Chapter 02 Basic Financial Statements Answer Key
True / False Questions
1.
The sale of additional shares of capital stock will cause treasury stock to increase.
2.
A business entity is regarded as separate from the personal activities of its owners
whether it is a sole proprietorship, a partnership, or a corporation.
3.
Assets need not always have physical characteristics as do buildings, machinery, or
inventory.
4.
The going concern principle assumes that the business will continue indefinitely.
5.
Notes payable and accounts payable both require a company to pay an amount owed by a
certain date. Notes payable generally have interest, while accounts payable generally do
not.
6.
Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
7.
The practice of showing assets on the balance sheet at their cost, rather than at their
current market value is explained, in part, by the fact that cost is supported by objective
evidence that can be verified by independent experts.
8.
Liabilities are usually listed in order of magnitude, from smallest dollar amount to largest
dollar amount.
9.
The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
10.
The accounting equation may be stated as “assets minus liabilities equals owners’
equity.”
11.
Total assets plus total liabilities must equal total owners’ equity.
12.
A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners’ equity.
13.
The collection of an account receivable will cause total assets to decrease.
14.
The payment of a liability causes an increase in owners’ equity.
15.
When a business borrows money from a bank, the immediate effect is an increase in total
assets and a decrease in liabilities or owners’ equity.
16.
The purchase of an asset, such as office equipment, for cash will cause owners’ equity to
decrease.
17.
Total assets must always equal total liabilities plus total owners’ equity.
18.
If a company purchases equipment with cash, its total assets will increase.
19.
If a company purchases equipment by issuing a note payable, its total assets will not
change.
20.
A net profit results from having more revenues than liabilities.
21.
A statement of cash flows reports revenue and expense activities for a specific time period
such as one month or one year.
22.
It is not unusual for an entity to report a significant increase in cash from operating
activities, but a decrease in the total amount of cash.
23.
The statement of cash flows provides a link between two balance sheets by showing how
net income (or loss) has changed owners’ equity from one balance sheet date to the next.
24.
Articulation between the financial statements means that they relate closely to each other
on the basis of the same underlying transaction information.
25.
Limited liability means that owners of a business are only liable for the debts of the
business up to the amounts they can afford.
26.
In a business organized as a corporation, it is not necessary to list the equity of each
stockholder on the balance sheet.
27.
The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
28.
Window dressing occurs when management attempts to make a company look financially
stronger than it actually is.
29.
Decision makers outside the organization base their credit decisions on weekly, or even
daily, financial statements.
30.
The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990′s was the passage of the Securities and Exchange Act.
Multiple Choice Questions
31.
Which of the following is the primary objective of an income statement?
32.
Which of the following describes the proper form of a balance sheet?
33.
A balance sheet is designed to show:
34.
Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said
she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt
Co. is considered to be a:
35.
Which of the following
best
defines an asset?
36.
From an accounting viewpoint, when is a business considered as an entity separate from
its owner(s)?
37.
The accounting principle that assumes that a company will operate in the foreseeable
future is:
statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
38.
Topic: A Starting Point: Statement of Financial Position
The valuation of assets in the balance sheet is based primarily upon:
39.
Which of the following is
not
a generally accepted accounting principle relating to the
valuation of assets?
40.
Each year, the accountant for Southern Real Estate Company adjusts the recorded value
of each asset to its market value. Using these market value figures on the balance sheet
violates:
41.
The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away
at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the
restaurant’s balance sheet. The reporting of this item in this manner violated the:
42.
Eton Corporation purchased land in 1998 for $190,000. In 2014, it purchased a nearly
identical parcel of land for $430,000. In its 2014 balance sheet, Eton valued these two
parcels of land at a combined value of $860,000. Reporting the land in this manner
violated the:
43.
Bob Bertolucci, owner of Bob’s Bazaar, also owns a personal residence that costs
$575,000. The market value of his residence is $725,000. During preparation of the
financial statements for Bob’s Bazaar, the accounting principle most relevant to the
presentation of Bob’s home is: