Chapter 1—Accounting Information: Users and Uses

MULTIPLE CHOICE

1. Which of the following is NOT typically true of accounting information?

a. The information is quantitative in nature.
b. The information relates to future time periods.
c. The information relates to specific accounting entities.
d. The information is primarily financial in nature.
ANS: B PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

2. Which of the following is true about the double-entry system of bookkeeping?

a. It was developed in the 1300s1400s in France.
b. It was developed in the 1800s in Italy.
c. It was developed in the 1300s1400s in Italy.
d. It was developed in the 1800s in the United States.
ANS: C PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

3. Businesses use accounting systems to

a. Analyze transactions
b. Handle routine bookkeeping tasks
c. Evaluate the performance and health of the business
d. All of these are correct
ANS: D PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

4. Which of the following is the most correct definition of accounting?

a. A system for providing quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions.
b. An entity without a profit objective, oriented toward providing services efficiently and
effectively.
c. The preservation of a systematic, quantitative record of an activity.
d. The procedures and processes used by a company to analyze transactions and handle
routine bookkeeping tasks.
ANS: A PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

5. Which of the following is NOT a function of accounting?

a. Accumulating economic information about organizations
b. Measuring economic information about organizations
c. Executing sales transactions for organizations
d. Communicating economic information about organizations
ANS: C PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 6. Which of the following is NOT a key component of the definition of accounting?
a. Financial
b. Qualitative
c. Useful
d. Decision-oriented
ANS: B PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

7. Which of the following is NOT a step in the decision making process?

a. Identify the issue.
b. Identify alternatives.
c. Select the option that will result in the greatest financial increase.
d. Gather information.
ANS: C PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling

8. Accounting can be best described as a

a. Manufacturing activity
b. Service activity
c. Retailing activity
d. All of these are correct
ANS: B PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

9. Which of the following is NOT a typical source of monetary resources for a business
enterprise?
a. Investors
b. Creditors
c. Business earnings
d. Employees
ANS: D PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

10. Accountants typically perform what action related to the financial results of business
activities?
a. Report the results of business activities
b. Advise on how to structure business activities
c. Both report the results of and advise on how to structure business activities
d. None of these are correct
ANS: C PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Reporting

11. The accounting cycle includes all of the following, EXCEPT:

a. Recording
b. Summarizing
c. Analyzing
d. Interpreting

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 ANS: D PTS: 1 DIF: Easy OBJ: 1.1
NAT: AACSB Reflective Thinking | AICPA FN Measurement

12. The emphasis in financial accounting is on which of the following external user groups?
a. Management
b. Certified public accountants
c. Investors and creditors
d. Educators
ANS: C PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

13. The primary internal group that uses accounting information is

a. Government agencies
b. Investors
c. Management
d. Competitors
ANS: C PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

14. Internal reports are generally used by

a. Management
b. Suppliers
c. Lenders
d. Employees
ANS: A PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

15. Which of the following is NOT an important aspect of management accounting?

a. Planning
b. Product design
c. Implementing plans
d. Controlling costs
ANS: B PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

16. The area of accounting that is concerned with providing information for external users is
referred to as
a. Financial accounting
b. Governmental accounting
c. Management accounting
d. Not-for-profit accounting
ANS: A PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

17. Which of the following is NOT one of the three primary financial statements?
a. Statement of cash flows
b. Statement of comprehensive income
c. Statement of retained earnings

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 d. Balance sheet
ANS: C PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

18. Which of the following financial statements reports a company's resources, obligations, and
owner's equity?
a. Balance sheet
b. Statement of comprehensive income
c. Statement of retained earnings
d. Statement of cash flows
ANS: A PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

19. Which of the following financial statements reports the excess of a company's revenues over
its expenses?
a. Balance sheet
b. Statement of comprehensive income
c. Statement of retained earnings
d. Statement of cash flows
ANS: B PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

20. Which of the following financial statements reports the amount of cash collected and paid out
by a company?
a. Balance sheet
b. Statement of comprehensive income
c. Statement of retained earnings
d. Statement of cash flows
ANS: D PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

21. Which of the following is NOT an external user of financial information?

a. Competitors
b. Employees
c. Management
d. Suppliers
ANS: C PTS: 1 DIF: Easy OBJ: 1.2
NAT: AACSB Reflective Thinking | AICPA FN Reporting

22. Which of the following is NOT one of the factors that influences the accounting environment?
a. International business
b. Technology
c. The development of generally accepted accounting principles (GAAP)
d. Investors
ANS: D PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
23. Which of the following is NOT true of the Financial Accounting Standards Board (FASB)?
a. It consists of five full-time members
b. It is a government agency
c. It seeks consistency for its proposed standards
d. It has no legal power to enforce the standards it sets
ANS: B PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting

24. Generally accepted accounting principles are

a. Natural laws
b. Based on scientific proofs
c. Developed by accounting rule makers
d. None of these are correct
ANS: C PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting

25. The initials GAAP stand for

a. General Accounting Administration Practices
b. Generally Applied Accounting Procedures
c. Generally Accepted Accounting Principles
d. Generally Accepted Accounting Practices
ANS: C PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting

26. Which of the following organizations has specific legal authority to establish accounting standards
for publicly held companies?
a. Financial Accounting Standards Board (FASB)
b. Securities and Exchange Commission (SEC)
c. Internal Revenue Service (IRS)
d. American Institute of Certified Public Accountants (AICPA)
ANS: B PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Legal

27. The Sarbanes-Oxley Act created the

a. Financial Accounting Standards Board
b. Public Company Accounting Oversight Board
c. American Institute of Certified Public Accountants
d. Enron-WorldCom Fraud Committee
ANS: B PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Legal

28. The initials CPA stand for

a. Certified Professional Appraiser
b. Certified Professional Accountant
c. Certified Public Accountant
d. Certified Public Auditor
ANS: C PTS: 1 DIF: Easy OBJ: 1.3

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 NAT: AACSB Reflective Thinking | AICPA BB Legal
29. Which of the following is NOT a service typically provided by large public accounting firms?
a. Performing audits
b. Making management decisions
c. Redesigning operating procedures
d. Establishing accounting systems
ANS: B PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting
30. Which of the following is the government agency that stipulates the rules and regulations that
govern the collection of taxes in the United States?
a. Securities and Exchange Commission
b. Federal Accounting Standards Board
c. Internal Revenue Service
d. American Institute of Certified Public Accountants
ANS: C PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Legal

31. The organization that develops worldwide accounting standards is the

a. International Committee on Accounting Standards (ICAS)
b. International Accounting Standards Board (IASB)
c. International Board of Accounting Standards (IBAS)
d. International Accounting Standards Committee (IASC)
ANS: B PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Global
32. Standards established by the International Accounting Standards Board are referred to as
a. Generally Accepted Accounting Standards
b. International Auditing Standards
c. International Financial Reporting Standards
d. International Financial Accounting Standards
ANS: C PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Global

33. In 2008, the SEC began to

a. Allow U.S. companies trading on the U.S. stock exchange to issue their financial reports
using IASB standards
b. Require U.S. companies trading on the U.S. stock exchange to issue their financial reports
using IASB standards
c. Require non-U.S. companies trading on the U.S. stock exchange to issue their financial
reports using IASB standards
d. Allow non-U.S. companies trading on the U.S. stock exchange to issue their financial
reports using IASB standards
ANS: D PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA BB Global

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
34. Ethics are especially important in accounting because
a. Independent accountants represent the public interest
b. Accountants can steal money more easily than other employees
c. Accountants have historically committed more company thefts than other employees
d. The accounting profession does not have a code of professional conduct
ANS: A PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Ethics | AICPA FN Reporting

35. Which of the following is NOT one of the ways that technology has changed the way
accounting is done?
a. Technology easily allows companies to collect large amounts of data about transactions
b. Technology allows greater access to a company's financial statements and other financial
information
c. Technology is able to perform the mechanics of accounting therefore, people are not
required to understand the mechanics
d. Technology allows for large amounts of data to be compiled quickly and accurately
ANS: C PTS: 1 DIF: Easy OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Measurement

36. Which of the following is a reason that you may need to understand accounting information in
the future?
a. To evaluate an employer's short and long-term potential
b. To perform a personal budget
c. To perform responsibilities in future employment
d. All of these are reasons to study accounting
ANS: D PTS: 1 DIF: Easy OBJ: 1.4
NAT: AACSB Reflective Thinking | AICPA FN Measurement

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
PROBLEM

1. Identify and describe the functions of an accounting system.

ANS:
The functions of an accounting system are analysis, bookkeeping, and evaluation. Analysis involves
analyzing business transactions to determine what information should be captured by the accounting
system. Bookkeeping is tracking activities on a day-to-day basis. Evaluation uses summary
information to evaluate the financial health and performance of a business.

PTS: 1 DIF: Medium OBJ: 1.1

NAT: AACSB Reflective Thinking | AICPA FN Reporting

2. The definition of accounting is a system for providing "quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions." List and
explain the key components of this definition.

ANS:

Quantitative Accounting relates to numbers.

Financial The health and performance of a company are affected and reflected in many
dimensions but accounting focuses only on the financial aspect.

Useful Accounting exists only because it is useful.

Decisions Accounting is only useful as the past information can be used to impact future
decisions.

PTS: 1 DIF: Medium OBJ: 1.1

NAT: AACSB Reflective Thinking | AICPA FN Measurement

3. List the four steps in the decision making process.

ANS:

1. Identify the issue.

2. Gather information.
3. Identify alternatives.
4. Select the option that will most likely result in the desired objective.

PTS: 1 DIF: Medium OBJ: 1.1

NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
4. Identify the three primary financial statements and discuss the content of each.

ANS:
The balance sheet reports the assets, liabilities, and owners' equity of a business.

The statement of comprehensive income reports the net income or net loss of a company, which
represents the difference between revenues and expenses.

The statement of cash flows reports the cash inflows and outflows from operating, investing, and
financing activities.

PTS: 1 DIF: Medium OBJ: 1.1

NAT: AACSB Reflective Thinking | AICPA FN Reporting

5. List six users of accounting information and indicate whether they are an internal or an external user.

ANS:

Management internal
Creditors (Lenders) external
Investors external
Suppliers external
Customers external
Employees external
Competitors external
Government agencies external
The press external

PTS: 1 DIF: Medium OBJ: 1.2

NAT: AACSB Analytic | AICPA FN Reporting

6. Lenders, investors, and management are three potential users of external financial statements. Discuss
how the information found in external financial statements can benefit each of these external users.

ANS:
Lenders want to be repaid. External financial statements help lenders predict the future ability of the
borrower to repay the loan.

Investors want to be able to estimate how much cash they will receive in the future if they invest in a
company now. Financial statements, along with knowledge of business plans, market forecasts, and
character of management, can help investors to assess future cash flows.

Management can use the information found in external financial statements to state goals, calculate
management bonuses, and analyze the company in order to pinpoint weaknesses.

PTS: 1 DIF: Medium OBJ: 1.2

NAT: AACSB Analytic | AICPA FN Reporting

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
7. Describe the major difference between internal reports and external reports.
ANS:
Internal reports are dynamic and created to meet the needs of management. These reports may vary
greatly among companies.
External reports generally consist of general-purpose financial statements and must follow certain
standards or guidelines. These reports are more uniform among companies.
PTS: 1 DIF: Medium OBJ: 1.2
NAT: AACSB Analytic | AICPA FN Reporting
8. It is often said that companies must keep two sets of books. Isn't this dishonest? Explain.
ANS:
No, it is not dishonest. Companies are subject to both the rules governing financial accounting and
those governing tax accounting. One set of books must be maintained according to GAAP from which
the company's financial statements are prepared. The other set of books is maintained in compliance
with income tax regulations, from which the company's tax return is prepared.
PTS: 1 DIF: Medium OBJ: 1.3
NAT: AACSB Analytic | AICPA FN Reporting
9. FASB, GAAP, SEC, CPA, AICPA, IRS, IASB, IFRS are all acronyms used in accounting. For the
preceding list of acronyms, state what the acronym stands for and then give a definition of each
acronym.
ANS:
FASB: Financial Accounting Standards Board. The private organization responsible for
establishing the standards for financial accounting and reporting in the United
States.
GAAP: Generally Accepted Accounting Principles. Authoritative guidelines that define
accounting practice at a particular time.
SEC: Securities and Exchange Commission. The government body responsible for
regulating the financial reporting practices of most publicly owned corporations in
connection with the buying and selling of stocks and bonds.
CPA: Certified Public Accountant. A special designation given to an accountant who has
passed a national uniform examination and has met other certifying requirements.
AICPA: American Institute of Certified Public Accountants. The national organization of
CPAs in the United States.
IRS: Internal Revenue Service. A government agency that prescribes the rules and
regulations that govern the collection of tax revenues in the United States.
IASB: International Accounting Standards Board. The committee formed in 1973 to
develop worldwide accounting standards.
IFRS: International Financial Reporting Standards. The accounting standards produced by
the IASB and envisioned to be a set of standards that can be used by all companies
regardless of where the company is based.
PTS: 1 DIF: Medium OBJ: 1.3
NAT: AACSB Reflective Thinking | AICPA FN Reporting

© 2014 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.