Accounting Exam 1 chapter 1

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The proprietorship form of business organization

generally receives favorable tax treatment relative to a corporation.

A business organized as a corporation

is owned by its stockholders.

The partnership form of business organization

is a common form of organization for service-type businesses.

Which of the following is not one of the three forms of business organization?


Most business enterprises in the United States are

proprietorships and partnerships.

A business organized as a separate legal entity is a


Which of the following is not an advantage of the corporate form of business organization?

Favorable tax treatment

An advantage of the corporate form of business is that

its ownership is easily transferable via the sale of shares of stock.

Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?

Reduced legal liability for investors

A corporation has which of the following set of characteristics?

Easier to transfer ownership and raise funds, no personal liability

A small neighborhood barber shop that is operated by its owner would likely be organized as a


A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?

The prestige of operating as a corporation

All of the following are advantages for choosing a proprietorship for a business except

transfer of ownership is easily achieved through stock sales.

Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt?

Both Jack and Jill are personally liable for the business debt.

Which one of the following questions is most likely asked by an internal human resources director for the company?

What average pay raise is affordable for employees this year?

External users of accounting information, like the Internal Revenue Service, are most commonly known as

taxing authorities.

Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?

The Act calls for decreased independence of outside auditors reviewing corporate financial statements.

Which of the following would not be considered an internal user of accounting data for the Xanadu Company?

President of the employees’ labor union

Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules?

Regulatory agencies

Which of the following groups uses accounting information to determine whether the company can pay its obligations?


Which type of corporate information is readily available to investors?

Amount of net income retained in the business

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)

account payable.

The right to receive money in the future is called a(n)

account receivable.

Borrowing money is an example of a(n)

financing activity.

Issuing shares of stock in exchange for cash is an example of a(n)

financing activity.

Debt securities sold to investors that must be repaid at a particular date some years in the future are called

bonds payable.

Expenses are incurred

to generate revenues.

The cost of assets consumed or services used is also known as

an expense.

Resources owned by a business are referred to as


Which of the following is not a liability?

Accounts Receivable

Which of the following financial statements is divided into major categories of operating, investing, and financing activities?

The statement of cash flows.

Ending retained earnings for a period is equal to beginning

Retained earnings + Net income – Dividends

Dividends are reported on the

retained earnings statement.

Dividends paid

decrease retained earnings.

To show how successfully your business performed during a period of time, you would report its revenues and expenses in the

income statement.

Net income results when

Revenues > Expenses.

Net income will result during a time period when

revenues exceed expenses.

Which of the following financial statements is concerned with the company at a point in time?

Balance sheet

Which financial statement is prepared first?

Income statement

An income statement shows

revenues, expenses, and net income.

Henson Company began the year with retained earnings of $330,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Henson’s retained earnings at the end of the year?

$410,000 X Solution: $330,000 + ($500,000 − $380,000) − $40,000 = $410,000

Finney Company began the year by issuing $40,000 of common stock for cash. The company recorded revenues of $370,000, expenses of $320,000, and paid dividends of $20,000. What was Finney’s net income for the year?

$50,000 X $370,000 – $320,000 = $50,000

A balance sheet shows

assets, liabilities, and stockholders’ equity.

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