CHAPTER 1: INTRODUCTION TO ACCOUNTING
1. That a business may only report activities on financial statements that are specifically related to company
operations, not those activities that affect the owner personally, is known as which of the following?
A. separate entity concept
B. monetary measurement concept
C. going concern assumption
D. time period assumption
2. That companies can present useful information in shorter time periods such as years, quarters, or months is
known as which of the following?
A. separate entity concept
B. monetary measurement concept
C. going concern assumption
D. time period assumption
3. The system of using a monetary unit, such as the US dollar, to value the transaction is known as which of the
following?
A. separate entity concept
B. monetary measurement concept
C. going concern assumption
D. time period assumption
4. Which of the following terms is used when assuming a business will continue to operate in the foreseeable
future?
A. separate entity concept
B. monetary measurement concept
C. going concern assumption
D. time period assumption
5. The standards, procedures, and principles companies must follow when preparing their financial statements
are known as which of the following?
A. Financial Accounting Standards Board (FASB)
B. generally accepted accounting principles (GAAP)
C. Securities and Exchange Commission (SEC)
D. conceptual framework
6. Which of the following is the principle that a company must recognize revenue in the period in which it is
earned; it is not considered earned until a product or service has been provided?
A. revenue recognition principle
B. expense recognition (matching) principle
C. cost principle
D. full disclosure principle
7. Which of the following is the principle that a business must report any business activities that could affect
what is reported on the financial statements?
A. revenue recognition principle
B. expense recognition (matching) principle
C. cost principle
D. full disclosure principle
8. Also known as the historical cost principle, ________ states that everything the company owns or controls
(assets) must be recorded at their value at the date of acquisition.
A. revenue recognition principle
B. expense recognition (matching) principle
C. cost principle
D. full disclosure principle
9. Which of the following principles matches expenses with associated revenues in the period in which the
revenues were generated?
A. revenue recognition principle
B. expense recognition (matching) principle
C. cost principle
D. full disclosure principle
10. Accounting is sometimes called the “language of _____.”
A. Wall Street
B. business
C. Main Street
D. financial statements
11. Financial accounting information ________.
A. should be incomplete in order to confuse competitors
B. should be prepared differently by each company
C. provides investors guarantees about the future
D. summarizes what has already occurred
12. External users of financial accounting information include all of the following except ________.
A. lenders such as bankers
B. governmental agencies
C. employees of a business
D. potential investors
13. Which of the following groups would have access to managerial accounting information?
A. bankers
B. investors
C. competitors of the business
D. managers
14. All of the following are examples of managerial accounting activities except ________.
A. preparing external financial statements in compliance with GAAP
B. deciding whether or not to use automation
C. making equipment repair or replacement decisions
D. deciding whether or not to use automation
15. Typical accounting tasks include all of the following tasks except ________.
A. auditing
B. recording and tracking costs
C. tax compliance and planning
D. consulting
E. purchasing direct materials
16. Michael, the majority shareholder of a company, decided to produce the company's balance sheet whose
cash balance included the cash in his own bank account. Would Michael be allowed to do this by GAAP?
a. No, because of the revenue recognition principle.
b. Yes, because of the full disclosure principle.
c. Yes, because of the going concern principle.
d. No, because of the economic entity assumption.
Exercise 1. Match the correct term with its definition.
A. cost principle i. if uncertainty in a potential financial estimate, a company should err on the side of
caution and report the most conservative amount
B. full disclosure ii. also known as the historical cost principle, states that everything the company owns
principle or controls (assets) must be recorded at their value at the date of acquisition
C. separate entity iii. (also referred to as the matching principle) matches expenses with associated
concept revenues in the period in which the revenues were generated
D. monetary iv. business must report any business activities that could affect what is reported on
measurement concept the financial statements
E. conservatism v. system of using a monetary unit by which to value the transaction, such as the US
dollar
F. revenue recognition vi. period of time in which you performed the service or gave the customer the
principle product is the period in which revenue is recognized
G. expense recognition vii. business may only report activities on financial statements that are specifically
principle related to company operations, not those activities that affect the owner personally
Exercise 2. Match the correct term with its definition.
A. Financial Accounting i. used by the FASB, which is a set of concepts that guide financial reporting
Standards Board (FASB)
B. generally accepted ii. independent, nonprofit organization that sets financial accounting and reporting
accounting principles standards for both public- and private-sector businesses that use generally accepted
(GAAP) accounting principles (GAAP) here in the United States
C. Securities and iii. standards, procedures, and principles companies must follow when preparing
Exchange Commission their financial statements
(SEC)
D. conceptual framework iv. assumes a business will continue to operate in the foreseeable future
E. going concern v. independent federal agency protecting the interests of investors, regulating stock
assumption markets, and ensuring companies adhere to GAAP requirements
F. time period assumption vi. companies can present useful information in shorter time periods such as years,
quarters, or months
Exercise 3. For each of the following situations write the principle, assumption, or concept that justifies
or explains what occurred.
A. A landscaper received a customer’s order and cash prepayment to install sod at a house that would not
be ready for installation until March of next year. The owner should record the revenue from the
customer order in March of next year, not in December of this year.
B. A company divides its income statements into four quarters for the year.
C. Land is purchased for $205,000 cash; the land is reported on the balance sheet of the purchaser at
$205,000.
D. Brandy’s Flower Shop is forecasting its balance sheet for the next five years.
E. When preparing financials for a company, the owner makes sure that the expense transactions are kept
separate from expenses of the other company that he owns.
F. A company records the expenses incurred to generate the revenues reported.
Exercise 4: which GAAP principles are violated?
A. company always recorded purchases in the Cost of Goods Sold account (expense) whether or not the
merchandise had been sold.
B. A company has produced financial statements for years without any date or fiscal period identified on them.
C. Brueht owns a construction company and believes because he is the owner, no accounting entries are needed
when he removes lumber from the jobsite to add a deck to his house.
D. A company changed their method of amortizing every two years.
E. A used appliance store works on the cash and barter business. The bookkeeper is confused about how to
record an entry, where a customer received a stove and in return owes the store 15 hours of plumbing labour.
F. A company debited $15 to Office Equipment for the purchase of a new pencil sharpener which will be used
by the business for the next 5 years.
E. A company prepared an unclassified set of financial statements.
F. M. Elliot, after three business failures, has opened a new restaurant. When calculating the life expectancy of
her new equipment, it never entered her mind how long the equipment could be used for, but only how long she
felt the business would last.
G. A company recorded the purchase of land at cost price and then realized the value was greatly
underestimated. They wanted to change the price based on the current market value of the property.
H. A company wrote the value of their equipment down to its estimated disposal value in order to lower net
income for the year.
I. A company selling franchises charges a franchise fee lasting 20 years. They wanted to show the entire fee as
revenue in the year they sold the franchise.
J. A company recorded the payment for a one year insurance policy by debiting Insurance Expense.
K. A company, after considering the resale value to properties close to theirs, tripled the value of land on their
general ledger and recorded a Gain on value of Land (a revenue account).
Exercise 5: Identify whether each of the following situations represents a violation or a correct application of
GAAP, and which principle is relevant in each instance.
a. A small storage shed was purchased from a home supply store at a discount sale price of $5,000 cash. The
clerk recorded the asset at $6,000, which was the regular price.
b. One of the business partners of a small architect firm continually charges the processing of his family
vacation photos to the business firm.
c. An owner of a small engineering business, operating as a proprietorship from his home office, also paints and
sells water colour paintings in his spare time. He combines all the transactions in one set of books.
d. ABS Consulting received cash of $6,000 from a new customer for consulting services that ABS is to provide
over the next six months. The transaction was recorded as a credit to revenue.
e. Tyler Tires, purchased a shop tool for cash of $20 to replace the one that had broken earlier that day. The tool
would be useful for several years, but the transaction was recorded as a debit to shop supplies expense instead
of to shop equipment (asset).
f. Embassy Lighting, a small company operating in Canada, sold some merchandise to a customer in California
and deposited cash of $5,000 US. The bookkeeper recorded it as a credit to revenue of $7,250 CAD, which was
the Canadian equivalent currency at that time.
g. An owner of a small car repair shop purchased shop supplies for cash of $2,200, which will be used over the
next six months. The transaction was recorded as a debit to shop supplies (asset) and will be expensed as they
are used.
h. At the end of each year, a business owner looks at his estimated net income for the year and decides which
depreciation method he will use in an effort to reduce his business income taxes to the lowest amount possible.
i. XYZ is in deep financial trouble and recently was able to obtain some badly needed cash from an investor
who was interested in becoming an equity partner. However, a few days ago, the investor unexpectedly changed
the terms of his cash investment in XYZ company from the proposed equity partnership to a long-term loan.
XYZ does not disclose this to their bank, who they recently applied to for an increase in their overdraft line-of-
credit.