TEST BANK for Financial Accounting 7th Canadian Editon by Robert Libby, Patricia Libby, Daniel G. Sh by digitaldownload87

Chapter 01 - Financial Statements and Business Decisions

Chapter 01 Financial Statements and Business Decisions

True / False Questions 1. Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

2. External users of accounting information include the managers who plan, organize, and run a business. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

3. In accounting and reporting for a business entity, the accounting and reporting for the business must be kept separate from other economic affairs of its owners. TRUE

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Chapter 01 - Financial Statements and Business Decisions

4. Accounting communicates financial information about a business to both internal and external users. TRUE

5. A statement of financial position should be dated for a period (such as "For the year ended December 31, 20X1"), whereas a statement of earnings should be dated at a point in time (such as "At December 31, 20X1"). FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-01 The Four Basic Financial Statements: An Overview

6. Expenses are the cost of assets consumed or services used in the process of generating revenue. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-06 The Statement of Earnings

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Chapter 01 - Financial Statements and Business Decisions

7. Generally speaking, a financially success business will have positive cash flows from operating activities. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-12 The Statement of Cash Flows

8. The issuance of additional common shares is a financing activity that generates positive cash flow to the firm. TRUE

9. Borrowing money and issuing shares are examples of financing activities TRUE

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Chapter 01 - Financial Statements and Business Decisions

10. Total assets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore, retained earnings is $5,000. FALSE Calculation: $60,000 - $30,000 - $20,000 = $10,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-02 The Statement of Financial Position

11. Investing activities involve collecting the necessary funds to operate the business. FALSE

12. The purchase of equipment is an example of a financing activity. FALSE

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Chapter 01 - Financial Statements and Business Decisions

13. The reasons for a decrease in cash can be determined by examining the statement of earnings. FALSE

14. Economic resources that are owned by a business are called shareholders' equity. FALSE

15. The accounting model for the statement of financial position is: Assets + Liabilities Shareholders' Equity. FALSE

16. Assets are resources owned by a business that provide current services or benefits to the business. FALSE

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Chapter 01 - Financial Statements and Business Decisions

17. Profit is the excess of total revenues over total expenses incurred to generate revenue during a specific period. TRUE

18. The financial statements prepared by a corporation include a statement of financial position, statement of earnings, statement of cash flows, and statement of money. FALSE

19. A banker who is considering making a loan to a corporation would be one of the corporation's internal decision makers. FALSE

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Chapter 01 - Financial Statements and Business Decisions

20. Assets are economic resources controlled by the entity as a result of past transactions or events and from which future economic benefits can be obtained. TRUE

21. The financial statement that shows an entity's economic resources and its liabilities is the statement of retained earnings. FALSE

22. The statement of comprehensive income reports the change in shareholders' equity during a period from business activities other than investments by shareholders or distributions to shareholders. TRUE

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Chapter 01 - Financial Statements and Business Decisions

23. A note payable is a borrowing instrument that generally does not involve the payment of interest. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-02 The Statement of Financial Position

24. If a corporation does not pay its obligations when they are due, its creditors may be able to force the sale of the business's assets to pay their claims. TRUE

25. The fiscal year end of a given business must be December 31, the calendar year end. FALSE

26. A net loss in a given accounting period will shrink the retained earnings account. TRUE

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Chapter 01 - Financial Statements and Business Decisions

27. A plane ticket sold by Air Canada in the fall for going home during Christmas immediately gets recorded as revenue. FALSE

28. When a company ships products to a customer and bills the customer, the company should recognize revenue as earned. TRUE

29. The amount of cash paid by a business for office rent would be reported on the statement of cash flows as a financing activity. FALSE

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Chapter 01 - Financial Statements and Business Decisions

30. Repayment of a bank loan is classified on the statement of cash flows as an operating activity. FALSE

31. Liabilities are the entity's legal obligations that result from past business events. TRUE

32. International Financial Accounting Standards are produced by the International Accounting Standards Board (IASB), which is an independent standard-setting board consisting of 15 members from twelve countries. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-19 International Financial Reporting Standards (IFRS)

33. Financial accounting is based on man-made rules that sometimes undergo change. TRUE

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Chapter 01 - Financial Statements and Business Decisions

34. Auditors are responsible for expressing an opinion of the consolidated financial statements based on their audits. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

35. Primary responsibility for the information in the financial statements lies with auditors. FALSE

36. The AcSB is currently the body responsible for establishing accounting standards. TRUE

37. The Accounting Standards Board (AcSB) is an agency of the federal government that establishes generally accepted accounting principles for businesses. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-18 Responsibilities for the Accounting Communication Process

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Chapter 01 - Financial Statements and Business Decisions

38. Generally accepted accounting principles are essentially identical in most developed countries. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-02 Identify the role of International Financial Reporting Standards (IFRS) in determining the content of financial statements and how companies ensure the accuracy of their financial statements. Topic: 01-19 International Financial Reporting Standards (IFRS)

39. One of the disadvantages of a corporation when compared to a partnership is the limited liability of the owners. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

40. Corporations have the advantage of having limited liability. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

41. In a partnership, the creditor can come after the personal assets of either partner should the business default on its debt. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

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Chapter 01 - Financial Statements and Business Decisions

42. In a sole proprietorship the owner is often an employee of the business. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

43. A partnership is an incorporated entity that has more than one owner. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 01-S1 Describe the different types of business entities. Topic: 01-27 Appendix 1A: Types of Business Entities

44. Independent CPAs in the public practice of accounting are viewed as employees of their clients. FALSE

45. An audit involves the examination of the financial reports (prepared by the management of the company) to ensure that they represent what they claim and conform with IFRS. TRUE

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Chapter 01 - Financial Statements and Business Decisions

46. Many opportunities exist for managers to intentionally prepare misleading financial reports. TRUE

47. Failure to comply with professional rules of conduct can result in serious penalties for professional accountants, but not the rescinding of the professional designation of an offending member. FALSE

48. High ethical standards are required for preparers of financial information. TRUE

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Chapter 01 - Financial Statements and Business Decisions

Multiple Choice Questions 49. What is the primary purpose of the statement of financial position? A. To measure the profit of a business up to a particular point in time. B. To report the difference between cash inflows and cash outflows for the period. C. To report the financial position of the reporting entity at a particular point in time. D. To report assets at their current market value at a particular point in time.

50. On January 1, 20X1, two individuals invested $150,000 each to form Hornbeck Corporation. Hornbeck had total revenues of $15,000 during 20X1 and $40,000 during 20X2. Total expenses for the same periods were $8,000 and $22,000, respectively. Cash dividends paid out to shareholders totaled $6,000 in 20X1 and $12,000 in 20X2. What was the ending balance in Hornbeck's retained earnings account at the end of 20X1 and 20X2? A. $1,000 and $6,000 respectively. B. $1,000 and $7,000, respectively. C. $7,000 and $19,000 respectively. D. $301,000 and $306,000 respectively. Calculation: $15,000 - $8,000 - $6,000 = $1,000; $1,000 + $40,000 - $22,000 - $12,000 = $7,000.

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Hard Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-09 The Statement of Changes in Equity

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Chapter 01 - Financial Statements and Business Decisions

51. The HAT Corporation had revenues of $210,000, expenses of $85,000, and an income tax rate of 20 percent in 20X2. What would profit after taxes be? A. $5,000. B. $15,000. C. $20,000. D. $100,000. Calculation: ($210,000 - $85,000) ´ 80% = $100,000.

52. Brown Corporation reported the following amounts at the end of the first year of operations, December 31, 20X1: Share capital $20,000; Sales revenue $95,000; Total assets $85,000, No dividends, and Total liabilities $35,000. What would shareholders' equity and total expenses be? A. Shareholders' equity, $50,000 and expenses $65,000. B. Shareholders' equity, $60,000 and expenses $75,000. C. Shareholders' equity, $80,000 and expenses $40,000. D. Shareholders' equity, $80,000 and expenses $85,000. Calculation: $85,000 - $35,000 = $50,000; $20,000 + $95,000 - $50,000 = $65,000.

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Chapter 01 - Financial Statements and Business Decisions

53. All of the following are internal users of accounting data except: A. The president of a company. B. The controller of a company. C. Labour union for the company's employees D. A salesperson of a company.

54. If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period, then total assets must change by what amount and direction during that same period? A. $20,000 decrease. B. $20,000 increase. C. $25,000 increase. D. $30,000 increase. Calculation: $25,000 + $5,000 = $30,000.

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Chapter 01 - Financial Statements and Business Decisions

55. Which of the following activities involves raising the necessary funds to support the business? A. Operating. B. Investing. C. Financing. D. Marketing.

56. Buying assets needed to operate a business is an example of a(n) A. purchasing activity. B. financing activity. C. investing activity. D. operating activity.

57. The common characteristic possessed by all assets is A. long life. B. depreciation C. tangible nature. D. future economic benefit.

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Chapter 01 - Financial Statements and Business Decisions

58. Expenses are incurred A. only on rare occasions. B. to produce assets. C. to produce liabilities. D. to generate revenues.

59. The financial statement that summarizes the changes in contributed capital and retained earnings for a specific period of time is the A. statement of financial position. B. statement of earnings. C. statement of cash flows. D. statement of changes in equity.

60. Retained earnings at the end of the period is equal to A. retained earnings at the beginning of the period plus net earnings minus liabilities. B. retained earnings at the beginning of the period plus net earnings minus dividends. C. net earnings for the period D. assets plus liabilities.

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Chapter 01 - Financial Statements and Business Decisions

61. What form does financial accounting information provided by an entity to decision makers generally take? A. Financial statements. B. Various forecasts and performance reports. C. An analysis of changes in the price of a corporation's shares. D. Comparisons between the company and its competitors.

62. If the retained earnings account increases from the beginning of the year to the end of the year, then A. profit is greater than dividends. B. a loss is less than dividends. C. additional investments are less than reported losses. D. dividends were paid.

63. Shareholders' equity can be described as claims of A. creditors on total assets. B. owners on total assets. C. customers on total assets. D. debtors on total assets.

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Chapter 01 - Financial Statements and Business Decisions

64. Which financial statement would reveal whether the company relies more on debt or shareholders' equity to finance its assets? A. Statement of cash flows. B. Statement of changes in equity. C. Statement of earnings. D. Statement of financial position.

65. The statement of financial position and statement of changes in equity are related because A. the total assets on the statement of financial position is reported on the statement of changes in equity. B. the ending amount on the statement of changes in equity is reported on the statement of financial position. C. the ending amount on the statement of changes in equity is transferred to the statement of cash flows. D. both contain information for the corporation.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

66. Carrington Company owes you $500 on account due within 15 days. Which of the following amounts on its statement of financial position would help you to determine the likelihood that you will be paid in full and on time? A. Cash and trade receivables. B. Cash and property and equipment. C. Cash and inventory. D. Contributed capital and retained earnings.

67. The statement of cash flows and the statement of financial position are interrelated because A. the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings. B. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. C. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. D. both disclose the corporation's profit.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

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Chapter 01 - Financial Statements and Business Decisions

68. Which of the following are the two primary components of shareholders' equity? A. Non-current assets and liabilities B. Contributed capital and Retained earnings. C. Short term debt and retained earnings D. Long-term debt and retained earnings.

69. The statement of changes in equity is dependent on the results from A. the statement of cash flows. B. the statement of financial position. C. the statement of earnings. D. a company's share capital.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

70. The primary purpose of the statement of cash flows is to report A. a company's investing transactions. B. a company's financing transactions. C. information about cash receipts and cash payments of a company. D. the net increase or decrease in cash.

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Chapter 01 - Financial Statements and Business Decisions

71. Speedy Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and dividends of $5,000. Shareholders' equity at the end of the year was A. $60,000. B. $65,000. C. $70,000. D. $75,000. Calculation: Beginning shareholders equity is 70000 - 40000 = 30000. Profit for the year was 100000 - 65000 = 35000. Ending SE is 30000 + 35000 - 5000 = 60000.

72. A service business' income statement is likely to have which one of the following as the largest figure? A. salaries expense B. equipment maintenance C. cost of goods sold D. income taxes

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Chapter 01 - Financial Statements and Business Decisions

73. The most significant expense for a merchandising company is A. salaries expense B. equipment maintenance C. cost of goods sold D. income taxes

74. On the statement of financial position, assets may be presented A. in order of liquidity B. in order of reverse liquidity C. either in order of liquidity or in order of reverse liquidity D. in alphabetical order

75. Retained earnings are A. the shareholders' claim on total assets. B. equal to cash. C. equal to revenues. D. the amount of profit kept in the corporation for future use.

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Chapter 01 - Financial Statements and Business Decisions

76. What are business liabilities? A. Amounts it expects to collect in the future from customers. B. Debts or obligations resulting from past business events. C. The amounts that owners have invested in the business. D. The increases in assets that result from profitable operations.

77. Why would EZ Bank, in deciding whether to make a loan to Davis Company, be interested in the amount of liabilities Davis has on its statement of financial position? A. The liabilities represent resources that could be used to repay the loan. B. If Davis already has many other obligations, it might not be able to repay the loan. C. Existing liabilities give an indication of how profitable Davis has been in the past. D. EZ bank would be interested in the amount of Davis's assets but not the amount of liabilities.

78. What are the two categories of shareholders' equity usually found on the statement of financial position of a corporation? A. Share capital and long-term liabilities. B. Share capital and property, plant, and equipment. C. Retained earnings and notes payable. D. Contributed capital and retained earnings.

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Chapter 01 - Financial Statements and Business Decisions

79. Jameson & Johnson Inc., recorded $250,000 of depreciation expense in December 20X6. The most likely effect on the company's accounting equation is A. no effect on assets. B. a decrease in assets of $250,000. C. an increase in liabilities of $250,000. D. an increase in assets of $250,000.

80. Allentown Corporation has on its statement of financial position the following amounts: Total assets of $3,500,000 Total liabilities of $500,000 Contributed capital of $1,000,000. What is the amount of retained earnings that should appear on Allentown's statement of financial position? A. $2,000,000. B. $3,000,000. C. $4,000,000. D. $5,000,000. Calculation: $3,500,000 - $500,000 - $1,000,000 = $2,000,000.

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Chapter 01 - Financial Statements and Business Decisions

81. Which financial statement for a business would you look at to determine the company's performance during an accounting period? A. Statement of financial position. B. Statement of cash flows. C. Statement of earnings. D. Statement of changes in equity.

82. Which of the following is not a principal type of business activity? A. Operating B. Investing C. Financing D. Delivering

83. How do most businesses earn revenues? A. When they collect trade receivables. B. Through sales of goods or services to customers. C. By borrowing money from a bank. D. By selling shares to shareholders.

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Chapter 01 - Financial Statements and Business Decisions

84. A group of individuals formed a new company with an investment of $100,000. The most likely effect of this transaction on the company's accounting equation at the time of the formation is an increase in cash and A. an increase in revenue. B. an increase in liabilities. C. an increase in owners' capital. D. an increase in assets.

85. During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. The amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. What is the amount of sales revenue that Banner should report on its statement of earnings for 20X2? A. $4,650,000. B. $4,760,000. C. $5,850,000. D. $5,960,000.

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Chapter 01 - Financial Statements and Business Decisions

86. During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. Assume all sales were on account and the amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. Based on this information, what is the amount of trade receivables that Banner would report at the end of 20X2? A. $110,000. B. $1,090,000. C. $1,310,000. D. $5,850,000. Calculation: $1,200,000 + $5,850,000 - $5,960,000 = $1,090,000.

87. What is the amount of revenue recognized in the statement of earnings by a company that sells goods to customers? A. The cash collected from customers during the current period. B. Total sales, both cash and credit sales, for the period. C. Total sales minus beginning amount of trade receivables. D. The amount of cash collected plus the beginning amount of trade receivables.

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Chapter 01 - Financial Statements and Business Decisions

88. The statement of cash flows and the statement of financial position are interrelated because A. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. B. the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. C. both disclose the corporation's profit. D. the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 01-01 Recognize both the information conveyed in each of the four basic financial statements and describe how the information is used by different decision makers (investors, creditors, and managers). Topic: 01-15 Relationships among the Four Financial Statements

89. On January 1, 20X1, Taylor Corporation had retained earnings of $6,500,000. During 20X1, Taylor had profit of $1,050,000 and dividends of $450,000. What is the amount of Taylor's retained earnings at the end of 20X1? A. $6,050,000. B. $6,950,000. C. $7,100,000. D. $7,550,000. Calculation: $6,500,000 + $1,050,000 - $450,000 = $7,100,000.

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Chapter 01 - Financial Statements and Business Decisions

90. What are the categories of cash flows that appear on a statement of cash flows? A. Cash flows from investing, financing, and service activities. B. Cash flows from operating, production, and internal activities. C. Cash flows from financing, production, and growth activities. D. Cash flows from operating, investing, and financing activities.

91. Borrowing money is an example of a(n) A. marketing activity B. financing activity. C. investing activity. D. operating activity.

92. On the statement of cash flows, how would a company report the purchase of machinery? A. As cash used in operating activities. B. As cash used in financing activities. C. As cash used in purchasing activities. D. As cash used in investing activities.

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Chapter 01 - Financial Statements and Business Decisions

93. When would a company report a net loss? A. When retained earnings decreased due to paying dividends to shareholders. B. When its assets decreased during an accounting period. C. When its liabilities increased during an accounting period. D. When its expenses exceeded its revenues for an accounting period.

94. Which of the following is the amount of rent expense reported on the statement of earnings? A. The amount of cash paid for rent in the current period. B. The amount of cash paid for rent in the current period less any unpaid rent at the end of the period. C. The amount of rent used up in the current period to earn revenue. D. The amount of cash paid for rent for the future period.

95. What events cause changes in a corporation's retained earnings? A. Profit or loss and declaration of dividends. B. Declaration of dividends and issuance of shares to new shareholders. C. Profit issuance of shares, and borrowing from a bank. D. Declaration of dividends and purchase of new machinery.

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Chapter 01 - Financial Statements and Business Decisions

96. The statement of financial position A. reports the changes in assets, liabilities, and shareholders' equity over a period of time. B. reports the assets, liabilities, and shareholders' equity at a specific date. C. presents the revenues and expenses for a specific period of time. D. summarizes the changes in retained earnings for a specific period of time.

97. If you wanted to know how much of its profit a corporation distributed as dividends, which financial statement would you look at? A. Statement of financial position. B. Statement of earnings. C. Statement of cash flows. D. Statement of changes in equity.

98. Why is the operating activities section often believed to be the most important part of a statement of cash flows? A. It gives the most information about how operations have been financed. B. It shows the dividends that have been paid to shareholders. C. It indicates a company's ability to generate cash from sales to meet current cash needs. D. It shows the net increase or decrease in cash during the period.

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