Question 1

The primary objective of external financial reporting is to provide useful economic information about a business to help external parties,primarily investors and creditors,make sound financial decisions.

Accepted Answer

This statement accurately describes the primary objective of external financial reporting. The information presented in external financial reports should be relevant and reliable so that investors and creditors can make informed decisions about providing funding or investing in a company.

Question 2

Three of the four basic assumptions that underlie accounting measurement and reporting relate to the statement of financial position.

Accepted Answer

The three basic assumptions that relate to the statement of financial position are the monetary unit assumption, economic entity assumption, and the continuity (or going concern) assumption. The fourth basic assumption, the period assumption, relates to the statement of comprehensive income.

Question 3

Liabilities are generally classified on a statement of financial position as

Accepted Answer

Liabilities are classified as current and non-current on a statement of financial position. Current liabilities are obligations that are due within one year or one operating cycle (whichever is longer), while non-current liabilities are obligations that are due beyond one year or one operating cycle (whichever is longer). This classification helps users of financial statements to assess a company's ability to meet its short-term and long-term obligations.

Question 4

When a company has a debt-to-equity ratio close to 1 to 1,which of the following is true?

Accepted Answer

When a company has a debt-to-equity ratio close to 1 to 1, it means that the company's assets are financed almost equally by owners and creditors. This indicates a balanced capital structure between debt and equity financing. It does not necessarily indicate that the company primarily uses debt financing for the acquisition of its assets or that creditors would be more willing to give a loan. The return to shareholders is dependent on other factors such as profitability, revenue growth, and market conditions, not just the debt-to-equity ratio.

Question 5

Dow Construction Company reports a net use of cash for investing activities of $1.2 million and a net source of cash provided by financing of $.8 million.What was the effect on the cash balance?

Accepted Answer

The net use of cash for investing activities is $1.2 million, and the net source of cash from financing activities is $0.8 million. The overall effect is a decrease in cash balance by $0.4 million ($0.8 million - $1.2 million = -$0.4 million).

Question 6

Liability accounts are reported on the statement of financial position..

Accepted Answer

Liability accounts represent the amounts owed by a company to others and are reported on the statement of financial position (also known as the balance sheet).

Question 7

Liabilities are categorized as current liabilities and non-current liabilities.

Accepted Answer

Liabilities are categorized into two types, i.e. current liabilities and non-current liabilities based on their maturity period. Current liabilities are obligations that are payable within one year, while non-current liabilities are obligations that are payable after one year.

Question 8

Loans made to outside parties would be classified into which of the following categories for the purpose of disclosure in the statement of cash flows?

Accepted Answer

Loans made to outside parties are considered as investing activities as they represent the acquisition or disposal of long-term assets or other investments that are not considered to be cash equivalents. The statement of cash flows categorizes cash inflows and outflows into three categories: operating activities, investing activities, and financing activities. Operating activities include cash inflows and outflows from day-to-day operating activities of the business. Financing activities include cash inflows and outflows from sources of financing, such as debt and equity. Investing activities include cash inflows and outflows from purchases and sales of long-term assets and other investments. Loans made to outside parties fall under the category of investing activities as they represent the acquisition of long-term assets.

Question 9

When a new business is just starting up,which of the following must be done first?

Accepted Answer

A new business must first acquire financing to fund the acquisition of assets and cover initial operational costs before it can generate positive cash flow.

Question 10

The debt-to-equity ratio is computed by taking which of the following?

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total shareholders' equity. This ratio measures a company's financial leverage and indicates the proportion of equity and debt used to finance the company's assets.

Question 11

The unit-of-measure assumption states that financial information is reported in the national monetary unit.

Accepted Answer

The unit-of-measure assumption is a fundamental accounting principle that requires financial information to be reported in the national monetary unit. This means that financial statements must be expressed in a common currency, such as dollars or euros, in order to be useful to investors, creditors, and other stakeholders.

Question 12

Which of the following would be an example of a financing transaction?

Accepted Answer

Selling shares to investors for cash is an example of a financing transaction because it involves raising funds from external sources to finance the company's operations or growth. Purchasing equipment or inventory for cash would be considered investing activities, while buying inventory on credit would be considered operating activities.

Question 13

The usefulness of the debt-to-equity ratio is that it allows interested parties to assess all of the following except?

Accepted Answer

The debt-to-equity ratio does not provide any information about the number of shares issued by the company. Instead, it focuses on the relationship between the company's debt and equity in terms of how assets are financed and the level of risk associated with debt financing. It might suggest whether the company should adopt more debt financing, but not in terms of how many shares it has issued.

Question 14

Assets are economic resources controlled by an entity as a result of past transactions or events and for which future economic benefits may be obtained.

Accepted Answer

This is the definition of assets as per the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP).

Question 15

A primary objective of accounting is to provide the fair market value of assets on the statement of financial position..

Accepted Answer

The primary objective of accounting is to provide financial information that is useful for decision-making, not specifically to provide fair market values. Assets are typically recorded at historical cost, not fair market value.

Question 16

Which of the following would cause an inflow of cash?

Accepted Answer

Sale of an asset for cash at less than its book value would cause an inflow of cash.

Question 17

On the income statement,assets should always equal liabilities plus shareholders' equity.

Accepted Answer

The income statement does not include information about liabilities or shareholders' equity, only revenues and expenses. The balance sheet is where assets, liabilities, and shareholders' equity are all reported and should always balance.

Question 18

To determine the economic effect of a transaction on the entity in terms of its accounting equation,each transaction is analyzed as to the accounts (at least two)that are affected.

Accepted Answer

To determine the economic effect of a transaction on an entity in terms of its accounting equation, it is necessary to analyze each transaction and identify the accounts (at least two) that are affected by it. This analysis helps to ensure that the accounting equation remains in balance after the transaction is recorded. Therefore, the given statement is true.

Question 19

If a company has assets of $60,000 and shareholders' equity of $30,000,then its liabilities must be $90,000.

Accepted Answer

The equation for the balance sheet is Assets = Liabilities + Shareholders' Equity. Rearranging this equation, we get Liabilities = Assets - Shareholders' Equity. Therefore, Liabilities = $60,000 - $30,000 = $30,000.

Question 20

The separate-entity assumption assumes a stable monetary unit (not affected by inflation or deflation).

Accepted Answer

The answer of The separate-entity assumption assumes a stable monetary...

Quiz 2: Investing and Financing Decisions and the Accounting System