1st Edition | Test Bank - Financial Accounting Reporting

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Chapter 1

The Financial Accounting Reporting System

Test Bank

True/False Questions

1. Financial accounting reports are created primarily for use by internal users.

Page: p8

1. External users include investors, managers, employees, lenders, suppliers and other creditors, customers, governments and their agencies and the public.

Page: p9

1. A transaction is an exchange between two entities.

Page: p9

1. In the past, accounting used the double-entry method created in the 15^th century but modern accounting has replaced this with transaction accounting.

Page: p9

1. The owner or owners of a business are a separate entity from the business.

Page: p11

1. The entity concept refers to a business organization in which the individual owner and the business are one and the same.

Page: p13

1. A barter transaction is an exchange that does not involve money.

Page: p13

1. A limited liability company is sometimes referred to as a corporation, joint stock company or share-based entity.

Page: p15

1. 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.

Page: p15

1. A company named Benedikt Motor Works, AG would be a limited liability company registered in either Austria or Germany.

Page: p14

1. A share provides evidence of ownership of a partner’s share in a partnership.

Page: p15

1. Partnerships can be either privately-held or publicly-traded.

Page: p16

1. Alternative names for bourses are stock exchanges, stock markets or equity securities market.

Page: p15

1. One primary advantage of a sole proprietorship is that raising capital is easier than in the other two forms of business organization.

Page: p16

1. An individual who is a sole proprietor has no protection from creditors.

Page: p16

1. Creditors cannot pursue the individual partners in a partnership to collect debts of the partnership. Only the partnership is responsible to the creditors.

Page: p16

1. 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.

Page: p15

1. 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.

Page: p18

1. The statement of comprehensive income answers the question ‘How did the business perform?’

Page: p19

1. The statement of changes in equity answers the question ‘How did the business obtain cash and how was it used?’

Page: p19

1. The statement of cash flows answers the question ‘What resources have the owners invested in the business?’

Page: p19

1. The reporting date for a business entity is the same as the date on the statement of financial position.

Page: p20

1. The reporting date for a business entity is the same as the date on the statement of comprehensive income.

Page: p20

1. The time period assumption requires that businesses prepare financial statements at least once annually.

Page: p20

1. 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.

Page: p20

1. The term ‘financial position’ refers to the relationship between the statement of financial position and the statement of comprehensive income.

Page: p22

1. If equity is deducted from assets, the result is liabilities.

Page: p24

1. In order to be an asset, an item must have some future relevance to the business.

Page: p23

1. Cash is classified as equity on the statement of financial position.

Page: p25

1. If liabilities are $75 000 and equity is $32 000, assets must be $43 000.

Page: p24

1. 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.

Page: p24

1. Total comprehensive income is the total of profit or loss plus other comprehensive income.

Page: p31

1. 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.

Page: p28

1. Revenue is also known as profit or sales.

Page: p25

1. Expenses are outflows of economic benefits during the period arising from the entity’s business activity.

Page: p28

1. The difference between revenue and expenses is profit or loss.

Page: p29

1. Equity has three basic elements: contributed capital, reserves and retained earnings.

Page: p25

1. A dividend is an expense of the business and therefore appears on the statement of comprehensive income.

Page: p31

1. Operating activities and financing activities are sources of cash while investing activities are a use of cash.

Page: p33

1. 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.

Page: p33

1. If a company sells more shares to investors, this would be a source of cash from financing activities.

Page: p33

1. If a company pays a supplier cash, this would be a use of cash from operating activities.

Page: p33

1. If a business repays a loan to a creditor, this would be a source of cash from financing activities.

Page: p33

1. 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.

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1. The four major steps in the accounting process are to analyze transactions, record transactions, prepare financial statements and then close the account.

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1. The reporting decision deals with the question ‘What additional information should be provided to external users?’

Page: p41

1. The recognition decision deals with the question ‘Should a transaction be included?’ in the accounting records.

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1. Generally accepted accounting principles include laws and regulations of governments and commonly accepted accounting practices but do not include accounting standards which are separate.

Page: p43

1. All nations have now use international accounting standards which are referred to as International Financial Reporting Standards (IFRS).

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1. 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.

Page: p45

1. 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.

Page: p56

Multiple Choice Questions

1. Someone who uses accounting information is:
   1. an internal user
   2. an external user
   3. a user
   4. a manager

Page: p7

1. External users include all of the following except:
   1. lenders
   2. customers
   3. managers
   4. employees

Page: p9

1. 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.
   1. Investors
   2. Lenders
   3. Suppliers and other trade creditors
   4. Customers

Page: p9

1. Accounting accounts for which of the following?
   1. Any information desired by external users
   2. Only financial information desired by external users
   3. All financial transactions except those involving barter transactions
   4. Financial transactions including barter transactions

Page: p8

1. 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:
   1. of the form of business organization
   2. of the entity concept
   3. the business is profit-making
   4. Anzhela began the business

Page: p13

1. 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.
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p15

1. Which of the following business forms has the advantage of being able to operating continuously even though ownership changes?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p15

1. Which of the following business forms has the advantage of protecting the owners from business creditors?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p15

1. Which of the following forms of business has the advantage of simplicity?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p16

1. Which of the following forms of business does not protect owners from business creditors?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and b

Page: p16

1. Which of the following forms of business would result in the termination of the business if the ownership changes?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and b

Page: p16

1. Which of the following forms of business can engage in transactions on its own cognizance?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p15

1. Which of the following forms of business engages in transactions in the name of the owners rather than the business itself?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and b

Page: p16

1. Which of the following forms of business organization can be publicly-traded?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. Both a and c

Page: p15

1. Which of the following forms of business organization can be privately owned?
   1. Partnership
   2. Sole proprietorship
   3. Limited liability company
   4. All can be privately owned

Page: p15

1. Which of the following financial statements answers the question ‘How did the business perform”?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p19

1. Which of the following financial statements answers the question ‘What resources have the owners invested in the business”?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p19

1. Which of the following is true about the time period assumption?
   1. It allows reporting periods to be broken into specific time periods
   2. It requires that business report their financial results at least once annually
   3. It requires businesses to choose whether to report their financial results once per year, quarter or month
   4. It requires businesses to report their financial results at least monthly

Page: p20

1. Which of the following financial statements reports financial results as of a single date?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Which of the following items would not appear on the statement of financial position?
   1. Assets
   2. Revenues
   3. Equity
   4. Liabilities

Page: p22

1. Inventories would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Trade accounts receivable would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Cash in bank would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Equipment would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Trade accounts payable would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows
2. Contributed capital would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p20

1. Retained earnings would appear on which financial statement?
   1. Statement of financial position
   2. Statement of comprehensive income
   3. Statement of changes in equity
   4. Statement of cash flows

Page: p24

1. A company has equity of $125 000, liabilities of $80 000. Which of the following is true?
   1. Total assets cannot be determined from this information
   2. Total assets are equal to $205 000
   3. Total assets are equal to $35 000
   4. Revenue is equal to $35 000

Page: p24

1. Which of the following is not true?
   1. Assets – liabilities = equity
   2. Liabilities + equity = assets
   3. Liabilities – equity = assets
   4. Assets – equity = liabilities

Page: p24

1. During a reporting period, a company’s assets increase by ¥80 000 000. Liabilities decrease by ¥20 000 000. Equity must therefore:
   1. decrease by ¥100 000 000
   2. increase by ¥100 000 000
   3. decrease by ¥60 000 000
   4. increase by ¥60 000 000

Page: p24

1. 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?
   1. Increases by €400
   2. Decreases by €400
   3. Increases by €600
   4. Decreases by €600

Page: p24

1. 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?
   1. Increases by £150
   2. Decreases by £1150
   3. Decreases by £150
   4. Increases by £1150

Page: p24

1. 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?
   1. $42
   2. $365
   3. $407
   4. $1542

Page: p28

1. 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?
   1. $200
   2. $365
   3. $930
   4. $2 065

Page: p28

1. Which of the following items would be reported in the statement of changes in equity?

1- A change in other comprehensive income

2- The beginning balance in equity

3- A change in the amount of assets during the reporting period

4- A change in the amount of liabilities during the reporting period

5- Profit for the reporting period

6- Dividends paid during the reporting period

7- Increases and decreases in contributed capital during the reporting period

• 1. 1, 2, 5, 6 and 7 only
  2. 1, 3, 4, 6 and 7 only
  3. 2, 5, 6 and 7 only
  4. All items are reported in the statement of changes in equity

Page: p28

1. An investor purchases shares in privately-held limited liability company. For the company, this is a:
   1. source of cash from an investing activity
   2. source of cash from a financing activity
   3. use of cash from an investing activity
   4. use of cash from a financing activity

Page: p33

1. A company collects a trade accounts receivable balance owed by a customer. For the company, this is a:
   1. Source of cash from a financing activity
   2. Use of cash from a financing activity
   3. Source of cash from an operating activity
   4. Use of cash from an operating activity

Page: p33

1. A company borrows €1 000 000 to be repaid over the next two years. The cash will be used to buy more inventory to sell to customers and to purchase some additional display equipment for a retail store. For the company, this is a:
   1. Source of cash for operating activity
   2. Use of cash for operating activity
   3. Source of cash for financing activity
   4. Source of cash for investing activity

Page: p33

1. A company reported the following amounts on the statement of cash flows for the year ended 31 December 2010. Beginning cash balance $410; use of cash from investing activity 130; use of cash from financing activity $112 and source of cash from operating activity $200. Which of the following statements is correct?
   1. The ending cash balance for the reporting period was $452
   2. The cash balance increased by $42 during the reporting period
   3. The cash balance decreased by $42 during the reporting period
   4. The ending cash balance for the reporting period was negative

Page: p33

1. The question of whether a transaction should be included in accounting refers to:
   1. Reporting
   2. Recognition
   3. Disclosure
   4. Measurement

Page: p41

1. The question of what monetary amount is associated to a transaction refers to:
   1. Reporting
   2. Recognition
   3. Disclosure
   4. Measurement

Page: p41

1. The question of whether the results of certain transactions should be reported separately in the financial statements refers to:
   1. reporting
   2. recognition
   3. disclosure
   4. measurement

Page: p41

1. The question of what additional information should be provided to external users refers to:
   1. reporting
   2. recognition
   3. disclosure
   4. measurement

Page: p41

Essay Question

1. Define generally accepted accounting principles and accounting standards. Discuss the difference between the two.