Chapter 02 – Investing and Financing Decisions and the Balance Sheet
1. The primary objective of financial reporting is to provide relevant information to external
decision makers.
2. In order for information to be reliable the information needs to be provided on a timely
basis.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
3. In order for information to be relevant the information should have both predictive and
feedback value.
4. The continuity assumption assumes that a business will continue to operate into the
foreseeable future.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
5. The current assets section of a balance sheet includes both inventory and accounts
receivable.
6. The stockholders’ equity section of a balance sheet includes contributed capital and retained
earnings.
7. Assets are reported on the balance sheet in the order of their liquidity.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
8. Many valuable assets such as trademarks and copyrights are not reported within a
company’s balance sheet.
9. Stockholders’ equity includes the financing provided by owners.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
10. Financial reporting focuses on reporting the impact of transactions on an entity’s financial
position.
11. Unearned revenue is reported on the balance sheet as a liability and represents amounts
paid to an entity for which the entity has an obligation to provide future services and/or
goods.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
12. A business transaction consists of an exchange of assets or services for assets, services, or
promises to pay between a business and an external party to the business.
13. The dual effects concept implies that every transaction has at least two effects on the
accounting equation.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
14. The accounting equation doesn’t have to be in balance after the recording of each
transaction.
15. A company’s assets and stockholders’ equity both increase when the company sells
additional shares of stock in exchange for cash.
16. Purchasing stock of another company for cash doesn’t result in an increase in total assets
for the purchasing company.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
17. The normal balance for an asset account is a debit and the normal balance for a liability
account is a credit.
18. The recording of a journal entry precedes the posting to the general ledger.
19. Asset accounts have a debit balance and are increased by debiting the account.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
20. Liability and stockholders’ equity accounts have credit balances and are decreased by
debiting the account.
21. A journal entry is an expression of the effects of a transaction on accounts which has
equal debits and credits.
22. The T-account is useful for summarizing account balances and is found in the general
ledger.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
23. The T-account is very useful for accumulating the effects of transactions on account
balances and for determining individual account balances.
24. Current assets include accounts receivable and prepaid expenses.
25. The current ratio is current assets divided by current liabilities.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
26. Current liabilities are defined as obligations to be paid within six months.
Bloom’s Remember
27. The current ratio measures the ability of a company to pay its short-term obligations with
short-term assets.
28. A company with a high current ratio should never have liquidity problems.
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
29. When a company borrows money from a bank, it leads to a cash inflow from an investing
activity.
30. Issuing stock in exchange for cash creates a financing activity cash flow.
31. Which of the following statements about stockholders’ equity is false?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
32. Assets, liabilities, and stockholders’ equity are found within which of the following
financial statements?
33. An account payable would be reported within which of the following financial
statements?
34. Which of the following assumptions implies that a business can continue to remain in
operation into the foreseeable future?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
35. Which of the following best describes assets?
36. Which of the following assumptions implies that the assets and liabilities of the business
are accounted for separately from the assets and liabilities of the owners?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
37. Which of the following best describes liabilities?
38. Which of the following is included within current assets on a balance sheet?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
39. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. Jones purchased a
truck for $30,000 to be used in the business. Which of the following fundamentals requires
Jones to record the truck at the price paid to buy it?
40. In what order are current assets listed on a balance sheet?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
41. In what order would the following assets be listed on a balance sheet?
42. Where would changes in stockholders’ equity resulting from operations be reported?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
43. Which of the following events will cause retained earnings to increase?
44. Which of the following correctly describes retained earnings?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
45. Which of the following statements is false?
46. Which of the following describes the primary objective of financial accounting?
Chapter 02 – Investing and Financing Decisions and the Balance Sheet
47. Which of the following would not be considered a current asset?
48. Which of the following does not correctly describe a business transaction?