Deck 1: Introduction to Financial Statements

Question 1

Proprietorships in the United States generate more revenue than the other two forms of business enterprise.

Answer 1

False

Question 2

Financing activities for corporations include borrowing money and selling shares of their own stock.

Answer 2

True

Question 3

The purchase of equipment is an example of a financing activity.

Answer 3

False

Question 4

Assets are resources owned by a business and provide future services or benefits to the business.

Question 5

A business organized as a separate legal entity owned by stockholders is a partnership.

Question 6

The economic resources that are owned by a business are called stockholders' equity.

Question 7

Management of a business enterprise is the major external user of information.

Question 8

Owners of business firms are the only people who need accounting information.

Question 9

The information needs and questions of external users vary considerably.

Question 10

Payments to owners are operating activities.

Question 11

Two primary external users of accounting information are investors and creditors.

Question 12

Corporate stockholders generally pay higher taxes but have no personal liability.

Question 13

A business is usually involved in two types of activity-financing and investing.

Question 14

External users of accounting information are managers who plan, organize, and run a business.

Question 15

The majority of U.S. business is transacted by proprietorships.

Question 16

Operating activities involve putting the resources of the business into action to generate a profit.

Question 17

Investing activities involve collecting the necessary funds to support the business.

Question 18

Net income for the period is determined by subtracting total expenses and dividends from revenues.

Question 19

The liability of corporate stockholders is limited to the amount of their investment.

Question 20

Accounting communicates financial information about a business to both internal and external users.

Question 21

An auditor is an accounting professional who conducts an independent examination of the accounting data presented by a company.

Question 22

Information in the notes to the financial statements has to be quantifiable (numeric).

Question 23

The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time.

Question 24

One way of stating the accounting equation is: Assets + Liabilities = Stockholders' Equity.

Question 25

Claims of creditors and owners on the assets of a business are called liabilities.

Question 26

The heading for the income statement might include the line "As of December 31, 20xx."

Question 27

Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of contingencies, and various statistics.

Question 28

All publicly traded U.S. companies must provide their stockholders with an annual report each year.

Question 29

If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders' equity totals $45,000.

Question 30

A different set of financial statements usually is prepared for each user.

Question 31

The management discussion and analysis (MD & A) section of an annual report covers various financial aspects of a company.

Question 32

Cash is another term for stockholders' equity.

Question 33

The accounting equation can be expressed as Assets - Liabilities = Stockholders' Equity.

Question 34

Creditors' rights to assets supersede owners' rights to the assets.

Question 35

The balance sheet reports assets and claims to those assets at a specific point in time.

Question 36

Net income is another term for revenue.

Question 37

If the assets owned by a business total $100,000 and liabilities total $65,000, stockholders' equity totals $25,000.

Question 38

Explanatory notes and supporting schedules are an optional part of an annual report.

Question 39

The accounting equation can be expressed as Assets - Stockholders' Equity = Liabilities.

Question 40

The basic accounting equation states that Assets = Liabilities.

Question 41

Which of the following is not a step for solving an ethical dilemma?

A)Identifying the alternatives and weighing the impact of each alternative on various stakeholders.
B)Certifying the ethical accuracy of the financial information.
C)Identifying and analyzing the principal elements in the situation.
D)Recognizing the ethical situation and issues involved.

Question 42

The proprietorship form of business organization

A)must have at least two owners in most states.
B)generally receives favorable tax treatment relative to a corporation.
C)combines the records of the business with the personal records of the owner.
D)is classified as a separate legal entity.

Question 43

Which of the following is the best definition of an internal user of accounting information?

A)Investors who use accounting information to decide whether to buy or sell stock.
B)Creditors like banks that use accounting information to evaluate the risk of lending money.
C)Labor unions who use accounting information to examine the ability of the company to pay increased wages and benefits.
D)Managers who use accounting information to plan, organize, and run a business.

Question 44

Which of the following is not one of the three forms of business organization?

A)Corporations
B)Partnerships
C)Proprietorships
D)Investors

Question 45

Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt?

A)Only Jack is personally liable for the debt, since he has been the managing partner during that time.
B)Only Jill is personally liable for the debt of the business, since Jack has been working and she has not.
C)Both Jack and Jill are personally liable for the business debt.
D)Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.

Question 46

A business organized as a separate legal entity is a

A)corporation.
B)proprietor.
C)government unit.
D)partnership.

Question 47

An advantage of the corporate form of business is that

A)it has limited life.
B)its owner's personal resources are at stake.
C)its ownership is easily transferable via the sale of shares of stock.
D)it is simple to establish.

Question 48

A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?

A)Ability to raise capital for expansion
B)Desire to limit the owner's personal liability
C)The prestige of operating as a corporation
D)The ease in transferring shares of the corporation's stock

Question 49

A business organized as a corporation

A)is not a separate legal entity in most states.
B)requires that stockholders be personally liable for the debts of the business.
C)is owned by its stockholders.
D)has tax advantages over a proprietorship or partnership.

Question 50

A corporation has which of the following set of characteristics?

A)Shared control, tax advantages, increased skills and resources
B)Simple to set up and maintains control with founder
C)Easier to transfer ownership and raise funds, no personal liability
D)Harder to raise funds and gives owner control

Question 51

A small neighborhood barber shop that is operated by its owner would likely be organized as a

A)joint venture.
B)partnership.
C)corporation.
D)proprietorship.

Question 52

The partnership form of business organization

A)is a separate legal entity.
B)is a common form of organization for service-type businesses.
C)enjoys an unlimited life.
D)has limited liability.

Question 53

Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?

A)Reduced legal liability for investors
B)Harder to transfer ownership
C)Lower taxes
D)Most common form of organization

Question 54

Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?

A)The Act calls for increased oversight responsibilities for boards of directors.
B)The Act has resulted in increased penalties for financial fraud by top management.
C)The Act calls for decreased independence of outside auditors reviewing corporate financial statements.
D)The Act is meant to decrease the likelihood of unethical corporate behavior.

Question 55

External users of accounting information, like the Internal Revenue Service, are most commonly known as

A)taxing authorities.
B)labor unions.
C)customers.
D)regulatory agencies.

Question 56

Which one of the following questions is most likely asked by an internal human resources director for the company?

A)Which product line is most profitable?
B)What price for our product will maximize the company income?
C)What average pay raise is affordable for employees this year?
D)Should any product lines be eliminated?

Question 57

Most business enterprises in the United States are

A)proprietorships and partnerships.
B)partnerships.
C)corporations.
D)government units.

Question 58

Which of the following are internal reports that accounting provides to internal users?

A)Forecasts of cash needs for next year.
B)Financial comparisons of operating activity alternatives.
C)Both forecasts of cash needs and financial comparisons are internal reports.
D)Neither forecasts of cash needs or financial comparisons is an internal report.

Question 59

Which of the following is not an advantage of the corporate form of business organization?

A)No personal liability
B)Easy to transfer ownership
C)Favorable tax treatment
D)Easy to raise funds

Question 60

All of the following are advantages for choosing a proprietorship for a business except

A)a proprietorship is a simple form of business to set up.
B)a proprietorship gives the owner control of the business.
C)proprietorship receive more favorable tax treatment.
D)transfer of ownership is easily achieved through stock sales.

Question 61

Which of the following is a primary user of accounting information with a direct financial interest in the business?

A)Taxing authority
B)Creditor
C)Regulatory agency
D)Labor union

Question 62

The right to receive money in the future is called a(n)

A)account payable.
B)account receivable.
C)liability.
D)revenue.

Question 63

Borrowing money is an example of a(n)

A)delivering activity.
B)financing activity.
C)investing activity.
D)operating activity.

Question 64

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)

A)account payable.
B)account receivable.
C)revenue.
D)expense.

Question 65

Which of the following is not a principal type of business activity?

A)Operating
B)Investing
C)Financing
D)Delivering

Question 66

External users want answers to all of the following questions except

A)Is the company earning satisfactory income?
B)Will the company be able to pay its debts as they come due?
C)Will the company be able to afford employee pay raises this year?
D)How does the company compare in profitability with competitors?

Question 67

The group of users of accounting information charged with achieving the goals of the business is its

A)auditors.
B)investors.
C)managers.
D)creditors.

Question 68

Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective?

A)Investors in common stock
B)Marketing managers
C)Creditors
D)Chief Financial Officer

Question 69

Which of the following is a user of accounting information with an indirect financial interest in a business?

A)A financial adviser
B)Management
C)Investor
D)Creditor

Question 70

Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules?

A)Taxing authorities
B)Regulatory agencies
C)Labor Unions
D)Management

Question 71

Which type of corporate information is not available to investors?

A)Dividend history
B)Forecast of cash needs for the upcoming year
C)Cash provided by investing activities
D)Beginning cash balance

Question 72

Which type of corporate information is readily available to investors?

A)Financial comparison of operating alternatives
B)Marketing strategies for a product that will be introduced in eighteen months
C)Forecasts of cash needs for the upcoming year
D)Amount of net income retained in the business

Question 73

Which of the following groups uses accounting information to determine whether the company's net income will result in a stock price increase?

A)Investors in common stock
B)Marketing managers
C)Creditors
D)Chief Financial Officer

Question 74

Which of the following would not be considered an internal user of accounting data for the Xanadu Company?

A)President of the company
B)Production manager
C)Merchandise inventory clerk
D)President of the employees' labor union

Question 75

Which of the following would not be considered an external user of accounting data for the Julian Company?

A)Internal Revenue Service agent
B)Management
C)Creditors
D)Customers

Question 76

Which of the following is the most appropriate and modern definition of accounting?

A)The information system that identifies, records, and communicates the economic events of an organization to interested users.
B)A means of collecting information.
C)The interconnected network of subsystems necessary to operate a business.
D)Electronic collection, organization, and communication of vast amounts of information.

Question 77

Which of the following statements concerning users of accounting information is incorrect?

A)Management is considered an internal user.
B)Present creditors are considered external users.
C)Regulatory authorities are considered internal users.
D)Taxing authorities are considered external users.

Question 78

Issuing shares of stock in exchange for cash is an example of a(n)

A)delivering activity.
B)investing activity.
C)financing activity.
D)operating activity.

Question 79

Which of the following external groups uses accounting information to determine whether the company can pay its obligations?

A)Investors in common stock
B)Marketing managers
C)Creditors
D)Chief Financial Officer

Question 80

Which of the following would not be considered an internal user of accounting data for a company?

A)The president of a company
B)The controller of a company
C)Creditor of a company
D)Salesperson of a company