained earnings are net profits minus dividend payments to stockholders.(T/F)

Answer 35

T

Question 36

Current assets are all assets that are able to be liquidated in a short amount of time. (T/F)

Answer 36

T

Question 37

What is the statement of cash flow required by the SEC and why is it required?

Answer 37

the SEC requires all firms whose stock is publicly traded to issue a third report, the statement of cash flows, which describes yearly cash receipts and cash payments.

Question 38

When a firm needs a large amount of capital for an extended period of time, what type of financing, even with stiff annual or semi-annual interest payments, might be best? A) Retained earnings B) Corporate bonds C) Common stock D) Stock split E) IPO

Answer 38

Answer: B

Question 39

Explain the difference between angel investors and venture capital.

Answer 39

Angel investors are wealthy individuals who invest their own money in early-stage startups. Venture capital comes from investment firms that provide larger funding to high-growth companies. Both help startups that can’t get bank loans, but angel investors invest personally, while venture capital is more formal and often involves more control.

Question 40

When a new bond is issued, when does the bond's par value have to be repaid? A) When the company files for bankruptcy B) Before the company goes into default C) On the maturity date D) On the issue date E) When the company makes enough profit to cover the value of the bond

Answer 40

Answer: C

Question 41

What is the legal document that identifies a borrower's obligation when issuing corporate bonds? A) Bondholder's claim B) Risk claim analysis C) Initial public offering D) Mortgage-backed security E) Bond indenture

Answer 41

Answer: E

Question 42

What can an angel investor offer to small businesses when the small business doesn't have enough history to get a loan from a commercial bank? A) A credit history B) Start-up funds C) Stock options D) Financial oversight E) Bonds

Answer 42

Answer: B

Question 43

Describe the differences between primary and secondary securities market

Answer 43

In the primary market, companies sell new stocks or bonds for the first time. In the secondary market, investors buy and sell existing stocks and bonds with each other.

Question 44

In a secondary securities market, new stocks and bonds are bought and sold by firms and governments. (T/F)

Answer 44

F

Question 45

Which of the following is a summary of price trends in a specific industry and/or the stock market as a whole? A) Investment index B) Average index C) Market indicator D) Market index E) Prospectus

Answer 45

Answer: D

Question 46

New stocks and bonds are sold in what market? A) Private placement market B) Secondary market C) Primary market D) Tertiary market E) Open market

Answer 46

Answer: C

Question 47

Differentiate between market value and book value.

Answer 47

Market value is the current stock price in the market—what people are willing to pay. Book value is the company’s total equity divided by the number of shares. Market value is usually higher, but if it drops near book value, some investors see it as a good buying opportunity.

Question 48

Dividend payments are optional and variable. The corporation's CEO decides whether and when a dividend will be paid, as well as the amount that is best for the future of the company's employees. (T/F)

Answer 48

Answer: FALSE Explanation: While it is true that dividend payments are optional and variable, it is the company's board of directors that decides whether and when a dividend will be paid

Question 49

) How is the market value of a stock determined? A) Interest rates B) The firm's owners' equity C) Number of shares available D) Profit-seeking potential E) How much buyers are willing to pay

Answer 49

Answer: E

Question 50

What is the cumulative growth of money from interest paid over a given period of time known as? A) Compound growth B) Rule of 72 C) Time value of money D) Interest E) Market value

Answer 50

Answer: A

Question 51

While it's invested, money grows by earning interest or yielding some other form of return. What is this known as? A) Compound growth B) Dividend C) Capital gains D) Security E) Diversity

Answer 51

Answer: A

Question 52

What is a stock's book value? A) The current price of a share of stock in the stock market B) The average price of one share of stock over the past year C) The face value of a share of stock, set by the issuing company's board of directors D) The value expressed as total stockholders' equity divided by the total number of shares of stock issued E) The value expressed by the number of stock shares issued by the board of directors

Answer 52

Answer: D

Question 53

Which of the following is the name for a portion of the ownership of a corporation? A) Schedule C B) Stock C) Partnership D) LLC E) Dividend

Answer 53

Answer: B

Question 54

) What is a stock's market value? A) The current price of a share of stock in the stock market B) The average price of one share of stock over the past year C) The face value of a share of stock, set by the issuing company's board of directors D) The price of the stock plus the previous year's dividend E) The monthly average of a stock's price over a year

Answer 54

Answer: A

Question 55

What value of a stock is calculated by dividing total shareholders' equity by the total number of shares of stock issued? A) Par value B) Market value C) Book value D) Dividend value E) Total value

Answer 55

Answer: C