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2-1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter 02 Basic Financial Statements
True / False Questions
- The sale of additional shares of capital stock will cause treasury stock to increase.
True False
- A business entity is regarded as separate from the personal activities of its owners whether it is a
sole proprietorship, a partnership, or a corporation.
True False
- Assets need not always have physical characteristics as do buildings, machinery, or inventory.
True False
- The going concern principle assumes that the business will continue indefinitely.
True False
- Notes payable and accounts payable both require a company to pay an amount owed by a certain
date. Notes payable generally have interest, while accounts payable generally do not.
True False
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2-2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- Any business event that might affect the future profitability of a business should be reported in its
balance sheet.
True False
- The practice of showing assets on the balance sheet at their cost, rather than at their current
market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts.
True False
- Liabilities are usually listed in order of magnitude, from smallest dollar amount to largest dollar
amount.
True False
- The entity principle states that the affairs of the owners are not part of the financial operations of a
business entity and should be separated.
True False
- The accounting equation may be stated as "assets minus liabilities equals owners' equity."
True False
- Total assets plus total liabilities must equal total owners' equity.
True False
2-3 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- A transaction that causes an increase in an asset may also cause a decrease in another asset, an
increase in a liability, or an increase in owners' equity.
True False
- The collection of an account receivable will cause total assets to decrease.
True False
- The payment of a liability causes an increase in owners' equity.
True False
- When a business borrows money from a bank, the immediate effect is an increase in total assets
and a decrease in liabilities or owners' equity.
True False
- The purchase of an asset, such as office equipment, for cash will cause owners' equity to decrease.
True False
- Total assets must always equal total liabilities plus total owners' equity.
True False
- If a company purchases equipment with cash, its total assets will increase.
True False
2-4 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- If a company purchases equipment by issuing a note payable, its total assets will not change.
True False
- A net profit results from having more revenues than liabilities.
True False
- A statement of cash flows reports revenue and expense activities for a specific time period such as
one month or one year.
True False
- It is not unusual for an entity to report a significant increase in cash from operating activities, but a
decrease in the total amount of cash.
True False
- The statement of cash flows provides a link between two balance sheets by showing how net
income (or loss) has changed owners' equity from one balance sheet date to the next.
True False
- Articulation between the financial statements means that they relate closely to each other on the
basis of the same underlying transaction information.
True False
- Limited liability means that owners of a business are only liable for the debts of the business up to
the amounts they can afford.
True False
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