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Chapters 1 Through 8
CHAPTER
1
INTRODUCTION
TO FINANCIAL STATEMENTS
TRUE-FALSE
STATEMENTS
1. A business organized as a separate legal
entity owned by stockholders is a partnership.
2. Corporate stockholders generally pay higher
taxes but have no personal liability.
3. The liability of corporate stockholders is
limited to the amount of their investment.
4. The majority of U.S. business is transacted
by proprietorships.
5. Proprietorships in the United States
generate more revenue than the other two forms of business enterprise.
6. Owners of business firms are the only
people who need accounting information.
7. Management of a business enterprise is the
major external user of information.
8. External users of accounting information
are managers who plan, organize, and run a business.
9. The information needs and questions of
external users vary considerably.
10. Accounting communicates financial
information about a business to both internal and external users.
11. Two primary external users of accounting
information are investors and creditors.
12. Financing activities for corporations
include borrowing money and selling shares of their own stock.
13. Investing activities involve collecting the
necessary funds to support the business.
14. The purchase of equipment is an example of
a financing activity.
15. Assets are resources owned by a business
and provide future services or benefits to the business.
16. Payments to owners are operating
activities.
17. The economic resources that are owned by a
business are called stockholders’ equity.
18. Operating activities involve putting the
resources of the business into action to generate a profit.
19. A business is usually involved in two types
of activity—financing and investing.
20. Net income for the period is determined by
subtracting total expenses and dividends from revenues.
21. A different set of financial statements
usually is prepared for each user.
22. The heading for the income statement might
include the line “As of December 31, 20xx.”
23. Net income is another term for revenue.
24. Cash is another term for stockholders’
equity.
25. 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.
26. The balance sheet reports assets and claims
to those assets at a specific point in time.
27. The basic accounting equation states that
Assets = Liabilities.
28. One way of stating the accounting equation
is: Assets + Liabilities = Stockholders’ Equity.
29. The accounting equation can be expressed as
Assets - Stockholders’ Equity = Liabilities.
30. The accounting equation can be expressed as
Assets - Liabilities = Stockholders’ Equity.
31. If the assets owned by a business total
$150,000 and liabilities total $105,000, stockholders’ equity totals $45,000.
32. If the assets owned by a business total
$100,000 and liabilities total $65,000, stockholders’ equity totals $25,000.
33. Claims of creditors and owners on the
assets of a business are called liabilities.
34. Creditors’ rights to assets supersede
owners’ rights to the assets.
35. All publicly traded U.S. companies must
provide their stockholders with an annual report each year.
36. Information in the notes to the financial
statements has to be quantifiable (numeric).
37. An auditor is an accounting professional
who conducts an independent examination of the accounting data presented by a
company.
38. The management discussion and analysis (MD
& A) section of an annual report covers various financial aspects of a
company.
39. Explanatory notes and supporting schedules
are an optional part of an annual report.
40. Examples of notes are descriptions of the
significant accounting policies and methods used in preparing the statements,
explanations of contingencies, and various statistics.
MULTIPLE CHOICE QUESTIONS
41. The proprietorship form of business
organization
a. must have at least two owners in most states.
b. generally receives favorable tax treatment relative to a
corporation.
c. combines the records of the business with the personal records of
the owner.
d. is classified as a separate legal entity.
42. A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of
the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.
43. The partnership form of business
organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
44. Which of the following is not one of the three forms of business
organization?
a. Corporations
b. Partnerships
c. Proprietorships
d. Investors
45. Most business enterprises in the United
States are
a. proprietorships and partnerships.
b. partnerships.
c. corporations.
d. government units.
46. A business organized as a separate legal
entity is a
a. corporation.
b. proprietor.
c. government unit.
d. partnership.
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