Copyright 2014 Nelson Education 1

Copyright © 2014 Nelson Education 1 -1 Chapter 1—Accounting and the Financial Statements

TRUE/FALSE

• The majority of business in Canada is conducted by corporations.

ANS: T PTS: 1 DIF: Easy OBJ: 1-2

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• The three main business activities are financing, operating, and investing.

ANS: T PTS: 1 DIF: Easy OBJ: 1-2

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-03-Business Forms

• Internal users of accounting information include present creditors and management.

ANS: F PTS: 1 DIF: Easy OBJ: 1-1

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• The income statement summarizes the assets, liabilities and shareholders’ equity for a period of time.

ANS: F PTS: 1 DIF: Easy OBJ: 1-3 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The four basic financial statements are the income statement, statement of retained earnings, balance

sheet, and statement of cash flows.ANS: T PTS: 1 DIF: Easy OBJ: 1-3 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The amount of earnings distributed to shareholders can be found in the income statement as an

expense.ANS: F PTS: 1 DIF: Moderate OBJ: 1-5 | 1-6 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement 7.Shareholders’ equity is composed of two main sources: liabilities and contributed capital.ANS: F PTS: 1 DIF: Easy REF: CS1-2

OBJ: 1-4

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The first step in preparing the classified balance sheet is to list the assets in order of liquidity.

ANS: F PTS: 1 DIF: Moderate REF: CS1-2 OBJ: 1-4NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement Cornerstones of Financial Accounting, 1st Canadia n Edition 1e Rich Jones Mowen Hansen (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Chapter 1 Accounting and the Financial Statements Test Bank Copyright © 2014 Nelson Education 1-2

• The only financial statement that reports the retained earnings balance at the end of the period is the

statement of retained earnings.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-4 | 1-6 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• An income statement provides information at one specific point in time, while the other basic financial

statements provide information on activities that occur over a period of time.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-5 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• When an entity’s share issuances exceed its expenses for a period of time, the entity will report net

income.

ANS: F PTS: 1 DIF: Moderate REF: CS1-3

OBJ: 1-5

NAT: AICPA FN-Measurement | AACSB Communication | ACBSP-APC-09-Financial Statement

• Contributed capital is the residual interest that remains after deducting liabilities from shareholders’

equity.

ANS: F PTS: 1 DIF: Moderate REF: CS1-2

OBJ: 1-4

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The four steps in preparing the income statement are: 1) prepare a heading; 2) list the revenues of the

company; 3) list the expenses of the company; and 4) list the dividends of the company.

ANS: F PTS: 1 DIF: Moderate REF: CS1-3

OBJ: 1-5

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• Shareholders’ equity is composed of contributed capital and retained earnings.

ANS: T PTS: 1 DIF: Moderate OBJ: 1-4 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The primary objective of internal auditors who are employees of the company is to provide assurance

to the company’s shareholders that the financial statements are fairly presented.

ANS: F PTS: 1 DIF: Easy OBJ: 1-9

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• The independent auditor’s report conveys whether or not the business is a good investment.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-9

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

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Chapter 1 Accounting and the Financial Statements Test Bank Copyright © 2014 Nelson Education 1-3

• The statement of cash flows shows cash inflows and cash outflows for a period of time.

ANS: T PTS: 1 DIF: Moderate OBJ: 1-7 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• Because the four financial statements are interrelated (i.e., there is a natural progression from one

financial statement to another), the balance sheet should be prepared first.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-8 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The company’s annual report includes an audit report, notes to the financial statements, but NOT

management’s discussion and analysis.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-9

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• Investing is the business activity that measures the company’s ability to generate cash from its revenue

and expense activities.

ANS: F PTS: 1 DIF: Easy OBJ: 1-2

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-03-Business Forms

• The owners of a sole proprietorship, partnership, and corporations have limited liability.

ANS: F PTS: 1 DIF: Easy OBJ: 1-1

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• The purpose of financial reporting is to provide economic information to investors, creditors, and other

financial statement users.

ANS: T PTS: 1 DIF: Easy OBJ: 1-1

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• Creditors use accounting information to evaluate whether to loan money to a company.

ANS: T PTS: 1 DIF: Easy OBJ: 1-1

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose

• Current assets include all of the following: cash, inventory, equipment, supplies, and accounts

receivable.

ANS: F PTS: 1 DIF: Easy OBJ: 1-4 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• Current liabilities are typically listed in the order in which they will be paid.

ANS: T PTS: 1 DIF: Moderate OBJ: 1-4 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• / 4

Chapter 1 Accounting and the Financial Statements Test Bank Copyright © 2014 Nelson Education 1-4

• Three common categories of long-term assets are: 1) property, plant, and equipment; 2) long-term

investments; and 3) intangibles.

ANS: T PTS: 1 DIF: Easy REF: CS1-2

OBJ: 1-4

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• In the shareholders’ equity section of a classified balance sheet, a distinction is made between amounts

invested by owners and amounts financed by creditors.

ANS: F PTS: 1 DIF: Moderate REF: CS1-2

OBJ: 1-4

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• One primary purpose of a classified balance sheet is to help users evaluate the working capital of a

company.

ANS: T PTS: 1 DIF: Easy OBJ: 1-4 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• A classified balance sheet is to help users determine how a company obtained its resources.

ANS: T PTS: 1 DIF: Easy REF: CS1-2

OBJ: 1-4

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• The current ratio is useful in determining a company’s ability to pay obligations when they become

due.

ANS: T PTS: 1 DIF: Moderate OBJ: 1-4 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-23-Financial Statement Analysis

• Income from operations includes interest revenue and interest expense because these items are

considered to be operating in nature.

ANS: F PTS: 1 DIF: Moderate OBJ: 1-5 NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• Net loss reduces a company’s retained earnings balance.

ANS: T PTS: 1 DIF: Moderate REF: CS1-4

OBJ: 1-6

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

• Dividend payments appear on the statement of retained earnings.

ANS: T PTS: 1 DIF: Moderate REF: CS1-3 | CS1-4

OBJ: 1-6

NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement

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