Chapter 1
1. The managers of a business prepare financial statements to present meaningful information
about that business’s activities to external users,
2. The independent external auditors of a business prepare financial statements to present meaningful
information about that business’s activities to external users,
3. The activities of a business include establishing goals and strategies, obtaining financing, making investments
and conducting operations.
4. Goals are the end results toward which the firm directs its energies, and strategies are the
means for achieving those results.
5. Each firm makes financing decisions about the proportion of funds to obtain from owners,
long-term creditors, and short-term creditors.
6. A firm makes investments to obtain productive capacity to carry out its business activities.
7. Patents, licenses, and other contractual rights are tangible, in the sense that the rights have a physical
existence.
8. Management operates the productive capacity of the firm to generate earnings.
9. Firms communicate the results of their business activities in the annual report to shareholders.
10. Assets are economic resources with the potential to provide future economic benefits to
a firm.
11. Liabilities are creditors’ claims for funds, usually because they have provided funds, or
goods and services, to the firm.
12. Retained earnings represent the net assets (total assets – total liabilities) a firm derives
from its earnings that exceed the dividends
13. The amounts of individual assets that make up total assets, represented by accounts receivable, inventories,
equipment, and other assets, reflect a firm’s financing decisions, each measured at the balance sheet date.
14. The mix of liabilities plus shareholders’ equity reflects a firm’s investing decisions, each measured at the
balance sheet date.
15. Current liabilities represent obligations a firm expects to pay within one year.
16. Current assets, typically held and used for several years, include land, buildings,
equipment, patents; and long-term investments in securities.
17. Current liabilities and shareholders’ equity are sources of funds where the supplier of
funds does not expect to receive them all back within the next year.
18. The historical amount reflects the acquisition cost of assets or the amount of funds originally obtained from
creditors or owners.
19. To assist users of financial reports in making over-time comparisons, both U.S. GAAP and IFRS require
firms to include results for multiple reporting periods in each report.
20. The income statement, also called the statement of financial position, provides information, at
a point in time, on the firm’s productive resources and the financing used to pay for those
resources.
21. The _____ shows assets, liabilities and shareholders’ equity as of a specific date, similar to a snapshot.
22. The _____ report changes in assets and liabilities over a period of time, similar to a motion picture.
23. Who evaluates the accounting system, including its ability to record transactions properly and its operational
effectiveness, and also determines whether the financial reports prepared conform to the requirements of the
applicable authoritative guidance?
24. Who provides an opinion that reflects their professional conclusions regarding the financial statements and
for most publicly traded firms in the U.S. also provides a separate opinion on the effectiveness of the firm’s
internal controls over financial reporting?
25. Who under the oversight of the firm’s governing board, prepares the financial statements?
26. The number of days between when the employees and suppliers provide goods and services and when the
firm pays cash to those employees and suppliers is called the _____ period.
27. _____ represent amounts owed by customers for goods and services they have already received. The
customer, therefore, has the benefit of the goods and services before it pays cash.
28. Investments in long-lived assets, with useful lives (or service lives) that can extend for several or many
years such as land, buildings, and equipment represent _____ capital.
29. A _____ year ends on a date that is determined by the firm, perhaps based on its business model (for
example, many retailers choose the end of January).
30. Most firms report the amounts in their financial statements using _____.
31. A _____ item is expected to result in a cash receipt or a cash payment within approximately one year or
less.
32. A(n) _____ item is expected to generate cash over periods longer than a year or use cash over periods longer
than a year.
33. _____ are the amounts at which items entered the firm’s balance sheet and reflect economic conditions at
the time the firm obtained assets or obtained financing.
34. _____ reflect values at the balance sheet date, so they reflect that day’s economic conditions.
35. An income statement connects two successive _____ through its effect on retained earnings.
36. Net income that is not paid to shareholders as dividends increases _____.
37. A _____ connects two successive balance sheets because it explains the change in cash from operating,
financing, and investing activities.
38. The _____ shows the relation between net income and cash flows from operations, and changes in assets
and liabilities that involve cash flows.
39. The _____ is the government agency that enforces the securities laws of the U.S., including those that apply
to financial reporting.
40. The _____ is the private-sector financial accounting standard setter in the U.S., but has no enforcement
powers.
41. _____ is a private-sector financial accounting standard setter that promulgates accounting standards that are
required or permitted to be used in over 100 countries, but has no enforcement powers.
42. _____ must be used by U.S. Securities and Exchange Commission (SEC) registrants.
43. The purpose of the conceptual framework developed by the Financial Accounting Standards Board (FASB)
is to guide?
44. The _____ matches revenues with the costs associated with earning those revenues and is not sensitive to
the timing of expenditures.
45. Revenues are:
46. Expenses are:
47. Which of the following are true regarding setting goals and strategies for a charitable organization?
48. Which of the following are true regarding the financing of a charitable organization?
49. Which of the following is true regarding the investing activities of charitable organizations?
50. Which of the following is not true regarding the operations of a charitable organization?
51. The balance sheet of Allhear, a communications firm, for the year ended December 31, 2009, showed
current assets of $20 million, current liabilities of $16 million, shareholders’ equity of $17 million, and
noncurrent assets of $29 million.
Compute the amount of noncurrent liabilities on Allhear’s balance sheet at the end of 2009.
52. The balance sheet of Old Gold Mines, a gold mining company, for the year ended June 30, 2009, showed
current assets of $6 million, noncurrent assets of $49 million, noncurrent liabilities of $14 million, and current
liabilities of $4 million. Compute the amount of shareholders’ equity on Old Gold Mines’ balance sheet at the
end of 2009.
53. The income statement of Ride-on Motors, an automotive manufacturer, for the year ended December 31,
2009, reported revenues $7,400 million and cost of sales of $6,000 million. In addition, it reported other
operating expenses of $900 million, a loss of $2 million on the sale of a business, and net financing income of
$200 million. Tax expense for the year was $100 million. Compute the amount of net income or loss that
Ride-on Motors reported for 2009.
54. The income statement of Peoples Motors Corporation, a U.S. automotive manufacturer, for the year ended
December 31, 2009, reported revenues of $207,000, cost of sales of $165,000, other operating expenses,
including income taxes of $50,000, and net financing income, after taxes, of $6,000. Compute the amount of
net income or loss that Peoples Motors reported for 2009.
55. The balance sheet of Old Gold Mines for the year ended June 30, 2009, showed a balance in retained
earnings of $6,000 million at the end of 2009 and $4,600 million at the end of 2008. Net income for 2009 was
$2,400, million. Compute the amount of dividends Old Gold Mines declared during 2009.
56. The balance sheet of Copper Industries, a producer of copper, showed retained earnings of $26,000 million
at March 31, 2008. At March 31, 2009, the balance in retained earnings was $70,500 million . Copper declared
dividends during the year ended March 31, 2009, of $3,500 million . Compute Copper’s net income for the year
ended March 31, 2009 (fiscal 2008).
57. The statement of cash flows for Goal Corporation, a U.S. retailer, for the year ended February 2, 2009
(fiscal 2008), showed a net cash inflow from operations of $4,100 million, a net cash outflow for investing of
$6,200 million, and a net cash inflow for financing of $3,700 million. The balance sheet at February 3, 2008,
showed a balance in cash of $800 million.. Compute the amount of cash on the balance sheet at February 2,
2009.
58. The statement of cash flows for Lights-On, a leading electric utility for the year ended December 31, 2009,
showed a net cash inflow from operations of $427,000 million and a net cash outflow for financing of $21,800
million. The comparative balance sheets showed a balance in cash of $32,700 at December 31, 2008, and
$101,200 at December 31, 2009. Compute the net amount of cash provided or used by Lights–On’s investing
activities for 2009.
59. Broke Inc is experiencing a cash flow problem finding that its cash decreases, even though net income
increases. Which of the following is a possible reason?
60. The income statement and statement of cash flows provide information about the _____, respectively, of a
firm during a period.
61. Which of the following is true?
62. To reduce the lag on collection of accounts receivable, a company might
63. To increase cash flow, a manufacturer might:
64. What inventory system requires ordering raw materials only when needed in production and manufacturing
products only to customer orders?
65. To increase the margin between selling price and manufacturing cost, a manufacturing company might:
66. The managers of a business prepare financial statements to present meaningful information about that
business’s activities to external users. Who are the external users?
67. Which of the following is not a business:activity?
68. _____ are the end results toward which the firm directs its energies.
69. _____ are the means for achieving goals.
70. Management, under the oversight of the firm’s governing board (or boards), sets the firm’s strategies. Such
strategies might include:
71. Examples of factors from the operating environment that would affect a firm’s goals and
strategies include which of the following?
72. To carry out their plans, firms require financing, that is, funds from owners and creditors. Owners provide
funds to a firm and in return receive ownership interests. For a corporation, the ownership interests are:
73. To carry out their plans, firms require financing, that is, funds from owners and creditors. When the firm
raises funds from owners, which of the following is true?
74. When creditors provide funds to a firm, which of the following is true?
75. A firm makes investments to obtain productive capacity to carry out its business activities.
Investing activities involve acquiring all of the following except:
76. Management operates the productive capacity of the firm to generate earnings. Operating activities include
the following except for:
77. Firms communicate the results of their business activities in the _____.
78. In the United States, regulatory requirements applicable to publicly traded firms require the inclusion
of a(n) _____, in which management discusses operating results, liquidity (sources and uses of cash), capital
resources, and reasons for changes in profitability and risk during the past year.
79. _____ are economic resources with the potential to provide future economic benefits to a firm.
80. _____ are creditors’ claims for funds, usually because they have provided funds, or goods and services, to
the firm.
81. _____ measure the inflows of assets (or reductions in liabilities) from selling goods and providing services
to customers.
82. _____ measure the outflow of assets (or increases in liabilities) used in generating revenues.
83. _____ reports information about cash generated from (or used by) operating, investing, and financing
activities during specified time periods.
84. The financial statements present aggregated information, for example, the total amount of land, buildings,
and equipment. Financial reports provide more detail for some of the items reported in the financial statements,
and they provide additional explanatory material to help the user to understand the information in the financial
statements. This information appears in _____ that are an integral part of the financial reports.
85. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should be pertinent to the decisions made by users of financial
statements, in the sense of having the capacity to affect their resource allocation decisions?
86. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should represent what it is supposed to represent, in the sense that the
information should correspond to the phenomenon being reported, and it should be verifiable and free from
bias?
87. FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
qualitative characteristics of accounting information. Which of the qualitative characteristics of accounting
information holds that the information should facilitate comparisons across firms and over time.
88. Concerns over the quality of financial reporting have led, and continue to lead, to government initiatives in
the United States. For example, the _____, among other things, established the Public Company Accounting
Oversight Board (PCAOB), which is responsible for monitoring the quality of audits of SEC registrants. This
Act requires the PCAOB to register firms conducting independent audits of SEC registrants; establish or adopt
acceptable auditing, quality control, and independence standards; and provide for periodic inspections of the
registered auditors.
89. The _____ is an independent accounting standard-setting entity with 14 voting members from a number of
countries.
90. Regulatory bodies generally require firms whose securities trade publicly (for example, common shares) to
obtain an audit of their financial reports by _____.
91. An audit by an independent external auditor usually does not involve which of the following?
92. In 2007 the U.S. SEC adopted new rules that permit _____ that list and trade their securities in the United
States to apply IFRS in their financial reports filed with the SEC without any reconciliation to U.S. GAAP.
93. _____ items are depicted in words and numbers on the face of the financial statements, with amounts
included in the totals.
94. _____ refers to converting a noncash item to cash, for example, collecting an account receivable.
95. _____ captures the qualitative notion that financial reports need not include items that are so small as to be
meaningless to users of the reports.
96. The cash basis of accounting, as a basis for measuring performance for a particular accounting period, has
which of the following weakness(es)?