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 False

2. Assets on the balance sheet are recorded at market value or replacement cost.
True False

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 o!ners.
True False

". The accounting period in !hich service revenue is recognized #i.e. revenue for services
rendered$ is generally the period in !hich the cash is collected.
True False

%. Total assets are &'(((( total liabilities &"(((( and contributed capital is &2(((()
therefore retained earnings are &1%(((.
True False

*. The payment of a cash dividend to stockholders increases stockholders+ e,uity.
True False

'. The accounting model for the balance sheet is- Assets . /iabilities 0 1tockholders+ 2,uity.
True False

3. A decision maker !ho !ants to understand a company+s financial statements must carefully
read the notes to the financial statements because the notes provide useful supplemental
information.
True False

4. The financial statement that sho!s an entity+s economic resources and its liabilities is the
statement of cash flo!s.
True False

1(. 5ompanies prepare financial statements at the end of each year and more often as needed.
True False

11. A note payable is a borro!ing instrument that generally does not involve the payment of
interest.
True False

12. The amount of cash paid by a business for office utilities !ould be reported on the
statement of cash flo!s as an operating activity.
True False

13. The income statement e,uation is 26penses 7 8evenues 0 9et Income.
True False

1". :enerally accepted accounting principles almost never change once created.
True False

1%. The Financial Accounting 1tandards ;oard #FA1;$ is an agency of the federal
government that establishes generally accepted accounting principles for businesses.
True False

1*. 1ince 2((2 there has been substantial movement to develop international financial
reporting standards.
True False

1'. An audit guarantees that the financial statements are free of all misstatements.
True False

13. An auditor !ho fails to detect a material misstatement of a business+s financial statements
may be sued by anyone !ho suffered a loss from relying on the financial statements.
True False

14. In terms of economic importance partnerships are the dominant form of organization in
the <.1. because of their ease of formation.
True False

2(. =ne of the advantages of a corporation !hen compared to a partnership is the limited
liability of the o!ners.
True False


Multiple Choice Questions

21. The primary purpose of the balance sheet is to
A. measure the net income of a business up to a particular point in time.
;. report the difference bet!een cash inflo!s and cash outflo!s for the period.
5. report the financial position of the reporting entity at a particular point in time.
>. report the current value of the business.

22. The ;eta 5orporation had 2((4 revenues of &2((((( e6penses of &1"(((( and an
income ta6 rate of 3( percent. 9et income after ta6es !ould be
A. &*((((.
;. &13(((.
5. &"2(((.
>. &"3(((.

23. Atlantic 5orporation reported the follo!ing amounts at the end of the first year of
operations- contributed capital &1((((() sales revenue &"((((() total assets &3((((()
&2(((( dividends) and total liabilities &1*((((. 8etained earnings and total e6penses !ould
be
A. retained earnings &"(((( and e6penses &3"((((.
;. retained earnings &*(((( and e6penses &32((((.
5. retained earnings &1"(((( and e6penses &2"((((.
>. retained earnings &1*(((( and e6penses &22((((.

2". The financial statement that reports the financial position of a business is the
A. income statement.
;. balance sheet.
5. statement of cash flo!s.
>. footnotes to the financial statements.

2%. ?hich of the follo!ing reports the cash inflo!s cash outflo!s and change in cash for
period@
A. Income statement.
;. ;alance sheet.
5. 1tatement of cash flo!s.
>. Auditor+s report.

2*. For a business a supplier
A. is a company or individual that o!ns shares of the business.
;. is a company or individual to !hom the business sells goods or services.
5. provides goods and services used by the business.
>. makes loans to the company to help finance its activities.

2'. For a business an e6ample of an internal decision maker is
A. a loan officer at a bank.
;. a supplier !ho sells goods to the company on account.
5. one of the business+s long7term customers.
>. one of the business+s managers.

23. Financial accounting
A. provides information primarily for e6ternal decision makers.
;. is re,uired for corporations but probably !ould not be done by other business entities.
5. provides information primarily for the use of managers of the company.
>. has been practiced in this country for appro6imately the last 1% years.

24. Accounting information developed primarily for internal decision makers is called
A. management accounting.
;. risk accounting.
5. auditing.
>. financial accounting.

3(. ?hat financial statement !ould you look at to determine the dividends declared by a
business@
A. income statement.
;. statement of retained earnings.
5. statement of cash flo!s.
>. balance sheet.

31. ?hich of 5hao+s financial statements !ould you look at to determine !hether 5hao !ill
be able to pay for the goods !hen payment is due in 3( days@
A. income statement.
;. balance sheet.
5. statement of retained earnings.
>. statement of cash flo!s.

32. ?hich of the follo!ing is not considered to be a liability@
A. accounts payable
;. notes payable
5. !ages payable
>. cost of goods sold

33. A business+s assets are
A. e,ual to liabilities minus stockholders+ e,uity.
;. the economic resources of the business.
5. 8eported at current cost.
>. 8eported on the income statement.

3". Assets for a particular business might include
A. cash accounts payable and notes payable.
;. cash retained earnings and accounts receivable.
5. cash accounts receivable and inventory.
>. inventories property and e,uipment and contributed capital.

3%. A business+s balance sheet cannot be used to accurately predict !hat the business might be
sold for because
A. it identifies all the revenues and e6penses of the business.
;. assets are generally listed on the balance sheet at their historical cost not their current
value.
5. it gives the results of operations for the current period.
>. some of the assets and liabilities on the balance sheet may actually be those of another
entity.

3*. /iabilities and stockholders+ e,uity are
A. sources of financing for economic resources.
;. economic resources used by a business entity.
5. increases in assets resulting from profitable operations.
>. sho!n on the income statement in calculating net income.

3'. The accounting e,uation #balance sheet e,uation$ is
A. Assets . /iabilities 0 1tockholders+ e,uity.
;. Assets . 1tockholder+s e,uity 0 /iabilities.
5. Assets 0 /iabilities . 1tockholders+ e,uity.
>. 8evenues 7 26penses 0 9et income.

33. >o!nard ;ank in deciding !hether to make a loan to 8odney 5ompany !ould be
interested in the amount of liabilities 8odney has on its balance sheet because
A. the liabilities represent resources that could be used to repay the loan.
;. if 8odney already has many other obligations it might not be able to repay the loan.
5. e6isting liabilities give an indication of ho! profitable 8odney has been in the past.
>. >o!nard !ould be interested in the amount of 8odney+s assets but not the amount of
liabilities.

34. The t!o categories of stockholders+ e,uity usually found on the balance sheet of a
corporation are
A. contributed capital and long7term liabilities.
;. contributed capital and property plant and e,uipment.
5. retained earnings and notes payable.
>. contributed capital and retained earnings.

"(. ?hich financial statement for a business !ould you look at to determine the company+s
earnings performance during an accounting period@
A. balance sheet.
;. statement of retained earnings.
5. income statement.
>. statement of cash flo!s.

"1. The income statement e,uation is
A. Assets 7 /iabilities 0 1tockholders+ 2,uity.
;. Assets . 1tockholders+ e,uity 0 /iabilities.
5. 9et income 0 8evenues 7 26penses.
>. 26penses 7 9et income 0 8evenues.

"2. Aost businesses earn revenues
A. !hen they collect accounts receivable.
;. through sales of goods or services to customers.
5. by borro!ing money from a bank.
>. by selling shares of stock to stockholders.

"3. Accounts receivable represents-
A. amounts !hich are o!ed to the company by its customers resulting from credit sales.
;. amounts !hich are o!ed by the company to its suppliers for past purchases.
5. amounts !hich have been borro!ed to finance operations.
>. amounts !hich are due to stockholders.

"". Inventories
A. are an asset.
;. result from paying for a product that has no! been sold to a customer.
5. !ill result in a liability being charged sometime in the future.
>. are an e6pense.

"%. The amount of revenue recognized in the income statement by a company that sells goods
to customers !ould be
A. the cash collected from customers during the current period.
;. total sales both cash and credit sales for the period.
5. total sales minus beginning amount of accounts receivable.
>. the amount of cash collected plus the beginning amount of accounts receivable.

"*. =n Banuary 1 2((4 Aammoth 5orporation had retained earnings of &"((((((. >uring
2((4 they reported net income of &'%(((( and dividends of &1(((((. ?hat is the amount
of Aammoth+s retained earnings at the end of 2((4@
A. &"((((((
;. &""%((((
5. &"*%((((
>. &"3%((((

"'. ?hat are the categories of cash flo!s that appear on a statement of cash flo!s@
A. cash flo!s from investing financing and service activities
;. cash flo!s from operating production and internal activities
5. cash flo!s from financing production and gro!th activities
>. cash flo!s from operating investing and financing activities

"3. =n the statement of cash flo!s an amount paid for utilities !ould be classified as
A. an operating activity.
;. an investing activity.
5. a financing activity.
>. a production activity.

"4. A company !ould report a net loss !hen
A. retained earnings decreased due to paying dividends to stockholders.
;. its assets decreased during an accounting period.
5. its liabilities increased during an accounting period.
>. its e6penses e6ceeded its revenues for an accounting period.

%(. The amount of insurance e6pense reported on the income statement is
A. the amount of cash paid for insurance in the current period.
;. the amount of cash paid for insurance in the current period less any unpaid insurance at the
end of the period.
5. the amount of insurance used up #incurred$ in the current period to help generate revenue.
>. an increase in net income.

%1. ?hat events cause changes in a corporation+s retained earnings@
A. 9et income or net loss and declaration of dividends.
;. >eclaration of dividends and issuance of stock to ne! stockholders.
5. 9et income issuance of stock and borro!ing from a bank.
>. >eclaration of dividends and purchase of ne! machinery.

%2. The operating activities section is often believed to be the most important part of a
statement of cash flo!s because
A. it gives the most information about ho! operations have been financed.
;. it sho!s the dividends that have been paid to stockholders.
5. it indicates a company+s ability to generate cash from sales to meet current cash payments
for goods or services.
>. it sho!s the net increase or decrease in cash during the period.

%3. If you !anted to kno! !hat accounting rules a company follo!s related to its inventory
!here !ould you look@
A. the balance sheet
;. the income statement
5. the notes to the financial statements
>. the headings to the financial statements

%". At the beginning of 2((4 ;uck 5orporation had assets of &%"(((( and liabilities of
&32((((. >uring the year assets increased by &%(((( and liabilities decreased by &1((((.
?hat !as the total amount of stockholders+ e,uity at the end of 2((4@
A. &22((((
;. &23((((
5. &33((((
>. &%(((((

%%. The term used for economic resources o!ned by an entity as a result of past transactions
is
A. assets.
;. liabilities.
5. revenues.
>. retained earnings.

%*. Co! are the differing claims of creditors and investors recognized by a corporation@
A. The claims of creditors are liabilities) those of investors are assets.
;. The claims of both creditors and investors are liabilities but only the claims of investors
are considered to be long term.
5. The claims of creditors are liabilities) the claims of investors are recorded as stockholders+
e,uity.
>. The claims of creditors and investors are considered to be essentially e,uivalent.

%'. In !hat order !ould the items on the balance sheet appear@
A. assets retained earnings liabilities contributed capital
;. contributed capital retained earnings liabilities assets
5. assets liabilities contributed capital retained earnings
>. contributed capital assets liabilities retained earnings

%3. ?hich of the follo!ing !ould increase retained earnings@
A. an increase to an e6pense
;. an increase to a revenue
5. a cash dividend
>. issuance of additional common stock

%4. The ending retained earnings balance of Buan+s Ae6ican 8estaurant chain increased by
&3.2 million from the beginning of the year. The company had declared a dividend of &1.3
million during the year. ?hat !as the net income earned during the year@
A. &1.4 million
;. &3.2 million
5. &".% billion
>. There is not enough information given to determine net income.

*(. ?hich of the follo!ing items is an e6pense@
A. Accounts Dayable
;. 5ost of :oods 1old
5. Accounts 8eceivable
>. 1ales 8evenue

*1. ?hich of the follo!ing activities !ould cause investors to overpay for the ac,uisition of a
company from its current o!ners@
A. =verstated accounts payable and understated inventory
;. <nderstated revenues and overstated e6penses
5. <nderstated assets and overstated e6penses
>. =verstated accounts payable and overstated inventory

*2. The government regulatory agency that has the legal authority to prescribe financial
reporting re,uirements for corporations that sell their securities to the public is the
A. FA1;.
;. FT5.
5. 125.
>. AD;.

*3. The part of the federal government that has broad po!ers to determine measurement rules
for financial statements of public companies is
A. the Internal 8evenue 1ervice.
;. the 1ecurities and 26change 5ommission.
5. the :eneral Accounting =ffice.
>. the 1upreme 5ourt.

*". Identify the potential economic conse,uences of the public learning a company did not
follo! generally accepted accounting principles #:AAD$.
A. It could increase the stock price of the company.
;. It could increase management and employee bonuses.
5. It could result in legal liability for the company.
>. It could increase a company+s market share.

*%. The nature of generally accepted accounting principles #:AAD$ is important to large
corporations because
A. a change in :AAD !ill not likely affect the selling price of the company+s stock.
;. a change in :AAD !ill not likely affect the amount of bonuses paid to managers and
employees.
5. a change in :AAD !ill not likely affect a corporation+s competitive position.
>. a change in :AAD !ill likely affect a company+s financial statements

**. The International Accounting 1tandards ;oard has !orked to develop global accounting
standards kno!n as
A. generally accepted accounting principles.
;. globally accepted financial standards.
5. international financial reporting standards.
>. !orld!ide financial standards.

*'. ?hich of the follo!ing statements is true about the price earnings #DE2$ ratio@
A. It is a ratio of importance to creditors.
;. A high DE2 ratio indicates investors have little confidence in the future earnings potential of
the company.
5. The DE2 ratio could be used to appro6imate the value investors !ould be !illing to pay for
the company+s ac,uisition from e6isting o!ners.
>. The DE2 ratio is of value is estimating future dividend payments.

*3. 5harlie 5ompany bought Tolar 5ompany for &2((((((. If Tolar+s income !as
understated by &1(((( and the DE2 ratio is % ho! much should 5harlie have paid for Tolar@
A. &2((((((
;. &2(%((((
5. &14%((((
>. &144((((

*4. ?hat is another name for the DE2 ratio@
A. DriceEearnings margin
;. DriceEearnings multiple
5. DaymentEe,uity margin
>. DaymentEe,uity multiple

'(. An e6amination of the financial statements of a business to ensure that they conform !ith
generally accepted accounting principles is called
A. a certification.
;. an audit.
5. a verification.
>. a validation.

'1. The purpose of an audit is to
A. prove the accuracy of an entity+s financial statements.
;. lend credibility to an entity+s financial statements.
5. endorse the ,uality of leadership that managers provide for a corporation.
>. establish that a corporation+s stock is a sound investment.

'2. ?hy do the managers of a corporation hire independent auditors@
A. To guarantee annual and ,uarterly financial statements.
;. To handle some personnel issues and problems.
5. To audit and report on the fairness of financial statement presentation.
>. To lobby the FA1; for changes in generally accepted accounting principles.

'3. The 5DA+s role in performing audits is important to our society because
A. auditors provide direct financial advice to potential investors.
;. auditors have the primary responsibility for the information contained in financial
statements.
5. auditors issue reports on the accuracy of each financial transaction.
>. an audit of financial statements helps investors and others to kno! that they can rely on the
information presented in the financial statements.

'". ?hich of the follo!ing is 9=T one of the three steps taken by a corporation to ensure the
accuracy of its records@
A. implementing a system of controls
;. hiring an independent auditor
5. hiring a financial analyst
>. forming a committee made up of board of directors+ members to oversee the records

'%. ?hich of the follo!ing groups has primary responsibility for the information contained in
the financial statements@
A. the company+s management
;. the company+s auditor
5. the company+s investors
>. the 125

'*. The private sector body recently given the primary responsibility to !ork out detailed
auditing standards is called the-
A. FA1;.
;. 125.
5. D5A=;.
>. AI5DA.

''. ?hich group maintains the professional code of ethics to !hich 5DAs must adhere@
A. AI5DA
;. FA1;
5. AAA
>. FT5

'3. =ne of the disadvantages of a corporation !hen compared to a partnership is that
A. the stockholders have limited liability.
;. the corporation is treated as a separate legal entity from the stockholders.
5. the corporation and its stockholders are subFect to double ta6ation.
>. the corporation must account for the business+s transactions separate and apart from those
of the o!ners.

'4. ?hich of the follo!ing statements is true about a sole proprietorship@
A. The o!ner and the business are separate legal entities but not separate accounting entities.
;. The o!ner and the business are separate accounting entities but not separate legal entities.
5. the o!ner and the business are separate legal entities and separate accounting entities.
>. most large businesses in this country are organized as sole proprietorships.

3(. For a business organized as a general partnership !hich statement is true@
A. The o!ners and the business are separate legal entities.
;. 2ach partner is potentially responsible for the debts of the business.
5. Formation of a partnership re,uires getting a charter from the state of incorporation.
>. A partnership is not considered to be a separate accounting entity.





5hapter (1 Financial 1tatements and ;usiness >ecisions Ans!er Gey


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

2. Assets on the balance sheet are recorded at market value or replacement cost.
FASE
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 o!ners.
TRUE
". The accounting period in !hich service revenue is recognized #i.e. revenue for services
rendered$ is generally the period in !hich the cash is collected.
FASE
%. Total assets are &'(((( total liabilities &"(((( and contributed capital is &2(((()
therefore retained earnings are &1%(((.
FASE
*. The payment of a cash dividend to stockholders increases stockholders+ e,uity.
FASE
'. The accounting model for the balance sheet is- Assets . /iabilities 0 1tockholders+ 2,uity.
FASE
3. A decision maker !ho !ants to understand a company+s financial statements must carefully
read the notes to the financial statements because the notes provide useful supplemental
information.
TRUE


4. The financial statement that sho!s an entity+s economic resources and its liabilities is the
statement of cash flo!s.
FASE

1(. 5ompanies prepare financial statements at the end of each year and more often as needed.
TRUE

11. A note payable is a borro!ing instrument that generally does not involve the payment of
interest.
FASE
12. The amount of cash paid by a business for office utilities !ould be reported on the
statement of cash flo!s as an operating activity.
TRUE
13. The income statement e,uation is 26penses 7 8evenues 0 9et Income.
FASE
1". :enerally accepted accounting principles almost never change once created.
FASE
1%. The Financial Accounting 1tandards ;oard #FA1;$ is an agency of the federal
government that establishes generally accepted accounting principles for businesses.
FASE
1*. 1ince 2((2 there has been substantial movement to develop international financial
reporting standards.
TRUE
1'. An audit guarantees that the financial statements are free of all misstatements.
FASE

13. An auditor !ho fails to detect a material misstatement of a business+s financial statements
may be sued by anyone !ho suffered a loss from relying on the financial statements.
TRUE

14. In terms of economic importance partnerships are the dominant form of organization in
the <.1. because of their ease of formation.
FASE

2(. =ne of the advantages of a corporation !hen compared to a partnership is the limited
liability of the o!ners.
TRUE


Multiple Choice Questions

21. The primary purpose of the balance sheet is to
A. measure the net income of a business up to a particular point in time.
;. report the difference bet!een cash inflo!s and cash outflo!s for the period.
C! report the financial position of the reporting entity at a particular point in time.
>. report the current value of the business.
22. The ;eta 5orporation had 2((4 revenues of &2((((( e6penses of &1"(((( and an
income ta6 rate of 3( percent. 9et income after ta6es !ould be
A. &*((((.
;. &13(((.
C! &"2(((.
>. &"3(((.
23. Atlantic 5orporation reported the follo!ing amounts at the end of the first year of
operations- contributed capital &1((((() sales revenue &"((((() total assets &3((((()
&2(((( dividends) and total liabilities &1*((((. 8etained earnings and total e6penses !ould
be
A! retained earnings &"(((( and e6penses &3"((((.
;. retained earnings &*(((( and e6penses &32((((.
5. retained earnings &1"(((( and e6penses &2"((((.
>. retained earnings &1*(((( and e6penses &22((((.

2". The financial statement that reports the financial position of a business is the
A. income statement.
B! balance sheet.
5. statement of cash flo!s.
>. footnotes to the financial statements.
2%. ?hich of the follo!ing reports the cash inflo!s cash outflo!s and change in cash for
period@
A. Income statement.
;. ;alance sheet.
C! 1tatement of cash flo!s.
>. Auditor+s report.
2*. For a business a supplier
A. is a company or individual that o!ns shares of the business.
;. is a company or individual to !hom the business sells goods or services.
C! provides goods and services used by the business.
>. makes loans to the company to help finance its activities.
2'. For a business an e6ample of an internal decision maker is
A. a loan officer at a bank.
;. a supplier !ho sells goods to the company on account.
5. one of the business+s long7term customers.
D! one of the business+s managers.

23. Financial accounting
A! provides information primarily for e6ternal decision makers.
;. is re,uired for corporations but probably !ould not be done by other business entities.
5. provides information primarily for the use of managers of the company.
>. has been practiced in this country for appro6imately the last 1% years.
24. Accounting information developed primarily for internal decision makers is called
A! management accounting.
;. risk accounting.
5. auditing.
>. financial accounting.


3(. ?hat financial statement !ould you look at to determine the dividends declared by a
business@
A. income statement.
B! statement of retained earnings.
5. statement of cash flo!s.
>. balance sheet.


31. ?hich of 5hao+s financial statements !ould you look at to determine !hether 5hao !ill
be able to pay for the goods !hen payment is due in 3( days@
A. income statement.
B! balance sheet.
5. statement of retained earnings.
>. statement of cash flo!s.

32. ?hich of the follo!ing is not considered to be a liability@
A. accounts payable
;. notes payable
5. !ages payable
D! cost of goods sold
33. A business+s assets are
A. e,ual to liabilities minus stockholders+ e,uity.
B! the economic resources of the business.
5. 8eported at current cost.
>. 8eported on the income statement.


3". Assets for a particular business might include
A. cash accounts payable and notes payable.
;. cash retained earnings and accounts receivable.
C! cash accounts receivable and inventory.
>. inventories property and e,uipment and contributed capital.

3%. A business+s balance sheet cannot be used to accurately predict !hat the business might be
sold for because
A. it identifies all the revenues and e6penses of the business.
B! assets are generally listed on the balance sheet at their historical cost not their current
value.
5. it gives the results of operations for the current period.
>. some of the assets and liabilities on the balance sheet may actually be those of another
entity.

3*. /iabilities and stockholders+ e,uity are
A! sources of financing for economic resources.
;. economic resources used by a business entity.
5. increases in assets resulting from profitable operations.
>. sho!n on the income statement in calculating net income.
3'. The accounting e,uation #balance sheet e,uation$ is
A. Assets . /iabilities 0 1tockholders+ e,uity.
;. Assets . 1tockholder+s e,uity 0 /iabilities.
C! Assets 0 /iabilities . 1tockholders+ e,uity.
>. 8evenues 7 26penses 0 9et income.
33. >o!nard ;ank in deciding !hether to make a loan to 8odney 5ompany !ould be
interested in the amount of liabilities 8odney has on its balance sheet because
A. the liabilities represent resources that could be used to repay the loan.
B! if 8odney already has many other obligations it might not be able to repay the loan.
5. e6isting liabilities give an indication of ho! profitable 8odney has been in the past.
>. >o!nard !ould be interested in the amount of 8odney+s assets but not the amount of
liabilities.


34. The t!o categories of stockholders+ e,uity usually found on the balance sheet of a
corporation are
A. contributed capital and long7term liabilities.
;. contributed capital and property plant and e,uipment.
5. retained earnings and notes payable.
D! contributed capital and retained earnings.

"(. ?hich financial statement for a business !ould you look at to determine the company+s
earnings performance during an accounting period@
A. balance sheet.
;. statement of retained earnings.
C! income statement.
>. statement of cash flo!s.
"1. The income statement e,uation is
A. Assets 7 /iabilities 0 1tockholders+ 2,uity.
;. Assets . 1tockholders+ e,uity 0 /iabilities.
C! 9et income 0 8evenues 7 26penses.
>. 26penses 7 9et income 0 8evenues.

"2. Aost businesses earn revenues
A. !hen they collect accounts receivable.
B! through sales of goods or services to customers.
5. by borro!ing money from a bank.
>. by selling shares of stock to stockholders.

"3. Accounts receivable represents-
A! amounts !hich are o!ed to the company by its customers resulting from credit sales.
;. amounts !hich are o!ed by the company to its suppliers for past purchases.
5. amounts !hich have been borro!ed to finance operations.
>. amounts !hich are due to stockholders.


"". Inventories
A! are an asset.
;. result from paying for a product that has no! been sold to a customer.
5. !ill result in a liability being charged sometime in the future.
>. are an e6pense.

"%. The amount of revenue recognized in the income statement by a company that sells goods
to customers !ould be
A. the cash collected from customers during the current period.
B! total sales both cash and credit sales for the period.
5. total sales minus beginning amount of accounts receivable.
>. the amount of cash collected plus the beginning amount of accounts receivable.

"*. =n Banuary 1 2((4 Aammoth 5orporation had retained earnings of &"((((((. >uring
2((4 they reported net income of &'%(((( and dividends of &1(((((. ?hat is the amount
of Aammoth+s retained earnings at the end of 2((4@
A. &"((((((
;. &""%((((
C! &"*%((((
>. &"3%((((

"'. ?hat are the categories of cash flo!s that appear on a statement of cash flo!s@
A. cash flo!s from investing financing and service activities
;. cash flo!s from operating production and internal activities
5. cash flo!s from financing production and gro!th activities
D! cash flo!s from operating investing and financing activities
"3. =n the statement of cash flo!s an amount paid for utilities !ould be classified as
A! an operating activity.
;. an investing activity.
5. a financing activity.
>. a production activity.


"4. A company !ould report a net loss !hen
A. retained earnings decreased due to paying dividends to stockholders.
;. its assets decreased during an accounting period.
5. its liabilities increased during an accounting period.
D! its e6penses e6ceeded its revenues for an accounting period.
%(. The amount of insurance e6pense reported on the income statement is
A. the amount of cash paid for insurance in the current period.
;. the amount of cash paid for insurance in the current period less any unpaid insurance at the
end of the period.
C! the amount of insurance used up #incurred$ in the current period to help generate revenue.
>. an increase in net income.
%1. ?hat events cause changes in a corporation+s retained earnings@
A! 9et income or net loss and declaration of dividends.
;. >eclaration of dividends and issuance of stock to ne! stockholders.
5. 9et income issuance of stock and borro!ing from a bank.
>. >eclaration of dividends and purchase of ne! machinery.
%2. The operating activities section is often believed to be the most important part of a
statement of cash flo!s because
A. it gives the most information about ho! operations have been financed.
;. it sho!s the dividends that have been paid to stockholders.
C! it indicates a company+s ability to generate cash from sales to meet current cash payments
for goods or services.
>. it sho!s the net increase or decrease in cash during the period.
%3. If you !anted to kno! !hat accounting rules a company follo!s related to its inventory
!here !ould you look@
A. the balance sheet
;. the income statement
C! the notes to the financial statements
>. the headings to the financial statements

%". At the beginning of 2((4 ;uck 5orporation had assets of &%"(((( and liabilities of
&32((((. >uring the year assets increased by &%(((( and liabilities decreased by &1((((.
?hat !as the total amount of stockholders+ e,uity at the end of 2((4@
A. &22((((
B! &23((((
5. &33((((
>. &%(((((


%%. The term used for economic resources o!ned by an entity as a result of past transactions
is
A! assets.
;. liabilities.
5. revenues.
>. retained earnings.

%*. Co! are the differing claims of creditors and investors recognized by a corporation@
A. The claims of creditors are liabilities) those of investors are assets.
;. The claims of both creditors and investors are liabilities but only the claims of investors
are considered to be long term.
C! The claims of creditors are liabilities) the claims of investors are recorded as stockholders+
e,uity.
>. The claims of creditors and investors are considered to be essentially e,uivalent.

%'. In !hat order !ould the items on the balance sheet appear@
A. assets retained earnings liabilities contributed capital
;. contributed capital retained earnings liabilities assets
C! assets liabilities contributed capital retained earnings
>. contributed capital assets liabilities retained earnings

%3. ?hich of the follo!ing !ould increase retained earnings@
A. an increase to an e6pense
B! an increase to a revenue
5. a cash dividend
>. issuance of additional common stock

%4. The ending retained earnings balance of Buan+s Ae6ican 8estaurant chain increased by
&3.2 million from the beginning of the year. The company had declared a dividend of &1.3
million during the year. ?hat !as the net income earned during the year@
A. &1.4 million
;. &3.2 million
C! &".% billion
>. There is not enough information given to determine net income.

*(. ?hich of the follo!ing items is an e6pense@
A. Accounts Dayable
B! 5ost of :oods 1old
5. Accounts 8eceivable
>. 1ales 8evenue
*1. ?hich of the follo!ing activities !ould cause investors to overpay for the ac,uisition of a
company from its current o!ners@
A! =verstated accounts payable and understated inventory
;. <nderstated revenues and overstated e6penses
5. <nderstated assets and overstated e6penses
>. =verstated accounts payable and overstated inventory
*2. The government regulatory agency that has the legal authority to prescribe financial
reporting re,uirements for corporations that sell their securities to the public is the
A. FA1;.
;. FT5.
C! 125.
>. AD;.

*3. The part of the federal government that has broad po!ers to determine measurement rules
for financial statements of public companies is
A. the Internal 8evenue 1ervice.
B! the 1ecurities and 26change 5ommission.
5. the :eneral Accounting =ffice.
>. the 1upreme 5ourt.

*". Identify the potential economic conse,uences of the public learning a company did not
follo! generally accepted accounting principles #:AAD$.
A. It could increase the stock price of the company.
;. It could increase management and employee bonuses.
C! It could result in legal liability for the company.
>. It could increase a company+s market share.
*%. The nature of generally accepted accounting principles #:AAD$ is important to large
corporations because
A. a change in :AAD !ill not likely affect the selling price of the company+s stock.
;. a change in :AAD !ill not likely affect the amount of bonuses paid to managers and
employees.
5. a change in :AAD !ill not likely affect a corporation+s competitive position.
D! a change in :AAD !ill likely affect a company+s financial statements

**. The International Accounting 1tandards ;oard has !orked to develop global accounting
standards kno!n as
A. generally accepted accounting principles.
;. globally accepted financial standards.
C! international financial reporting standards.
>. !orld!ide financial standards.


*'. ?hich of the follo!ing statements is true about the price earnings #DE2$ ratio@
A. It is a ratio of importance to creditors.
;. A high DE2 ratio indicates investors have little confidence in the future earnings potential of
the company.
C! The DE2 ratio could be used to appro6imate the value investors !ould be !illing to pay for
the company+s ac,uisition from e6isting o!ners.
>. The DE2 ratio is of value is estimating future dividend payments.

*3. 5harlie 5ompany bought Tolar 5ompany for &2((((((. If Tolar+s income !as
understated by &1(((( and the DE2 ratio is % ho! much should 5harlie have paid for Tolar@
A. &2((((((
B! &2(%((((
5. &14%((((
>. &144((((

*4. ?hat is another name for the DE2 ratio@
A. DriceEearnings margin
B! DriceEearnings multiple
5. DaymentEe,uity margin
>. DaymentEe,uity multiple
'(. An e6amination of the financial statements of a business to ensure that they conform !ith
generally accepted accounting principles is called
A. a certification.
B! an audit.
5. a verification.
>. a validation.

'1. The purpose of an audit is to
A. prove the accuracy of an entity+s financial statements.
B! lend credibility to an entity+s financial statements.
5. endorse the ,uality of leadership that managers provide for a corporation.
>. establish that a corporation+s stock is a sound investment.

'2. ?hy do the managers of a corporation hire independent auditors@
A. To guarantee annual and ,uarterly financial statements.
;. To handle some personnel issues and problems.
C! To audit and report on the fairness of financial statement presentation.
>. To lobby the FA1; for changes in generally accepted accounting principles.


'3. The 5DA+s role in performing audits is important to our society because
A. auditors provide direct financial advice to potential investors.
;. auditors have the primary responsibility for the information contained in financial
statements.
5. auditors issue reports on the accuracy of each financial transaction.
D! an audit of financial statements helps investors and others to kno! that they can rely on the
information presented in the financial statements.

'". ?hich of the follo!ing is 9=T one of the three steps taken by a corporation to ensure the
accuracy of its records@
A. implementing a system of controls
;. hiring an independent auditor
C! hiring a financial analyst
>. forming a committee made up of board of directors+ members to oversee the records

'%. ?hich of the follo!ing groups has primary responsibility for the information contained in
the financial statements@
A! the company+s management
;. the company+s auditor
5. the company+s investors
>. the 125

'*. The private sector body recently given the primary responsibility to !ork out detailed
auditing standards is called the-
A. FA1;.
;. 125.
C! D5A=;.
>. AI5DA.

''. ?hich group maintains the professional code of ethics to !hich 5DAs must adhere@
A! AI5DA
;. FA1;
5. AAA
>. FT5

'3. =ne of the disadvantages of a corporation !hen compared to a partnership is that
A. the stockholders have limited liability.
;. the corporation is treated as a separate legal entity from the stockholders.
C! the corporation and its stockholders are subFect to double ta6ation.
>. the corporation must account for the business+s transactions separate and apart from those
of the o!ners.
'4. ?hich of the follo!ing statements is true about a sole proprietorship@
A. The o!ner and the business are separate legal entities but not separate accounting entities.
B! The o!ner and the business are separate accounting entities but not separate legal entities.
5. the o!ner and the business are separate legal entities and separate accounting entities.
>. most large businesses in this country are organized as sole proprietorships.
3(. For a business organized as a general partnership !hich statement is true@
A. The o!ners and the business are separate legal entities.
B! 2ach partner is potentially responsible for the debts of the business.
5. Formation of a partnership re,uires getting a charter from the state of incorporation.
>. A partnership is not considered to be a separate accounting entity.