Chapter 1—Accounting and the Financial Statements Key
1. There are more corporations than sole proprietorships and partnerships in the United States.
2. The three main business activities are financing, operating, and investing.
3. Internal users of accounting information include present creditors and management.
4. The income statement summarizes the assets, liabilities and stockholders’ equity for a period of time.
5. The four basic financial statements are the Income Statement, Statement of Retained Earnings, Balance
Sheet, and Statement of Cash Flows.
6. The amount of earnings distributed to stockholders can be found in the income statement as an expense.
7. Stockholders’ equity is composed of two main sources: liabilities and contributed capital.
8. The first step in preparing the classified balance sheet is to list the assets in order of liquidity.
9. The only financial statement that reports the retained earnings balance at the end of the period is the
Statement of Retained Earnings.
10. An income statement provides information at one specific point in time, while the other basic financial
statements provide information on activities that occur over a period of time.
11. When an entity’s stock issuances exceed its expenses for a period of time, the entity will report net income.
12. Contributed capital is the residual interest that remains after deducting liabilities from stockholders’ equity.
13. The four steps in preparing the Income Statement are: 1) Prepare heading, 2) List the revenues of the
company, 3) List the expenses of the company, 4) List the dividends of the company.
14. Stockholders equity is composed of contributed capital and retained earnings.
15. The primary objective of internal auditors who are employees of the company is to provide assurance to the
company’s stockholders that the financial statements are fairly presented.
16. The independent auditor’s report conveys whether or not the business is a good investment.
17. The Statement of Cash Flows shows cash inflows and cash outflows for a period of time.
18. Because the four financial statements are interrelated (i.e., there is a natural progression from one financial
statement to another), the balance sheet should be prepared first.
19. The company’s annual report includes an audit report, notes to the financial statements, but not
management’s discussion and analysis.
20. Investing is the business activity that measures the company’s ability to generate cash from its revenue and
expense activities.
21. The owners of a sole proprietorship, partnership and corporations have limited liability.
22. The purpose of financial reporting is to provide economic information to investors, creditors, and other
financial statement users.
23. Creditors use accounting information to evaluate whether to loan money to a company.
24. Current assets include all of the following: cash, inventory, equipment, supplies, and accounts receivable.
25. Current liabilities are typically listed in the order in which they will be paid.
26. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) long-term
investments, and 3) intangibles.
27. In the stockholders’ equity section of a classified balance sheet, a distinction is made between amounts
invested by owners and amounts financed by creditors.
28. One primary purpose of a classified balance sheet is to help users evaluate the working capital of a
company.
29. A Classified balance sheet is to help users determine how a company obtained its resources.
30. The current ratio is useful in determining a company’s ability to pay obligations when they become due.
31. Income from operations includes interest revenue and interest expense because these items are considered to
be operating in nature.
32. Net loss reduces a company’s retained earnings balance.
33. Dividend payments appear on the Statement of Retained Earnings.
34. The Statement of Cash Flows, like the Income Statement, reports only operating activities and other
activities of a company.
35. The ending cash balance is shown on the Balance Sheet and the Statement of Retained Earnings.
36. The company’s annual report is contained within the company’s 10-K filing with the Securities Exchange
Commission.
37. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a
company’s financial position, operating results, and cash flows.
38. An independent auditor’s (CPA’s) report is a guarantee that the financial statements are free from fraud or
material error.
39. In the independent auditors’ report included with the annual report, management discusses the financial
statements and provides the shareholders with explanations for certain amounts reported in the statements.
40. A company with healthy cash flows from operating activities is in a good position to repay its debts.
41. External users and outside decision makers use ____________________ accounting.
42. The three forms of business organizations are ____________________, ____________________, and
____________________.
43. The type of business activity that relates to obtaining funds from either issuing stock or borrowing money is
called ____________________.
44. The names of the four basic financial statements are ____________________, ____________________,
____________________, and ____________________
45. The fundamental accounting equation is ____________________ = ____________________ +
46. The step of listing the liabilities of the company in order of their time to maturity is performed for a
financial statement called ____________________.
47. Current assets minus current liabilities is called ____________________.
48. The financial statement in which you list revenues, starting with sales revenue (service revenue), is called
49. Both net income and dividends can be found on this financial statement: ____________________.
50. Net Income from the Income Statement increases ____________________.
51. ____________________ have claims to an entity’s economic resources.
52. ____________________ are cash and other assets that are reasonably expected to be realized in cash during
the normal operating cycle, whichever is longer.
53. Property, plant and equipment is classified as ____________________ assets on the balance sheet.
54. ____________________ is a liquidity measure that is calculated by subtracting current assets from current
liabilities.
55. The ability of a company to pay its debt as it comes due relates to ____________________.
56. In a(n) ____________________-step income statement, all expenses and losses are added together, then
deducted from the sum of all revenues and gains.
57. The Statement of Cash Flows classifies cash flow into these three categories: ____________________,
____________________ and ____________________.
58. The three financial statements in which net income can be found are the ____________________,
____________________ and ____________________.
59. The demand for accounting information comes from stakeholders both inside and outside the business. The
five stakeholder groups discussed in the text include ____________________, ____________________,
____________________, ____________________, and ____________________.
60. The current ratio is found by dividing current assets by ____________________.
61. Match each statement to the item listed below.
Cash flows from
2. Cash flows related to obtaining capital for the
Cash flows from
3. Cash flows related to the acquisition or sale of
Cash flows from
62. Match each statement to the item listed below.
1. Investment in the debt and stock of other companies
6. Cash and other resources that are expected to become
8. Resources that provide a benefit over a number of years
63. Match each statement to the item listed below.
1. An accounting period that may or may not cover
Management’s
2. Information that clarifies and expands upon the
3. Contains the auditor’s opinion as to whether the
financial statements fairly present the company’s
4. A set of reports that communicate a company’s
5. Section in the annual report that highlights
favorable or unfavorable trends and significant risks
Notes to the financial
64. Match each statement to the item listed below.
1. Organization currently working to establish
International Accounting
65. Which one of the following is an internal user of financial information?
66. Which one of the following is not an external user of financial statements?
67. Which one of the following groups is considered an internal user of financial statements?
68. What is the name for a person who lends funds to a business entity and expects repayment with interest?
69. What is the name of the branch of accounting concerned with providing outside decision makers with
information to assess the amounts, timing and uncertainties of the company’s future cash flows?
70. Which of the following invests funds into a business and is considered an owner?
71. Which of the following is not a form of a business entity?
72. In which form of organization are the owners’ legal responsibility for the debt of the business limited to the
amount they invested in the business?
73. Businesses engage in which of the following three main activity categories?
74. “Revenues” are best described as:
75. What is unearned revenue?
76. Which of the following best describes the term “expenses”?
77. Which one of the following is not one of the three business activities?
78. You are a potential creditor and are concerned that a particular company you are ready to give a loan to
might have too much debt. Which financial statement would provide you information needed in order to
evaluate your concern?
79. Which financial statement would you analyze to assess a firm’s operating performance for the past year?
80. Which financial statement would you refer to in order to determine how much resources (assets) the
company owned?
81. Which one of the following financial statements show the end of the year cash balance for a business
entity?
82. On January 1, 2012, a company reported assets of $1,000,000 and liabilities of $600,000. During 2012,
assets decreased by $100,000 and Stockholders’ Equity decreased $200,000. What is the amount of liabilities at
December 31, 2012?
83. Which one of the following correctly represents one of the basic financial statement models?
84. Which one of the following is a correct fundamental accounting equation?
85. How is the Balance Sheet linked to the other financial statements?
86. Bennett Motors is facing the following business decisions. Which decision will least likely require
financial information?
87. Which of the following best describes the term “retained earnings” of a company?
88. Which of the following best describes the term “current assets”?
89. Which one of the following items is a classification on the Classified Balance Sheet?
90. Which of the following are Noncurrent assets?
91. Which one of the following items appears on a balance sheet?
92. Which one of the following financial statements reports an entity’s financial position at a specific date?
93. Another term for Short Term Investments is:
94. Which of the following terms best describes a distribution of the net income of a corporation to its owners?
95. Which of the following is the correct date format for the financial statement heading?
96. Which statement summarizes the results of the company’s operations?
97. The resources used to earn revenues during a period are called:
98. Bargain Spot Fabrics
This company’s end–of-year balance sheet consisted of the following amounts:
Cash
$ 75,000
Accounts Receivable
$250,000
Property, plant & equipment
350,000
Long-term debt
200,000
Capital stock
500,000
Accounts payable
100,000
Retained earnings
?
Inventory
175,000
Refer to Bargain Spot Fabrics. What amount should the company report on its Balance Sheet for Total Assets?
99. Bargain Spot Fabrics
This company’s end–of-year balance sheet consisted of the following amounts:
Cash
$ 75,000
Accounts Receivable
$250,000
Property, plant & equipment
350,000
Long-term debt
200,000
Capital stock
500,000
Accounts payable
100,000
Retained earnings
?
Inventory
175,000
Refer to Bargain Spot Fabrics. What is the retained earnings balance at the end of the current year?
100. Bay Camera
The company reported the following items on its financial statements for the year ended December 31, 2013:
Sales
$780,000
Cost of Sales
$700,000
Selling, general & administrative expense
20,000
Other Expense
15,000
Dividends
5,000
Income Tax Expense
12,500
Refer to Bay Camera. What is the company’s Net Income for the current year?
101. Bay Camera
The company reported the following items on its financial statements for the year ended December 31, 2013:
Sales
$780,000
Cost of Sales
$700,000
Selling, general & administrative expense
20,000
Other Expense
15,000
Dividends
5,000
Income Tax Expense
12,500
Refer to Bay Camera. What amount will be reported as Retained Earnings on the Balance Sheet at December 31, 2013, assuming this is the first
year of operations?
102. Beard Marine
The company reported the following information for the year ended December 31, 2013:
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2013
$120,000
Refer to Beard Marine. What was the balance of Retained Earnings at January 1, 2013?
103. Beard Marine
The company reported the following information for the year ended December 31, 2013:
Net income
$100,000
Dividends
6,000
Retained earnings at December 31, 2013
$120,000
Refer to Beard Marine. What was the economic effect of the dividend payment?
104. B&B Painting reported the following information for the year ended December 31, 2013.
Revenues
$2,500,000
Expenses
2,000,000
Retained Earnings at December 31, 2012
100,000
Retained Earnings at December 31, 2013
450,000
How much was paid out in dividends in 2013?
105. Barr Attorneys reported the following information for the year ended December 31, 2013.
Revenue
$14,000,000
Expenses
11,500,000
Dividends
1,000,000
Retained Earnings at December 31, 2013
1,750,000
What was the retained earnings balance at December 31, 2012?
106. A company had the following balance sheet amounts at the beginning of the year:
Total assets
$650,000
Total stockholder’s equity
250,000
During the year, total assets increased by $350,000, total liabilities increased by $100,000, and dividends were paid in the amount of $300,000. No
other transactions occurred except revenues and expenses. How much is net income for the year?
107. On January 1, 2013, a company’s balance in retained earnings was $10,000,000. At December 31, 2013,
the balance in retained earnings was $9,400,000. If the company earned net income of $440,000 during the year,
how much were dividends?
108. On January 1, 2013, a company’s balance in retained earnings was $275,000. During 2013, the company
earned net income of $23,500 and paid $11,200 in dividends. Calculate the retained earnings balance at
December 31, 2013.
109. Beaver Tree Service
Beginning Retained Earnings
$550,000
Ending Retained Earnings
700,000
Dividends Paid
100,000
Revenue
525,000
Refer to Beaver Tree Service. What is the company’s net income?
110. Beaver Tree Service
Beginning Retained Earnings
$550,000
Ending Retained Earnings
700,000
Dividends Paid
100,000
Revenue
525,000
Refer to Beaver Tree Service. The company’s expenses are:
111. If a company has $10,500,000 of revenues, declares and pays $550,000 in dividends, and has net income of
$1,600,000, how much were expenses for the year?
112. Suppose a company reports the following information at December 31, 2013:
Sales
$15,000,000
Cash
$ 3,000,000
Unearned Revenue
$ 400,000
Dividends
$ 1,000,000
Cost of Sales
$ 8,500,000
What is the company’s Gross Profit?
113. If a company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000, how
much is total stockholders’ equity?
114. Calculate total sales for a company that reported a net loss of $1,500,000 and total expenses of
$2,900,000.
115. What is the primary objective of financial reporting?
116. “Economic resources” are known as
117. External users of financial information
118. Net Income appears on which financial statement(s)?