Test Bank For
Accounting Principles, Volume 1, 10th Canadian Edition Jerry J. Weygandt,
Paul D. Kimmel, Jill E. Mitchell, Valerie Warren, Lori Novak
Chapter 1-10
CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the uses and users of accounting and the objective of financial reporting. Accounting is the
information system that identifies, records, and communicates the economic events of an
organization to a wide variety of interested users. Good accounting is important to people both
inside and outside the organization. Internal users, such as management, use accounting
information to plan, control, and evaluate business operations. External users include investors and
creditors, among others. Accounting data are used by investors (owners or potential owners) to
decide whether to buy, hold, or sell their financial interests. Creditors (suppliers and bankers)
evaluate the risks of granting credit or lending money based on the accounting information. The
objective of financial reporting is to provide useful information to investors and creditors to make
these decisions. Users need information about the business’s ability to earn a profit and generate
cash. For our economic system to function smoothly, reliable and ethical accounting and financial
reporting are critical.
2. Compare the different forms of business organization. The most common examples of business
organization are proprietorships, partnerships, and corporations. Proprietorships and partnerships
are not separate legal entities but are separate entities for accounting purposes; income taxes are
paid by the owners and owners have unlimited liability. Corporations are separate legal entities as
well as separate entities for accounting purposes; income taxes are paid by the corporation and
owners of the corporation have limited liability.
3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual
framework. Generally accepted accounting principles are a common set of guidelines that are used
to prepare and report accounting information. The conceptual framework outlines some of the
body of theory used by accountants to fulfill their goal of providing useful accounting information
to users. Ethical behaviour is fundamental to fulfilling the objective of financial accounting. The
reporting entity concept requires the business activities of each reporting entity to be kept separate
from the activities of its owner and other economic entities. The going concern assumption
presumes that a business will continue operations for enough time to use its assets for their
intended purpose and to fulfill its commitments. The periodicity concept requires businesses to
divide up economic activities into distinct periods of time. Qualitative characteristics include
fundamental and enhancing characteristics that help to ensure accounting information is useful.
Only events that cause changes in the business’s economic resources or changes to the claims on
those resources are recorded. Recognition is the process of recording transactions and
,measurement is the process of determining the amount that should be recognized. The historical
cost concept states that economic resources should be recorded at their historical (original) cost.
Fair value may be a more appropriate measure for certain types of resources. Generally, fair value is
the amount the resource could be sold for in the market. The monetary unit concept requires that
only transactions that can be expressed as an amount of money be included in the accounting
records, and it assumes that the monetary unit is stable.
The revenue recognition principle requires companies to recognize revenue when a performance
obligation(s) is satisfied. The matching concept requires that costs be recognized as expenses in the
same period as revenue is recognized when there is a direct association between the cost incurred
and revenue recognized.
In Canada, there are two sets of standards for profit-oriented businesses. Publicly accountable
enterprises must follow International Financial Reporting Standards (IFRS) and private enterprises
have the choice of following IFRS or Accounting Standards for Private Enterprises (ASPE).
4. Describe the elements of the financial statements and explain the accounting equation. Assets,
liabilities, and owner’s equity are reported on the balance sheet. Assets are present economic
resources controlled by the business as a result of past events and have the potential to produce
economic benefits. Liabilities are present obligations of a business to transfer an economic resource
as a result of past events. Owner’s equity is the owner’s claim on the company’s assets and is equal
to total assets minus total liabilities. The balance sheet is based on the accounting equation: Assets
= Liabilities + Owner’s equity.
The Income statement reports the profit or loss for a specified period of time. Profit is equal to
revenues minus expenses. Revenues are the increases in assets, or decreases in liabilities, that
result from business activities that are undertaken to earn profit. Expenses are the cost of assets
consumed or services used in a company’s business activities. They are decreases in assets or
increases in liabilities, excluding withdrawals made by the owners, and result in a decrease to
owner’s equity.
The statement of owner’s equity summarizes the changes in owner’s equity during the period.
Owner’s equity is increased by investments by the owner and profits. It is decreased by drawings
and losses. Investments are contributions of cash or other assets by owners. Drawings are
withdrawals of cash or other assets from the business for the owner’s personal use. Owner’s equity
in a partnership is referred to as partners’ equity and in a corporation as shareholders’ equity.
A cash flow statement summarizes information about the cash inflows (receipts) and outflows
(payments) for a specific period of time.
5. Analyze the effects of business transactions on the accounting equation. Each business transaction
must have a dual effect on the accounting equation. For example, if an individual asset is increased,
there must be a corresponding (1) decrease in another asset, (2) increase in a liability, and/or (3)
increase in owner’s equity.
6. Prepare financial statements. The income statement is prepared first. Expenses are deducted from
revenues to calculate the profit or loss for a specific period of time. Then the statement of owner’s
equity is prepared using the profit or loss reported in the income statement. The profit is added to
(losses are deducted from) the owner’s equity at the beginning of the period. Drawings are then
deducted to calculate owner’s equity at the end of the period. A balance sheet reports the assets,
liabilities, and owner’s equity of a business as at the end of the accounting period. The owner’s
equity at the end of the period, as calculated in the statement of owner’s equity, is reported on the
,balance sheet in the owner’s equity section.
TRUE-FALSE STATEMENTS
1. Accounting is the information system that identifies, records, and communicates the economic
events of an organization to a wide variety of interested users.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
2. A working knowledge of accounting can be useful to doctors or lawyers.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
3. The main objective of financial statements is to provide useful information to management.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
4. Sales managers are an example of an external user of accounting information.
Answer: False
Bloomcode: Knowledge
, Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
5. Creditors are an example of an internal user of accounting information.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
6. Accounting information is used only by external users with a direct financial interest in a
company.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the uses and users of accounting and the objective of financial
reporting.
Section Reference: Why Is Accounting Important?
CPA: Financial Reporting
AACSB: Analytic
7. In a proprietorship, there may be two or more owners.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Compare the different forms of business organization.
Section Reference: Forms of Business Organization
CPA: Financial Reporting
AACSB: Analytic
8. One of the disadvantages of a proprietorship is that there is unlimited liability for the owner.
Answer: True
