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Financial Accounting Robert Libby 10th Edition - Test Bank
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Financial Accounting, 10e (Libby) Chapter 1 Financial Statements and Business Decisions 1) A business entity's accounting system creates financial accounting reports which are provided to external decision makers. Answer: TRUE Explanation: The accounting system collects financial data and produ...

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  • September 16, 2023
  • 1054
  • 2022/2023
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,Financial Accounting, 10e (Libby)
Chapter 1 Financial Statements and Business Decisions

1) A business entity's accounting system creates financial accounting reports which are provided
to external decision makers.

Answer: TRUE
Explanation: The accounting system collects financial data and produces reports used by both
internal decision makers and external decision makers.
Difficulty: 1 Easy
Topic: Accounting system-Information users
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

2) Business managers utilize managerial accounting reports to plan and manage the daily
operations.

Answer: TRUE
Explanation: Managerial accounting reports are for internal use to assist managers with day-to-
day operations. Unlike financial accounting reports, managerial reports are for internal use.
Difficulty: 1 Easy
Topic: Accounting system-Information users
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

3) Borrowing money is an investing activity.

Answer: FALSE
Explanation: Borrowing money is a form of financing and therefore is a financing activity.
Difficulty: 1 Easy
Topic: Accounting system-Information conveyed
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation


1
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

,4) The balance sheet includes assets, liabilities, and stockholders' equity as of a point in time.

Answer: TRUE
Explanation: The balance sheet reports the amount of assets, liabilities, and stockholders' equity
of an entity at a point in time.
The balance sheet is referred to as a financial position statement; listing assets, liabilities, and
equity accounts as of a specific date.
Difficulty: 1 Easy
Topic: Financial statements—Balance sheet
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

5) Revenue is recognized within the income statement during the period in which cash is
collected.

Answer: FALSE
Explanation: Revenue is recognized within the income statement during the period in which
revenue is earned.
Difficulty: 1 Easy
Topic: Financial statements—Income statement
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

6) Total assets are $37,500, total liabilities are $20,000 and common stock is $10,000; therefore,
retained earnings are $7,500.

Answer: TRUE
Explanation: $37,500 = $20,000 + $10,000 + X; X = $7,500
Difficulty: 2 Medium
Topic: Financial statements—Balance sheet
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation



2
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

, 7) For the current year, net income of Carol Company is $20,000 and dividends declared are
$6,000; therefore, retained earnings have increased $26,000 during the year.

Answer: FALSE
Explanation: Retained earnings = Net income less dividends declared. Therefore, retained
earnings have increased by $20,000 less $6,000 = $14,000.
Difficulty: 1 Easy
Topic: Financial statements—Stockholders equity
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation

8) The income statement is a measure of an entity's economic performance for a period of time.

Answer: TRUE
Explanation: The income statement reports the performance of a business during the accounting
period.
Difficulty: 1 Easy
Topic: Financial statements—Income statement
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

9) The accounting equation states that Assets = Liabilities + Stockholders' Equity.

Answer: TRUE
Explanation: The accounting equation, also known as the balance sheet equation, states that
Assets = Liabilities + Stockholders' Equity.
Difficulty: 1 Easy
Topic: Financial statements—Balance sheet
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation




3
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

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