Ch.1 – The Purpose and Use of Financial | Exam Questions - Financial Accounting Tools 8e Canadian Complete Test Bank by Paul D. Kimmel. DOCX document preview.
CHAPTER 1
THE PURPOSE AND USE OF FINANCIAL STATEMENTS
Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes
Item | LO | LOD | Bloom’s | CPA | AACSB | Item | LO | LOD | Bloom’s | CPA | AACSB | Item | LO | LOD | Bloom’s | CPA | AACSB |
True-False Statements | |||||||||||||||||
1. | 1 | E | K | F | AN | 13. | 2 | E | K | F | AN | 25. | 4 | M | K | F | AN |
2. | 1 | E | C | F | AN | 14. | 2 | E | K | F | AN | 26. | 4 | M | K | F | AN |
3. | 1 | E | C | F | AN | 15. | 2 | M | K | F | AN | 27. | 4 | E | K | F | AN |
4. | 1 | E | K | F | AN | 16. | 2 | E | K | F | AN | 28. | 4 | M | K | F | AN |
5. | 1 | E | K | F | AN | 17. | 3 | E | K | F | AN | 29. | 4 | E | K | F | AN |
6. | 1 | E | K | F | AN | 18. | 3 | E | K | F | AN | 30. | 4 | M | C | F | AN |
7. | 1 | M | C | F | AN | 19. | 3 | M | K | F | AN | 31. | 4 | E | C | F | AN |
8. | 1 | M | C | F | AN | 20. | 3 | E | K | F | AN | 32. | 4 | E | K | F | AN |
9. | 1 | M | C | F | AN | 21. | 3 | M | K | F | AN | 33. | 4 | M | C | F | AN |
10. | 1 | M | C | F | AN | 22. | 3 | E | C | F | AN | 34. | 4 | E | K | F | AN |
11. | 1 | M | C | F | AN | 23. | 4 | M | K | F | AN | ||||||
12. | 2 | E | K | F | AN | 24. | 4 | E | K | F | AN | ||||||
Multiple Choice Questions | |||||||||||||||||
35. | 1 | E | K | F | AN | 60. | 3 | E | C | F | AN | 85. | 4 | E | C | F | AN |
36. | 1 | E | K | F | AN | 61. | 3 | E | C | F | AN | 86. | 4 | E | K | F | AN |
37. | 1 | M | K | F | AN | 62. | 3 | M | C | F | AN | 87. | 4 | E | C | F | AN |
38. | 1 | M | K | F | AN | 63. | 3 | M | K | F | AN | 88. | 4 | H | AP | F | AN |
39. | 1 | E | K | F | AN | 64. | 3 | M | K | F | AN | 89. | 4 | M | AP | F | AN |
40. | 1 | E | K | F | AN | 65. | 3 | M | C | F | AN | 90. | 4 | M | AP | F | AN |
41. | 1 | E | K | F | AN | 66. | 3 | E | K | F | AN | 91. | 4 | M | AP | F | AN |
42. | 1 | E | K | F | AN | 67. | 3 | E | C | F | AN | 92. | 4 | M | K | F | AN |
43. | 1 | E | K | F | AN | 68. | 3 | E | C | F | AN | 93. | 4 | M | C | F | AN |
44. | 1 | E | C | F | AN | 69. | 3 | E | K | F | AN | 94. | 4 | M | K | F | AN |
45. | 1 | M | C | F | AN | 70. | 3 | E | K | F | AN | 95. | 4 | E | K | F | AN |
46. | 1 | E | K | F | AN | 71. | 3 | E | K | F | AN | ||||||
47. | 2 | E | K | F | AN | 72. | 3 | E | K | F | AN | ||||||
48. | 2 | M | K | F | AN | 73. | 3 | M | C | F | AN | 96. | 4 | M | K | F | AN |
49. | 2 | M | K | F | AN | 74. | 3 | E | C | F | AN | 97. | 4 | M | C | F | AN |
50. | 2 | M | K | F | AN | 75. | 4 | E | C | F | AN | 98. | 4 | M | K | F | AN |
51. | 2 | E | K | F | AN | 76. | 4 | M | K | F | AN | 99. | 4 | E | K | F | AN |
52. | 2 | E | K | F | AN | 77. | 4 | M | C | F | AN | 100. | 4 | E | C | F | AN |
53. | 2 | E | C | F | AN | 78. | 4 | E | K | F | AN | 101. | 4 | E | K | F | AN |
54. | 2 | E | K | F | AN | 79. | 4 | E | C | F | AN | 102. | 4 | E | C | F | AN |
55. | 2 | M | K | F | AN | 80. | 4 | M | K | F | AN | 103. | 4 | E | C | F | AN |
56. | 2 | E | C | F | AN | 81. | 4 | H | C | F | AN | 104. | 4 | H | C | F | AN |
57. | 2 | M | K | F | AN | 82. | 4 | E | K | F | AN | 105. | 4 | M | C | F | AN |
58. | 3 | E | K | F | AN | 83. | 4 | M | C | F | AN | 106. | 4 | M | C | F | AN |
59. | 3 | M | C | F | AN | 84. | 4 | E | C | F | AN | ||||||
LOD: E = Easy M = Medium H = Hard
Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting CM = Communication
AACSB: AN = Analytic E = Ethics
Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes
(Cont’d)
Item | LO | LOD | Bloom’s | CPA | AACSB | Item | LO | LOD | Bloom’s | CPA | AACSB | Item | LO | LOD | Bloom’s | CPA | AACSB |
Exercises | |||||||||||||||||
107. | 2 | M | C | F | AN | 117. | 4 | E | AP | F | AN | 127. | 4 | E | C | F | AN |
108. | 2 | M | C | F | AN | 118. | 4 | M | AP | F | AN | 128. | 4 | E | C | F | AN |
109. | 3 | M | C | F | AN | 119. | 4 | E | AP | F | AN | 129. | 4 | E | AP | F | AN |
110. | 3 | M | C | F | AN | 120. | 4 | E | C | F | AN | 130. | 4 | E | C | F | AN |
111. | 3 | H | AP | F | AN | 121. | 4 | M | AP | F | AN | 131. | 4 | M | AP | F | AN |
112. | 3 | M | AP | F | AN | 122. | 4 | H | AP | F | AN | 132. | 4 | E | AP | F | AN |
113. | 3 | E | C | F | AN | 123. | 4 | E | C | F | AN | 133. | 4 | M | AP | F | AN |
114. | 4 | E | K | F | AN | 124. | 4 | H | AP | F | AN | 134. | 4 | H | AP | F | AN |
115. | 4 | H | AP | F | AN | 125. | 4 | E | AP | F | AN | ||||||
116. | 4 | M | AP | F | AN | 126. | 4 | E | C | F | AN | ||||||
Matching | |||||||||||||||||
135. | 1-4 | E,M | K | F | AN | ||||||||||||
Short-Answer Essay | |||||||||||||||||
136. | 1 | E | C | F | AN | 140. | 2 | E | K | F | AN | 144. | 4 | E | C | F | AN |
137. | 1 | E | C | F | AN | 141. | 4 | H | C | F | AN | 145. | 4 | M | C | F,CM | AN |
138. | 1 | H | C | F | AN | 142. | 4 | E | C | F | AN | 146. | 4 | E | C | F | AN |
139. | 1,2 | M | AP | F | AN, E | 143. | 4 | M | C | F | AN | ||||||
CPA Questions | |||||||||||||||||
147. | 1 | M | C | F | AN | 149. | 2 | M | K | F | AN | 151. | 4 | M | AN | F | AN |
148. | 2 | M | K | F | AN | 150. | 4 | E | K | F | AN | ||||||
LOD: E = Easy M = Medium H = Hard
Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting CM = Communication
AACSB: AN = Analytic E = Ethics
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type |
Learning Objective 1 | |||||||||||||
1. | TF | 6. | TF | 11. | TF | 39. | MC | 44. | MC | 137. | SAE | ||
2. | TF | 7. | TF | 35. | MC | 40. | MC | 45. | MC | 138. | SAE | ||
3. | TF | 8. | TF | 36. | MC | 41. | MC | 46. | MC | 139. | SAE | ||
4. | TF | 9. | TF | 37. | MC | 42. | MC | 135. | Ma | 147. | CP | ||
5. | TF | 10. | TF | 38. | MC | 43. | MC | 136. | SAE | ||||
Learning Objective 2 | |||||||||||||
12. | TF | 16. | TF | 50. | MC | 54. | MC | 107. | Ex | 140. | SAE | ||
13. | TF | 47. | MC | 51. | MC | 55. | MC | 108. | Ex | 148. | CP | ||
14. | TF | 48. | MC | 52. | MC | 56. | MC | 135. | Ma | 149. | CP | ||
15. | TF | 49. | MC | 53. | MC | 57. | MC | 139. | SAE | ||||
Learning Objective 3 | |||||||||||||
17. | TF | 22. | TF | 62. | MC | 67. | MC | 72. | MC | 111. | Ex | ||
18. | TF | 58. | MC | 63. | MC | 68. | MC | 73. | MC | 112. | Ex | ||
19. | TF | 59. | MC | 64. | MC | 69. | MC | 74. | MC | 113. | Ex | ||
20. | TF | 60. | MC | 65. | MC | 70. | MC | 109. | Ex | 135. | Ma | ||
21. | TF | 61. | MC | 66. | MC | 71. | MC | 110. | Ex | ||||
Learning Objective 4 | |||||||||||||
23. | TF | 34. | TF | 85. | MC | 96. | MC | 114. | Ex | 125. | Ex | 141. | SAE |
24. | TF | 75. | MC | 86. | MC | 97. | MC | 115. | Ex | 126. | Ex | 142. | SAE |
25. | TF | 76. | MC | 87. | MC | 98. | MC | 116. | Ex | 127. | Ex | 143. | SAE |
26. | TF | 77. | MC | 88. | MC | 99. | MC | 117. | Ex | 128. | Ex | 144. | SAE |
27. | TF | 78. | MC | 89. | MC | 100. | MC | 118. | Ex | 129. | Ex | 145. | SAE |
28. | TF | 79. | MC | 90. | MC | 101. | MC | 119. | Ex | 130. | Ex | 146. | SAE |
29. | TF | 80. | MC | 91. | MC | 102. | MC | 120. | Ex | 131. | Ex | 150. | CP |
30. | TF | 81. | MC | 92. | MC | 103. | MC | 121. | Ex | 132. | Ex | 151. | CP |
31. | TF | 82. | MC | 93. | MC | 104. | MC | 122. | Ex | 133. | Ex | ||
32. | TF | 83. | MC | 94. | MC | 105. | MC | 123. | Ex | 134. | Ex | ||
33. | TF | 84. | MC | 95. | MC | 106. | MC | 124. | Ex | 135. | Ma | ||
Note: TF = True-False Ma = Matching CP = CPA Questions
MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Identify the uses and users of accounting information. The purpose of accounting is to provide useful information for decision-making. There are two types of decision makers who use accounting information: internal users and external users. The primary internal users are managers, who work for the business and need internal accounting information to manage and run its operations. The primary external users are investors and lenders and other creditors. Investors (existing and potential shareholders) use accounting information to help decide whether to buy, hold, or sell shares. Lenders (such as bankers) and other creditors (such as suppliers) use accounting information to evaluate the risk of lending money or granting credit to a business. Other external users include non-management employees, customers, regulators, and taxing authorities.
2. Describe the primary forms of business organization. There are three types of business organizations: proprietorships, partnerships, and corporations. A proprietorship is a business owned by one person. A partnership is a business owned by two or more people. A corporation is a separate legal entity whose shares provide evidence of ownership. Corporations can be public, which means their shares trade on a stock exchange, or private, which means their shares are closely held and do not trade on a stock exchange.
Generally accepted accounting principles are a common set of guidelines that are used to record and report economic events. These can differ depending on the form of business organization. Public corporations follow International Financial Reporting Standards (IFRS) and private corporations have the choice of using Accounting Standards for Private Enterprises (ASPE) or IFRS. Proprietorships and partnerships generally use ASPE.
3. Explain the three main types of business activity. Financing activities involve obtaining the necessary funds (through the issue of equity or the assumption of debt) to support the business. Repayments of debt, the declaration and payment of dividends, and share repurchases are also financing activities. Investing activities primarily involve purchasing the long-term assets (such as property, plant, and equipment) that are needed to run the business, but also include the disposition of these items. Operating activities involve putting the resources of the business into action to generate net income. These involve the day-to-day activities of the business as it earns revenues and incurs expenses doing so.
4. Describe the purpose and content of each of the financial statements. The statement of income presents the revenues and expenses of a company for a specific period of time. The statement of changes in equity summarizes the changes in shareholders’ equity that have occurred for a specific period of time including those related to the issue of shares, generation of net income, and distribution of dividends. The statement of financial position reports the assets, liabilities, and shareholders’ equity of a business at a specific date. The statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. Notes to the financial statements add explanatory detail where required. The financial statements are included in an annual report, along with the management discussion and analysis (MD&A), the auditor’s report, and the notes to the financial statements.TRUE-FALSE STATEMENTS
1. Accounting identifies and records economic events of a business.
2. High standards of ethics are not required for preparers of financial information.
3. Accounting information is not important to marketing managers.
4. Authorities, such as the Canada Revenue Agency, want to know whether a business complies with the tax laws.
5. Accounting communicates financial information about a business to both internal and external users.
6. Two internal users of accounting information are investors and managers.
7. Accounting provides financial comparisons of operating alternatives, projections of income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for external users.
Feedback: Accounting provides financial comparisons of operating alternatives, projections of income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for internal users.
8. Companies present summarized financial information in the form of financial statements for both internal and external use.
9. Anyone who works for a company but does not necessarily have access to accounting information to assist them in managing and operating the company is still considered to be an internal user.
Feedback: Anyone who works for a company but does not necessarily have access to accounting information to assist them in managing and operating the company is considered to be an external user.
10. Potential employees who use annual reports to learn about the company and evaluate job prospects are regarded as external users.
11. As labour unions represent employees they are also regarded as internal users.
Feedback: Labour unions who represent employees are regarded as external users.
12. A partnership is a business organized as a separate legal entity.
13. A proprietor has unlimited liability.
14. The liability of corporate shareholders is limited to the amount of their investment.
15. The users of private company financial statements do not have access to financial information beyond that available to the users of public company financial statements.
16. A proprietorship is usually operated by the owner.
17. Expenses are the cost of assets consumed or services used in the process of generating revenue.
18. Assets are resources owned by a business that provide current services or benefits to the business.
19. Economic resources that are owned by a business are called shareholders’ equity.
20. Payments to shareholders are called dividends.
21. Expenses are identified by the type of liability associated with them.
22. Depreciation is the cost of certain long-lived assets allocated to expense for each period.
23. Net income for the period is determined by subtracting total expenses and dividends declared from revenues.
24. Net income is another term for revenue.
25. The issue of shares and distribution of dividends are used in determining net income.
26. Financial statement users are interested in net income because it may be a predictor of future net income.
27. The statement of cash flows shows how cash was used during the period.
28. Claims of creditors and shareholders on the assets of a business are called liabilities.
29. Shareholder’s equity consists of at least two parts: share capital and retained earnings.
30. Any deficiency in cash from operating activities must be made up by issuing shares.
31. The statement of changes in equity is not dependent on the results from the statement of income.
32. The statement of financial position is always the first statement prepared and presented.
33. The reasons for a decrease in cash can be determined by examining the statement of income.
34. A negative balance in retained earnings is called a deficit.
Answers to True-False Statements
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
1. | 7. | 13. | 19. | 25. | 31. | ||||||
2. | 8. | 14. | 20. | 26. | 32. | ||||||
3. | 9. | 15. | 21. | 27. | 33. | ||||||
4. | 10. | 16. | 22. | 28. | 34. | ||||||
5. | 11. | 17. | 23. | 29. | |||||||
6. | 12. | 18. | 24. | 30. |
MULTIPLE CHOICE QUESTIONS
35. The world’s economic systems depend on financial reporting that is
(a) highly transparent.
(b) accurate.
(c) reliable.
(d) all of the above
36. Which of the following is the most appropriate definition of accounting?
(a) the information system that identifies, records, and communicates the economic events of an organization to interested users
(b) a means of collecting information
(c) the interconnected network of subsystems necessary to operate a business
(d) electronic collection, organization, and communication of vast amounts of information
37. Which of the following would not be considered an internal user of accounting data for XYZ Inc.?
(a) the company president
(b) production manager
(c) purchasing clerk
(d) receptionist of the employees’ labour union
38. Which of the following groups uses accounting information primarily to ensure the company is operating within prescribed rules?
(a) taxing authorities
(b) regulatory agencies
(c) labour unions
(d) management
39. Which of the following uses accounting information to determine whether a company can pay its obligations?
(a) shareholders
(b) marketing managers
(c) creditors
(d) Canada Revenue Agency
40. Which of the following uses accounting information to determine whether a company’s net income will result in a share price increase?
(a) shareholders
(b) marketing managers
(c) creditors
(d) Chief Financial Officer
41. Which of the following uses accounting information to determine whether a marketing proposal will be cost effective?
(a) shareholders
(b) marketing managers
(c) creditors
(d) Human Resource managers
42. Which of the following would not be considered an external user of accounting data?
(a) Canada Revenue Agency
(b) management
(c) creditors
(d) customers
43. Which of the following would not be considered an internal user of accounting data?
(a) the president of a company
(b) the controller of a company
(c) a creditor of a company
(d) a sales manager of a company
44. External users want answers to all of the following questions except
(a) Is the company earning satisfactory income?
(b) Will the company be able to pay its debts as they come due?
(c) How many employees can the company hire this year?
(d) How does the company compare in profitability with competitors?
45. Which of the following statements regarding external users is true?
(a) Shareholders and creditors are the only people who need accounting information.
(b) Canada Revenue Agency is the primary external user of financial information.
(c) External users of accounting information include the managers who plan, organize, and run a business.
(d) The information needs and questions of external users vary considerably.
46. An internal user
(a) is not involved in managing a company.
(b) does not have access to internal accounting information.
(c) is any employee in the company.
(d) includes company officers.
47. The reporting entity concept applies to
(a) sole proprietorships only.
(b) partnerships only.
(c) corporations only.
(d) all three forms of business organizations.
48. The proprietorship form of business organization
(a) in most provinces, must have at least two owners.
(b) is often chosen for single owner operated businesses.
(c) is difficult to set up.
(d) is classified as a separate legal entity.
49. A business organized as a corporation
(a) is not a separate legal entity in most provinces.
(b) requires that shareholders be personally liable for the debts of the business.
(c) is owned by its shareholders.
(d) has income tax disadvantages over a proprietorship or partnership.
50. The partnership form of business organization
(a) is a separate legal entity.
(b) is a common form of organization for service-type businesses.
(c) enjoys an unlimited life.
(d) has limited liability.
51. Which form of business would have its shares listed on a stock exchange?
(a) proprietorship
(b) partnership
(c) private corporation
(d) public corporation
52. A business organized as a separate legal entity is a
(a) corporation.
(b) proprietorship.
(c) government unit.
(d) partnership.
53. The concept that economic activity, which can be identified with a particular company must be kept separate and distinct from the owner(s) and from all other economic entities is known as
(a) the separation concept.
(b) the reporting entity concept.
(c) the economic concept.
(d) the business organization concept.
54. An advantage of the corporate form of business is that
(a) it has limited life.
(b) its shareholders’ personal resources are at stake.
(c) its ownership is easily transferable via the sale of shares.
(d) it is simple to establish.
55. A corporation has which of the following set of characteristics?
(a) shareholder control, income tax disadvantages, increased skills and resources
(b) simple to set up and maintains control with founder
(c) harder to raise funds and gives shareholders control
(d) easier to transfer ownership and raise funds, limited liability
56. A small neighbourhood barber shop that is operated by its owner would likely be organized as a
(a) public corporation.
(b) partnership.
(c) private corporation.
(d) proprietorship.
57. Which of the following statements is not true?
(a) Public corporations must use International Financial Reporting Standards.
(b) Private corporations can choose to use either International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE).
(c) Both public and private corporations issue shares.
(d) All private corporations are small.
58. The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is called a(n)
(a) account payable.
(b) account receivable.
(c) revenue.
(d) expense.
59. The right to receive money in the future is called a(n)
(a) account payable.
(b) account receivable.
(c) liability.
(d) deferred revenue.
60. Which of the following is not a principal type of business activity?
(a) operating
(b) investing
(c) financing
(d) marketing
61. Which of the following activities involves raising the necessary funds to support the business?
(a) operating
(b) investing
(c) financing
(d) marketing
62. If a company borrows funds and subsequently ceases operations,
(a) shareholders have immediate claim on the assets of the corporation.
(b) shareholders have no claim on the assets of the corporation.
(c) shareholders have to pay all debt first before claiming the assets of the corporation.
(d) shareholders have only a residual claim on the assets of the corporation.
63. Cost of goods sold is a(n)
(a) liability.
(b) financing activity.
(c) asset.
(d) expense.
64. Allocating and recording the cost of using property, plant & equipment over its useful life is called
(a) allocation expense.
(b) depreciation expense.
(c) a general expense.
(d) amortization expense.
65. Which of the following would be create a cash inflow?
(a) issue common shares
(b) cash dividends paid
(c) repurchase common shares
(d) purchase of equipment
66. The common characteristic possessed by all assets is
(a) long life.
(b) great monetary value.
(c) tangible nature.
(d) future economic benefit.
67. Expenses are incurred
(a) only on rare occasions.
(b) to produce assets.
(c) to produce liabilities.
(d) to generate revenues.
68. The cost of assets consumed or services used is also known as a(n)
(a) revenue.
(b) expense.
(c) liability.
(d) asset.
69. Resources owned by a corporation are referred to as
(a) shareholders’ equity.
(b) liabilities.
(c) assets.
(d) revenues.
70. Debt and obligations of a business are referred to as
(a) assets.
(b) equities.
(c) liabilities.
(d) expenses.
71. Liabilities:
(a) are future economic benefits.
(b) are debts and obligations.
(c) possess service potential.
(d) are things of value owned by a business.
72. Liabilities of a company are owed to
(a) debtors.
(b) owners.
(c) creditors.
(d) shareholders.
73. Which of the following is true regarding the statement of cash flows?
(a) Financing activities for corporations include lending money and buying shares.
(b) Investing activities involve collecting the necessary funds to operate the business.
(c) The purchase of equipment is an example of a financing activity.
(d) Revenues are increases in economic resources that result from a business’s operating activities.
74. When an expense is incurred
(a) an asset increases.
(b) a liability decrease.
(c) an asset will decrease or a liability will increase.
(d) an asset will increase or a liability will decrease.
75. The statement of cash flows does not provide information related to
(a) the cash used during the period.
(b) the change in the cash balance during the period.
(c) the change in income during the period.
(d) where cash came from during the period.
76. Dividends declared are reported on
(a) the statement of income.
(b) the statement of changes in equity.
(c) the statement of financial position.
(d) both the statement of income and statement of financial position.
77. Dividends declared
(a) increase assets.
(b) increase expenses.
(c) decrease revenues.
(d) decrease retained earnings.
78. The financial statement that summarizes the changes in common shares and retained earnings for a specific period of time is the
(a) statement of financial position.
(b) statement of income.
(c) statement of cash flows.
(d) statement of changes in equity.
79. Net income results when
(a) Assets > Liabilities.
(b) Assets < Liabilities.
(c) Revenues > Expenses.
(d) Revenues < Expenses.
80. Retained earnings at the end of the period is equal to
(a) retained earnings at the beginning of the period plus net income minus liabilities.
(b) retained earnings at the beginning of the period plus net income minus dividends declared.
(c) net income for the period.
(d) assets plus liabilities.
81. A company’s policy toward dividends and growth could best be determined by examining the
(a) statement of financial position.
(b) statement of income.
(c) statement of changes in equity.
(d) statement of cash flows.
82. A statement of income
(a) summarizes the changes in retained earnings for a specific period of time.
(b) reports the changes in assets, liabilities, and shareholders’ equity over a period of time.
(c) reports the assets, liabilities, and shareholders’ equity at a specific date.
(d) reports the revenues and expenses for a specific period of time.
83. If the retained earnings account increases from the beginning of the year to the end of the year, then
(a) net income is greater than dividends declared.
(b) a loss is less than dividends declared.
(c) additional investments are less than reported losses.
(d) dividends were received.
84. The statement of changes in equity would not show
(a) the beginning retained earnings balance.
(b) revenues and expenses.
(c) dividends declared.
(d) the ending retained earnings balance.
85. Which financial statement is prepared first?
(a) Statement of financial position
(b) Statement of income
(c) Statement of changes in equity
(d) Statement of cash flows
86. A statement of financial position shows
(a) revenues, liabilities, and shareholders’ equity.
(b) expenses, dividends declared, and shareholders’ equity.
(c) revenues, expenses, and dividends declared.
(d) assets, liabilities, and shareholders’ equity.
87. The accounting equation may be expressed as
(a) Assets = Shareholders’ Equity – Liabilities.
(b) Assets = Liabilities + Shareholders’ Equity.
(c) Assets + Liabilities = Shareholders’ Equity.
(d) Assets + Shareholders’ Equity = Liabilities.
Use the following information for questions 88–89.
Plumbers-on-the-Go Ltd. started the year with total assets of $120,000 and total liabilities of $75,000. During the year, the business recorded $82,000 in service revenues, $45,000 in expenses, and paid dividends of $2,500.
88. Shareholders’ equity at the end of the year was
(a) $79,500.
(b) $45,000.
(c) $82,000.
(d) $77,000.
Feedback: Opening shareholders’ equity: $120,000 – $75,000 = $45,000; Closing shareholders’ equity: $45,000 + $82,000 – $45,000 – $2,500 = $79,500.
89. The net income reported for the year was
(a) $34,500.
(b) $37,000.
(c) $45,000.
(d) $82,000.
Feedback: $82,000 – $45,000 = $37,000
90. If total liabilities increased by $18,000 and shareholders’ equity increased by $21,000 during a period of time, then total assets must change by what amount and direction (increase or decrease) during that same period?
(a) $18,000 increase
(b) $21,000 increase
(c) $39,000 decrease
(d) $39,000 increase
Feedback: $18,000 + $21,000 = $39,000 increase
91. If total liabilities decreased by $134,000 during a period of time and shareholders’ equity increased by $103,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
(a) $134,000 increase.
(b) $103,000 increase.
(c) $31,000 decrease.
(d) $31,000 increase.
Feedback: ($134,000) + $103,000 = ($31,000) decrease
92. The statement of financial position
(a) summarizes the changes in shareholders’ equity for a specific period of time.
(b) reports the changes in assets, liabilities, and shareholders’ equity over a period of time.
(c) reports the assets, liabilities, and shareholders’ equity at a specific date.
(d) presents the revenues and expenses for a specific period of time.
93. Which of the following financial statements is concerned with the company at a point in time?
(a) Statement of financial position
(b) Statement of income
(c) Statement of changes in equity
(d) Statement of cash flows
94. 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.
95. Payments to shareholders are called
(a) expenses.
(b) liabilities.
(c) dividends.
(d) shares.
96. Common shares are reported on
(a) the statement of financial position.
(b) the statement of changes in equity.
(c) both the statement of financial position and the statement of income.
(d) both the statement of changes in equity and the statement of financial position.
97. Shareholders’ equity is usually comprised of
(a) common shares and dividends declared.
(b) common shares and retained earnings.
(c) dividends declared and retained earnings.
(d) net income and retained earnings.
98. Common shares represent
(a) the creditors’ claims on the company.
(b) the total net income of the company to date.
(c) the amount paid by investors for ownership in the company.
(d) the owners’ claims on the company.
99. Retained earnings are
(a) the shareholders’ claim on total assets.
(b) equal to cash.
(c) equal to revenues.
(d) the amount of net income kept in the corporation for future use.
100. Which financial statement would indicate whether the company relies more on debt or on shareholders’ equity to finance its assets?
(a) Statement of cash flows
(b) Statement of changes in equity
(c) Statement of income
(d) Statement of financial position
101. 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.
102. 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 income.
(d) a company's share capital.
103. 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 each statement is transferred to the statement of cash flows.
(d) both contain information for the corporation.
104. 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 income.
(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 net income.
105. Which one of the following statements is false?
(a) The basic accounting equation does not subdivide liabilities into two categories: claims of creditors and claims of the Canada Revenue Agency.
(b) The accounting equation can be expressed as: Assets – Shareholders’ Equity = Liabilities.
(c) The accounting equation can be expressed as: Assets + Liabilities = Shareholders’ Equity.
(d) If the assets owned by a business total $100,000 and liabilities total $52,000, shareholders’ equity must total $48,000.
106. Which of the following is false regarding financial statements?
(a) The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a business for a specific period of time.
(b) The statement of financial position reports assets and claims against those assets at a specific point in time.
(c) The statement of changes in equity covers a different time period than that covered by the statement of income.
(d) Creditors use the statement of financial position as another source of information to determine the likelihood they will be repaid.
Answers to Multiple Choice Questions
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
35. | 47. | 59. | 71. | 83. | 95. | ||||||
36. | 48. | 60. | 72. | 84. | 96. | ||||||
37. | 49. | 61. | 73. | 85. | 97. | ||||||
38. | 50. | 62. | 74. | 86. | 98. | ||||||
39. | 51. | 63. | 75. | 87. | 99. | ||||||
40. | 52. | 64. | 76. | 88. | 100. | ||||||
41. | 53. | 65. | 77. | 89. | 101. | ||||||
42. | 54. | 66. | 78. | 90. | 102. | ||||||
43. | 55. | 67. | 79. | 91. | 103. | ||||||
44. | 56. | 68. | 80. | 92. | 104. | ||||||
45. | 57. | 69. | 81. | 93. | 105. | ||||||
46. | 58. | 70. | 82. | 94. | 106. |
Exercises
Ex. 107
For each of the following identify which combination of characteristics reflect a proprietorship, partnership or corporation and why.
1. economic resources and skills are shared; unlimited liability; income from the company is reported as self-employment income.
2. indefinite life; owner(s) not personally liable for debt of the business.
3. business organization simple to set up; income from the company is reported as self-employment income; unlimited liability.
4. separate legal entity; business organization complex to set up.
5. control over the business; definite life.
Ex. 108
For each of the below statements, indicate whether it is true or false for a private corporation, public corporation, both, or neither:
Private Corp. Public Corp. Both Neither
1. Issues “closely held” shares
2. Shares listed on a stock exchange
3. May follow ASPE when preparing internal
use financial statements
4. Seldom distribute financial statements publicly
5. Required to report on a quarterly basis
6. Can choose to follow IFRS or ASPE
7. Required to follow IFRS
8. Business formed as a corporation
Ex. 109
Classify each of the following items as investing, financing, or operating activity:
1. Cash sale of merchandise
2. Repayment of bank loan
3. Purchase of inventory
4. Sale of equipment for cash
5. Payment of commission to a salesperson
6. Payment of dividends
7. Receipt of interest on accounts receivable
8. Payment for insurance for the current year
9. Purchase of shares in another company as a long-term investment
10. Issue of debt
Ex. 110
Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity.
_____ 1. Cash receipts from customers
_____ 2. Issue of common shares for cash
_____ 3. Payment of cash dividends
_____ 4. Cash purchase of equipment
_____ 5. Cash payments to suppliers
_____ 6. Sale of old machine for cash
Ex. 111
For each of the following transactions, identify how they would be classified on the cash flow statement and whether it is a cash outflow (O) or cash inflow (I). If none are applicable indicate an “X” under the N/A (not applicable) column.
Operating Investing Financing N/A
Cash paid for employee salaries
Cash dividends declared
Repurchased shares
Cash paid for new equipment
Issued bonds
Recorded depreciation expense
Cash received from customers
Paid interest expense on bonds
payable
Cash paid for the purchase of ABC
company shares
Purchased land in exchange for
common shares
Ex. 112
Use the following information to prepare the statement of cash flows for Arlinton Limited for the year ended October 31, 2022:
Collected cash from customers $150,750
Repaid long-term debt 37,500
Cash dividends paid 7,500
Purchased inventory for cash 52,500
Purchased computer equipment for cash 30,000
Cash, November 1, 2021 16,300
Cash, October 31, 2022 31,800
Given the three types of business activities on a cash flow statement, complete the below table by identifying how interest and dividend payments can be treated under IFRS and whether these items are cash inflows or outflows.
ITEM ACTIVITY INFLOW/OUTFLOW
Payment of interest on borrowed funds _____ _____
Payment of dividends _____ _____
Ex. 114
Identify the order in which financial statements must be prepared by placing a 1 for the first statement through to a 4 for the last statement in the below table.
STATEMENT ORDER
Statement of financial position _____
Statement of cash flows _____
Statement of changes in equity _____
Statement of income _____
Ex. 115
The following questions are unrelated:
1. You know that net income is $62,000, opening retained earnings $80,000, dividends declared $25,000, common shares $15,000, current assets $37,000 and total liabilities are $45,000. What is the amount of total assets?
2. Cash provided by operating activities is $38,000, cash used in investing activities is $26,000 and cash used in financing activities is $4,500. The ending cash balance is $18,700. What is the beginning cash balance?
Ex. 116
Prepare an statement of income, a statement of changes in equity, and a statement of financial position for Norman Rae Ltd., a service business, from the items listed below for the month of October, 2022:
Accounts payable $10,000
Accounts receivable 14,000
Cash 10,000
Common shares 28,000
Dividends paid 6,000
Income tax expense 4,500
Equipment 30,000
Supplies 2,800
Supplies expense 3,500
Rent expense 3,000
Retained earnings, October 1 15,000
Salaries expense 7,000
Service revenue 28,500
Utilities expense 700
Ex. 117
Use the following information to calculate for the year ended December 31, 2022:
(a) net income,
(b) ending retained earnings, and
(c) total assets.
Accounts payable 11,000
Accounts receivable 6,000
Bank loan payable 2,000
Cash 20,000
Common shares 10,000
Dividends declared 3,000
Income tax expense 1,500
Equipment 3,500
Operating expenses 10,000
Retained earnings (beginning) 4,000
Revenues 18,500
Supplies $ 1,500
Ex. 118
Use the following information to prepare, in good form, a statement of income, a statement of changes in equity, and a statement of financial position for Geelin Industries Ltd. for the month ended August 31, 2022:
Accounts payable $ 9,375
Accounts receivable 5,500
Bank loan payable 13,750
Cash 58,750
Common shares 94,375
Dividends declared 6,250
Income tax expense 17,375
Insurance expense 2,125
Building 125,000
Retained earnings (beginning) 40,625
Revenues 78,750
Salaries expense 20,625
Supplies 1,250
Ex. 119
Listed below in alphabetical order is accounting information for Mellencamp Corp. at December 31, 2022. Prepare a statement of financial position in good format.
Accounts payable $ 35,625
Accounts receivable 60,000
Building 187,500
Cash 78,750
Common shares 300,000
Land 112,500
Equipment 75,000
Retained earnings 118,750
Ex. 120
Indicate in the space provided by each item whether it would appear on the Income statement (IS), Statement of financial position (SFP), and/or Statement of changes in equity (SCE):
1. Service Revenue 7. Accounts Receivable
2. Utilities Expense 8. Common Shares
3. Cash 9. Equipment
4. Accounts Payable 10. Advertising Expense
5. Supplies 11. Dividends Declared
6. Salaries Expense 12. Notes Payable
Ex. 121
Grayson Inc. was reviewing its business activities at the end of its fiscal year (November 30, 2022) and decided to prepare a statement of changes in equity. At the beginning of the year, its assets were $600,000, liabilities were $150,000, and common shares were $200,000. The net income for the year was $220,000. Dividends of $120,000 were paid during the year.
Instructions
Prepare a statement of changes in equity for the year ended November 30, 2022.
Ex. 122
At September 1, the statement of financial position accounts for GoodFood Restaurant Ltd. were as follows:
Accounts payable $ 3,800
Accounts receivable 1,600
Bank loan payable 46,000
Building 68,000
Cash 5,000
Common shares ?
Equipment 18,700
Land 33,000
Retained earnings 43,200
Supplies 4,600
The following transactions occurred during the next two days:
Shareholders invested an additional $32,000 cash in the business. The accounts payable were paid in full. (No payment was made on the bank loan payable.)
Instructions
Prepare a statement of financial position at September 3, 2022.
Ex. 123
From the following list of selected accounts taken from the records of Smiles Unlimited Clinic Inc., identify those that would appear on the statement of financial position:
(a) Common Shares (f) Accounts Payable
(b) Service Revenue (g) Cash
(c) Land (h) Supplies Expense
(d) Salaries Expense (i) Supplies
(e) Notes Payable (j) Utilities Expense
Ex. 124
One item is omitted in each of the following summaries of statement of financial position and statement of income data for three different corporations, X, Y, and Z.
Instructions
Determine the amounts of the missing items, identifying each corporation by letter.
Corporation
X Y Z
Beginning of the Year:
Assets $400,000 $150,000 $199,000
Liabilities 250,000 105,000 168,000
End of the Year:
Assets 450,000 195,000 195,000
Liabilities 280,000 95,000 169,000
During the Year:
Common shares issued by shareholders ___? 79,000 78,000
Dividends declared 70,000 83,000 __?
Revenue 195,000 __? 187,000
Expenses, including income tax expense 155,000 113,000 185,000
Ex. 125
Calculate the missing items.
Assets = Liabilities + Shareholders’ Equity
$80,000 = $32,000 + (a)
(b) = $28,000 + $90,000
$84,000 = (c) + $65,000
Ex. 126
Identify which of the following accounts appear on a statement of financial position:
- Service revenue
- Cash
- Common shares
- Accounts payable
- Rent expense
- Supplies
- Land
Ex. 127
For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or shareholders’ equity item.
Code
Asset A
Liability L
Shareholders’ Equity SE
1. Rent expense 7. Accounts receivable
2. Equipment 8. Retained earnings
3. Accounts payable 9. Service revenue
4. Common shares 10. Bank loan payable
5. Insurance expense 11. Dividends declared
6. Cash 12. Deferred revenue
Ex. 128
Classify each of these items as an asset (A), liability (L), or shareholders’ equity (SE).
_____ 1. Accounts receivable _____ 6. Cash
_____ 2. Salaries payable _____ 7. Mortgage payable
_____ 3. Common shares _____ 8. Land
_____ 4. Supplies _____ 9. Dividends declared
_____ 5. Retained earnings _____ 10. Supplies expense
Ex. 129
At the beginning of the year, Hanover Limited had total assets of $600,000 and total liabilities of $300,000. Answer the following questions, viewing each situation as being independent of the others.
1. If total assets increased $225,000 during the year, and total liabilities decreased $100,000, what is the amount of shareholders’ equity at the end of the year?
2. During the year, total liabilities increased $315,000 and shareholders’ equity decreased $130,000. What is the amount of total assets at the end of the year?
3. If total assets decreased $60,000 and shareholders’ equity increased $180,000 during the year, what is the amount of total liabilities at the end of the year?
Ex. 130
Rug Repairs Ltd. has the following statement of financial position items:
Accounts Payable
Accounts Receivable
Bank Loan Payable
Cash
Common Shares
Equipment
Retained Earnings
Deferred Revenue
Vehicles
Instructions
Identify which items are
(a) Assets
(b) Liabilities
(c) Shareholders’ Equity
Ex. 131
On June 1, Archipelego Ltd. prepared a statement of financial position that shows the following:
Assets (no cash) $350,000
Liabilities 210,000
Shareholders’ Equity 140,000
Shortly thereafter, all of the assets were sold for cash.
Instructions
How would the statement of financial position appear immediately after the sale of the assets for cash for each of the following cases?
Cash Received for Balances Immediately After Sale
the Assets Assets – Liabilities = Shareholders’ Equity
Case A $360,000 $________ $________ $________
Case B 350,000 ________ ________ ________
Case C 325,000 ________ ________ ________
Ex. 132
Calculate the missing amount in each category of the accounting equation:
Assets Liabilities Shareholders’ Equity
(a) $360,000 $ __? $ 98,000
(b) $178,000 $ 73,000 $?
(c) $ ___ ? $302,000 $310,000
Ex. 133
Use the following information to prepare the statement of cash flows for Santorini Corporation for the year ended December 31, 2022:
Cash received from customers $37,500
Cash dividends paid 4,500
Cash paid to suppliers 15,000
Cash paid for new equipment 45,000
Cash received from lenders 10,500
Cash, January 1, 2022 37,500
Cash, December 31, 2022 21,000
Ex. 134
Cooper Corporation’s shareholders’ equity equals one-fifth of the company’s total assets. The company’s liabilities are $345,000. What is the amount of the company’s shareholders’ equity?
Proprietorship, Partnership, or Corporation | |
(a) The business must use international financial reporting standards (IFRS) for financial reporting. | |
(b) Shares are listed on a public stock exchange. | |
(c) The business life is definite. | |
| |
| |
| |
| |
| |
| |
|
(1), (2), (3), or (4) | |
(a)Common shares issued during the year | |
(b)Revenues | |
(c)Accounts payable | |
(d)Depreciation expense | |
(e)Land | |
(f)Deferred revenue | |
(g)Income tax expense | |
(h)Retained earnings | |
(i)Dividends declared and paid |
(a) Common shares issued | (2), (4) The ending balance of common shares is shown on the statement of financial position, but new issuances are only shown on the statement of cash flows and statement of changes in equity. |
(b) Revenues | (1) Revenues are only reported on the statement of income. |
(c) Accounts payable | (3) Accounts payable is a short-term liability, which is reported on the statement of financial position. |
(d) Depreciation expense | (1) All expenses are only reported on the statement of income. |
(e) Land | (3) Land is a long-lived asset, which is reported on the statement of financial position. |
(f) Deferred revenue | (3) Deferred revenue is a liability. It is money that the company has received for a service it has not yet performed or products that have not yet been provided. Liabilities are reported on the statement of financial position. |
(g) Income tax expense | (1) All expenses are only reported on the statement of income. |
(h) Retained earnings | (2), (3) Retained earnings are shown on both the statement of changes in equity and the statement of financial position. The statement of changes in equity shows the detailed breakdown of how retained earnings is determined, while the statement of financial position only shows its ending balance. |
(i) Dividends declared and paid | (2), (4) Dividends are not an expense. They are a distribution of income to shareholders. They are shown on the statement of changes in equity as well as the statement of cash flows. |
(a) Total expenses |
(b) Net income |
(c) Common shares, beginning of year |
(d) Retained earnings, beginning of year |
(e) Net income |
(f) Total shareholders’ equity, end of year |
(g) Total assets |
(h) Total shareholders’ equity |
(i) Total liabilities and shareholders’ equity |
(a) Total expenses | 5. $993,000 |
(b) Net income | 1. $257,000 |
(c) Common shares, beginning of year | 4. $225,000 |
(d) Retained earnings, beginning of year | 9. $586,000 |
(e) Net income | 1. $257,000 |
(f) Total shareholders’ equity, end of year | 2. $1,260,000 |
(g) Total assets | 11. $3,045,000 |
(h) Total shareholders’ equity | 2. $1,260,000 |
(i) Total liabilities and shareholders’ equity | 11. $3,045,000 |
Document Information
Connected Book
Financial Accounting Tools 8e Canadian Complete Test Bank
By Paul D. Kimmel