Accounting in Business Practice Quiz (26 questions)

Explanation

Accounting identifies, records, communicates, and measures an organization’s business activities. Preparing tax returns is one accounting application, but accounting focuses on a broader information and measurement role rather than primarily on tax returns.

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Bookkeeping records transactions and events, while accounting also analyzes and interprets the resulting information. Interpretation belongs to accounting, and the two activities are related but not identical.

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Internal users manage the organization and receive reports tailored to their needs. External users evaluate it from outside and have limited access; they do not directly run daily operations.

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Accounting opportunities include financial, managerial, and taxation work. They also extend to government and not-for-profit agencies.

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Data analytics analyzes data to identify meaningful relationships and trends. Recording transactions, making automatic decisions, and merely presenting graphics do not define the process.

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Prescriptive analytics recommends possible actions, diagnostic analytics examines why events occurred, descriptive analytics summarizes past events, and predictive analytics forecasts likely future events. Data visualization presents data graphically, rather than numerically, to help users understand its significance and make informed business decisions.

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Ethics are accepted standards of good and bad behavior that distinguish right from wrong. They are broader than rules governing financial reporting alone.

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Ethical decision-making begins by recognizing the concern and analyzing options and consequences. The best option is chosen only after those consequences have been weighed.

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The fraud triangle consists of opportunity, pressure or incentive, and rationalization or attitude. Auditing, taxation, and advisory services are accounting services, not fraud-triangle factors.

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Generally accepted accounting principles provide financial-accounting concepts and rules. Relevant information affects decisions, while faithful representation accurately reflects business results; the final statement reverses these meanings.

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The FASB sets GAAP under SEC authority, while the SEC oversees its use by publicly financed companies. The SEC does not independently establish GAAP, and oversight of public-company use is not the FASB’s primary role.

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The conceptual framework includes objectives, qualitative characteristics, elements, and recognition and measurement criteria. Tax filing procedures are not listed as a component of that framework.

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The four general accounting principles include measurement and revenue recognition, along with expense recognition and full disclosure. The monetary unit, business entity, and going-concern concepts are assumptions rather than principles.

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Revenue is recognized when goods or services are provided and measured at the amount expected from the customer. Cash collection may occur later, and production cost does not determine the recognized revenue amount.

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The four fundamental assumptions are monetary unit, business entity, time period, and going concern. Full disclosure is an accounting principle, not one of the four fundamental assumptions.

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Assets are resources a company owns or controls and expects to yield future benefits. Creditors’ claims are liabilities, while the owners’ residual claim is equity.

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The accounting equation is $Assets = Liabilities + Equity$, so equity equals assets minus liabilities: $120{,}000 - 45{,}000 = 75{,}000$. Liabilities are therefore not $75{,}000$, and equity is not assets plus liabilities. Dividends decrease equity rather than increase it, while the company’s assets remain $120{,}000$.

Explanation

Common stock and revenues increase equity, whereas dividends and expenses decrease it. Dividends distribute resources to owners, and expenses reduce equity rather than increase it.

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Transaction analysis identifies affected accounts, determines whether each account increases or decreases, and records equal effects to preserve the accounting equation. A cash purchase of supplies increases supplies but decreases cash, rather than increasing both accounts. Transaction analysis does not permit unequal effects or prevent accounts from changing.

Explanation

A $30,000 cash investment increases both cash and common stock by $30,000. It does not decrease cash, reduce equity, or create a liability.

Explanation

Providing services for cash increases cash and revenue, while providing services on credit increases accounts receivable and revenue. Paying expenses decreases cash and total equity. Collecting accounts receivable exchanges one asset for another without changing total assets, and providing services for cash increases cash rather than accounts receivable.

Explanation

The income statement reports revenues and expenses over a period and computes net income or loss. Assets and liabilities at a point in time belong to the balance sheet, while cash flows and retained earnings are reported elsewhere.

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The balance sheet reports the types and amounts of assets, liabilities, and equity at a point in time. Revenues and expenses belong to the income statement, while cash-flow classifications belong to the statement of cash flows.

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The statement of cash flows reports inflows and outflows over a period, classifies them as operating, investing, or financing, and links ending cash to the balance sheet. Assets and liabilities at a point in time are reported by the balance sheet.

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The statement of retained earnings begins with beginning retained earnings, adds net income or subtracts net loss, subtracts dividends, and produces ending retained earnings. A net loss is therefore subtracted rather than added.

Explanation

Return on assets, also called return on investment, is net income divided by average total assets. Average total liabilities are not used as the denominator, and the measure does not use ending total assets in place of average total assets or compare liabilities with equity.