Horngren’s Accounting 11th Edition TEST BANK
AND SOLUTIONS MANUAL 2025 Miller-
Nobles Mattison Matsumura
Chapter 1
Accounting and the Business Environment
Review Questions
1. Accounting is the information system that measures business activities, processes the information
into reports, and communicates the results to decision makers. Accounting is the language of
business.
2. Financial accounting provides information for external decision makers, such as outside investors,
lenders, customers, and the federal government. Managerial accounting focuses on information for
internal decision makers, such as the company’s managers and employees.
3. Individuals use accounting information to help them manage their money, evaluate a new job, and
better decide whether they can afford to make a new purchase. Business owners use accounting
information to set goals, measure progress toward those goals, and make adjustments when needed.
Investors use accounting information to help them decide whether or not a company is a good
investment and once they have invested, they use a company’s financial statements to analyze how
their investment is performing. Creditors use accounting information to decide whether to lend
money to a business and to evaluate a company’s ability to make the loan payments. Taxing
authorities use accounting information to calculate the amount of income tax that a company has to
pay.
4. Certified Public Accountants (CPAs) are licensed professional accountants who serve the general
public. They work for public accounting firms, businesses, government, or educational institutions.
To be certified they must meet educational and/or experience requirements and pass an exam.
Certified Management Accountants (CMAs) specialize in accounting and financial management
knowledge. They work for a single company.
5. The FASB oversees the creation and governance of accounting standards. They work with
governmental regulatory agencies, congressionally created groups, and private groups.
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,6. The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule
book and is currently created and governed by the FASB. Investors and lenders must have
information that is relevant and has faithful representation in order to make decisions and GAAP
provides the framework for this financial reporting.
7. A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner
has personal liability for the business’s debts, and it is not a separate tax entity. A partnership has
two or more owners, terminates at partner’s choice or death, the partners have personal liability,
and it is not a separate tax entity. A corporation is a separate legal entity, has one or more owners,
has indefinite life, the stockholders are not personally liable for the business’s debts, and it is a
separate tax entity. A limited-liability company has one or more members and each is only liable
for his or her own actions, has an indefinite life, and is not a separate tax entity.
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,8. The land should be recorded at $5,000. The cost principle states that assets should be recorded at
their historical cost.
9. The going concern assumption assumes that the entity will remain in business for the foreseeable
future and long enough to use existing resources for their intended purpose.
10. The faithful representation concept states that accounting information should be complete, neutral,
and free from material error.
11. The monetary unit assumption states that items on the financial statements should be measured in
terms of a monetary unit.
12. The IASB is the organization that develops and creates IFRS which are a set of global accounting
standards that would be used around the world.
13. Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the
business in the future. They are things of value that a business owns or has control of. Liabilities
are debts that are owed to creditors. They are one source of claims against assets. Equity is the
other source of claims against assets. Equity is the owner’s claims against assets and is the amount
of assets that is left over after the company has paid its liabilities. It represents the net worth of the
business.
14. Equity increases with owner’s contributions and revenue. Equity decreases with expenses and
owner’s withdrawals.
15. Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or
services to customers. Expenses are the cost of selling goods or service.
16. Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or
decreases. Step 3: Determine if the accounting equation is in balance.
17. Income Statement – Shows the difference between an entity’s revenues and expenses and reports
the net income or net loss for a specific period.
Statement of Owner’s Equity – Shows the changes in the owner’s capital account for a specific
period including owner contributions, net income (loss) and owner’s withdrawals.
Balance Sheet – Shows the assets, liabilities, and owner’s equity of the business as of a specific
date.
Statement of Cash Flows – Shows a business’s cash receipts and cash payments for a specific
period.
18. Return on Assets = Net income / Average total assets. ROA measures how profitably a company
uses its assets.
Short Exercises
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, S1-1
a.FA e.MA
b. FA f.FA
c. FA g.MA
d.MA h.FA
S1-2
The Financial Accounting Standards Board governs the majority of guidelines, called Generally
Accepted Accounting Principles (GAAP), that the CPA will use to prepare financial statements for
Wholly Shirts.
S1-3
Chloe’s needswill best be met by organizing a corporation since a corporation hasan unlimited life
and is a separate tax entity. In addition, the owners (stockholders) have limited liability. Chloe could
also consider a limited liability company (LLC) as an option. A LLC meets two of the three criteria.
It has an unlimited life and limited liability for the owner. However, a LLC is not a separate tax
entity.
S1-4
Advantages:
1. Easy to organize.
2. Unification of ownership and management.
3. Less government regulation.
4. Owner has more control over business.
Disadvantages:
1. The owner pays taxes since it is not a separate tax entity.
2. No continuous life or transferability of ownership.
3. Unlimited liability of owner for business’s debts.
S1-5
a. The economic entity assumption
b. The cost principle.
c. The monetary unit assumption.
d. The goingconcern assumption.
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