INTRODUCTION TO FINANCIAL STATEMENTS

CHAPTER 1

INTRODUCTION TO FINANCIAL STATEMENTS

CHAPTER LEARNING OBJECTIVES

1.Identify 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.*4. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, governmental, and forensic accounting.Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement Accounting Tools for Business Decisions Making, 8e Paul Kimmel, Jerry Weygandt, Jill Mitchell (Test Bank All Chapters, 100% Original Verified, A

• Grade)

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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Difficulties:

Easy: 143

Medium: 101

Hard: 12

Question List by Section

Business Organization and Accounting Information Uses:

Forms of Business Organization; 47, 48, 202, 246

Sole Proprietorship: 5, 44, 49, 58, 59

Partnership: 1, 4, 46, 56

Corporation: 2, 3, 45, 50, 51, 52, 53, 55, 57, 233, 245

Hybrid Forms of Organization: 60, 61

Users and Uses of Financial Information: 6, 7, 11, 74, 87

Internal Users: 62, 63, 64, 75, 77, 82, 234

External Users: 8, 9, 10, 12, 65, 76, 78, 79, 80, 81, 83, 84, 85, 86, 88, 89

Data Analytics: 66, 67, 68, 69, 70, 235, 236

Ethics in Financial Reporting: 71, 72, 73, 237, 255

The Three Types of Business Activity: 97

Financing Activities: 13, 15, 18, 90, 91, 93, 94, 95, 96, 97, 102, 109, 117, 118, 119, 238

Investing Activities: 14, 16, 98, 99, 115, 116

Operating Activities: 17, 19, 20, 100, 101, 103, 104, 105, 106, 107, 108, 110, 111, 112, 113, 114

The Four Financial Statements:

Income Statement: 21, 22, 23, 24,127, 128, 132, 133, 134, 138, 142, 143

Retained Earnings Statement: 120, 122, 123, 124, 125, 126, 129, 130, 131, 135, 137, 139, 140,

141, 144, 145, 146, 147, 148, 149, 150, 154, 164, 169, 178, 181, 252

Balance Sheet: 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 136, 151, 152, 153, 163, 165, 166, 168,

170, 173, 177, 179, 180, 182, 185, 186, 187, 188, 199, 200, 201, 207, 208, 213, 214, 215, 216,

217, 218, 219, 220, 221, 222, 225, 229, 239, 240, 241, 253

Statement of Cash Flows: 26, 121, 171, 174, 183, 242, 249

Interrelationships of Statements: 155, 156, 157, 158, 159, 160, 161, 162, 167, 175, 176, 184,

250, 251, 256

Elements of an Annual Report: 36, 41, 192, 196, 197

Management Discussion and Analysis: 40, 191

Notes to the Financial Statements: 37, 42, 190, 193, 194, 198, 254

Auditor’s Report: 38, 39, 195

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Introduction to Financial Statements

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TRUE-FALSE STATEMENTS

• A business organized as a separate legal entity and owned by stockholders is a

partnership.Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Corporate stockholders have no personal liability for the debts of the corporation.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• The liability of corporate stockholders is limited to the amount of their investment.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• The majority of U.S. business is transacted by partnerships.

Ans: F, LO: 1, Bloom: K, Section: Business Organization and Accounting Information Uses, Subsection: Partnerships, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Sole proprietorships in the United States generate more revenue than the other two forms

of business enterprise.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Owners of business firms are the only people who need accounting information.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC:

None, IMA: Reporting

• Some users of accounting information are internal to the company while others are

external.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC:

None, IMA: Reporting

• Management of a business enterprise is the major external user of accounting

information.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• External users of accounting information include managers who plan, organize, and run a

business.

Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• The accounting information needs and questions of external users vary considerably.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Accounting communicates financial information about a business to both internal and

external users.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC:

None, IMA: Reporting

• Two primary external users of accounting information are investors and creditors.

Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e

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• Financing activities for corporations include borrowing money and selling shares of their

own stock.

Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Investing activities involve collecting the necessary funds to support the business.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

business.

Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Payments by the business to its owners are operating activities.

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: 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, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

revenues.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• The heading for an income statement prepared for the year ending December 31, 2025

will include the line “As of December 31, 2025.”

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Net income is another term for revenue.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

• Cash is another term for stockholders’ equity.

Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting

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