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Chapter 01 Introducing Financial Statements Answer Key
True / False Questions
1.
Accounting is an information and measurement system that identifies, records, and
communicates relevant, reliable, and comparable information about an organization’s
business activities.
2.
Bookkeeping is the recording of transactions and events and is only one part of
accounting.
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3.
An accounting information system communicates data to help users make better
decisions.
4.
Financial accounting is the area of accounting that serves the decision making needs of
internal users.
5.
Internal operating activities include research and development, distribution, and human
resources.
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6.
The primary objective of managerial accounting is to provide general purpose financial
statements to help external users analyze and interpret an organization’s activities.
7.
External auditors examine financial statements to verify that they are prepared according
to generally accepted accounting principles.
8.
External users include lenders, shareholders, customers, and regulators.
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9.
Regulators often have legal authority over certain activities of organizations.
10.
Internal users include lenders, shareholders, brokers and managers.
11.
Opportunities in accounting include auditing, consulting, market research, and tax
planning.
12.
Identifying the proper ethical path is usually easy.
13.
The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether it
has adopted a code of ethics for its senior financial officers and the contents of that code.
14.
The fraud triangle asserts that the three factors that must exist for a person to commit
fraud are opportunity, pressure, and rationalization.
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15.
The Sarbanes-Oxley Act (SOX) does not require public companies to apply both
accounting oversight and stringent internal controls.
16.
A partnership is a business owned by two or more people.
17.
Owners of a corporation are called shareholders or stockholders.
18.
In the partnership form of business, the owners are called stockholders.
19.
The balance sheet shows a company’s net income or loss due to earnings activities over a
period of time.
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20.
The Financial Accounting Standards Board is the governmental agency that sets both
broad and specific accounting principles.
21.
The business entity principle means that accounting information reflects a presumption
that the business will continue operating instead of being closed or sold.
22.
Generally accepted accounting principles are the basic assumptions, concepts, and
guidelines for preparing financial statements.
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23.
The business entity assumption means that a business is accounted for separately from
other business entities, including its owner or owners.
24.
As a general rule, revenues should not be recognized in the accounting records when
earned, but rather when cash is received.
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25.
Specific accounting principles are basic assumptions, concepts, and guidelines for
preparing financial statements and arise out of long-used accounting practice.
26.
General accounting principles arise from long-used accounting practices.
27.
A sole proprietorship is a business owned by one or more persons.
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28.
Unlimited liability and separate taxation of the business are advantages of a sole
proprietorship.
29.
Understanding generally accepted accounting principles is not necessary to effectively use
and interpret financial statements.
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30.
The International Accounting Standards Board (IASB) has the authority to impose its
standards on companies around the world.
31.
Objectivity means that financial information is supported by independent, unbiased
evidence.
32.
The idea that a business will continue to operate instead of being closed or sold underlies
the going-concern assumption.
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33.
According to the cost principle, it is necessary for managers to report an approximation of
an asset’s market value upon purchase.
34.
The monetary unit assumption means that all companies doing business in the United
States must express transactions and events in U.S. dollars.
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35.
The International Accounting Standards Board (IASB) is the government group that
establishes reporting requirements for companies that issue stock to the public.
36.
A limited liability company offers the limited liability of a partnership or proprietorship and
the tax treatment of a corporation.
37.
The Securities and Exchange Commission (SEC) is a government agency that has legal
authority to establish GAAP.
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38.
The FASB and IASB are attempting to converge and enhance the conceptual framework
that guides standard setting, however the differences between U.S. GAAP and IFRS
greatly outweigh the similarities.
39.
The three major types of business activities are operating, financing, and investing.
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40.
Planning involves defining an organization’s ideas, goals, and actions.
41.
A company’s operating and financing totals are always equal.
42.
Investing activities are the means an organization uses to pay for resources like land,
buildings, and equipment to carry out its plans.
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43.
Investing activities are the acquiring and disposing of resources that an organization uses
to acquire and sell its products or services.
44.
Owner financing refers to resources contributed by creditors or lenders.
45.
Revenues are increases in equity from a company’s sales of products and services to
customers.
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46.
A net loss occurs when revenues exceed expenses.
47.
Net income occurs when revenues exceed expenses.
48.
Liabilities are the owner’s claim on assets.
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49.
Assets are the resources a company owns or controls that are expected to yield future
benefits.
50.
Dividends are expenses.
51.
The accounting equation can be restated as: Assets – Equity = Liabilities.
52.
The accounting equation implies that: Assets + Liabilities = Equity.
53.
Common stock is an increase in equity from a company’s earnings activities.
54.
Every business transaction leaves the accounting equation in balance.