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 ii 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 iv 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 Vii 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 V iv. business must report any business activities that could affect what is reported on
measurement concept the financial statements
E. conservatism i 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 vi 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 iii related to company operations, not those activities that affect the owner personally
Exercise 2. Match the correct term with its definition.
ii
A. Financial Accounting i. used by the FASB, which is a set of concepts that guide financial reporting
iii
Standards Board (FASB)
B. generally accepted iii ii. independent, nonprofit organization that sets financial accounting and reporting
accounting principles i standards for both public- and private-sector businesses that use generally accepted
(GAAP) accounting principles (GAAP) here in the United States
C. Securities and v iii. standards, procedures, and principles companies must follow when preparing
Exchange Commission their financial statements
(SEC) ii
D. conceptual framework v iv. assumes a business will continue to operate in the foreseeable future
i
E. going concern v. independent federal agency protecting the interests of investors, regulating stock
assumption iv markets, and ensuring companies adhere to GAAP requirements
F. time period assumption vi 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. accural
B. A company divides its income statements into four quarters for the year. period
C. Land is purchased for $205,000 cash; the land is reported on the balance sheet of the purchaser at
$205,000. materiality
D. Brandy’s Flower Shop is forecasting its balance sheet for the next five years. going
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. separate entity concept
F. A company records the expenses incurred to generate the revenues reported. matching
Exercise 4: which GAAP principles are violated?
A. company always recorded purchases in the Cost of Goods Sold account (expense) whether or not the
merchand ise had been sold. materiality
B. A company has produced financial statements for years without any date or fiscal period identified on them.
period
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. business entity
D. A company changed their method of amortizing every two years. consistency
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. going
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.
history cost
H. A company wrote the value of their equipment down to its estimated disposal value in order to lower net
income for the year. conser
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. matching
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).
going