MULTIPLE CHOICE QUESTIONS

1-1 Chapter 1 Financial Accounting and Its Economic Context

MULTIPLE CHOICE QUESTIONS

• A bank that loans money to a company is called
• a supplier.
• a creditor.
• an equity investor.
• a shareholder.

Ans: B LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• The auditors are charged with responsibility
• to detect financial fraud committed by employees during the course of their audit
• to conduct a thorough and independent audit
• to correct all errors in the financial statements
• for the accuracy and completeness of the financial statements

Ans: B LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which of the following best describes the two perspectives of the financial reporting

process that managers need to understand in investing decisions?

• Economic consequences and user orientation.
• Corporate governance and user orientation.
• User orientation and debt covenants.
• Economic consequences and corporate governance.

Ans: A LO 1 BT: K Difficulty: Moderate TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Considering and understanding how business decisions affect the financial statements is
• the sole responsibility of the Securities and Exchange Commission.
• provided in the auditor’s report.
• referred to as an economic consequence perspective.
• interpreted strictly by the company’s suppliers.

Ans: C LO 1,2,5 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Financial Accounting in an Economic Context 10th Edition Pratt Test Bank Visit TestBankDeal.com to get complete for all chapters

1-2 Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

• A statement that “the financial statements were prepared in accordance with generally

accepted accounting principles” is found in the

• collateral.
• stock market.
• footnotes to the balance sheet.
• auditor’s report.

Ans: D LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• A statement that financial statement information “is the responsibility of the company”

issuing the statements is found in the

• footnotes to the financial statements.
• loan contract.
• management letter.
• board of directors’ report.

Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• CPA is an abbreviation for
• Certified Public Accountant.
• Certified Production Accountant.
• Consumer Protection Agency.
• Certified Permissible Accounting.

Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• An explanation about the assumptions, estimates, and choices of alternative accounting

methods used in the financial statements is found in the

• footnotes to the balance sheet.
• auditor’s report.
• statement of shareholders’ equity.
• president’s letter to the shareholders.

Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Which of the following best describes assets paid to owners of a company as a return for

their initial investment?

• payables
• compensation contracts
• dividends
• interest

Ans: C LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

Test Bank – Chapter 1 – Financial Accounting and Its Economic Context 1-3

10. All of the following would likely be part of a loan contract except:

• maturity date
• earning power
• collateral
• annual interest

Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• A Certified Public Accountant
• reviews every transaction that a company conducts during any given year.
• performs a company’s audit.
• is one of the investors of a company.
• is responsible for the preparation and integrity of a company’s financial statements.

Ans: B LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• An internal control system
• is maintained to ensure that transactions of a company are properly recorded and

reported and the assets are safeguarded.

• is included in the set of footnotes to the financial statements.
• is an estimate of the profits a company expects to earn in the future.
• measures how much control management has over its staff.

Ans: A LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Footnotes to financial statements
• more fully explain certain items in the financial statements.
• reflect financial notes personalized by the company’s executive team.
• show the detail of salaries of every employee.
• justify fraudulent business practices.

Ans: A LO 2,3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• The balance sheet communicates
• proof to the investor that the company is profitable.
• assets, liabilities, and shareholders’ equity with all transactions reflected through the

year.

• assets, liabilities, and shareholders’ equity as of a certain date.
• operating, investing, and financing activities.

Ans: C LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

1-4 Test Bank – Chapter 1 – Financial Accounting and Its Economic Context

• The income statement communicates
• assets, liabilities, and shareholders’ equity as of a certain date.
• how much cash the owner received during the period.
• information about dividends the company paid to its owners.
• revenues less expenses during a period of time.

Ans: D LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• Where would you find information on the amount of net income for the year?
• Factory production reports on units produced
• Auditor’s report
• Income statement
• Internal Revenue Service

Ans: C LO 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• The statement of cash flows communicates
• assets, liabilities, and owners’ equity at a point of time.
• operating, investing, and financing activities.
• beginning balance plus income less dividends.
• how much cash the company owes its employees.

Ans: B LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• The retained earnings section of the statement of shareholders’ equity communicates
• beginning balance plus income less dividends.
• revenues less expenses during a period of time.
• how much cash that management has paid for bonuses.
• operating, investing, and financing activities.

Ans: A LO 3 BT: K Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting

• An investor wants to find the amount of cash and land that a company has. Where will

the investor look?

• Statement of shareholders’ equity
• Income statement
• Balance sheet
• Statement of cash flows

Ans: C LO 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting