Financial Accounting, 10e (Libby)
Chapter 2 Investing and Financing Decisions and the Accounting System
1) The primary objective of financial reporting is to provide useful information to external
decision makers.
2) In order for information to be relevant, the information needs to be complete, neutral, and free
from error.
3) In order for information to be relevant, the information should have both predictive and/or
feedback value.
4) The continuity assumption states that a business will continue to operate into the foreseeable
future.
5) The current assets section of a balance sheet includes both inventory and prepaid expenses.
6) The stockholders’ equity section of a balance sheet includes capital contributed by owners and
also retained earnings.
7) Under the monetary unit assumption, accounting information should be measured and
reported in terms of the national monetary unit, with an adjustment for changes in purchasing
power.
8) Assets are reported on the balance sheet in the order of liquidity.
9) Many valuable internally-developed intangible assets such as trademarks and copyrights are
not reported on a company’s balance sheet.
10) Stockholders’ equity reflects the financing provided by owners.
11) Common stock and additional-paid in capital represent the financing sources from
shareholders.
12) Financial reporting focuses on reporting the impact of transactions on an entity’s financial
position.
13) Unearned revenue is reported on the balance sheet as a liability and represents amounts paid
to an entity in exchange for future services and/or goods.
14) A transaction may be an exchange of assets or services by one business for assets, services,
or promises to pay from a different business.
15) The dual effects concept implies that every transaction has at least two effects on the
accounting equation.
16) The accounting equation does not have to be in balance after the recording of each
transaction.
17) Additional paid-in capital is reported on the balance sheet as a component of shareholders’
equity.
18) Common stock and additional paid-in capital are both reported on the balance sheet as
components of shareholders’ equity.
19) A company’s assets and stockholders’ equity both increase when the company sells additional
shares of stock in exchange for cash.
20) Purchasing supplies for cash results in an increase in total assets for the purchasing company.
21) The normal balance for an asset account is a debit and the normal balance for a liability
account is a credit.
22) The recording of a journal entry precedes the posting to the general ledger.
23) An asset account normally has a debit balance and is increased by debiting the account.
24) Liability and stockholders’ equity accounts normally have credit balances and are decreased
by debiting the accounts.
25) A journal entry is a written expression of the effects of a transaction on accounts and has
equal debits and credits.
26) The general ledger is a chronological listing of each transaction and its effects on the
accounting equation.
27) The T-account is very useful for accumulating the effects of transactions on account balances
and for determining individual account balances.
28) The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, and
stockholders’ equity and is provided to external decision makers.
29) The trial balance is a listing of account balances that are found in the general ledger.
30) An objective of preparing the trial balance is to test the equality of debits and credits.
31) Current assets include accounts receivable and prepaid expenses.
32) The current ratio is current assets divided by current liabilities.
33) Current liabilities are defined as obligations to be paid within six months.
34) The current ratio measures the ability of a company to pay its short-term obligations with
short-term assets.
35) A company with a high current ratio should never have liquidity problems.
36) When a company borrows money from a bank, the statement of cash flows will report a cash
increase from an investing activity.
37) Issuing stock in exchange for cash creates an increase in cash from a financing activity.
38) Which of the following statements about stockholders’ equity is false?
A) Stockholders’ equity is the shareholders’ residual interest in the company resulting from the
difference in assets and liabilities.
B) Stockholders’ equity accounts are increased with credits.
C) Stockholders’ equity results only from contributions of the owners.
D) The purchase of land for cash has no effect on stockholders’ equity.
39) Assets, liabilities, and stockholders’ equity are all found within which of the following
financial statements?
A) Balance sheet.
B) Income statement.
C) The investing activities section of the Statement of Cash Flows.
D) Statement of stockholders’ equity.
40) Accounts payable would be reported within which of the following financial statements?
A) Statement of cash flows.
B) Income statement.
C) Balance sheet.
D) Statement of stockholders’ equity.
41) Which of the following assumptions implies that a business can continue to remain in
operation into the foreseeable future?
A) Historical cost principle.
B) Monetary unit assumption.
C) Continuity assumption.
D) Separate-entity assumption.
42) Which of the following best describes assets?
A) Resources with possible future economic benefits owed by an entity as a result of past
transactions.
B) Resources with probable future economic benefits owned by an entity as a result of past
transactions.
C) Resources with probable future economic benefits owned by an entity as a result of future
transactions.
D) Resources with possible future economic benefits owed by an entity as a result of future
transactions.
43) 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?
A) Monetary unit assumption.
B) Continuity assumption.
C) Historical cost principle.
D) Separate entity assumption.
44) Which of the following is being applied when, under certain conditions, the value recorded
for an asset is adjusted to a different amount?
A) Comparability
B) Timeliness
C) Mixed-attribute
D) Understandability
45) Which of the following best describes liabilities?
A) Possible debts or obligations of an entity as a result of future transactions, which will be paid
with assets or services.
B) Possible debts or obligations of an entity as a result of past transactions, which will be paid
with assets or services.
C) Probable debts or obligations of an entity as a result of future transactions, which will be paid
with assets or services.
D) Probable debts or obligations of an entity as a result of past transactions, which will be paid
with assets or services.
46) Which of the following statements is incorrect concerning balance sheets prepared under
IFRS and GAAP?
A) The same elements are used in preparing balance sheets under both GAAP and IFRS.
B) Under IFRS stockholders’ equity is listed before liabilities, while under GAAP liabilities are
listed before stockholders’ equity.
C) Under GAAP assets are usually listed in increasing order of liquidity, while under IFRS assets
are usually listed in decreasing order of liquidity.
D) Under GAAP current items are presented first, while under IFRS noncurrent items are
presented first.
47) Chad Jones is the sole owner and manager of Jones Glass Repair Shop. Jones purchased a
truck, to be used in the business, for its market value of $35,000. Which of the following
fundamentals requires Jones to record the truck at the price paid to buy it?
A) Separate-entity assumption.
B) Revenue principle.
C) Monetary unit assumption.
D) Historical cost principle.
48) In what order are current assets listed on a balance sheet?
A) By dollar amount (largest first).
B) By date of acquisition (earliest first).
C) By liquidity.
D) By relevance to the operation of the business.
49) In what order would the following assets be listed on a balance sheet?
A) Cash, Short-term Investments, Accounts Receivable, Inventory.
B) Cash, Intangible Assets, Accounts Receivable, Property and Equipment.
C) Cash, Accounts Receivable, Property and Equipment, Inventory.
D) Cash, Inventory, Intangible Assets, Accounts Receivable.
50) Where would changes in stockholders’ equity resulting from financing provided by
operations be reported?
A) Within a long-term asset account.
B) Within the additional paid-in capital account.
C) Within a liability account.
D) Within the retained earnings account.
51) Which of the following events will cause retained earnings to increase?
A) Dividends declared by the Board of Directors.
B) Net income reported for the period.
C) Net loss reported for the period.
D) Issuance of stock in exchange for cash.
52) Which of the following correctly describes retained earnings?
A) It is the cumulative earnings of a company.
B) It represents the investments by stockholders in a company.
C) It equals total assets minus total liabilities.
D) It is the cumulative earnings of a company less dividends declared.