Fundamentals of Financial Accounting, 6e (Phillips)
Chapter 1 Business Decisions and Financial Accounting
1) Stockholders are owners of a corporation.
Answer: TRUE
Explanation: Stockholders are the owners of a corporation.
Difficulty: 1 Easy
Topic: Accounting for Business Decisions
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) All corporations acquire financing by issuing stock for sale on public stock exchanges.
Answer: FALSE
Explanation: Most corporations start out as private companies and will apply to become public
companies ("go public") if they need a lot of financing. Financing can also be acquired by
borrowing from banks.
Difficulty: 2 Medium
Topic: Organizational Forms
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The company
owes $10 million dollars to its creditors. As a result of the bankruptcy, you are responsible for
paying $100,000 (or $10 million × 1%) of the amount owed to the creditors.
Answer: FALSE
Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from
both legal and accounting perspectives. This means that a corporation, not its owners, is legally
responsible for its own taxes and debts.
Difficulty: 2 Medium
Topic: Organizational Forms
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
,4) Cash paid for wages is an example of an operating activity on the statement of cash flows.
Answer: TRUE
Explanation: Cash flows from running the business, including cash paid for wages, are operating
activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) Borrowing money from a bank is a financing activity on the statement of cash flows.
Answer: TRUE
Explanation: On the statement of cash flows, borrowing and repaying bank loans are financing
activities.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) The daily activities involved in running a business, such as buying supplies and paying
salaries and wages, are classified as operating activities on the statement of cash flows.
Answer: TRUE
Explanation: Buying supplies and paying salaries and wages are normal operating costs on the
statement of cash flows.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
,7) Stockholders' equity is the difference between a company's assets and its liabilities.
Answer: TRUE
Explanation: Assets = Liabilities + Stockholders' Equity; therefore, Assets – Liabilities =
Stockholders' Equity
Difficulty: 2 Medium
Topic: The Basic Accounting Equation
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) A company owes $200,000 on a bank loan. It will be reported by the company as Accounts
Payable.
Answer: FALSE
Explanation: Formal debt, evidenced by a written contract or note, is reported as Notes Payable.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) Amounts reported on financial statements are sometimes rounded to the nearest million.
Answer: TRUE
Explanation: Large businesses often round the numbers on their financial statements to the
nearest thousand or million.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
, 10) Accounts Payable, Notes Payable, and Salaries and Wages Payable are examples of
liabilities.
Answer: TRUE
Explanation: An account with the word "payable" in its title is a liability.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Dividends are subtracted from revenues on the income statement.
Answer: FALSE
Explanation: The income statement reports revenues and expenses. Dividends are not expenses.
Rather, dividends are an optional distribution of earnings to stockholders, approved by the
company's board of directors, and are presented on the statement of retained earnings.
Difficulty: 2 Medium
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) If a company reports net income on the income statement, then the statement of cash flows
will report the same amount as cash flows from operating activities for the period.
Answer: FALSE
Explanation: Net income is not the same as cash flows from operating activities. Net income is
not necessarily equal to cash because revenues are reported when earned and expenses when
incurred regardless of when cash is received or paid.
Difficulty: 2 Medium
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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