ACCT229 EXAM 1 TERMS

All terms found in quizzes 1-4, review packets, and practice exam 1

A disadvantage of a partnership is that the partners are subject to unlimited liability

TRUE

A sole proprietorship is a separate entity from its owner for accounting purposes

TRUE

Owners of a corporation are subject to limited liability

TRUE

An advantage of incorporation is the ease of transfer of ownership.

TRUE

A corporation is a separate legal entity for accounting purposes, but not for tax purposes

FALSE

 An investment in stock of another company is classified as either current or non-current depending on when management intends to sell the stock.

TRUE

Unearned Revenue will increase total Net Income

FALSE

The book value of a company’s fixed assets is calculated by subtracting the accumulated depreciation from the cost of the asset

TRUE

The economic entity assumption states that the economic life of a business can be divided into artificial time periods.

FALSE; Time period assumption

The monetary unit assumption states that a company will not go out of business in the near future.

FALSE; Going concern

The current ratio will decrease if a company buys equipment with cash

TRUE

Working capital will increase with the issuance of a short-term note for cash.

FALSE; Working Capital = Current assets - current liabilities

The ability of a company to compare and analyze its financial statements from one month to the next.

Consistency

The concept that an error made below a certain monetary threshold would not be corrected in the preparation of the company’s financial statements.

Materiality

The capacity of information to influence a decision.

Relevance

The quality that allows a user to analyze two or more companies and look for similarities and differences.

Comparability

Using the least optimistic of two equally likely estimates of financial information.

Conservatism

Borrowing money from the bank is a form of permanent financing.

FALSE

An Income Statement reports the earnings of a company at a point in time.

FALSE

Retained Earnings is defined as net income over the life of a company.

FALSE

SOX requires that audit committee members be independent of management.

TRUE

SOX requires that some members of the Board of Directors be independent of management.

TRUE

SOX requires that the independent auditors certify the annual financial statements as complete and accurate.

FALSE; CEO and CFO

Firms must provide whistle blower protection.

TRUE

When revenue is earned, most likely either cash or accounts payable will be debited.

FALSE; Accounts payable is a liability and is not used to record earned revenue

Every transaction affects both the income statement and the balance sheet.

FALSE

If debits equal credits on a trial balance, that is proof that all journal entries were correctly made.

FALSE; It does NOT prove that they were correctly made

Expenses are increased with a debit, and decrease stockholders’ equity.

TRUE

A credit to Utilities Expense would decrease Retained Earnings

FALSE; Utilities Expense increases R.E.

Cash, Dividends, Accumulated Depreciation, and Wage Expense all have debit balances.

FALSE; Accu. depreciation is a CONTRA-ASSET and is CREDITED

The issuance of stock decreases a company’s assets and increases its stockholders’ equity.

FALSE; Increases Assets and increases SHE

If a company purchases inventory on account, its total assets will not change.

FALSE; total assets INCREASE

Under the accrual method, expenses are recognized when revenue is earned.

FALSE; when they are incurred

Every adjusting entry involves at least one income statement and one balance sheet account.

TRUE

Dividends is a temporary account that appears on the income statement.

FALSE; Dividends don’t appear on the income statement. It appears on the statement of retained earnings or SHE