Accounting Principles and Ethics Quiz

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Questions and Answers

What does the Expense Recognition Principle dictate?

Only known expenses need to be recognized in the financial statements.

Expenses should be recorded regardless of revenue generation.

Expenses incurred to generate reported revenue should be recorded. (correct)

Expenses must be recorded only when cash is received.

Which assumption allows a business to be considered separate from its owner?

Business Entity Assumption (correct)

Monetary Unit Assumption

Accounting Period Assumption

Going-Concern Assumption

What is the purpose of the Full Disclosure Principle in financial reporting?

To disclose only audited financial statements to stakeholders.

To minimize the information shared with investors.

To provide details that could impact users’ decisions in the notes to the financial statements. (correct)

To ensure all non-financial information is omitted.

Which assumption relates to the idea of expressing transactions in money units?

Monetary Unit Assumption Signup and view all the answers

How does the Time Period Assumption affect financial reporting?

It divides a company’s life into measurable periods such as months or years. Signup and view all the answers

What does the Sarbanes–Oxley Act primarily aim to address?

Prevent financial abuses in public companies Signup and view all the answers

Which provision of the Dodd-Frank Act allows for the recovery of excessive pay?

Clawback provision Signup and view all the answers

Which of the following statements is true regarding ethics in accounting?

Good ethics contribute to good business Signup and view all the answers

What is a possible consequence for executives who fail to comply with the requirements of the Sarbanes–Oxley Act?

Criminal prosecution Signup and view all the answers

What does the whistleblower provision of the Dodd-Frank Act provide?

A financial reward for reporting misconduct Signup and view all the answers

Which of the following is a common reason that individuals may commit fraud?

Pressure from unpaid bills Signup and view all the answers

What is a key requirement of the Sarbanes–Oxley Act?

Documentation of internal controls Signup and view all the answers

How are ethics generally perceived in the context of accounting?

Critical for maintaining trust Signup and view all the answers

What is the primary purpose of Generally Accepted Accounting Principles (GAAP)?

To ensure information is relevant, reliable, and comparable Signup and view all the answers

Why is comparability important in financial accounting?

It helps users to make decisions by contrasting different organizations Signup and view all the answers

Which organization is responsible for issuing International Financial Reporting Standards (IFRS)?

International Accounting Standards Board (IASB) Signup and view all the answers

What does reliable information in financial accounting imply?

It can be trusted by users Signup and view all the answers

What is a key characteristic of relevant information in financial reporting?

It is useful for making future economic decisions Signup and view all the answers

In the context of global finance, why is there an increasing demand for comparability in accounting reports?

To facilitate cross-border transactions and investments Signup and view all the answers

What does IFRS primarily focus on?

Establishing preferred accounting practices Signup and view all the answers

What does GAAP ensure about financial statements?

They provide a framework for consistency and comparability Signup and view all the answers

What is the equity when assets are $99,000 and liabilities are $32,000?

$67,000 Signup and view all the answers

Which accounts are involved in the transaction when Chas Taylor invests $30,000 to start FastForward?

Cash and Common Stock Signup and view all the answers

How is the accounting equation represented after Chas Taylor's investment?

Assets = Liabilities + Equity Signup and view all the answers

In the transaction where the company purchases supplies for $2,500 cash, which accounts are involved?

Cash and Supplies Signup and view all the answers

If liabilities are zero, what would be the equity if assets total $50,000?

$50,000 Signup and view all the answers

What happens to cash when the company purchases supplies for $2,500?

Cash decreases by $2,500 Signup and view all the answers

Which of the following equations correctly represents the accounting equation?

Total Assets = Total Liabilities + Total Equity Signup and view all the answers

If a company’s equity increases, what can be inferred about its assets or liabilities?

Assets must have increased or liabilities must have decreased Signup and view all the answers

What is the total amount of accounts receivable after providing consulting services and rental facilities for credit?

$1,900 Signup and view all the answers

How does the transaction of providing services and facilities for credit affect equity?

It increases equity by $1,600 and $300 Signup and view all the answers

What is the new total for cash after all transactions?

$4,000 Signup and view all the answers

What accounts are affected when services are provided on credit?

Accounts Receivable and Consulting Revenues Signup and view all the answers

What is the effect of expenses on equity?

Expenses decrease equity Signup and view all the answers

Which of the following amounts reflects the total revenues recognized from providing services for credit?

$3,600 Signup and view all the answers

What is the accounting equation after the transactions are recorded?

$41,500 = $41,500 Signup and view all the answers

When rent revenues are generated from facilities rented, how does it affect the overall accounting equation?

Total equity increases by $300 Signup and view all the answers

What is the formula to calculate return on assets (ROA)?

Net income divided by average total assets Signup and view all the answers

How does risk relate to expected returns?

Higher risk usually leads to higher expected returns Signup and view all the answers

Which statement about return on assets (ROA) is true?

ROA measures the efficiency of a company in generating profits from its assets. Signup and view all the answers

Which of the following best describes the role of average total assets in calculating ROA?

It reflects the total value of resources available for generating income. Signup and view all the answers

What is a common misconception regarding the relationship of return and risk?

Risk is always beneficial for achieving higher returns. Signup and view all the answers

What can be inferred if a company has a very low return on assets?

The company's total assets are ineffective in generating profit. Signup and view all the answers

Which of the following is NOT a consideration when analyzing return on assets?

The historical performance of stock prices. Signup and view all the answers

Study Notes

Introduction to Digital Management - Chapter 1

The course is Introduction to digital management - 2, taught by Prof. Maurizio Massaro.
The chapter focuses on accounting in business.
The course is offered at Ca' Foscari University of Venice.

Chapter 1 Learning Objectives

Conceptual:
Explain the purpose and importance of accounting.
Identify users and uses of, and opportunities in, accounting.
Explain why ethics are crucial to accounting.
Explain generally accepted accounting principles (GAAP) and define and apply several accounting principles.
Identify and describe the three major activities of organizations: financing, investing, and operating.
Analytical:
Define and interpret the accounting equation and each of its components.
Compute and interpret return on assets (ROA).
Explain the relation between return and risk (Appendix 1A).
Procedural:
Analyze business transactions using the accounting equation.
Identify and prepare basic financial statements and explain how they interrelate.

Importance of Accounting

Accounting is an information and measurement system.
It identifies, records, and communicates an organization's business activities.
The process involves identifying events, recording them chronologically, and communicating the information.

Learning Objective C1: Explain the Purpose and Importance of Accounting

Accounting is essential for decision making.
Reliable information is crucial for informed decisions.

Learning Objective C2: Identify Users and Uses of, and Opportunities in, Accounting

Accounting information is used by external and internal users.
External users include lenders, shareholders, auditors, board of directors, and regulators.
Internal users include research and development managers, purchasing managers, human resource managers, marketing managers, and production managers.

Learning ObjectivC3: Explain Why Ethics are Crucial to Accounting

Ethics are beliefs that distinguish right from wrong.
Accounting ethics are accepted standards of good and bad behavior.
Ethical concerns need to be identified, analyzed, and ethical decisions need to to be made.
The goal of accounting is to provide reliable information for decision making.
The fraud triangle highlights three factors that contribute to fraud: opportunity, pressure, and rationalization.
SOX (Sarbanes-Oxley Act) and Dodd-Frank Wall Street Reform and Consumer Protection Act improve accounting controls and ethical behavior.

Learning Objective C4: Explain Generally Accepted Accounting Principles (GAAP) and Define and Apply Several Accounting Principles

GAAP aims to make accounting information relevant, reliable & comparable.
Accounting information needs to be: relevant, reliable, and comparable.
Principles, assumptions, and constraints govern financial reporting.
General principles, including assumptions, concepts, and guidelines, are used for preparing financial statements. Specific principles are detailed rules employed in reporting events.
Cost-benefit and materiality are important accounting constraints.
Measurement principle (cost principle) signifies accounting information is based on actual costs.
Revenue recognition establishes when revenue should be recorded.
Expense recognition (matching principle) records expenses related to particular revenue.
Full disclosure ensures that all relevant information is revealed in notes to statements.
Going concern, monetary unit, business entity, and time period are accounting assumptions.

Learning Objective A1: Define and Interpret the Accounting Equation

Assets = Liabilities + Equity
Expanded equation: Assets = Liabilities + Contributed Capital + Retained Earnings
Assets include cash, supplies, equipment, and accounts receivable.
Liabilities include accounts payable and notes payable.
Equity includes common stock and retained earnings.
Net income drives retained earnings.

Learning Objective P1: Analyze Business Transactions Using the Accounting Equation

Business transactions include investment by owner, purchase supplies for cash, purchase equipment for cash, purchase supplies on credit, providing services for cash, and payment of accounts payable, paying cash dividend, and more.

Learning Objective P2: Identify and Prepare Basic Financial Statements and Explain How They Interrelate

Financial statements consist of the income statement, balance sheet, statement of cash flow, and statement of retained earnings.
The income statement shows revenues, expenses, and net income.
The balance sheet shows assets, liabilities, and equity.
The statement of cash flows shows cash inflows and outflows.
The statement of retained earnings explains changes in retained earnings.

Learning Objective A2: Compute and Interpret Return on Assets (ROA)

Return on Assets (ROA) quantifies the relationship between net income and average total assets.
ROA =(Net Income / Average Total Assets) *100

Learning Objective A3: Explain the Relation between Return and Risk (Appendix 1A)

Risk is the uncertainty of return.
Lower risk generally equals lower expected return.

Learning Objective C5: Identifying and Describing the Three Major Activities of Organizations

Organizations carry out three major activities: Financing, Investing, and Operating.
Financing involves providing resources to pay for resources. It includes both owner and non-owner financing.
Investing involves acquiring (or disposing of) the resources (assets) to create and sell products /services.
Operating activities involve researching, developing, producing, distributing, and marketing of products/services
Strategic management is the right mix of operating activities for the type of organization, its plans, and its market.

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Description

Test your knowledge on key accounting principles and ethics with this quiz. Explore topics like the Expense Recognition Principle, the Sarbanes–Oxley Act, and ethical considerations in financial reporting. Perfect for students and professionals looking to refresh their understanding of accounting standards.