Deck 1: A Framework for Financial Accounting

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Amounts owed to suppliers,employees,the government in the form of taxes,and utility companies are examples of liabilities.

Question 8

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

Question 9

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

Question 10

The costs related to rent,utilities,and salaries in the current reporting period are examples of liabilities.These are examples of expenses.

Question 11

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

Question 12

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

Question 13

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.Financial accounting primarily serves to provide information to external parties.

Question 14

If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000,then total assets equal $7,000.Total assets = Total liabilities ($16,000)+ Total stockholders' equity ($9,000)= $25,000.

Question 15

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

Question 16

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

Question 17

Investing activities include the purchase and sale of long-term resources.

Question 18

Financing activities are transactions involving externals sources of funding.

Question 19

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

Question 20

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

Question 21

One advantage of the corporate form of business is double taxation.Double taxation is a disadvantage of the corporate form of business.

Question 22

Dividends are considered an expense in running the business and reported in the income statement.Dividends are a distribution of resources to owners and not considered a cost in running the business to produce revenues.Dividends are reported in the statement of stockholders' equity.

Question 23

Investing cash flows generally include cash receipts and cash payments for transactions involving revenue and expense activities during the period.These are operating activities.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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 38

Operating cash flows generally include cash transactions for the purchase and sale of investments and long-term assets.These are investing activities.

Question 39

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

Question 40

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

Question 41

Financial accounting does not deal with which of the following?

A)Measuring a company's economic activity.
B)Providing information to internal users.
C)Preparing financial reports.

Question 42

What is the primary purpose of financial accounting?

A)Determine the amount of tax liability owed to the government.
B)Communicate business activities to internal management.
C)Measure business activities and communicate those measures to external users to make decisions.

Question 43

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

Question 44

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.

Question 45

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

A)Partnership.
B)Sole proprietorship.
C)Corporation.

Question 46

The primary focus for financial accounting information is to provide information useful for: $\begin{array} { | l | c | c | } \hline & \text { Investing decisions } & \text { Credit decisions } \\\hline \text { a. } & \text { Yes } & \text { Yes } \\\hline \text { b. } & \text { Yes } & \text { No } \\\hline \text { c. } & \text { No } & \text { Yes } \\\hline \text { d. } & \text { No } & \text { No } \\\hline\end{array}$

A)Investment decisions and credit decisions.
B)Investment decisions but not credit decisions.
C)Credit decisions but not investment decisions.

Question 47

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

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

Question 48

The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC)the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors.

Question 49

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 50

Which business form has the advantage of limited liability?

A)Corporation.
B)Sole proprietorship.
C)Partnership.

Question 51

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.

Question 52

Financing activities include:

A)Primary operations such as selling goods to customers.
B)Transactions with company employees.
C)Transactions involving external sources of funding.

Question 53

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.

Question 54

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

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

Question 55

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.

Question 56

Accountants are responsible for measuring various operating,investing and financing activities.Which of the following correctly matches the activity with its type?

A)Investing - paying utilities for the month.
B)Investing - purchasing land.
C)Operating - paying dividends to stockholders.

Question 57

How many of the following transactions are operating activities? Borrowed $50,000 from the bank
Purchased $12,000 in supplies
Provide services to customers for $27,000
Paid the utility bill of $750
Purchased a delivery truck for $12,000
Received $25,000 from issuing common stock

A)One.
B)Two.
C)Three.

Question 58

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

Question 59

The primary objective of financial accounting is to provide useful information to managers in making decisions.Financial accounting is intended primarily to provide information to investors and creditors.

Question 60

The role of independent 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 61

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

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

Question 62

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.

Question 63

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.

Question 64

The equation best describing the income statement is:

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

Question 65

The assets of a company represent:

A)Amounts owed to creditors.
B)Sales of goods or services to customers.
C)Resources that will be used to benefit the company.

Question 66

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.

Question 67

Liabilities can be best described as:

A)The amount of expenses over the past year.
B)The amount expected to be distributed to stockholders.
C)The amount owed to creditors.

Question 68

Which of the following best describes revenue?

A)Resources of a company.
B)Sales of goods and services to a customer.
C)Cash received from a customer.

Question 69

Amounts owed to suppliers for supplies purchased on account are defined as a(n):

A)Revenue.
B)Asset.
C)Liability.

Question 70

The accounting equation is defined as:

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

Question 71

Which of the following does not represent an asset of a company?

A)Supplies held by the company.
B)Amounts owed to suppliers.
C)Equipment owned and used for operations.

Question 72

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.

Question 73

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.

Question 74

Which of the following accounts represents a resource of the company?

A)Common stock.
B)Service revenue.
C)Accounts receivable.

Question 75

Stockholders' claims to the company's resources are referred to as:

A)Stockholders' equity.
B)Revenues.
C)Assets.

Question 76

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

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

Question 77

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.

Question 78

Dividends represent:

A)Resources of the company.
B)Cash payments to stockholders.
C)Amounts owed to creditors.

Question 79

The accounts that represent resources owed to creditors are called:

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

Question 80

Financing activities include:

A)The purchase of a building.
B)Issuing common stock to stockholders.
C)Transactions with company employees.