,Chapter 1—Accounting and the Financial Statements
TRUE/FALSE
1. There are more corporations than sole proprietorships and partnerships in the United States.
ANS: F PTS: 1 DIF: Easy OBJ: 1-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
2. The three main business activities are financing, operating, and investing.
ANS: T PTS: 1 DIF: Easy OBJ: 1-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-03-Business Forms
3. Internal users of accounting information include present creditors and management.
ANS: F PTS: 1 DIF: Easy OBJ: 1-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
4. The income statement summarizes the assets, liabilities and stockholders’ equity for a period of time.
ANS: F PTS: 1 DIF: Easy OBJ: 1-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
5. The four basic financial statements are the Income Statement, Statement of Retained Earnings,
Balance Sheet, and Statement of Cash Flows.
ANS: T PTS: 1 DIF: Easy OBJ: 1-3
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
6. The amount of earnings distributed to stockholders can be found in the income statement as an
expense.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-5 | 1-6
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
7. Stockholders' equity is composed of two main sources: liabilities and contributed capital.
ANS: F PTS: 1 DIF: Easy REF: CS1-2
OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
8. The first step in preparing the classified balance sheet is to list the assets in order of liquidity.
ANS: F PTS: 1 DIF: Moderate REF: CS1-2
OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
, 9. The only financial statement that reports the retained earnings balance at the end of the period is the
Statement of Retained Earnings.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-4 | 1-6
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
10. An income statement provides information at one specific point in time, while the other basic financial
statements provide information on activities that occur over a period of time.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-5
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
11. When an entity's stock issuances exceed its expenses for a period of time, the entity will report net
income.
ANS: F PTS: 1 DIF: Moderate REF: CS1-3
OBJ: 1-5
NAT: AICPA FN-Measurement | AACSB Communication | ACBSP-APC-09-Financial Statement
12. Contributed capital is the residual interest that remains after deducting liabilities from stockholders'
equity.
ANS: F PTS: 1 DIF: Moderate REF: CS1-2
OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
13. The four steps in preparing the Income Statement are: 1) Prepare heading, 2) List the revenues of the
company, 3) List the expenses of the company, 4) List the dividends of the company.
ANS: F PTS: 1 DIF: Moderate REF: CS1-3
OBJ: 1-5
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
14. Stockholders equity is composed of contributed capital and retained earnings.
ANS: T PTS: 1 DIF: Moderate OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
15. The primary objective of internal auditors who are employees of the company is to provide assurance
to the company’s stockholders that the financial statements are fairly presented.
ANS: F PTS: 1 DIF: Easy OBJ: 1-9
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
16. The independent auditor's report conveys whether or not the business is a good investment.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-9
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
, 17. The Statement of Cash Flows shows cash inflows and cash outflows for a period of time.
ANS: T PTS: 1 DIF: Moderate OBJ: 1-7
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
18. Because the four financial statements are interrelated (i.e., there is a natural progression from one
financial statement to another), the balance sheet should be prepared first.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-8
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
19. The company's annual report includes an audit report, notes to the financial statements, but not
management's discussion and analysis.
ANS: F PTS: 1 DIF: Moderate OBJ: 1-9
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
20. Investing is the business activity that measures the company’s ability to generate cash from its revenue
and expense activities.
ANS: F PTS: 1 DIF: Easy OBJ: 1-2
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-03-Business Forms
21. The owners of a sole proprietorship, partnership and corporations have limited liability.
ANS: F PTS: 1 DIF: Easy OBJ: 1-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
22. The purpose of financial reporting is to provide economic information to investors, creditors, and other
financial statement users.
ANS: T PTS: 1 DIF: Easy OBJ: 1-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
23. Creditors use accounting information to evaluate whether to loan money to a company.
ANS: T PTS: 1 DIF: Easy OBJ: 1-1
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-01-Purpose
24. Current assets include all of the following: cash, inventory, equipment, supplies, and accounts
receivable.
ANS: F PTS: 1 DIF: Easy OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
25. Current liabilities are typically listed in the order in which they will be paid.
ANS: T PTS: 1 DIF: Moderate OBJ: 1-4
NAT: AICPA FN-Reporting | AACSB Communication | ACBSP-APC-09-Financial Statement
26. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) long-term
investments, and 3) intangibles.
© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
