Deck 1: A Framework for Financial Accounting

Question 1

The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes.

Answer 1

False

Question 2

Accounting is a system of maintaining records of a company's operations and communicating this information to decision makers.

Answer 2

True

Question 3

Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation.

Answer 3

True

Question 4

Accounting information is used by investors to decide whether to invest in a company's stock.

Question 5

Accounting information is used by creditors to decide whether to invest in a company's stock.

Question 6

Financing activities are transactions involving externals sources of funding.

Question 7

The difference between revenues and expenses is referred to as net income or net loss.

Question 8

The accounting equation shows that a company's resources equal creditors' and owners' claims to those resources.

Question 9

Investing activities include the purchase and sale of (1)long-term resources and (2)any resources not directly related to a company's normal operations.

Question 10

If a company reports revenues of $17,000 and expenses of $12,000,then net income equals $5,000.

Question 11

Dividends represent a return of the company's profits to its owners,the stockholders.

Question 12

Operating activities include transactions that relate to the primary operations of the company.

Question 13

If total assets of a company equal $12,000 and total stockholders' equity equals $4,000,then total liabilities equal $8,000.

Question 14

Expenses are regular cash payments by a corporation to its stockholders.

Question 15

Cash,inventory,supplies,and buildings are examples of liabilities.

Question 16

If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000,then total assets equal $7,000.

Question 17

Amounts owed to suppliers,workers,governments,and utility companies are examples of liabilities.

Question 18

The costs of advertising,utilities,and salaries in the current reporting period are examples of liabilities.

Question 19

A corporation is an entity that is legally separate from its owners.

Question 20

One of the differences between a partnership and a corporation is that owners of a partnership have limited liability.

Question 21

Financial statements are periodic reports published by the company for the purpose of providing information to managers.

Question 22

All cash transactions reported in the statement of cash flows are classified as (1)operating activities, (2)investing activities,or (3)financing activities.

Question 23

Financial accounting has an impact on everyday business decisions as well as wide-ranging economic consequences.

Question 24

Double taxation refers to a corporation's income being taxed twice-first when the company earns it and pays corporate income taxes on it,and then again when stockholders pay personal income taxes on any amounts the firm distributes to them as dividends.

Question 25

Retained earnings represents the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends.

Question 26

Investing cash flows generally include cash receipts and cash payments for transactions involving revenues and expenses.

Question 27

Today,financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB).

Question 28

The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP).

Question 29

The two primary components of stockholders' equity include common stock and revenue.

Question 30

One advantage of the corporate form of business is double taxation.

Question 31

Financing cash flows include cash transactions with lenders,such as borrowing money and repaying debt,and with stockholders,such as issuing stock and paying dividends.

Question 32

Operating cash flows generally include cash transactions for the purchase and sale of investments and productive long-term assets.

Question 33

In general,if a company's net income is increasing,so will its stock price.

Question 34

Common stock represents an external source of stockholders' equity,whereas retained earnings represents an internal source.

Question 35

Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings.

Question 36

The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time.

Question 37

The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time.

Question 38

The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929.

Question 39

Dividends are considered an expense in running the business and reported in the income statement.

Question 40

Investors and creditors rely heavily on financial accounting information in making investment and lending decisions.

Question 41

Which of the following groups is not among the external users for whom financial statements are prepared?

A)Creditors.
B)Regulators.
C)Investors.
D)Managers.

Question 42

Which definition below best describes financial accounting?

A)Process of measuring income taxes owed to the government.
B)System of maintaining communication with a company's customers and suppliers.
C)Procedures designed to enhance the company's image to potential investors.
D)Measuring business activities and communicating them to external parties.

Question 43

The accounting equation is defined as:

A)Assets = Liabilities + Stockholders' Equity.
B)Assets = Liabilities
Stockholders' Equity.
C)Net Income = Revenues
Expenses.
D)Liabilities + Revenues = Assets.

Question 44

The primary objective of financial reporting is to provide useful information to managers in making decisions.

Question 45

The primary focus for financial accounting information is to provide information useful for:

Question 46

Transactions of a company involving external sources of funding are referred to as:

A)Investing activities.
B)Financing activities.
C)External activities.
D)Operating activities.

Question 47

What is the primary purpose of financial accounting?

A)Determine the amount of tax liability owed to the government.
B)Communicate business transactions to internal management.
C)Measure business transactions and communicate those measures to external users to make decisions.
D)Measure the profitability of the company in order to assist employees with making decisions.

Question 48

If a company has stockholders' equity of $60,000 at the end of the year,which of the following statements must be true?

A)The company's assets exceed liabilities by $60,000.
B)The company has issued $60,000 of common stock.
C)Net income for the year equals $60,000.
D)Total revenues earned during the year equal $60,000.

Question 49

Public accounting firms are professional service firms that traditionally have focused on three areas: auditing,tax preparation/planning,and business consulting.

Question 50

Emmitt had the following final balances after the first year of operations: assets,$55,000;stockholders' equity,$25,000;dividends,$3,000;and net income,$10,000.What is the amount of Emmitt's liabilities?

A)$55,000.
B)$30,000.
C)$13,000.
D)$7,000.

Question 51

Financial accounting:

A)Provides information primarily for external decision makers.
B)Provides information primarily for a company's employees.
C)Provides information primarily for the use of managers of the company.
D)Is primarily used to compute a company's tax obligation.

Question 52

Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company's financial statements.

Question 53

The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC)the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors.

Question 54

The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles.It provides an underlying foundation for the development of accounting standards and interpretation of accounting information.

Question 55

Which statement below best describes the accounting equation?

A)The change in retained earnings equals net income less dividends.
B)Equality of revenue and expense transactions over time.
C)Resources of the company equal creditors' and owners' claims to those resources.
D)Financing activities equal investing and operating activities.

Question 56

The role of auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP)in preparing the company's financial statements.

Question 57

The primary purpose(s)of financial accounting is (are)to:

A)Measure and record business transactions.
B)Prepare federal and state tax returns.
C)Communicate financial results to investors and creditors.
D)Both measure and communicate financial information.

Question 58

Transactions of a company that include the purchase and sale of long-term productive assets are referred to as:

A)Investing activities.
B)Financing activities.
C)Expenditure activities.
D)Operating activities.

Question 59

Financial accounting does not deal with which of the following?

A)Measuring a company's economic activity.
B)Making business decisions.
C)Preparing financial reports.
D)Communicating financial results to investors.

Question 60

McGill purchases additional office equipment to better serves its customers.This purchase is classified as what type of activity?

A)Company activity.
B)Financing activity.
C)Investing activity.
D)Operating activity.

Question 61

An alternative form of the accounting equation is:

A)Net Income = Revenues
Expenses.
B)Stockholders' Equity = Assets + Liabilities.
C)Assets = Liabilities
Stockholders' Equity.
D)Assets
Liabilities = Stockholders' Equity.

Question 62

Net income can best be described as:

A)Net cash received by a company during the year.
B)Revenues minus expenses.
C)The amount of profits retained in a company for the year.
D)Resources of a company.

Question 63

The costs of providing goods and services to customers are referred to as:

A)Assets.
B)Expenses.
C)Liabilities.
D)Revenues.

Question 64

The accounting equation is defined as:

A)Common Stock + Retained Earnings = Stockholders' Equity.
B)Revenues - Expenses = Net Income.
C)Revenues - Expenses - Dividends = Retained Earnings.
D)Assets = Liabilities + Stockholders' Equity.

Question 65

One disadvantage of the corporate form of business is:

A)Limited liability.
B)Access to more capital.
C)Smaller in size.
D)Double taxation.

Question 66

Use the following appropriate amounts to calculate net income: Revenues,$12,000;Liabilities,$5,000;Expenses,$4,000;Assets,$19,000;Dividends,$4,000.

A)$6,000.
B)$8,000.
C)$4,000.
D)$14,000.

Question 67

The account type that represents payments to stockholders is called:

A)Liabilities.
B)Assets.
C)Stockholders' equity.
D)Dividends.

Question 68

Limited liability means:

A)Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket.
B)Liabilities of a company cannot exceed its assets.
C)Companies are not allowed to borrow unless they are profitable.
D)Companies are less likely to be sued if they are formed as a corporation.

Question 69

The owners' interest in a corporation is called:

A)Dividends.
B)Assets.
C)Liabilities.
D)Stockholders' equity.

Question 70

Which business form has the advantage of limited liability?

A)Corporation.
B)Sole proprietorship.
C)Partnership.
D)All business forms share equal limited liability.

Question 71

The costs associated with producing revenues are referred to as:

A)Dividends.
B)Assets.
C)Liabilities.
D)Expenses.

Question 72

The form of business organization that is legally separate from its owners is a:

A)Partnership.
B)Sole proprietorship.
C)Corporation.
D)Separation entity.

Question 73

The accounts that represent the resources of the company are called:

A)Liabilities.
B)Revenues.
C)Expenses.
D)Assets.

Question 74

Liabilities are best defined as:

A)Amounts the company expects to collect in the future from customers.
B)Debts or obligations the company owes resulting from past transactions.
C)The amounts that owners have invested in the business.
D)Payments to stockholders.

Question 75

Transactions related to the primary business activities of the company,such as selling goods and services to customers,are referred to as:

A)Investing activities.
B)Operating activities.
C)Management activities.
D)Financing activities.

Question 76

The accounts that represent resources owed to creditors are called:

A)Assets.
B)Liabilities.
C)Dividends.
D)Stockholders' equity.

Question 77

Stimpleton Company engages in the following cash payments: What is the total amount of cash paid for operating activities?

A)$6,000.
B)$2,000.
C)$7,000.
D)$1,500.

Question 78

Creditors' claims to a corporation's resources are referred to as:

A)Dividends.
B)Assets.
C)Liabilities.
D)Stockholders' equity.

Question 79

Using the information below from the accounting records of Thomas Corporation,owners' claims to the company's resources amount to:

A)$1,200,000.
B)$800,000.
C)$250,000.
D)$400,000.

Question 80

Which of the following best describes revenue?

A)Resources of a company.
B)Amounts earned from providing goods and services to a customer.
C)Cash received from a customer.
D)Dividends paid to stockholders.