INTRODUCTION TO FINANCIAL STATEMENTS

CHAPTER 1

INTRODUCTION TO FINANCIAL STATEMENTS

CHAPTER LEARNING OBJECTIVES

1.Describe the forms of business organization and the uses of accounting information. A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners. A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock. Internal users are managers who need accounting information to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use accounting information to decide whether to buy, hold, or sell shares of a company’s stock. Creditors (suppliers and bankers) use accounting information to assess the risk of granting credit or loaning money to a business. Other groups who have an indirect interest in a business are taxing authorities, customers, labor unions, and regulatory agencies.

2.Explain the three principal types of business activity. Financing activities involve collecting the necessary funds to support the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the resources of the business into action to generate a profit.

3.Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time.Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the claims of owners on the assets of the business. Stockholders’ equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity. Within the annual report, the management discussion and analysis provides management’s interpretation of the company’s results and financial position as well as a discussion of plans for the future. Notes to the financial statements provide additional explanation or detail to make the financial statements more informative. The auditor’s report expresses an opinion as to whether the financial statements present fairly the company’s results of operations and financial position.Accounting Tools for Business Decision Making, 7e Paul Kimmel, Jerry Weygandt, Donald Kieso (Test Bank All Chapters, 100% Original Verified, A+ Grade)

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Test Bank for Financial Accounting: Tools for Business Decision Making, Ninth Edition

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TRUE-FALSE STATEMENTS

1.A business organized as a separate legal entity owned by stockholders is a partnership.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 2.Corporate stockholders have no personal liability for the debts of the corporation.Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 3.The liability of corporate stockholders is limited to the amount of their investment.Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 4.The majority of U.S. business is transacted by proprietorships.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

• Proprietorships

in the United States generate more revenue than the other two forms of business enterprise.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 6.Owners of business firms are the only people who need accounting information.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 7.Management of a business enterprise is the major external user of accounting information.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• External

users of accounting information are managers who plan, organize, and run a business.Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 9.The accounting information needs and questions of external users vary considerably.Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 10.Accounting communicates financial information about a business to both internal and external users.Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 11.Two primary external users of accounting information are investors and creditors.Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Financing

activities for corporations include borrowing money and selling shares of their own stock.Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 13.Investing activities involve collecting the necessary funds to support the business.Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Introduction to Financial Statements

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• The purchase of equipment is an example of a financing activity.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Assets are resources owned by a business and provide future services or benefits to the

business.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Payments by the business to owners are operating activities.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• The economic resources owned by a business are called stockholders’ equity.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Operating activities involve putting the resources of the business into action to generate a

profit.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• A business is usually involved in two types of activities—financing and investing.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Net income for the period is determined by subtracting expenses and dividends from

revenues.

Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• A different set of financial statements is usually prepared for each user.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• The heading for the income statement might include the line “As of December 31, 20xx.”

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Net income is another term for revenue.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• Cash is another term for stockholders’ equity.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• The primary purpose of the statement of cash flows is to provide information about the

cash receipts and cash payments of a company for a specific period of time.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• The balance sheet reports assets and claims to those assets at a specific point in time.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Financial Accounting: Tools for Business Decision Making, Ninth Edition

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27.The basic accounting equation states that Assets = Liabilities.Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 28.One way of stating the accounting equation is Assets + Liabilities = Stockholders’ Equity.Ans: F, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 29.The accounting equation can be expressed as Assets - Stockholders’ Equity = Liabilities.Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Medium: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics 30.The accounting equation can be expressed as Assets - Liabilities = Stockholders’ Equity.Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

• If

the assets owned by a business total $150,000 and liabilities total $105,000, then stockholders’ equity totals $45,000.Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Solution: $150,000

– $105,000 = $45,000

32.If the assets owned by a business total $100,000 and liabilities total $65,000, then stockholders’ equity totals $25,000.Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

Solution: $100,000

- $65,000 = $35,000

33.Claims of creditors and owners on the assets of a business are called liabilities.Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 34.Creditors’ rights to assets supersede owners’ rights to the assets.Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics

• All

publicly traded U.S. companies must provide their stockholders with an annual report each year.Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting 36.Information in the notes to the financial statements has to be quantifiable (numeric).Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting

• An auditor is an accounting professional who conducts an independent examination of the

accounting data presented by a company.Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: Professional

Demeanor, IMA: Reporting

38.The management discussion and analysis (MD&A) section of an annual report covers various financial aspects of a company.

Ans:

T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC:

Communications, IMA: Reporting

39.Explanatory notes and supporting schedules are an optional part of an annual report.

Ans:

F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC:

Communications, IMA: Reporting

.

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