Question 1

If an investor owns 10% of the shares of a company, they normally own 10 shares of the company.

Accepted Answer

The number of shares an investor owns depends on the total number of shares outstanding for the company. If there are 100 shares outstanding, owning 10% would mean owning 10 shares. However, if there are 1000 shares outstanding, owning 10% would mean owning 100 shares.

Question 2

The shareholders are an example of an internal user of annual report information.

Accepted Answer

Shareholders are considered external users of annual report information because they are not part of the company's day-to-day operations but have a financial interest in the company's performance.

Question 3

The primary purpose of financial accounting information is to aid users in their economic decision making relative to the organization.

Accepted Answer

The primary purpose of financial accounting information is to provide useful and relevant information to help users make informed economic decisions about the organization. This includes investors, creditors, management, and other stakeholders who rely on financial statements to understand the financial health of the organization and make decisions based on this information.

Question 4

Prepaid expenses can be found on the Statement of Income.

Accepted Answer

Prepaid expenses are initially recorded as assets on the Balance Sheet, not the Statement of Income. They are gradually expensed over time and eventually recognized on the Statement of Income as expenses.

Question 5

Net earnings is the amount of the company's revenue that remains after all of its expenses are accounted for.

Accepted Answer

Net earnings or net income is the amount of revenue a company generates after deducting all of its expenses, including taxes and interest, from its total revenue.

Question 6

Expenses are defined as increases in economic benefits.

Accepted Answer

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Question 7

A firm's activities can be divided into borrowing, investing, and operating.

Accepted Answer

The answer of A firm's activities can be divided into...

Question 8

Creditors are entities that lend money to a company rather than buying shares of a company.

Accepted Answer

Creditors provide loans to a company and expect repayment with interest, whereas shareholders buy ownership in a company by purchasing its shares.

Question 9

Profit is determined by subtracting the income earned during the period from the expenses incurred during the same period.

Accepted Answer

Profit is determined by subtracting the expenses incurred during the same period from the income earned during the period.

Question 10

Assets are listed in the order of their liquidity on the classified Statement of Financial Position.

Accepted Answer

This statement is true. Assets are typically listed in the order of their liquidity, with the most liquid assets (such as cash and cash equivalents) listed first and the least liquid assets (such as property, plant, and equipment) listed last.

Question 11

There may be a single shareholder in the case of a public company or many shareholders in the case of a private company.

Accepted Answer

This statement is incorrect. Public companies typically have many shareholders, while private companies may have a single owner or a small group of owners.

Question 12

The statement of financial position measures cash inflows and outflows of a company over a period of time.

Accepted Answer

The statement of financial position, also known as the balance sheet, is a snapshot of a company's financial situation at a specific point in time. It shows the company's assets, liabilities, and equity, but does not measure cash flows. The statement of cash flows is the financial statement that measures cash inflows and outflows over a period of time.

Question 13

Income can also include gains that a company generates from sales that are outside their normal course of operations.

Accepted Answer

This is true. Income can include gains from sources such as the sale of an asset or investments that are not part of the company's regular business operations.

Question 14

Decision makers are often referred to as users of the financial statements and include investors and creditors.

Accepted Answer

Decision makers, such as investors and creditors, rely on financial statements to make informed decisions about investing and lending money. Therefore, they are considered users of financial statements.

Question 15

A gain or increase in the value of shares is known as capital appreciation.

Accepted Answer

Capital appreciation refers to the increase in value of an asset, such as shares, over time.

Question 16

The section of an annual report that contains management's discussion of the company's operating results is referred to as the Statement of Management's Responsibility.

Accepted Answer

The section of an annual report that contains management's discussion of the company's operating results is referred to as the Management's Discussion and Analysis, or MD&A. The Statement of Management's Responsibility typically refers to a statement by management acknowledging their responsibility for the accuracy and completeness of the financial statements.

Question 17

Dividends are payments made by the company to distribute future profits.

Accepted Answer

Dividends are payments made by a company to distribute a portion of its current or retained earnings to its shareholders.

Question 18

Gross profit is equal to the sales received from goods and the operating expenses incurred during the period.

Accepted Answer

Gross profit is equal to the sales received from goods minus the cost of goods sold. It does not include operating expenses.

Question 19

Information contained in the financial statements of a company is of use to both internal and external users.

Accepted Answer

The financial statements of a company provide important information that can be used by both internal users (such as management and employees) and external users (such as investors, creditors, and regulatory bodies). Internal users use the information to make strategic decisions and to monitor the company's performance. External users rely on the information to evaluate the company's financial health and make investment or lending decisions.

Question 20

The financial statements of a company are prepared by the shareholders.

Accepted Answer

The financial statements of a company are prepared by the company's management, usually by the chief financial officer (CFO) or accountant. The shareholders may review and approve the financial statements.

Quiz 1: Overview of Corporate Financial Reporting