Test Bank for for Understanding Financial Accounting, 3rd Canadian Edition, By Christopher Burnley CHAPTER 1 OVERVIEW OF CORPORATE FINANCIAL REPORTING CHAPTER LEARNING OBJECTIVES 1. Define financial accounting and understand its relationship to economic decision -making. • Financial accounting is the process by which information on the transactions of an organization is captured, analyzed, and reported to external decision makers. • These decision makers are referred to as financial statement users and include investors and creditors. • The primary purpose of financial acc ounting information is to aid these users in making economic decisions related to the reporting organization, such as whether to invest in it or lend it money. 2. Identify the main users of financial accounting information and explain how they use this information. • The main users of financial accounting information include shareholders, the board of directors, potential investors, creditors (bankers and suppliers), regulators (stock exchanges), taxing authorities (governments), securities analysts, and ot hers. • Shareholders, the board of directors, and potential investors will use financial accounting information to enable them to assess how well management has run the company; determine whether they should buy, sell, or continue to hold shares in the compa ny; assess the company’s share price relative to the financial accounting information; and so on. • Creditors will use financial accounting information to determine whether they should lend funds to the company, establish credit terms for it, assess a compan y’s ability to meets its obligations, and so on. • Regulators will use financial accounting information to determine whether a company has met its listing requirements. • Taxing authorities will use this information in assessing the taxes owed by the organizat ion. 3. Describe the major forms of business organization and explain the key distinctions between each form. • There are three major forms of business organization: (1) proprietorships, (2) partnerships, and (3) corporations. • There are public corporations (whose shares trade on a public stock exchange and are widely held) and private corporations (whose shares do not trade on a public exchange and are generally owned by a small number of people). • Corporations are separate legal entities, whereas proprietor ships and partnerships are not. This means the personal assets of owners are protected in the event of legal action against 1 - 2 Test Bank for Understanding Financial Accounting , Third Canadian Edition corporations, whereas they are at risk in the case of proprietorships and partnerships. It also means corporations file separate tax returns, whereas the income from proprietorships and partnerships is reported on the personal tax returns of their owners. 4. Explain the three categories of business activities and identify examples of transactions related to each category. • The three c ategories of business activities are: (1) operating, (2) investing, and (3) financing activities. • Operating activities are related to the company’s revenues and expenses, such as sales to customers, collections from customers, purchases of inventory, and payments of wages and other expenses. • Investing activities include buying and selling property, plant, and equipment and buying and selling the shares of other companies. • Financing activities include borrowing money, issuing shares, repaying loan principal, and paying dividends. 5. Identify and explain the content and reporting objectives of the four basic financial statements and the notes to the financial statements. • There are four basic financial statements: (1) the statement of income, (2) the statement of changes in equity, (3) the statement of financial position, and (4) the statement of cash flows. • The objective of the statement of income is to measure the company’s operating performance (its profit) for a period of time. This is meas ured by subtracting the expenses incurred during the period from the income earned (revenues) in the same period. • The objective of the statement of changes in equity is to provide details on how each component of shareholders’ equity changed during the per iod. The components of shareholders’ equity include share capital (the shares issued by the company) and retained earnings (the company’s earnings that have been kept and not distributed as dividends). • The objective of the statement of financial position i s to present information on a company’s assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the company and embody a future benefit. Examples include cash; accounts receivable; inventory; property, plant, and equi pment; land; and so on. Liabilities are obligations of a company that will result in an outflow of resources. Examples include accounts payable, deferred revenue, long -term debt, and so on. Shareholders’ equity represents the shareholders’ interest in the assets of the company and is referred to as net assets . Examples include common shares and retained earnings. • The objective of the statement of cash flows is to enable financial statement users to assess the company’s inflows and outflows of cash related to its operating, investing, and financial activities for a period of time. • The notes to a company’s financial statements are used to provide additional detail and context for items in the financial statements. They enable the financial statements themselves to remain uncluttered, while increasing their usefulness. Overview of Corporate Financial Reporting 1 - 3 TRUE -FALSE STATEMENTS 1. Decision makers are often referred to as users of the financial statements and include investors and creditors. Answer: True Bloomcode: Knowledge Difficulty: Medium Learning Objective: Define financial accounting and understand its relationship to economic decision -
making . CPA: Financial Reporting AACSB: Analytic 2. The primary purpose of financial accounting information is to aid users in their economic decision -
making relative to the organization. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Define financial accounting and understand its relationship to economic decision -
making . CPA: Financial Reporting AACSB: A nalytic 3. The section of an annual report that contains management’s discussion of the company’s operating results is referred to as the Statement of Management’s Responsibility. Answer: False Bloomcode: Knowledge Difficulty: Medium Learning Objective: Define financial accounting and understand its relationship to economic decision -
making . Learning Objective: Identify and explain the content and reporting objectives of the four basic financial statements and the notes to the financial statements . CPA: Financial Reporting AACSB: Analytic 4. The shareholders are an example of an internal user of annual report information. 1 - 4 Test Bank for Understanding Financial Accounting , Third Canadian Edition Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the main users of financial acco unting information and explain how they use this information . CPA: Financial Reporting AACSB: Analytic 5. Information contained in the financial statements of a company is of use to both internal and external users. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the main users of financial accounting information and explain how they use this information . CPA: Financial Reporting AACSB: Analytic 6. There may be a single shareholder in the case of a public co mpany or many shareholders in the case of a private company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the main users of financial accounting information and explain how they use this information . CPA: Financial Rep orting AACSB: Analytic 7. A firm's activities can be divided into borrowing, investing, and operating. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the three categories of business activities and identify examples of transactions related to each category . CPA: Financial Reporting AACSB: Analytic
