Financial Accounting, 5e (Spiceland)
Chapter 1 A Framework for Financial Accounting
1) Accounting is a system of maintaining records of a company’s operations and communicating
that information to decision makers.
2) Accounting information is used by investors to decide whether to invest in a company’s stock.
3) Accounting information is used by creditors to decide whether to invest in a company’s stock.
4) The primary functions of financial accounting are to measure business activities of a company
and to communicate those measurements to internal parties for decision-making purposes.
5) Financing activities are transactions involving external sources of funding.
6) Investing activities include the purchase and sale of long-term resources.
7) Operating activities include transactions that relate to the primary operations of the company.
8) A corporation is an entity that is legally separate from its owners.
9) Cash, inventory for sale to customers, supplies, and buildings are examples of liabilities.
10) Amounts owed to suppliers, employees, the government in the form of taxes, and utility
companies are examples of liabilities.
11) If total assets of a company equal $12,000 and total stockholders’ equity equals $4,000, then
total liabilities equal $8,000.
12) If total liabilities of a company equal $16,000 and total stockholders’ equity equals $9,000,
then total assets equal $7,000.
13) The accounting equation shows that a company’s resources equal creditors’ and owners’
claims to those resources.
14) The costs related to rent, utilities, and salaries in the current reporting period are examples of
liabilities.
15) The difference between revenues and expenses is referred to as net income or net loss.
16) If a company reports revenues of $17,000 and expenses of $12,000, then net income equals
$5,000.
17) Expenses include a company’s costs of providing products and services to customers, as well
as cash payments to its stockholders.
18) Dividends represent a return of the company’s profits to its owners, the stockholders.
19) One of the differences between a partnership and a corporation is that owners of a
partnership have limited liability.
20) Limited liability means the stockholders are not held personally responsible for the financial
obligations of the corporation.
21) A company’s resources include assets and stockholders’ equity.
22) Double taxation refers to a corporation’s income being taxed twice—first when the company
pays corporate income taxes on income it earns, and then again when stockholders pay personal
income taxes when the company distributes that income as dividends to them.
23) Financial statements are periodic reports published by the company for the purpose of
providing information to managers.
24) The balance sheet is a financial statement that reports the company’s revenues and expenses
over an interval of time.
25) The statement of stockholders’ equity is a financial statement that summarizes the changes in
stockholders’ equity over an interval of time.
26) The two primary components of stockholders’ equity include common stock and revenue.
27) Common stock represents an external source of stockholders’ equity, whereas retained
earnings represents an internal source.
28) Retained earnings represents the cumulative amount of net income, over the life of the
company, which has not been distributed to stockholders as dividends.
29) Dividends are considered an expense in running the business and reported in the income
statement.
30) All cash transactions reported in the statement of cash flows are classified as (1) operating
activities, (2) investing activities, or (3) financing activities.
31) Investing cash flows generally include cash receipts and cash payments for transactions
involving revenue and expense activities during the period.
32) Operating cash flows generally include cash transactions for the purchase and sale of
investments and long-term assets.
33) Financing cash flows include cash transactions with lenders, such as borrowing money and
repaying debt, and with stockholders, such as issuing stock and paying dividends.
34) Any transaction that affects the income statement ultimately affects the balance sheet
through the balance of retained earnings.
35) Financial accounting has an impact on everyday business decisions as well as wide-ranging
economic consequences.
36) Investors and creditors rely heavily on financial accounting information in making
investment and lending decisions.
37) In general, if a company’s net income is increasing, so will its stock price.
38) The rules of financial accounting are called Generally Accepted Accounting Principles
(GAAP).
39) Financial accounting and reporting standards in the United States are established primarily
by the Financial Accounting Standards Board (FASB).
40) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore
investor confidence in financial accounting following the stock market crash in 1929.
41) The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the
power to require companies that publicly trade their stock to prepare periodic financial
statements for distribution to investors and creditors.
42) The role of independent auditors is to help ensure that management has in fact appropriately
applied Generally Accepted Accounting Principles (GAAP) in preparing the company’s financial
statements.
43) Auditors are trained individuals hired by a company as an independent party to express a
professional opinion of the fairness of that company’s financial statements.
44) The primary objective of financial accounting is to provide useful information to managers in
making decisions.
45) Public accounting firms are professional service firms that traditionally have focused on
three areas: auditing, tax preparation/planning, and business consulting.
46) The Financial Accounting Standards Board’s conceptual framework does not prescribe
Generally Accepted Accounting Principles. It provides an underlying foundation for the
development of accounting standards and interpretation of accounting information.
47) The two fundamental decision-specific qualitative characteristics that make accounting
information useful are comparability and understandability.
48) Relevance refers to accounting information having confirmatory value and/or predictive
value.
49) To be a faithful representation of business activities, accounting information should be
complete, neutral, and free from error.
50) The periodicity assumption indicates that the economic life of an enterprise can be divided
into artificial time periods for financial reporting purposes.
51) The economic entity assumption states that in the absence of information to the contrary, the
business entity will continue to operate indefinitely.
52) What is the primary purpose of financial accounting?
A) Determine the amount of tax liability owed to the government.
B) Communicate business activities to internal management.
C) Measure business activities and communicate those measures to external users to make
decisions.
D) Measure the profitability of the company in order to assist employees with making decisions.
53) The primary purpose(s) of financial accounting is(are) to:
A) Measure and record business transactions.
B) Prepare federal and state tax returns.
C) Communicate financial results to investors and creditors.
D) Both measure and communicate financial information to external parties.
54) Which definition below best describes financial accounting?
A) Process of measuring income taxes owed to the government.
B) System of maintaining communication with a company’s customers and suppliers.
C) Procedures designed to enhance the company’s image to potential investors.
D) Measuring business activities and communicating them to external parties.
55) Financial accounting does not deal with which of the following?
A) Measuring a company’s economic activity.
B) Providing information to internal users.
C) Preparing financial reports.
D) Communicating financial results to investors.
56) Financial accounting:
A) Provides information primarily for external decision makers.
B) Provides information primarily for a company’s employees.
C) Provides information primarily for the use of managers of the company.
D) Is primarily used to compute a company’s tax obligation.
57) The primary focus for financial accounting information is to provide information useful for:
Investing decisions
Credit decisions
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
A) Investing decisions and credit decisions.
B) Investing decisions but not credit decisions.
C) Credit decisions but not investing decisions.
D) Neither investing decisions nor credit decisions.
58) Which of the following groups is not among the external users for whom financial statements
are prepared?
A) Creditors.
B) Regulators.
C) Investors.
D) Managers.
59) Which of the following groups is not among the external users for whom financial statements
are prepared?
A) Customers.
B) Suppliers.
C) Employees.
D) Customers, suppliers, and employees are all external users of financial statements.
60) The form of business organization that is legally separate from its owners is a:
A) Partnership.
B) Sole proprietorship.
C) Corporation.
D) Separation entity.
61) Which business form has the advantage of limited liability?
A) Corporation.
B) Sole proprietorship.
C) Partnership.
D) All business forms share equal limited liability.
62) Limited liability means:
A) Stockholders of a corporation are not obligated to pay the corporation’s debts out of their own
pocket.
B) Liabilities of a company cannot exceed its assets.
C) Companies are not allowed to borrow unless they are profitable.
D) Companies are less likely to be sued if they are formed as a corporation.
63) One disadvantage of the corporate form of business is:
A) Limited liability.
B) Access to more capital.
C) Smaller in size.
D) Double taxation.