Accounting & Auditing
Introduction to Accounting
Credible financial reporting can reduce information asymmetry between:
A. Machines and products
B. Buildings and land
C. Weather and climate
D. Management and external capital providers
Correct Answer: D
External investors and lenders know less about internal operations than management; credible reporting helps narrow that information gap.
Accounting & Auditing
Introduction to Accounting
At the economy-wide level, reliable accounting information can support:
A. Elimination of all economic cycles
B. Guaranteed stock prices
C. Efficient allocation of capital
D. Elimination of competition
Correct Answer: C
Investors and lenders use reliable financial information to direct capital toward opportunities they judge appropriate.
Accounting & Auditing
Introduction to Accounting
In decision-making, relevant accounting information should focus on:
A. Only sunk historical amounts
B. Information that differs among alternatives and can influence the decision
C. Only favorable information
D. Only non-financial rumors
Correct Answer: B
Relevant information is capable of affecting a choice between alternatives.
Accounting & Auditing
Introduction to Accounting
Accounting helps management control operations through:
A. Performance reports and variance comparisons
B. Avoiding measurement
C. Removing budgets
D. Ignoring deviations
Correct Answer: A
Management compares actual results with plans, budgets or standards to identify deviations requiring action.
Accounting & Auditing
Introduction to Accounting
Accounting information helps management plan by providing a basis for:
A. Random guesses
B. Ignoring trends
C. Eliminating objectives
D. Budgets and forecasts
Correct Answer: D
Historical and current financial information supports realistic planning and forecasting.
Accounting & Auditing
Introduction to Accounting
Which event best illustrates an internal accounting event?
A. Borrowing from a bank
B. Paying a supplier
C. Recording depreciation expense
D. Selling to a customer
Correct Answer: C
Depreciation is recognized internally to allocate the cost of a long-lived asset over its useful periods.
Accounting & Auditing
Introduction to Accounting
Which event best illustrates an external transaction?
A. Recording depreciation
B. Sale of goods to a customer
C. Allocating overhead internally
D. Estimating year-end allowance
Correct Answer: B
A sale involves an exchange between the entity and an outside party.
Accounting & Auditing
Introduction to Accounting
A transaction supported by documentary evidence is generally easier to:
A. Verify
B. Hide
C. Ignore
D. Misclassify deliberately
Correct Answer: A
Source documentation enhances traceability and verification.
Accounting & Auditing
Introduction to Accounting
Which statement is correct about cash and credit transactions?
A. Only cash transactions are recorded
B. Only credit transactions are recorded
C. Neither is recorded
D. Both can be recorded if they have measurable financial effects
Correct Answer: D
Accounting records qualifying transactions regardless of whether payment is immediate or deferred.
Accounting & Auditing
Introduction to Accounting
Depreciation is an example of an accounting entry that may arise from:
A. A customer complaint
B. An advertising slogan
C. An internal accounting adjustment rather than a new external cash transaction
D. A personal event
Correct Answer: C
Some accounting events, such as depreciation, are recognized through internal period-end adjustments.
Accounting & Auditing
Introduction to Accounting
A credit purchase is still recorded because:
A. Only cash transactions are recorded
B. Accounting recognizes measurable obligations even when cash is paid later
C. Credit has no financial effect
D. Suppliers are internal users
Correct Answer: B
The purchase creates an asset/expense and a liability even before cash payment.
Accounting & Auditing
Introduction to Accounting
A business transaction must generally involve:
A. A measurable financial effect on the entity
B. Only cash
C. Only external parties
D. Only profit
Correct Answer: A
Transactions can be cash or credit and may be internal or external, but they must have a measurable financial effect.
Accounting & Auditing
Introduction to Accounting
Which event normally would NOT be recorded immediately in conventional accounting?
A. Payment of rent
B. Purchase of inventory
C. Receipt of cash from customer
D. A manager's opinion that employee morale has improved
Correct Answer: D
Improved morale may be economically important but does not ordinarily create a reliably measurable accounting transaction.
Accounting & Auditing
Introduction to Accounting
Which event would normally be recorded in the accounts?
A. Manager's personal plan to take a vacation
B. A rumor about a competitor
C. Purchase of office equipment for cash
D. An employee's favorite color
Correct Answer: C
Purchasing equipment has a measurable financial effect on the business.
Accounting & Auditing
Introduction to Accounting
An economic event that affects the financial position of a business and can be measured reliably is generally called a:
A. Marketing slogan
B. Transaction or accounting event
C. Personal preference
D. Weather observation only
Correct Answer: B
Accounting focuses on measurable economic transactions and events that affect the entity.
Accounting & Auditing
Introduction to Accounting
Which business form most clearly illustrates separation of ownership and management?
A. A widely held corporation
B. A self-employed individual
C. A household
D. A casual cash purchase
Correct Answer: A
Large corporations often have many shareholders while professional managers conduct day-to-day operations.
Accounting & Auditing
Introduction to Accounting
Regardless of legal form, accounting generally treats the business as:
A. Part of the owner's household records
B. A marketing campaign
C. A tax authority
D. A separate accounting entity
Correct Answer: D
The entity concept requires financial records to distinguish business transactions from those of owners.
Accounting & Auditing
Introduction to Accounting
A corporation/company is generally distinguished by:
A. Having no records
B. Prohibiting ownership
C. A legal identity separate from its owners
D. Never having liabilities
Correct Answer: C
A company is generally a separate legal person from its shareholders, subject to jurisdictional law.
Accounting & Auditing
Introduction to Accounting
A partnership is generally formed when:
A. One employee opens a bank account
B. Two or more persons agree to carry on a business and share results under applicable law
C. A customer buys goods
D. A government collects tax
Correct Answer: B
A partnership involves persons joining to conduct business together, subject to the relevant legal framework.
Accounting & Auditing
Introduction to Accounting
A sole proprietorship is owned by:
A. One individual
B. At least seven governments
C. Only a bank
D. Only employees
Correct Answer: A
A sole proprietorship is a business owned by one person, although it may employ many people.