Deck 1: The Purpose and Use of Financial Statements

Question 1

Authorities, such as the Canada Revenue Agency, want to know whether a business complies with the tax laws.

Answer 1

True

Question 2

Anyone who works for a company but does not necessarily have access to accounting information to assist them in managing and operating the company is still considered to be an internal user.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Assets are resources owned by a business that provide current services or benefits to the business.

Question 5

A proprietor has unlimited liability.

Question 6

A partnership is a business organized as a separate legal entity.

Question 7

Payments to shareholders are called dividends.

Question 8

Potential employees who use annual reports to learn about the company and evaluate job prospects are regarded as external users.

Question 9

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

Question 10

Accounting provides financial comparisons of operating alternatives, projections of income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for external users.

Question 11

Two internal users of accounting information are investors and managers.

Question 12

Companies present summarized financial information in the form of financial statements for both internal and external use.

Question 13

Expenses are the cost of assets consumed or services used in the process of generating revenue.

Question 14

As labour unions represent employees they are also regarded as internal users.

Question 15

High standards of ethics are not required for preparers of financial information.

Question 16

The users of private company financial statements do not have access to financial information beyond that available to the users of public company financial statements.

Question 17

Accounting identifies and records economic events of a business.

Question 18

A proprietorship is usually operated by the owner.

Question 19

Accounting information is not important to marketing managers.

Question 20

Economic resources that are owned by a business are called shareholders' equity.

Question 21

Which of the following is the most appropriate 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 22

Which of the following would not be considered an internal user of accounting data for XYZ Inc.?

A) the company president
B) production manager
C) purchasing clerk
D) receptionist of the employees' labour union

Question 23

Financial statement users are interested in net income because it may be a predictor of future net income.

Question 24

The world's economic systems depend on financial reporting that is

A) highly transparent.
B) accurate.
C) reliable.
D) all of the above

Question 25

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

Question 26

Depreciation is the cost of certain long-lived assets allocated to expense for each period.

Question 27

Net income is another term for revenue.

Question 28

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

A) shareholders
B) marketing managers
C) creditors
D) Chief Financial Officer

Question 29

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

A) taxing authorities
B) regulatory agencies
C) labour unions
D) management

Question 30

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

A) the president of a company
B) the controller of a company
C) a creditor of a company
D) a sales manager of a company

Question 31

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) How many employees can the company hire this year?
D) How does the company compare in profitability with competitors?

Question 32

Any deficiency in cash from operating activities must be made up by issuing shares.

Question 33

The issue of shares and distribution of dividends are used in determining net income.

Question 34

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

A) Canada Revenue Agency
B) management
C) creditors
D) customers

Question 35

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

A) shareholders
B) marketing managers
C) creditors
D) Canada Revenue Agency

Question 36

The statement of cash flows shows how cash was used during the period.

Question 37

Shareholder's equity consists of at least two parts: share capital and retained earnings.

Question 38

Expenses are identified by the type of liability associated with them.

Question 39

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

A) shareholders
B) marketing managers
C) creditors
D) Human Resource managers

Question 40

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

Question 41

If a company borrows funds and subsequently ceases operations,

A) shareholders have immediate claim on the assets of the corporation.
B) shareholders have no claim on the assets of the corporation.
C) shareholders have to pay all debt first before claiming the assets of the corporation.
D) shareholders have only a residual claim on the assets of the corporation.

Question 42

Which of the following would be create a cash inflow?

A) issue common shares
B) cash dividends paid
C) repurchase common shares
D) purchase of equipment

Question 43

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

A) operating
B) investing
C) financing
D) marketing

Question 44

Cost of goods sold is a(n)

A) liability.
B) financing activity.
C) asset.
D) expense.

Question 45

A corporation has which of the following set of characteristics?

A) shareholder control, income tax disadvantages, increased skills and resources
B) simple to set up and maintains control with founder
C) harder to raise funds and gives shareholders control
D) easier to transfer ownership and raise funds, limited liability

Question 46

Which of the following statements regarding external users is true?

A) Shareholders and creditors are the only people who need accounting information.
B) Canada Revenue Agency is the primary external user of financial information.
C) External users of accounting information include the managers who plan, organize, and run a business.
D) The information needs and questions of external users vary considerably.

Question 47

Allocating and recording the cost of using property, plant & equipment over their useful lives is called

A) allocation expense.
B) depreciation expense.
C) a general expense.
D) amortization expense.

Question 48

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

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

Question 49

An advantage of the corporate form of business is that

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

Question 50

Which form of business would have its shares listed on a stock exchange?

A) proprietorship
B) partnership
C) private corporation
D) public corporation

Question 51

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 52

The common characteristic possessed by all assets is

A) long life.
B) great monetary value.
C) tangible nature.
D) future economic benefit.

Question 53

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

A) public corporation.
B) partnership.
C) private corporation.
D) proprietorship.

Question 54

A business organized as a separate legal entity is a

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

Question 55

Which of the following activities involves raising the necessary funds to support the business?

A) operating
B) investing
C) financing
D) marketing

Question 56

The concept that economic activity which can be identified with a particular company must be kept separate and distinct from the owner(s) and from all other economic entities is known as

A) the separation concept.
B) the reporting entity concept.
C) the economic concept.
D) the business organization concept.

Question 57

The proprietorship form of business organization

A) in most provinces, must have at least two owners.
B) is often chosen for single owner operated businesses.
C) is difficult to set up.
D) is classified as a separate legal entity.

Question 58

A business organized as a corporation

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

Question 59

Which of the following statements is not true?

A) Public corporations must use International Financial Reporting Standards.
B) Private corporations can choose to use either International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE).
C) Both public and private corporations issue shares.
D) All private corporations are small.

Question 60

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

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

Question 61

Debt and obligations of a business are referred to as

A) assets.
B) equities.
C) liabilities.
D) expenses.

Question 62

Resources owned by a corporation are referred to as

A) shareholders' equity.
B) liabilities.
C) assets.
D) revenues.

Question 63

Use the following information for questions.
Plumbers-on-the-Go Ltd. started the year with total assets of $120,000 and total liabilities of $75,000. During the year, the business recorded $82,000 in service revenues, $45,000 in expenses, and paid dividends of $2,500.
Shareholders' equity at the end of the year was

A) $79,500.
B) $45,000.
C) $82,000.
D) $77,000.

Question 64

The statement of changes in equity would not show

A) the beginning retained earnings balance.
B) revenues and expenses.
C) dividends declared.
D) the ending retained earnings balance.

Question 65

Retained earnings at the end of the period is equal to

A) retained earnings at the beginning of the period plus net income minus liabilities.
B) retained earnings at the beginning of the period plus net income minus dividends declared.
C) net income for the period.
D) assets plus liabilities.

Question 66

Dividends declared are reported on

A) the income statement.
B) the statement of changes in equity.
C) the statement of financial position.
D) both the income statement and statement of financial position.

Question 67

Net income results when

A) Assets > Liabilities.
B) Assets < Liabilities.
C) Revenues > Expenses.
D) Revenues < Expenses.

Question 68

If the retained earnings account increases from the beginning of the year to the end of the year, then

A) net income is greater than dividends declared.
B) a loss is less than dividends declared.
C) additional investments are less than reported losses.
D) dividends were received.

Question 69

Which financial statement is prepared first?

A) Statement of financial position
B) Income statement
C) Statement of changes in equity
D) Statement of cash flows

Question 70

The cost of assets consumed or services used is also known as a(n)

A) revenue.
B) expense.
C) liability.
D) asset.

Question 71

A company's policy toward dividends and growth could best be determined by examining the

A) statement of financial position.
B) income statement.
C) statement of changes in equity.
D) statement of cash flows.

Question 72

Liabilities:

A) are future economic benefits.
B) are debts and obligations.
C) possess service potential.
D) are things of value owned by a business.

Question 73

Expenses are incurred

A) only on rare occasions.
B) to produce assets.
C) to produce liabilities.
D) to generate revenues.

Question 74

Liabilities of a company are owed to

A) debtors.
B) owners.
C) creditors.
D) shareholders.

Question 75

The financial statement that summarizes the changes in common shares and retained earnings for a specific period of time is the

A) statement of financial position.
B) income statement.
C) statement of cash flows.
D) statement of changes in equity.

Question 76

Which of the following is true regarding the statement of cash flows?

A) Financing activities for corporations include lending money and buying shares.
B) Investing activities involve collecting the necessary funds to operate the business.
C) The purchase of equipment is an example of a financing activity.
D) Revenues are increases in economic resources that result from a business's operating activities.

Question 77

Dividends declared

A) increase assets.
B) increase expenses.
C) decrease revenues.
D) decrease retained earnings.

Question 78

An income statement

A) summarizes the changes in retained earnings for a specific period of time.
B) reports the changes in assets, liabilities, and shareholders' equity over a period of time.
C) reports the assets, liabilities, and shareholders' equity at a specific date.
D) reports the revenues and expenses for a specific period of time.

Question 79

The accounting equation may be expressed as

A) Assets = Shareholders' Equity - Liabilities.
B) Assets = Liabilities + Shareholders' Equity.
C) Assets + Liabilities = Shareholders' Equity.
D) Assets + Shareholders' Equity = Liabilities.

Question 80

A statement of financial position shows

A) revenues, liabilities, and shareholders' equity.
B) expenses, dividends declared, and shareholders' equity.
C) revenues, expenses, and dividends declared.
D) assets, liabilities, and shareholders' equity.