Chapter 14 3 Owners' equity is meaningful for investors, but not for lenders

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

18. Owners’ equity = assets minus liabilities.

a. True

b. False

Difficulty: 1 Page-Reference: 436

Question ID: 14-2-138 Skill: Knowledge

Objective: 14.2

19. Owners’ equity is meaningful for investors, but not for lenders.

a. True

b. False

Difficulty: 1 Page-Reference: 436

Question ID: 14-2-139 Skill: Comprehension

Objective: 14.2

20. An asset is anything of economic value owned by the business firm.

a. True

b. False

Difficulty: 2 Page-Reference: 436

Question ID: 14-2-140 Skill: Knowledge

Objective: 14.2

21. Double-entry accounting is used by private-sector firms, but not public-sector organizations.

a. True

b. False

Difficulty: 2 Page-Reference: 436

Question ID: 14-2-141 Skill: Knowledge

Objective: 14.2

22. The equity that a homeowner has in a house is the amount of money that could be made by

selling the house and paying off the mortgage. This idea is similar to the idea of owners‘ equity in a

business.

a. True

b. False

Difficulty: 2 Page-Reference: 436

Question ID: 14-2-142 Skill: Comprehension

Objective: 14.2

23. Cash is the most liquid asset.

a. True

b. False

Difficulty: 2 Page-Reference: 437

Question ID: 14-2-143 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

24. The primary purpose of balance sheets is to show how various accounts like assets and liabilities

change over time.

a. True

b. False

Difficulty: 2 Page-Reference: 436

Question ID: 14-2-144 Skill: Knowledge

Objective: 14.3

25. Depreciation is used to recognize the cost of an asset in the year in which it is purchased.

a. True

b. False

Difficulty: 1 Page-Reference: 438

Question ID: 14-2-145 Skill: Knowledge

Objective: 14.3

26. Goodwill is the amount paid for an existing business beyond the value of its tangible assets.

a. True

b. False

Difficulty: 3 Page-Reference: 438

Question ID: 14-2-146 Skill: Knowledge

Objective: 14.3

27. Intangible assets like patents, trademarks, and copyrights are included in owners‘ equity.

a. True

b. False

Difficulty: 2 Page-Reference: 438

Question ID: 14-2-147 Skill: Comprehension

Objective: 14.3

28. Owners’ equity consists of two sources: the amount that the owners originally invested, and profits

earned by and reinvested in the company.

a. True

b. False

Difficulty: 1 Page-Reference: 439

Question ID: 14-2-148 Skill: Knowledge

Objective: 14.3

29. Retained earnings are net profits minus dividend payments to shareholders.

a. True

b. False

Difficulty: 1 Page-Reference: 439

Question ID: 14-2-149 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

30. The financial statement that shows the status of assets, liabilities, and owners’ equity at a

particular point in time is the balance sheet.

a. True

b. False

Difficulty: 2 Page-Reference: 436

Question ID: 14-2-150 Skill: Knowledge

Objective: 14.3

31. If a company needs cash for emergencies, it can use the money in retained earnings.

a. True

b. False

Difficulty: 2 Page-Reference: 439

Question ID: 14-2-151 Skill: Comprehension

Objective: 14.3

32. Liabilities reflected on the balance sheet are divided into two general categories: current (debts to

be paid within one year) and long term (due more than a year into the future).

a. True

b. False

Difficulty: 2 Page-Reference: 438

Question ID: 14-2-152 Skill: Knowledge

Objective: 14.3

33. John wants to determine gross profit for his company. To do so, he must subtract the cost of

goods sold from gross sales revenue.

a. True

b. False

Difficulty: 2 Page-Reference: 441

Question ID: 14-2-153 Skill: Application

Objective: 14.3

34. The income statement details a firm’s yearly cash receipts and cash payments.

a. True

b. False

Difficulty: 1 Page-Reference: 439

Question ID: 14-2-154 Skill: Knowledge

Objective: 14.3

35. The three major categories of items shown on an income statement are revenues, cost of goods

sold, and operating expenses.

a. True

b. False

Difficulty: 2 Page-Reference: 439

Question ID: 14-2-155 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

36. Madeline wants to determine operating income for her company. To do so, she must subtract

both the cost of goods sold and all operating expenses from gross sales revenue.

a. True

b. False

Difficulty: 2 Page-Reference: 441

Question ID: 14-2-156 Skill: Application

Objective: 14.3

37. Operating income is determined by subtracting from gross sales revenue the cost of goods sold,

operating expenses, and income taxes.

a. True

b. False

Difficulty: 2 Page-Reference: 441

Question ID: 14-2-157 Skill: Comprehension

Objective: 14.3

38. Gross profit percentages don’t vary much across industries, with most companies making about 6

percent.

a. True

b. False

Difficulty: 2 Page-Reference: 441

Question ID: 14-2-158 Skill: Knowledge

Objective: 14.3

39. A budget is a detailed financial plan of estimated receipts and expenditures for a given period in

the future.

a. True

b. False

Difficulty: 1 Page-Reference: 442

Question ID: 14-2-159 Skill: Knowledge

Objective: 14.3

40. All firms must issue a statement of cash flows.

a. True

b. False

Difficulty: 1 Page-Reference: 442

Question ID: 14-2-160 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

41. The revenue recognition principle says that earnings may not be reported until the earnings cycle

is completed.

a. True

b. False

Difficulty: 2 Page-Reference: 443

Question ID: 14-2-161 Skill: Knowledge

Objective: 14.4

42. The matching principle states that expenses should be matched with revenues to determine net

income for an accounting period.

a. True

b. False

Difficulty: 2 Page-Reference: 443

Question ID: 14-2-162 Skill: Knowledge

Objective: 14.4

43. Financial ratios are used to assess the financial health of a company.

a. True

b. False

Difficulty: 1 Page-Reference: 445

Question ID: 14-2-163 Skill: Knowledge

Objective: 14.5

44. Short-term solvency ratios are used to measure the profitability of a business firm.

a. True

b. False

Difficulty: 1 Page-Reference: 445

Question ID: 14-2-164 Skill: Knowledge

Objective: 14.5

45. The current ratio is usually satisfactory at 2:1 or higher; that is, if current assets are at least

double current liabilities.

a. True

b. False

Difficulty: 1 Page-Reference: 445

Question ID: 14-2-165 Skill: Knowledge

Objective: 14.5

46. The current ratio measures a company’s ability to meet current obligations out of current assets.

a. True

b. False

Difficulty: 1 Page-Reference: 445

Question ID: 14-2-166 Skill: Knowledge

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

47. If current assets are $10 000 and current liabilities are $5000, the current ratio is 0.5.

a. True

b. False

Difficulty: 1 Page-Reference: 445

Question ID: 14-2-167 Skill: Application

Objective: 14.3

48. Corporation L has debt of $50 million and equity of $100 million. Its debt–to-equity ratio is

therefore 0.50.

a. True

b. False

Difficulty: 1 Page-Reference: 446

Question ID: 14-2-168 Skill: Application

Objective: 14.3

49. The most commonly used activity ratio is the debt–to-equity ratio, which is calculated as current

assets divided by current liabilities.

a. True

b. False

Difficulty: 2 Page-Reference: 445

Question ID: 14-2-169 Skill: Knowledge

Objective: 14.5

50. The Mainline Corporation’s gross profit was $5 million, its net income was $2 million, and

operating expenses were $1 million. Its owners’ equity is $100 million. Its return on equity is 2 percent.

a. True

b. False

Difficulty: 1 Page-Reference: 446

Question ID: 14-2-170 Skill: Application

Objective: 14.3

51. Net income divided by total owners’ equity shows the return on equity for the owners.

a. True

b. False

Difficulty: 2 Page-Reference: 446

Question ID: 14-2-171 Skill: Knowledge

Objective: 14.5

52. Activity ratios are used to determine the amount of sales for the year.

a. True

b. False

Difficulty: 2 Page-Reference: 447

Question ID: 14-2-172 Skill: Comprehension

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Objective: 14.5

53. The inventory turnover ratio measures the average number of times that inventory is sold and

restocked during the year.

a. True

b. False

Difficulty: 1 Page-Reference: 447

Question ID: 14-2-173 Skill: Knowledge

Objective: 14.5

54. Marlin wants to calculate the inventory turnover ratio for his company. He has the following

information: beginning inventory = $30 000; ending inventory = $20 000; the cost of goods sold = $100

000. From this he concludes that the inventory turnover ratio is 4.0.

a. True

b. False

Difficulty: 1 Page-Reference: 447

Question ID: 14-2-174 Skill: Application

Objective: 14.3

55. Leverage measures the ability of the firm to pay bills as they come due.

a. True

b. False

Difficulty: 1 Page-Reference: 446

Question ID: 14-2-175 Skill: Knowledge

Objective: 14.5

56. Earnings per share determines the firm’s ability to pay its long-term debt.

a. True

b. False

Difficulty: 1 Page-Reference: 446

Question ID: 14-2-176 Skill: Knowledge

Objective: 14.5

57. When a Canadian company imports a product from a Swiss company, it has to take into

consideration foreign currency exchange rates.

a. True

b. False

Difficulty: 1 Page-Reference: 448

Question ID: 14-2-177 Skill: Comprehension

Objective: 14.6

1. Identify the potential users of accounting information.

Difficulty: 2 Page-Reference: 430

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Question ID: 14-3-178 Skill: Knowledge

Objective: 14.1

2. What is a controller?

Difficulty: 2 Page-Reference: 430

Question ID: 14-3-179 Skill: Knowledge

Objective: 14.1

3. What is an audit?

Difficulty: 2 Page-Reference: 433

Question ID: 14-3-180 Skill: Knowledge

Objective: 14.1

4. List the three accounting groups in Canada who certify accounting expertise.

Difficulty: 2 Page-Reference: 431-432

Question ID: 14-3-181 Skill: Knowledge

Objective: 14.1

5. What is the difference between financial and managerial accounting?

Difficulty: 2 Page-Reference: 431

Question ID: 14-3-182 Skill: Comprehension

Objective: 14.1

6. What is the difference accountants like CAs (who provide services to the public) and private

accountants?

Difficulty: 2 Page-Reference: 431

Question ID: 14-3-183 Skill: Comprehension

Objective: 14.1

7. What is the accounting equation?

Difficulty: 2 Page-Reference: 435

Question ID: 14-3-184 Skill: Knowledge

Objective: 14.2

8. Define the term current assets as found on a balance sheet.

Difficulty: 2 Page-Reference: 437

Question ID: 14-3-185 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

9. What is the difference between current and long-term liabilities?

Difficulty: 2 Page-Reference: 438

Question ID: 14-3-186 Skill: Comprehension

Objective: 14.3

10. What is a budget?

Difficulty: 2 Page-Reference: 442

Question ID: 14-3-187 Skill: Knowledge

Objective: 14.3

11. What is an income statement?

Difficulty: 2 Page-Reference: 439

Question ID: 14-3-188 Skill: Knowledge

Objective: 14.3

12. What is a statement of cash flows?

Difficulty: 2 Page-Reference: 442

Question ID: 14-3-189 Skill: Knowledge

Objective: 14.3

13. What is the formula for the current ratio?

Difficulty: 2 Page-Reference: 445

Question ID: 14-3-190 Skill: Knowledge

Objective: 14.5

14. Manhattan Corporation has total assets of $700 000, total liabilities of $200 000, and owners’

equity of $500 000. What is Manhattan Corporation’s debt-to-equity ratio?

Difficulty: 2 Page-Reference: 446

Question ID: 14-3-191 Skill: Application

Objective: 14.5

15. What is the formula for return on equity?

Difficulty: 2 Page-Reference: 446

Question ID: 14-3-192 Skill: Knowledge

Objective: 14.5

16. Carter Industries had net income of $250 000 for the year 2002. They had 50 000 shares of

preferred stock and 200 000 shares of common stock outstanding. What is Carter Industries earnings per

share?

Difficulty: 2 Page-Reference: 446

Question ID: 14-3-193 Skill: Application

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

17. What is the formula for inventory turnover?

Difficulty: 2 Page-Reference: 447

Question ID: 14-3-194 Skill: Knowledge

Objective: 14.5

1. Name and give an example of why the users of financial statements would be interested in these

statements.

Difficulty: 2 Page-Reference: 430

Question ID: 14-4-195 Skill: Comprehension

Objective: 14.1

2. What is the difference between financial accounting and managerial accounting?

Difficulty: 2 Page-Reference: 431

Question ID: 14-4-196 Skill: Comprehension

Objective: 14.1

3. What services does a CA provide? Provide a brief explanation of each service.

Difficulty: 2 Page-Reference: 431

Question ID: 14-4-197 Skill: Knowledge

Objective: 14.1

4. Explain the importance and use of GAAP.

Difficulty: 2 Page-Reference: 434

Question ID: 14-4-198 Skill: Comprehension

Objective: 14.1

5. Why do business firms have private accountants? What do these individuals do for the company?

Difficulty: 1 Page-Reference: 435

Question ID: 14-4-199 Skill: Comprehension

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Objective: 14.1

6. What is the accounting equation? Provide a brief explanation of the meaning of each part of this

equation.

Difficulty: 2 Page-Reference: 435-436

Question ID: 14-4-200 Skill: Comprehension

Objective: 14.2

7. What does the term “double-entry” accounting mean?

Difficulty: 2 Page-Reference: 436

Question ID: 14-4-201 Skill: Comprehension

Objective: 14.3

8. Explain how the accounting equation and double-entry accounting are used in record keeping.

Difficulty: 3 Page-Reference: 435-436

Question ID: 14-4-202 Skill: Comprehension

Objective: 14.3

9. Explain the three basic financial statements and show how they reflect the activity and financial

condition of a business.

Difficulty: 3 Page-Reference: 436-442

Question ID: 14-4-203 Skill: Comprehension

Objective: 14.3

10. What is the purpose of a balance sheet? What are the major types of information shown on the

balance sheet?

Difficulty: 2 Page-Reference: 436-438

Question ID: 14-4-204 Skill: Comprehension

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

11. How does a current asset differ from a fixed asset?

Difficulty: 1 Page-Reference: 437-438

Question ID: 14-4-205 Skill: Comprehension

Objective: 14.3

12. What is the purpose of an income statement? What important information is reflected in this

statement?

Difficulty: 2 Page-Reference: 439-440

Question ID: 14-4-206 Skill: Comprehension

Objective: 14.3

13. Describe the major elements of an income statement.

Difficulty: 1 Page-Reference: 439-441

Question ID: 14-4-207 Skill: Knowledge

Objective: 14.3

14. What is a budget? Who uses a budget?

Difficulty: 1 Page-Reference: 442

Question ID: 14-4-208 Skill: Comprehension

Objective: 14.3

15. Explain the accounting principles of revenue recognition and matching.

Difficulty: 2 Page-Reference: 443-444

Question ID: 14-4-209 Skill: Comprehension

Objective: 14.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

16. What are the three major classifications of ratios that are used to analyze financial statements?

What is measured by each of these types of ratios?

Difficulty: 2 Page-Reference: 445

Question ID: 14-4-210 Skill: Comprehension

Objective: 14.5

17. Identify the solvency ratios and what they measure.

Difficulty: 1 Page-Reference: 445-446

Question ID: 14-4-211 Skill: Comprehension

Objective: 14.5

18. Identify an activity ratio and what it measures.

Difficulty: 1 Page-Reference: 447

Question ID: 14-4-212 Skill: Comprehension

Objective: 14.5