Cambridge Business Publishers, 2020

© Cambridge Business Publishers, 2020 1-1Financial Accounting, 6 th Edition Chapter 1 Introducing Financial Accounting Learning Objectives – Coverage by question True/False Multiple Choice Exercises Problems Essay Questions LO1 Identify the users of accounting information and discuss the costs and benefits of disclosure. (p. 4)

1, 2 1-3 1, 2 2, 5, 6

LO2 Describe a company's business activities and explain how these activities are represented by the accounting equation. (p. 7)

3-6 4, 5 3 1, 6

LO3 Introduce the four key financial statements including the balance sheet, income statement, statement of stockholders' equity, and statement of cash flows.(p. 11)

7-9 4, 6-11 4-11 1-5

LO4 Describe the institutions that regulate financial accounting and their role in establishing generally accepted accounting principles.(p. 17)

10-12 12, 19, 20 3, 4

LO5 Compute two key ratios that are commonly used to assess profitability and risk - return on equity and the debt-to-equity ratio. (p. 21)

13, 14 13-18 13, 14

LO6 Appendix 1A: Explain the

conceptual framework for financial reporting. (p. 26)

15, 16 21, 22 12 3, 5

Financial Accounting, 6e Michelle Hanlon, Robert Magee, Glenn Pfeiffer, Thomas Dyckman (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

© Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-2

Chapter 1: Introducing Financial Accounting

True/False

Topic: Cost and benefits of disclosure

LO: 1

• One reason companies are motivated to disclose financial information to external decision makers is

that it may lower financing and operating costs.

Answer: True

Rationale: For example, when a company applies for a loan, the bank uses the company’s financial statements to help determine the appropriate interest rate. Without this financial information, a company may have a higher cost of borrowing or not obtain the loan at all.

Topic: Demand for accounting information

LO: 1

• Financial accounting is designed primarily for decision makers within the company.

Answer: False

Rationale: Financial accounting is designed primarily to provide information to decision makers outside of the company, while managerial accounting is designed primarily for decision makers within the company.

Topic: Investing activities

LO: 2

• Investing activities are the acquiring and disposing of liabilities that a company needs in order to

finance its operating activities.

Answer: False

Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company’s products and services.

Topic: Accounting equation

LO: 2

• Assets must always equal liabilities plus stockholders’ equity.

Answer: True

Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must always stay in balance.

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© Cambridge Business Publishers, 2020 1-3 Financial Accounting, 6 th Edition

Topic: Financing activities

LO: 2

• Other than operating profit, there are three main sources of external financing.

Answer: False

Rationale: There are two main sources of financing: owner (also called shareholder or equity) financing and nonowner (also called creditor or lender) financing.

Topic: Financing and investing activities

LO: 2

• Financing activities are defined as the acquiring and disposing of resources for the purpose

of selling products and services.

Answer: False

Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services.

Topic: Statement of cash flows

LO: 3

• A statement of cash flows reports on cash flows for operating, investing and financing activities at a

point in time.

Answer: False

Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.

Topic: Retained earnings

LO: 3

• Retained earnings are present on both the income statement and the statement of stockholders’

equity.

Answer: False

Rationale: Retained earnings are present in the statement of stockholders’ equity and the balance sheet. The income statement represents current period earnings.

Topic: Balance sheet

LO: 3

• If a company reports retained earnings of $242.6 million on its balance sheet, it will also

report $242.6 million in cash.

Answer: False

Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’ equity. That does not imply, however, that liability and equity accounts relate directly to specific assets.

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© Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-4

Topic: Regulation and Oversight

LO: 4

• The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external

users have in the financial statements.

Answer: True

Rationale: In the wake of scandals, like those that took down Enron, the U.S. Congress passed the Sarbanes-Oxley Act to improve external user confidence in financial statement reporting.

Topic: Global accounting perspective

LO: 4

• The International Accounting Standards Board (IASB) has legal authority to impose accounting

standards on any country.

Answer: False

Rationale: The IASB works with standard setters within many countries, but does not have legal authority to impose IASB standards on any country. It was charged with creating International Financial Reporting Standards with the intention of unifying all public companies under one global set of reporting standards.

Topic: IFRS

LO: 4

• Foreign companies using international accounting standards must reconcile their financial statements

to American rules if they wish to sell securities in the U.S.

Answer: False

Rationale: The SEC adopted a rule in 2007 that allows foreign companies to stop reconciling to American rules.

Topic: Financial statement analysis

LO: 5

• One key measure of profitability is the debt-to-equity ratio.

Answer: False

Rationale: Return on equity is a key profitability metric. The debt-to-equity ratio is a measure of long- term solvency when looking at credit risk.

Topic: Credit risk analysis

LO: 5

• The greater the risk of any decision, the greater the expected return.

Answer: True

Rationale: The riskier an investment is, the greater the return demanded by investors.

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