Financial Accounting, 10e (Libby)
Chapter 1 Financial Statements and Business Decisions
1) A business entity’s accounting system creates financial accounting reports which are provided
to external decision makers.
2) Business managers utilize managerial accounting reports to plan and manage the daily
operations.
3) Borrowing money is an investing activity.
4) The balance sheet includes assets, liabilities, and stockholders’ equity as of a point in time.
5) Revenue is recognized within the income statement during the period in which cash is
collected.
6) Total assets are $37,500, total liabilities are $20,000 and common stock is $10,000; therefore,
retained earnings are $7,500.
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7) For the current year, net income of Carol Company is $20,000 and dividends declared are
$6,000; therefore, retained earnings have increased $26,000 during the year.
8) The income statement is a measure of an entity’s economic performance for a period of time.
9) The accounting equation states that Assets = Liabilities + Stockholders’ Equity.
10) A decision maker who wants to understand a company’s financial statements must carefully
read the notes to the financial statements because these disclosures provide useful supplemental
information.
11) The financial statement that shows an entity’s economic resources and claims against those
resources is the balance sheet.
12) Stockholders’ equity on the balance sheet includes common stock and retained earnings.
13) The amount of cash paid by a business for dividends would be reported as an operating
activity cash flow on the statement of cash flows.
14) A company’s retained earnings balance increased $50,000 last year; therefore, net income
last year must have been $50,000.
15) Due to the relationships among financial statements, the statement of stockholders’ equity
links the income statement to the balance sheet.
16) The statement of stockholders’ equity explains the change in the retained earnings balance
caused by stockholder investments and dividend declarations.
17) The Financial Accounting Standards Board (FASB) has been given the authority by the
Securities and Exchange Commission (SEC) to develop generally accepted accounting
principles.
18) If a U.S. domestic company does business in a foreign country, the Securities and Exchange
Commission (SEC) requires the use of International Financial Reporting Standards (IFRS) for
the company’s financial reporting in the U.S.
19) In the United States, generally accepted accounting principles are published in the FASB
Accounting Standards Codification.
20) The primary responsibility for the content of the financial statements lies with the external
auditor.
21) An audit is an examination of the financial statements to ensure that they represent what they
claim and to make sure that they are in compliance with generally accepted accounting
principles.
22) The auditor can be held liable for malpractice in situations where the investors suffered
losses while relying on the financial statements.
23) One of the advantages of a corporation when compared to a partnership is the limited
liability of the owners.
24) Which of the following describes the primary objective of the balance sheet?
A) To measure the net income of a business up to a particular point in time.
B) To report the difference between cash inflows and cash outflows for the period.
C) To report the financial position of the reporting entity at a particular point in time.
D) To report the market value of assets, liabilities, and stockholders’ equity at a particular point
in time.
25) During the current fiscal year, a company had revenues of $400,000, cost of goods sold of
$280,000, and an income tax rate of 30 percent on income before income taxes. What was the
company’s current year net income?
A) $120,000
B) $36,000
C) $84,000
D) $400,000
26) Atlantic Corporation reported the following amounts at the end of the first year of operations
Common stock
$
200,000
Sales revenue
$
800,000
Total assets
$
600,000
Dividends declared
$
40,000
Total liabilities
$
320,000
What are the retained earnings of Atlantic at the end of the year, and what amount of expenses
were incurred during the year?
A) Retained earnings are $80,000 and expenses incurred totaled $680,000.
B) Retained earnings are $80,000 and expenses incurred totaled $720,000.
C) Retained earnings are $280,000 and expenses incurred totaled $480,000.
D) Retained earnings are $280,000 and expenses incurred totaled $520,000.
27) Which of the following best describes the balance sheet?
A) It includes a listing of assets at their market values.
B) It includes a listing of assets, liabilities, and stockholders’ equity at their market values.
C) It provides information pertaining to a company’s economic resources and the sources of
financing for those resources.
D) It provides information pertaining to a company’s liabilities for a period of time.
28) Which of the following statements is correct?
A) Assets on the balance sheet include retained earnings.
B) Retained earnings includes common stock.
C) The balance sheet equation states that assets equal liabilities.
D) A corporation’s net income does not necessarily equal its net cash flow from operations.
29) Which of the following correctly describes the various financial statements?
A) An income statement covers a period of time.
B) The cash flow statement is a financial statement at a specific point in time.
C) The balance sheet is a financial statement that covers a period of time.
D) The statement of stockholders’ equity is a financial statement at a specific point in time.
30) Which of the following accounts would not be reported on the balance sheet?
A) Retained earnings.
B) Inventory.
C) Accounts payable.
D) Dividends.
31) Which of the following would not be found on the statement of cash flows?
A) Cost flow from manufacturing activities.
B) Cash flow from operating activities.
C) Cash flow from investing activities.
D) Cash flow from financing activities.
32) Which of the following accounts is not a liability on the balance sheet?
A) Retained earnings.
B) Notes payable.
C) Accounts payable.
D) Interest payable.
33) What financial statement would you look at to determine the dividends declared by a
business?
A) Income statement.
B) Statement of stockholders’ equity.
C) Statement of cash flows.
D) Balance sheet.
34) Which financial statement would you utilize to determine whether a company will be able to
pay liabilities which are due in 30 days?
A) Income statement.
B) Balance sheet.
C) Statement of stockholders’ equity.
D) Statement of cash flows.
35) Which of the following is considered to be an expense on the income statement?
A) Accounts payable.
B) Notes payable.
C) Wages payable.
D) Cost of goods sold.
36) Which of the following best describes assets?
A) They are equal to liabilities minus stockholders’ equity.
B) They are considered to be the economic resources of the business.
C) They are all reported on the balance sheet at their current market value.
D) They equal financing provided by creditors.
37) Which of the following accounts would be reported as assets on the balance sheet?
A) Cash, accounts payable, and notes payable.
B) Cash, retained earnings, and accounts receivable.
C) Cash, accounts receivable, and inventories.
D) Inventories, property and equipment, and common stock.
38) Which of the following statements describes the balance sheet?
A) It reports a company’s revenues and expenses.
B) Assets are generally reported on the balance sheet at the cost incurred to acquire them.
C) Stockholders’ equity includes only retained earnings.
D) It reports a company’s cash flow from operations.
39) Which of the following best describes liabilities and stockholders’ equity?
A) They are the sources of financing an entity’s assets.
B) They are the economic resources owned by a business entity
C) They are reported on the income statement.
D) They both increase when assets increase.
40) Which of the following equations is the balance sheet equation?
A) Assets + Liabilities = Stockholders’ Equity.
B) Assets + Stockholder’s Equity = Liabilities.
C) Assets = Liabilities + Stockholders’ Equity.
D) Assets = Liabilities + Common Stock.
41) Willie Company’s retained earnings increased $20,000 during the current year. What was
Willie’s current year net income or loss given that Willie declared $25,000 of dividends during
this year?
A) Net income was $5,000.
B) Net income was $45,000.
C) Net loss was $45,000.
D) Net loss was $5,000.
42) Which of the following are the components of stockholders’ equity on the balance sheet?
A) Common stock and liabilities.
B) Common stock and assets.
C) Retained earnings and dividends.
D) Common stock and retained earnings.
43) Which of the following is represented by elements of the statement of stockholders’ equity?
A) Common stock reinvested in the business.
B) Revenues plus dividends and expenses.
C) Earnings not distributed to owners.
D) Financing from creditors and stockholders.
44) Which financial statement would you use to determine a company’s earnings performance
during an accounting period?
A) Balance sheet.
B) Statement of stockholders’ equity.
C) Income statement.
D) Statement of cash flows.
45) Which of the following equations best describes the income statement?
A) Assets − Liabilities = Stockholders’ Equity.
B) Net income = Revenues + Expenses.
C) Net income = Revenues − Expenses.
D) Retained earnings = Net Income + Dividends.