APPENDIX INTERNATIONAL FINANCIAL
1 REPORTING STANDARDS
MULTIPLE-CHOICE EXERCISES
A1-1. c
A1-2. b
A1-3. d
A1-4. c
A1-5. d
A1-6. a
A1-7. b
A1-8. d
A1-9. a
A1-10. b
A1-1
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, ACCOUNTING AND THE
1 FINANCIAL STATEMENTS
DISCUSSION QUESTIONS
1. Accounting is a system for identifying, measuring, recording, and communicating financial
information about an organization’s activities to permit informed decisions by users of the
information. Bookkeeping is the process—made up of mechanical “steps”—of recording
transactions and maintaining accounting records. While bookkeeping is part of accounting,
accounting is viewed as the complete information system that communicates the economic
activities of a company to interested parties. Accounting is often referred to as the “language
of business” because it communicates information about economic activities of a company
that help people make decisions.
2. Accounting information is demanded or needed by decision-makers both inside and outside the
business to provide information about business activities and finances so that informed decisions
can be made. Five groups that create the demand for accounting information and their uses of
accounting information are described below.
(1) Managers need accounting information to plan and make decisions about the business
(e.g., predicting the consequences of their actions and deciding on which actions to take)
and to control its operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers
(e.g., judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future
prospects of a business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or
extend credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by
businesses, to implement a variety of regulatory objectives, and to make national economic
policy decisions.
3. An accounting entity is a company that has an identity separate from that of its owners and
managers and for which accounting records are kept. There are three main forms that
accounting entities take: a sole proprietorship, a partnership, and a corporation.
4. A sole proprietorship is a business entity owned by one person. A partnership is a business entity
owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate
from the personal affairs of the owners. That is, the owners are responsible for the debts of the
business. A corporation is a separate legal entity formed by one or more persons called
stockholders. A corporation is legally separate from the affairs of its owners, which limits the
stockholders’ legal responsibility for the debt of the business to the amount that the stockholders
invested in the business. Corporate shareholders generally pay more taxes than owners of sole
proprietorships or partnerships. Although the combined number of sole proprietorships and
partnerships greatly outnumber the number of corporations, the majority of business in the
United States is conducted by corporations.
1-1
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,CHAPTER 1 Accounting and the Financial Statements
5. The three main types of business activities are financing activities, investing activities, and
operating activities. Financing activities involve obtaining the funds necessary to begin and
operate a business. These funds come from either issuing stock or borrowing money. Investing
activities involve buying and selling assets that enable a corporation to operate. Operating
activities are the normal business activities that a company engages in as it conducts its
business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
6. Assets are the economic resources or future economic benefits obtained or controlled by a
business. Liabilities are the creditors’ claims on the resources of a business. Stockholders’ equity
is the ownership claims on the resources of a business. Stockholders’ equity is considered a
residual interest in the assets of a business that remain after deducting the business’s liabilities.
All three items appear on the balance sheet, forming the following equation:
Assets = Liabilities + Stockholders’ Equity
7. Revenues are the increases in assets (resources) that result from the sale of products or services.
Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of
the business. If revenues are greater than expenses, a corporation has earned net income. If
expenses are greater than revenues, a corporation has incurred a net loss.
8. The four primary financial statements are:
(1) The balance sheet: a presentation of information about a company’s economic resources
(its assets) and the claims against those resources by creditors and owners (liabilities and
stockholders’ equity) at a specific point in time.
(2) The income statement: a report on how well a company has performed its operations—
the profitability of a company—over a period of time.
(3) The retained earnings statement: a report on how much of the company’s income was
retained in the business and how much was distributed to owners over a period of time.
(4) The statement of cash flows: a report on the changes in a company’s cash during a period
of time. The statement of cash flows provides information about the company’s cash inflows
(sources) and outflows (uses) from operating, investing, and financing activities.
9. There are many questions that can be answered based on each of the financial statements:
(1) The balance sheet:
a. What is the total amount of assets (economic resources) of a corporation? What is
the total amount of liabilities (claims against the resources) for a corporation?
b. How much equity do the owners of the corporation have in its assets?
c. Is the corporation able to pay its debts as they become due?
(2) The income statement:
a. How much revenue was earned last month? Last quarter? Last year?
b. What was the total amount of expenses incurred to earn that revenue?
c. How much better off is the corporation at the end of the year than it was at the
beginning of the year?
d. Was the corporation profitable, and what are the prospects for the corporation’s
future profitability?
e. What are the prospects for the future growth of the corporation?
1-2
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Accounting and the Financial Statements
(3) The retained earnings statement:
a. How much income was distributed in dividends by the corporation?
b. What amount of equity in the business has been generated internally?
(4) The statement of cash flows:
a. How much cash was taken in or paid out as a result of operations?
b. How much cash was invested in new equipment?
c. How much cash was used to pay off business debt?
10. Point-in-time measurement means as of a particular date. The balance sheet is a point-in-time
measurement. The period-of-time description applies to what has happened over a time interval.
The income statement is a period-of-time measurement that explains the business activities
between balance sheet dates. The statement of cash flows and the statement of retained
earnings are also period-of-time measurements.
11. The fundamental accounting equation is:
Assets = Liabilities + Stockholders’ Equity
The equation is significant because it means that the balance sheet must always balance. This
implies that what a company owns (its resources) must always be equal to the claims of its
creditors (liabilities) and investors (stockholders’ equity).
12. Each financial statement includes a heading that is comprised of (a) the name of the company,
(b) the title of the financial statement, and (c) the time period covered—either a point-in-time
measurement (an exact date) or a period-of-time description (e.g., a year ended in a specific
date).
13. Current assets are cash and other assets that are reasonably expected to be converted to cash
within one year or the operating cycle, whichever is longer. Current liabilities are obligations that
will be satisfied within one year or the operating cycle, whichever is longer.
Since current assets are presented separately from other assets, statement users can see if
the firm is likely to have enough resources available to meet its current liabilities as they come
due. If current assets were presented among other assets, such a determination would be difficult.
Current liabilities are separated from long-term liabilities because current liabilities will require
asset outflows (or replacement with another liability) much sooner than will long-term liabilities. If
all liabilities were presented together, financial statement users would have difficulty in determining
the assets (economic resources) required in the near future to satisfy the current liabilities.
14. Current assets are generally listed on the balance sheet in order of liquidity or nearness to cash,
whereas current liabilities are usually listed in the order in which they will be paid.
15. The two main components of equity are contributed capital and retained earnings. Contributed
capital is increased by investments of new capital in a company by its owners (the issue of
common stock to stockholders). Retained earnings is the accumulated net income of a company
that has not been distributed to owners. Retained earnings is increased by net income and
decreased by net losses and dividends.
16. Net Income = Total Revenues – Total Expenses
1-3
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 REPORTING STANDARDS
MULTIPLE-CHOICE EXERCISES
A1-1. c
A1-2. b
A1-3. d
A1-4. c
A1-5. d
A1-6. a
A1-7. b
A1-8. d
A1-9. a
A1-10. b
A1-1
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, ACCOUNTING AND THE
1 FINANCIAL STATEMENTS
DISCUSSION QUESTIONS
1. Accounting is a system for identifying, measuring, recording, and communicating financial
information about an organization’s activities to permit informed decisions by users of the
information. Bookkeeping is the process—made up of mechanical “steps”—of recording
transactions and maintaining accounting records. While bookkeeping is part of accounting,
accounting is viewed as the complete information system that communicates the economic
activities of a company to interested parties. Accounting is often referred to as the “language
of business” because it communicates information about economic activities of a company
that help people make decisions.
2. Accounting information is demanded or needed by decision-makers both inside and outside the
business to provide information about business activities and finances so that informed decisions
can be made. Five groups that create the demand for accounting information and their uses of
accounting information are described below.
(1) Managers need accounting information to plan and make decisions about the business
(e.g., predicting the consequences of their actions and deciding on which actions to take)
and to control its operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers
(e.g., judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future
prospects of a business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or
extend credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by
businesses, to implement a variety of regulatory objectives, and to make national economic
policy decisions.
3. An accounting entity is a company that has an identity separate from that of its owners and
managers and for which accounting records are kept. There are three main forms that
accounting entities take: a sole proprietorship, a partnership, and a corporation.
4. A sole proprietorship is a business entity owned by one person. A partnership is a business entity
owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate
from the personal affairs of the owners. That is, the owners are responsible for the debts of the
business. A corporation is a separate legal entity formed by one or more persons called
stockholders. A corporation is legally separate from the affairs of its owners, which limits the
stockholders’ legal responsibility for the debt of the business to the amount that the stockholders
invested in the business. Corporate shareholders generally pay more taxes than owners of sole
proprietorships or partnerships. Although the combined number of sole proprietorships and
partnerships greatly outnumber the number of corporations, the majority of business in the
United States is conducted by corporations.
1-1
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,CHAPTER 1 Accounting and the Financial Statements
5. The three main types of business activities are financing activities, investing activities, and
operating activities. Financing activities involve obtaining the funds necessary to begin and
operate a business. These funds come from either issuing stock or borrowing money. Investing
activities involve buying and selling assets that enable a corporation to operate. Operating
activities are the normal business activities that a company engages in as it conducts its
business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
6. Assets are the economic resources or future economic benefits obtained or controlled by a
business. Liabilities are the creditors’ claims on the resources of a business. Stockholders’ equity
is the ownership claims on the resources of a business. Stockholders’ equity is considered a
residual interest in the assets of a business that remain after deducting the business’s liabilities.
All three items appear on the balance sheet, forming the following equation:
Assets = Liabilities + Stockholders’ Equity
7. Revenues are the increases in assets (resources) that result from the sale of products or services.
Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of
the business. If revenues are greater than expenses, a corporation has earned net income. If
expenses are greater than revenues, a corporation has incurred a net loss.
8. The four primary financial statements are:
(1) The balance sheet: a presentation of information about a company’s economic resources
(its assets) and the claims against those resources by creditors and owners (liabilities and
stockholders’ equity) at a specific point in time.
(2) The income statement: a report on how well a company has performed its operations—
the profitability of a company—over a period of time.
(3) The retained earnings statement: a report on how much of the company’s income was
retained in the business and how much was distributed to owners over a period of time.
(4) The statement of cash flows: a report on the changes in a company’s cash during a period
of time. The statement of cash flows provides information about the company’s cash inflows
(sources) and outflows (uses) from operating, investing, and financing activities.
9. There are many questions that can be answered based on each of the financial statements:
(1) The balance sheet:
a. What is the total amount of assets (economic resources) of a corporation? What is
the total amount of liabilities (claims against the resources) for a corporation?
b. How much equity do the owners of the corporation have in its assets?
c. Is the corporation able to pay its debts as they become due?
(2) The income statement:
a. How much revenue was earned last month? Last quarter? Last year?
b. What was the total amount of expenses incurred to earn that revenue?
c. How much better off is the corporation at the end of the year than it was at the
beginning of the year?
d. Was the corporation profitable, and what are the prospects for the corporation’s
future profitability?
e. What are the prospects for the future growth of the corporation?
1-2
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Accounting and the Financial Statements
(3) The retained earnings statement:
a. How much income was distributed in dividends by the corporation?
b. What amount of equity in the business has been generated internally?
(4) The statement of cash flows:
a. How much cash was taken in or paid out as a result of operations?
b. How much cash was invested in new equipment?
c. How much cash was used to pay off business debt?
10. Point-in-time measurement means as of a particular date. The balance sheet is a point-in-time
measurement. The period-of-time description applies to what has happened over a time interval.
The income statement is a period-of-time measurement that explains the business activities
between balance sheet dates. The statement of cash flows and the statement of retained
earnings are also period-of-time measurements.
11. The fundamental accounting equation is:
Assets = Liabilities + Stockholders’ Equity
The equation is significant because it means that the balance sheet must always balance. This
implies that what a company owns (its resources) must always be equal to the claims of its
creditors (liabilities) and investors (stockholders’ equity).
12. Each financial statement includes a heading that is comprised of (a) the name of the company,
(b) the title of the financial statement, and (c) the time period covered—either a point-in-time
measurement (an exact date) or a period-of-time description (e.g., a year ended in a specific
date).
13. Current assets are cash and other assets that are reasonably expected to be converted to cash
within one year or the operating cycle, whichever is longer. Current liabilities are obligations that
will be satisfied within one year or the operating cycle, whichever is longer.
Since current assets are presented separately from other assets, statement users can see if
the firm is likely to have enough resources available to meet its current liabilities as they come
due. If current assets were presented among other assets, such a determination would be difficult.
Current liabilities are separated from long-term liabilities because current liabilities will require
asset outflows (or replacement with another liability) much sooner than will long-term liabilities. If
all liabilities were presented together, financial statement users would have difficulty in determining
the assets (economic resources) required in the near future to satisfy the current liabilities.
14. Current assets are generally listed on the balance sheet in order of liquidity or nearness to cash,
whereas current liabilities are usually listed in the order in which they will be paid.
15. The two main components of equity are contributed capital and retained earnings. Contributed
capital is increased by investments of new capital in a company by its owners (the issue of
common stock to stockholders). Retained earnings is the accumulated net income of a company
that has not been distributed to owners. Retained earnings is increased by net income and
decreased by net losses and dividends.
16. Net Income = Total Revenues – Total Expenses
1-3
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
