Chapter 02 Investing and Financing Decisions and the Accounting
System Answer Key
True / False Questions
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 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 T-account is an actual account in the general ledger of the accounting records.
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.
Multiple Choice Questions
38.
Which of the following statements about stockholders’ equity is false?
39.
Assets, liabilities, and stockholders’ equity are all found within which of the following financial
statements?
40.
An accounts payable would be reported within which of the following financial statements?
41.
Which of the following assumptions implies that a business can continue to remain in
operation into the foreseeable future?