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CollinsTest Item FileChapter 12The Role of Accounting in Business
Chapter 12
THE ROLE OF ACCOUNTING IN BUSINESS
MULTIPLE CHOICE
7.The best way to prepare to be an investor is to learn all the _____ that you can.
a. bookkeeping
b. accounting
c. stock market tips
d. spreadsheet
(b; Easy)
8._____,which supply relevant, accurate, timely information in a format that will aid them in making decisions, are tailored to the needs of individual managers.
a. Reports
b. Summaries
c. Department updates
d. Data sheets
(a; Easy)
9.If you were asked to identify “the language of business,” you should reply: _____.
a. “Finance”
b. “Money”
c. “Accounting”
d. “Data keeping”
(c; Moderate)
10.The purpose of accounting is to help _____, who are interested in the activities of a business because they’re affected by them.
a. shareholders
b. fiduciaries
c. investors
d. stakeholders
(d; Moderate)
11.Accountants communicate the meaning of _____ information and work with individuals and organizations to help them use that information to deal with business problems.
a. financial
b. investment
c. managerial
d. bookkeeping
(a; Moderate)
12.Accountantsdo all of the following except _____.
a. measure business activities
b. summarize business activities
c. interpret financial information
d. locate capital
(d; Hard)
13.To help them operate the business,_____ accounting provides information and analysis to decision makers inside the organization.
a. financial
b. internal
c. management
d. executive
(c; Hard)
14.Working in the field of _____ accounting, John Bates furnishes information to individuals and groups both inside and outside his organization to help them assess the firm’s financial performance.
a. comprehensive
b. financial
c. advisory
d. management
(b; Hard)
15.All of the following appear in the financial statements prepared by accountants except _____.
a. marketing budgets
b. income statements
c. balance sheets
d. statements of cash flows
(a; Hard)
16._____ are principles for financial reporting established by an independent agency called the Financial Accounting Standards Board.
a. Accounting guidelines
b. Governmentapproved accounting standards
c. Certified rules and regulations
d. Generally accepted accounting principles
(d; Hard)
17.Which of the following groups is typically not interested in financial accounting information?
a. labor unions
b. creditors
c. suppliers
d. all of these groups have some use for financial accounting information
(d; Moderate)
SCENARIO-BASED
Bakersfield, Smith, and Babble LLC is a midsized accounting firm in New England. In order to project an image as a fullservice company, each partner specializes in a different field of accounting. Bakersfield provides information and analysis to business owners in order to help them operate their companies. Smith’s job is to furnish information to individuals and groups both inside and outside organizations to help them assess their firms’ financial performances. Babble is primarily responsible for preparing financial statements for business owners, managers, and investors and other users, such as creditors and government agencies.
18.Smith specializes in corporate accounting.
(False; Easy)
19.Bakersfield works in management accounting.
(True; Moderate)
20.Babble spends his time in financial accounting.
(True; Hard)
21.Given the nature of their firm, none of these accountants would have much daily use for GAAP.
(False; Hard)
22.Government agencies would have little interest in the kind of information supplied by this firm.
(False; Hard)
LEARNING OBJECTIVE2
- Understand the functions of the three basic financial statements: income statement, balance sheet, and statement of cash flows.
TRUE/FALSE
23.Your statement of cash flows shows how much cash you have coming in and going out.
(True; Easy)
24. To find out if you’ve made a profit, you’d prepare a socalled “general statement,” which shows revenues and expenses.
(False; Easy)
25.Expenses are divided into two categories—cost of goods sold and operating expenses.
(True; Easy)
26.Its fiscal year is a company’s designated business year.
(True; Easy)
27.The key to surviving in business is generating cash to keep operating.
(True; Easy)
28.Breakeven analysis is a method of determining the level of sales at which a company will have no profit or loss.
(True; Easy)
29.Its statement of cash flows tells a business only where its cash was spent.
(False; Easy)
30.Your income statement shows how much cash you have coming in and going out.
(False; Moderate)
31.Your balance sheet shows what your sales and expenses are.
(False; Moderate)
32.Gross profit is the negative difference between revenues and the cost of goods sold.
(False; Moderate)
33.A company’s balance sheet reports its owner’s equity.
(True; Moderate)
34.Fixed cost/contribution margin per unit equals a company’s breakeven point in units.
(True; Moderate)
35.Contribution margin per unit is the shortage of revenue per unit over variable cost per unit.
(False; Hard)
MULTIPLE CHOICE
36._____ is another word for revenues.
a. Bottom line
b. Profits
c. Sales
d. Income
(c; Easy)
37.We read in business publications that net income is often called the _____.
a. banker’s best friend
b. bottom line
c. language of business
d. core line
(b; Easy)
38._____ is/are the resources from which a company expects to gain some future benefit.
a. Liabilities
b. Owner’s equity
c. Assets
d. Capital
(c; Easy)
39.The debt owed by a business to an outside individual or organization is called its _____.
a. liability
b. equity
c. asset base
d. variable outflow
(a; Easy)
40.Which of the following may cause a company to have cash problems?
a. The product in which it has invested isn’t selling as well as had been forecast.
b. It tied up too much money in a plant that’s too large for its operations.
c. It sold products to customers who can’t pay.
d. All of these
(d; Easy)
41.Cash flows from _____ activities are derived from the day-to-day operations of your main line of business.
a. operating
b. investing
c. sales
d. quotidian
(a; Easy)
42.Cash flows from _____ activities result from obtaining or paying back the funds with which you’ve financed your business.
a. investing
b. operating
c. inflowoutflow
d. financing
(d; Easy)
43._____ shows when your total sales revenues exactly equal your expenses.
a. Oddeven analysis
b. Flatline analysis
c. Breakeven analysis
d. The equilibrium point
(c; Easy)
44._____ costs vary with quantity of goods sold but remain constant on a perunit basis.
a. Breakeven
b. Variable
c. Fixed
d. Flat
(b; Easy)
45.Your _____ shows the amount of cash that you have coming in and going out.
a. balance sheet
b. income report
c. statement of cashflows
d. revenue summary
(c; Moderate)
46.Your _____ statement shows your revenues and expenses.
a. income
b. profit
c. operating
d. balance
(a; Moderate)
47.The difference between gross profit and operating expenses is _____.
a. net income
b. gross income
c. profit
d. cost of goods sold
(a; Moderate)
48.Your balance sheet is based on the_____ equation: Assets=Liabilities+ Owner’s equity.
a. accounting
b. bookkeeping
c. financial
d. profit
(a; Moderate)
49.Accounting can help your business in all of the following ways except _____.
a. by revealing whether you made a profit
b. by permitting you to play what-if games to determine your profit under different assumptions
c. by legalizing your financial records
d. by showing the value and sources of your assets
(c; Moderate)
50.Rather than record sales and purchases made on credit, your statement of _____ tells you where your cash came from and where it went.
a. assets
b. cash equity
c. cash flows
d. current cash
(c; Moderate)
51._____ costs don’t vary with quantity of goods sold.
a. Fixed
b. Variable
c. Breakeven
d. Flat
(a; Moderate)
52._____ analysis allows a business to determine the level of sales that it must reach to avoid losing money.
a. Receivership
b. Equity
c. Breakeven
d. Revenue
(c; Moderate)
53.Your _____ shows organizational sales, expenses, and profit.
a. balance sheet
b. income statement
c. statement of cash flows
d. returns summary
(b; Hard)
54.The difference between your sales and your cost of goods sold is known as your _____.
a. net profit
b. cost of doing business
c. owner’s equity
d. gross profit or gross margin
(d; Hard)
55._____ is the selling price per unit minus the variable cost per unit.
a. Contribution margin per unit
b. The breakeven point in units
c. Fixed price
d. Survival price
(a; Hard)
56.You’re reading an article entitled _____, which explains how and why a business divides its fixed costs by its contribution margin per unit.
a. “Revenue Margin per Unit”
b. “Variable Costs”
c. “Contribution Margin per Unit”
d. “Breakeven Point in Units”
(d; Hard)
57.Calvin’s Calendar Company has assets of $75,000 and liabilities of $15,000. How much is Calvin’s owner equity?
a. $90,000
b. 20%
c. $60,000
d. 80%
(c; Moderate)
58.This past year Donald’s Duck Farm had revenues of $25,000. The company spend $1,000 per month on duck eggs and $700 per month on feed, rent, and utilities to keep incubators running. What was Donald’s net income?
a. $8,000
b. $13,000
c. $4,600
d. $6,400
(c; Hard)
SCENARIO-BASED
As a junior accountant for the Waterford Crystal Co. of New Bedford, Connecticut, you’ve just completed an intensive four-week initial training session. During your first week at Waterford, you’ll be applying many of the concepts that you worked so hard to understand over the course of four grueling years of college accounting classes: sales revenues, cost of goods sold, operating and administrative costs, taxes, interest expenses, and net profit. In week two, you’ll get some actual experience working with current and long-term assets, current and long-term liabilities, and owner’s equity. In your third week, you’ll be keeping track of all cash coming into and going out of the business.
59.During your third week at Waterford, you’ll be working with _____.
a. income statements
b. balance sheets
c. cash flow statements
d. tax returns
(c; Easy)
60.Your balance sheet will report Waterford’s _____.
a. assets
b. liabilities
c. owner’s equity
d. all of these
(d; Easy)
61.During week one at Waterford, you’ll be working with _____
a. income statements
b. balance sheets
c. cash flow statements
d. tax returns
(a; Moderate)
62.During week two, you’ll get some experience working with _____.
a. income statements
b. balance sheets
c. cash flow statements
d. tax returns
(b; Moderate)
63.In preparing the company’s income statement, you’ll report on all of the following items except _____.
a. sales revenues
b. costs of goods sold
c. short-term assets
d. operating expenses
(c; Hard)
SHORT DISCUSSION
64.Define gross profit and net income.
Gross profit, also called gross margin, is the difference between sales and cost of goods sold. The difference between gross profit and operating expenses is net income or profit, which is often called the “bottom line.”
65.What’s the purpose of a balance sheet?
A balance sheet reports on a company’s assets, liabilities, and owner’s equity at a specific point in time.
MEDIUM-LENGTH DISCUSSION
66.What two items does an income statement show?
An income statement shows revenues (or sales) and expenses (cost of doing business). It divides expenses into two categories:cost of goods sold (the total cost of making the goods that the firm has sold) and operating expenses (the cost of operating the business except for cost of goods sold).
67.Explain breakeven analysis.
Breakeven analysis is a way to figure out the level of sales you need to avoid losing money—to “break even.” To break even (that is, have no profit or loss), your total sales revenues must exactly equal all your businesses expenses (both variable and fixed). For a merchandiser, this balance will occur when gross profit equals all other fixed costs.
LEARNING OBJECTIVE 3
- Understand the difference between cash-basis and accrual accounting
TRUE/FALSE
68.Long-term assets such as cars are also called fixed assets.
(True; Easy)
69.A more sophisticated kind of balance sheet is called a classified balance sheet.
(True; Easy)
70.A merchandiser is a company that makes a profit by selling goods.
(True; Easy)
71.The system that requires an accountant to record a transaction when it occurs is called immediate accounting.
(False; Moderate)
72.A long-term asset that will be used for several years—say, a vehicle—appears on the income statement as a depreciation expense.
(True; Moderate)
73.When figuring income taxes, you can regard the “bottom line” and “net income” as the same thing.
(True; Moderate)
74.If you sell merchandise rather than services, your financial statements won’t have a cost-of-goods sold line.
(False; Moderate)
75.A current loan is due in two years.
(False; Hard)
76.In order to find the difference between a company’s cash inflow from operating activities and its cash inflow from investing activities, you would examine its balance sheet.
(False)
77.Under accrual accounting, accounts receivable are recorded when sales are made and accounts payable when payments have been received.
(False)
78.An account receivable is recorded as a current asset.
(True)
MULTIPLE CHOICE
79.Holt Industries Ltd. has a(n)_____ loan that’s payable in one year.
a. long-term
b. annual
c. temporary
d. short-range
(b; Easy)
80.A _____ is a company that makes a profit by selling goods.
a. consumergoods dealer
b. merchandiser
c. B2B dealer
d. broker
(b; Easy)
81.When you sell goods, you generate a _____ profit.
a. net
b. consumer
c. merchandise
d. gross
(d; Easy)
82.If you buy something with the intent to pay later rather than in cash, the seller will set up an account _____.
a. depreciable
b. receivable
c. expense
d. liability
(b; Moderate)
83.If a companyarranges to pay laterrather than in cash for materials and other expenses, its accountant must set up accounts _____.
a. payable
b. receivable
c. on hand
d. accrued
(a; Moderate)
84.Both companies that manufacture goods and hold onto them for a while before selling them and companies that buy goods and hold them temporarily for resale have created _____.
a. receivable assets
b. accrual assets
c. receivable storage
d. inventories
(d; Moderate)
85.The Kathryn Lorillard Co.’s income before taxes is called _____ income.
a. accumulated
b. net
c. private
d. gross
(b; Moderate)
86.Because its cost is spread over its useful life, a long-term asset that will be used for several years—for example, a vehicle—appears on the balance sheet as a(n) _____ expense.
a. receivable
b. inventory
c. depreciation
d. variable
(c; Hard)
87.When a business needs a more sophisticated balance sheet than the one created for its first accounting records, it creates a _____ balance sheet to list assets and liabilities in separate categories.
a. classified
b. twoitem
c. long-term
d. extended
(a; Hard)
88.A classified balance sheet lists assets in order of _____.
a. useful life
b. depreciation value
c. date of acquisition
d. liquidity
(d; Hard)
89.Businesses that sell services rather than merchandise don’t have a line for _____ on their statements.
a. operating expenses
b. sales expenses
c. interest expenses
d. costofgoods sold
(d; Hard)
90.Because the assets were purchases, _____ reflects the amount that a business has charged as depreciation expense.
a. accumulated depreciation
b. expense depreciation
c. straightline depreciation
d. FIFO
(a; Hard)
91.The annual allocation of the cost of a long-term asset is recorded as a(n):
a. depreciation expense
b. operating expense
c. accrual expense
d. cost of goods sold
(a; Moderate)
92.In September, Sherry’s Shoe Mart ordered women’s boots from a supplier. The boots were delivered in October, paid for in November, and sold in December. If Sherry uses accrual-based accounting, in which month should she report the boots under Cost of goods sold?
a. September
b. October
c. November
d. December
(d; Moderate)
SHORT DISCUSSION
93.Explain the term account payable.
An account payable is a record of cash owed to a seller from a buyer who’s purchased products on credit. Businesses don’t generally pay cash for materials and other expenses—they often pay later.
MEDIUM-LENGTH DISCUSSION
94.What is a depreciation expense?
A depreciation expense appears on the balance sheet as a long-term asset that will be used for several years—say, a vehicle, machine, or building. Its cost is spread over its useful life (the number of years that it will be used). Its annual allocated cost appears on the income statement as a depreciation expense.
COMPREHENSIVE ESSAY
95.What is an asset, and what two kinds of assets can a business have?
On its classified balance sheet, a company lists its assets in order of liquidity—how quickly they can be converted into cash. They’re also broken down into two categories. Current assets are those that the business intends to convert into cash within a year. Those that it intends to hold for more than a year are long-term assets. Current assets include cash and inventory, long-term assets include furniture and equipment.
LEARNING OBJECTIVE4
- Evaluate a company’s performance using financial statements and ratio analysis.
TRUE/FALSE
96.A ratio analysis is a technique for financial comparison that shows the relationship between two numbers.
(True; Easy)
97.Its debt-to-equity ratio shows the risk entailed by a company’s capital structure.
(True; Easy)
98.A vertical income statement shows income for more than one year.
(False; Moderate)
99.Management effectiveness ratios measure overall company performance and show how successfully management is at running the business.
(True; Moderate)
100.Gross profit is the money that a company has earned after paying all its expenses.
(False; Moderate)
101.A business that has perishable goods will have high inventory turnover.
(True; Moderate)
102.The current ratio shows the relationship between a company’s current assets and its current liability.
(True; Moderate)
103.Interest coverage measures the number of times that a firm’s operating income can cover its interest expense.
(True; Moderate)
104.Vertical percentage analysis expresses each item on an income statement as a percentage of a certain base.
(True; Hard)
105.Financial condition ratios tell you how efficiently your assets are being managed.
(False; Hard)
106.Profit margin ratios help a company assess its financial strengths.
(False; Hard)
107.The inventory yield ratio measures a firm’s efficiency in selling its inventory.
(False; Hard)
108.Dividing your inventory by your cost of goods sold will yield your inventory turnover rate.
(False; Hard)
109.The relationship between funds acquired from creditors and funds invested by owners is called principal structure.