FINANCIAL ACCOUNTING 7TH EDITION BY MICHELLE HANLON, ROBERT MAGEE, GLENN PFEIFFER TEST BANK
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Module
FINANCIAL ACCOUNTING
Institution
FINANCIAL ACCOUNTING
Multiple Choice
Topic: Business organizations
LO: 1
1. Which of the following forms of business organizations exists as a legal entity?
A) A sole proprietorship
B) A partnership
C) A corporation
D) A labor union
Answer: C
Rationale: A corporation is a form of business organization that ex...
LO1-1 Identify the users of
accounting information and
1, 2 1-3 1, 2 2, 5, 6
discuss the costs and benefits of
disclosure. (p. 1-3)
LO1-2 Describe a company's
business activities and explain
how these activities are 3-6 4, 5 3 1, 6
represented by the accounting
equation. (p. 1-7)
LO1-3 Introduce the four key
financial statements including the
balance sheet, income statement,
7-9 4, 6-11 4-11 1-5
statement of stockholders' equity,
and statement of cash flows.
(p. 1-11)
LO1-4 Describe the institutions
that regulate financial accounting
and their role in establishing 10-12 12, 19, 20 3, 4
generally accepted accounting
principles. (p. 1-16)
LO1-5 Compute two key ratios
that are commonly used to
assess profitability and risk - 13, 14 13-18 13, 14
return on equity and the debt-to-
equity ratio. (p. 1-21)
LO1-6 Appendix 1A: Explain the
conceptual framework for 15, 16 21, 22 12 3, 5
financial reporting. (p. 1-25)
.
1-1 Financial Accounting, 7th Edition
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,Chapter 1: Introducing Financial Accounting
True/False
Topic: Cost and benefits of disclosure
LO: 1
1. One reason companies are motivated to disclose financial information to external decision makers is
that it may lower financing and operating costs.
Answer: True
Rationale: For example, when a company applies for a loan, the bank uses the company’s financial
statements to help determine the appropriate interest rate. Without this financial information, a company
may have a higher cost of borrowing or not obtain the loan at all.
Topic: Demand for accounting information
LO: 1
2. Financial accounting is designed primarily for decision makers within the company.
Answer: False
Rationale: Financial accounting is designed primarily to provide information to decision makers outside
of the company, while managerial accounting is designed primarily for decision makers within the
company.
Topic: Investing activities
LO: 2
3. Investing activities are the acquiring and disposing of liabilities that a company needs in order to finance
its operating activities.
Answer: False
Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the
production and sale of a company’s products and services.
Topic: Accounting equation
LO: 2
4. Assets must always equal liabilities plus stockholders’ equity.
Answer: True
Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must
always stay in balance.
.
Test Bank, Chapter 1 1-2
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, Topic: Financing activities
LO: 2
5. Other than operating profit, there are three main sources of external financing.
Answer: False
Rationale: There are two main sources of financing: owner (also called shareholder or equity) financing
and nonowner (also called creditor or lender) financing.
Topic: Financing and investing activities
LO: 2
6. Financing activities are defined as the acquiring and disposing of resources for the purpose
of selling products and services.
Answer: False
Rationale: Financing activities are defined as methods a company uses to raise funds to pay for
resources. Investing activities are defined as the acquiring and disposing of resources for the purpose
of selling products and services.
Topic: Statement of cash flows
LO: 3
7. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
activities over a period of time.
Topic: Retained earnings
LO: 3
8. Retained earnings are present on both the income statement and the statement of stockholders’ equity.
Answer: False
Rationale: Retained earnings are present in the statement of stockholders’ equity and the balance
sheet. The income statement represents current period earnings.
Topic: Balance sheet
LO: 3
9. If Beatty Company reports retained earnings of $242.6 million on its balance sheet, it will also
report $242.6 million in cash.
Answer: False
Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’
equity. That does not imply, however, that liability and equity accounts relate directly to specific assets.
.
1-3 Financial Accounting, 7th Edition
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