Type:
Test Bank
Financial Accounting A Global Resource: Perspective Edition:
1st Edition
Author(s):
Rod Monger
Chapter 1 The Financial Accounting Reporting System Test Bank True/False Questions 1. Financial accounting reports are created primarily for use by internal users. False Page: p8 2. External users include investors, managers, employees, lenders, suppliers and other creditors, customers, governments and their agencies and the public. False Page: p9 3. A transaction is an exchange between two entities. True Page: p9 4. In the past, accounting used the double-entry method created in the 15th century but modern accounting has replaced this with transaction accounting. False Page: p9 5. The owner or owners of a business are a separate entity from the business. True Page: p11 6. The entity concept refers to a business organization in which the individual owner and the business are one and the same. False Page: p13 7. A barter transaction is an exchange that does not involve money. True Page: p13 8. A limited liability company is sometimes referred to as a corporation, joint stock company or share-based entity. True Page: p15 9. Limited liability companies cannot own assets, create debt obligations, enter into legal contracts or engage in business transactions. All these things must be owned personally by the shareholders of the company. False Page: p15 . . 1
10. A company named Benedikt Motor Works, AG would be a limited liability company registered in either Austria or Germany. True Page: p14 11. A share provides evidence of ownership of a partner’s share in a partnership. False Page: p15 12. Partnerships can be either privately-held or publicly-traded. False Page: p16 13. Alternative names for bourses are stock exchanges, stock markets or equity securities market. True Page: p15 14. One primary advantage of a sole proprietorship is that raising capital is easier than in the other two forms of business organization. False Page: p16 15. An individual who is a sole proprietor has no protection from creditors. True Page: p16 16. Creditors cannot pursue the individual partners in a partnership to collect debts of the partnership. Only the partnership is responsible to the creditors. False Page: p16 17. The form of business organization that is the easiest to raise capital for is the limited liability company because it is able to continue operations uninterrupted even though the ownership changes. True Page: p15 18. A complete set of financial statements includes the statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows. False Page: p18 19. The statement of comprehensive income answers the question ‘How did the business perform?’ True Page: p19
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20. The statement of changes in equity answers the question ‘How did the business obtain cash and how was it used?’ False Page: p19 21. The statement of cash flows answers the question ‘What resources have the owners invested in the business?’ False Page: p19 22. The reporting date for a business entity is the same as the date on the statement of financial position. True Page: p20 23. The reporting date for a business entity is the same as the date on the statement of comprehensive income. False Page: p20 24. The time period assumption requires that businesses prepare financial statements at least once annually. False Page: p20 25. Only the statement of financial position is reported for a single date. The other financial statements report results for a period of time such as a year, quarter or month. True Page: p20 26. The term ‘financial position’ refers to the relationship between the statement of financial position and the statement of comprehensive income. False Page: p22 27. If equity is deducted from assets, the result is liabilities. True Page: p24 28. In order to be an asset, an item must have some future relevance to the business. True Page: p23 29. Cash is classified as equity on the statement of financial position. True Page: p25
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30. If liabilities are $75 000 and equity is $32 000, assets must be $43 000. False Page: p24 31. A company reports the following amounts: loans payable €230, trade accounts payable €1 170, inventories €500, contributed capital €100, land €2 500. Total liabilities are €4 500. False Page: p24 32. Total comprehensive income is the total of profit or loss plus other comprehensive income. True Page: p31 33. A company reports the following amounts on its statement of comprehensive income: Total comprehensive income £2 760, revenue £5 000 and other comprehensive income of £2 300. Expenses were £4 540. True Page: p28 34. Revenue is also known as profit or sales. False Page: p25 35. Expenses are outflows of economic benefits during the period arising from the entity’s business activity. True Page: p28 36. The difference between revenue and expenses is profit or loss. True Page: p29 37. Equity has three basic elements: contributed capital, reserves and retained earnings. True Page: p25 38. A dividend is an expense of the business and therefore appears on the statement of comprehensive income. False Page: p31 39. Operating activities and financing activities are sources of cash while investing activities are a use of cash. False Page: p33
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40. Investing activities on the statement of cash flows refers to changes in the size and composition of the amount owners have invested in the business and borrowings. False Page: p33 41. If a company sells more shares to investors, this would be a source of cash from financing activities. True Page: p33 42. If a company pays a supplier cash, this would be a use of cash from operating activities. True Page: p33 43. If a business repays a loan to a creditor, this would be a source of cash from financing activities. False Page: p33 44. A company reports on its statement of cash flows that operating activities were a source of cash for $500, investing activities were a use of cash for $600 and financing activities were a use of cash for $550. Then cash balance shown on the statement of financial position for the end of the year was $700. The cash balance shown on the statement of financial position at the end of the previous year was $1 350. True Page: p34 45. The four major steps in the accounting process are to analyze transactions, record transactions, prepare financial statements and then close the account. False Page: p40 46. The reporting decision deals with the question ‘What additional information should be provided to external users?’ False Page: p41 47. The recognition decision deals with the question ‘Should a transaction be included?’ in the accounting records. True Page: p41 48. Generally accepted accounting principles include laws and regulations of governments and commonly accepted accounting practices but do not include accounting standards which are separate. False Page: p43
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49. All nations have now use international accounting standards which are referred to as International Financial Reporting Standards (IFRS). False Page: p44 50. An audit is a review by management to determine whether the company’s accountants have prepared the financial statements in accordance with applicable accounting standards. False Page: p45 51. Accounting policies are formal and informal guidelines within a business to determine how the business will account for financial transactions within the context of applicable accounting standards. False Page: p56
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Multiple Choice Questions 1. Someone who uses accounting information is: a. an internal user b. an external user c. a user d. a manager Page: p7 2. External users include all of the following except: a. lenders b. customers c. managers d. employees Page: p9 3. The following would be a type of external user who needs financial information to help them decide whether to buy, hold or sell equity securities in the company, and whether the company can pay dividends. a. Investors b. Lenders c. Suppliers and other trade creditors d. Customers Page: p9 4. Accounting accounts for which of the following? a. Any information desired by external users b. Only financial information desired by external users c. All financial transactions except those involving barter transactions d. Financial transactions including barter transactions Page: p8
5. Anzhela begins a new business which is registered as a limited liability company. She invests €150 000 of her personal savings in the business. This would be treated as a transaction which must be accounted for because: a. of the form of business organization b. of the entity concept c. the business is profit-making d. Anzhela began the business Page: p13
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6. Which of the following business forms is a legally independent entity established under the laws and regulations of the government in the jurisdiction where the business is registered. a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p15 7. Which of the following business forms has the advantage of being able to operating continuously even though ownership changes? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p15 8. Which of the following business forms has the advantage of protecting the owners from business creditors? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p15 9. Which of the following forms of business has the advantage of simplicity? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p16 10. Which of the following forms of business does not protect owners from business creditors? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and b Page: p16 11. Which of the following forms of business would result in the termination of the business if the ownership changes? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and b Page: p16
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12. Which of the following forms of business can engage in transactions on its own cognizance? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p15 13. Which of the following forms of business engages in transactions in the name of the owners rather than the business itself? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and b Page: p16 14. Which of the following forms of business organization can be publicly-traded? a. Partnership b. Sole proprietorship c. Limited liability company d. Both a and c Page: p15 15. Which of the following forms of business organization can be privately owned? a. Partnership b. Sole proprietorship c. Limited liability company d. All can be privately owned Page: p15 16. Which of the following financial statements answers the question ‘How did the business perform”? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p19 17. Which of the following financial statements answers the question ‘What resources have the owners invested in the business”? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p19
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18. Which of the following is true about the time period assumption? a. It allows reporting periods to be broken into specific time periods b. It requires that business report their financial results at least once annually c. It requires businesses to choose whether to report their financial results once per year, quarter or month d. It requires businesses to report their financial results at least monthly Page: p20 19. Which of the following financial statements reports financial results as of a single date? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20 20. Which of the following items would not appear on the statement of financial position? a. Assets b. Revenues c. Equity d. Liabilities Page: p22 21. Inventories would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20 22. Trade accounts receivable would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20 23. Cash in bank would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20
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24. Equipment would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20 25. Trade accounts payable would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows 26. Contributed capital would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p20 27. Retained earnings would appear on which financial statement? a. Statement of financial position b. Statement of comprehensive income c. Statement of changes in equity d. Statement of cash flows Page: p24 28. A company has equity of $125 000, liabilities of $80 000. Which of the following is true? a. Total assets cannot be determined from this information b. Total assets are equal to $205 000 c. Total assets are equal to $35 000 d. Revenue is equal to $35 000 Page: p24 29. Which of the following is not true? a. Assets – liabilities = equity b. Liabilities + equity = assets c. Liabilities – equity = assets d. Assets – equity = liabilities Page: p24
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30. During a reporting period, a company’s assets increase by ¥80 000 000. Liabilities decrease by ¥20 000 000. Equity must therefore: a. decrease by ¥100 000 000 b. increase by ¥100 000 000 c. decrease by ¥60 000 000 d. increase by ¥60 000 000 Page: p24 31. During a reporting period, a company’s trade accounts payable increase by €1 200; cash in bank decreased by €800; trade accounts receivable increases by €1 300, Inventories decrease by €200, and loans payable decrease by €500. What is the effect on equity? a. Increases by €400 b. Decreases by €400 c. Increases by €600 d. Decreases by €600 Page: p24 32. During a reporting period, a company’s total assets decrease by £650. Liabilities increase by £300. Contributed capital increases by £200. What is the effect on the amount of retained earnings? a. Increases by £150 b. Decreases by £1150 c. Decreases by £150 d. Increases by £1150 Page: p24 33. A company reports the following amounts for the year ended 31 December 2011: Rent expense $120; revenue $1 500; other comprehensive income $42; cost of goods sold $800; and wages expense $215. How much is total comprehensive income? a. $42 b. $365 c. $407 d. $1542 Page: p28 34. A company reports the following amounts for the year ended 31 December 2011: Rent expense $120; revenue $1 500; total comprehensive income $565; cost of goods sold $800; and wages expense $215. How much is other comprehensive income? a. $200 b. $365 c. $930 d. $2 065 Page: p28
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