Copyright 2020 McGraw-Hill Education. All rights reserved.

1 Copyright © 2020 McGraw-Hill Education. All rights reserved.No reproduction or distribution without the prior written onsent of McGraw-Hill Education.Financial Accounting, 10e (Libby) Chapter 1 Financial Statements and Business Decisions 1) A business entity's accounting system creates financial accounting reports which are provided to external decision makers.

Answer: TRUE

Explanation: The accounting system collects financial data and produces reports used by both internal decision makers and external decision makers.

Difficulty: 1 Easy

Topic: Accounting system-Information users

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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2) Business managers utilize managerial accounting reports to plan and manage the daily operations.

Answer: TRUE

Explanation: Managerial accounting reports are for internal use to assist managers with day-to- day operations. Unlike financial accounting reports, managerial reports are for internal use.

Difficulty: 1 Easy

Topic: Accounting system-Information users

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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3) Borrowing money is an investing activity.

Answer: FALSE

Explanation: Borrowing money is a form of financing and therefore is a financing activity.

Difficulty: 1 Easy

Topic: Accounting system-Information conveyed

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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Financial Accounting, 10e Robert Libby, Patricia Libby, Daniel Short (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

2 Copyright © 2020 McGraw-Hill Education. All rights reserved.No reproduction or distribution without the prior written onsent of McGraw-Hill Education.4) The balance sheet includes assets, liabilities, and stockholders' equity as of a point in time.

Answer: TRUE

Explanation: The balance sheet reports the amount of assets, liabilities, and stockholders' equity of an entity at a point in time.The balance sheet is referred to as a financial position statement; listing assets, liabilities, and equity accounts as of a specific date.

Difficulty: 1 Easy

Topic: Financial statements—Balance sheet

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

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5) Revenue is recognized within the income statement during the period in which cash is collected.

Answer: FALSE

Explanation: Revenue is recognized within the income statement during the period in which revenue is earned.

Difficulty: 1 Easy

Topic: Financial statements—Income statement

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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6) Total assets are $37,500, total liabilities are $20,000 and common stock is $10,000; therefore, retained earnings are $7,500.

Answer: TRUE

Explanation: $37,500 = $20,000 + $10,000 + X; X = $7,500

Difficulty: 2 Medium

Topic: Financial statements—Balance sheet

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Apply

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3 Copyright © 2020 McGraw-Hill Education. All rights reserved.No reproduction or distribution without the prior written onsent of McGraw-Hill Education.7) For the current year, net income of Carol Company is $20,000 and dividends declared are $6,000; therefore, retained earnings have increased $26,000 during the year.

Answer: FALSE

Explanation: Retained earnings = Net income less dividends declared. Therefore, retained earnings have increased by $20,000 less $6,000 = $14,000.

Difficulty: 1 Easy

Topic: Financial statements—Stockholders equity

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

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8) The income statement is a measure of an entity's economic performance for a period of time.

Answer: TRUE

Explanation: The income statement reports the performance of a business during the accounting period.

Difficulty: 1 Easy

Topic: Financial statements—Income statement

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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9) The accounting equation states that Assets = Liabilities + Stockholders' Equity.

Answer: TRUE

Explanation: The accounting equation, also known as the balance sheet equation, states that Assets = Liabilities + Stockholders' Equity.

Difficulty: 1 Easy

Topic: Financial statements—Balance sheet

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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4 Copyright © 2020 McGraw-Hill Education. All rights reserved.No reproduction or distribution without the prior written onsent of McGraw-Hill Education.10) A decision maker who wants to understand a company's financial statements must carefully read the notes to the financial statements because these disclosures provide useful supplemental information.

Answer: TRUE

Explanation: The notes provide supplemental information necessary to fully understand the financial statements.

Difficulty: 1 Easy

Topic: Financial statements—Notes

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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11) The financial statement that shows an entity's economic resources and claims against those resources is the balance sheet.

Answer: TRUE

Explanation: The balance sheet contains assets (economic resources), liabilities (claims against those resources), and stockholders' equity.

Difficulty: 1 Easy

Topic: Financial statements—Balance sheet

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

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12) Stockholders' equity on the balance sheet includes common stock and retained earnings.

Answer: TRUE

Explanation: The stockholders' equity section of the balance sheet represents financing provided by owners of the business (common stock) and earnings (retained earnings).

Difficulty: 1 Easy

Topic: Financial statements—Balance sheet

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).

Bloom's: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

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