CHAPTER 1
INTRODUCTION TO FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the forms of business organization and the uses of accounting information. A
sole proprietorship is a business owned by one person. A partnership is a business owned
by two or more people associated as partners. A corporation is a separate legal entity for
which evidence of ownership is provided by shares of stock. Internal users are managers
who need accounting information to plan, organize, and run business operations. The
primary external users are investors and creditors. Investors (stockholders) use accounting
information to decide whether to buy, hold, or sell shares of a company‘s stock. Creditors
(suppliers and bankers) use accounting information to assess the risk of granting credit or
loaning money to a business. Other groups who have an indirect interest in a business are
taxing authorities, customers, labor unions, and regulatory agencies.
2. Explain the three principal types of business activity. Financing activities involve
collecting the necessary funds to support the business. Investing activities involve acquiring
the resources necessary to run the business. Operating activities involve putting the
resources of the business into action to generate a profit.
3. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses of a company for a specific period of time. A retained
earnings statement summarizes the changes in retained earnings that have occurred for a
specific period of time. A balance sheet reports the assets, liabilities, and stockholders‘
equity of a business at a specific date. A statement of cash flows summarizes information
concerning the cash inflows (receipts) and outflows (payments) for a specific period of time.
Assets are resources owned by a business. Liabilities are the debts and obligations of the
business. Liabilities represent claims of creditors on the assets of the business.
Stockholders‘ equity represents the claims of owners on the assets of the business.
Stockholders‘ equity is subdivided into two parts: common stock and retained earnings. The
basic accounting equation is Assets = Liabilities + Stockholders‘ Equity. Within the annual
report, the management discussion and analysis provides management‘s interpretation of
the company‘s results and financial position as well as a discussion of plans for the future.
Notes to the financial statements provide additional explanation or detail to make the
financial statements more informative. The auditor‘s report expresses an opinion as to
whether the financial statements present fairly the company‘s results of operations and
financial position.
*4. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting.
Accounting is a popular major because there are many different types of jobs, with unlimited
potential for career advancement
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
,2-2 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
Difficulties:
Easy: 143
Medium: 101
Hard: 12
Question List by Section
Business Organization and Accounting Information Uses:
Forms of Business Organization; 47, 48, 202, 246
Sole Proprietorship: 5, 44, 49, 58, 59
Partnership: 1, 4, 46, 56
Corporation: 2, 3, 45, 50, 51, 52, 53, 55, 57, 233, 245
Hybrid Forms of Organization: 60, 61
Users and Uses of Financial Information: 6, 7, 11, 74, 87
Internal Users: 62, 63, 64, 75, 77, 82, 234
External Users: 8, 9, 10, 12, 65, 76, 78, 79, 80, 81, 83, 84, 85, 86, 88, 89
Data Analytics: 66, 67, 68, 69, 70, 235, 236
Ethics in Financial Reporting: 71, 72, 73, 237, 255
The Three Types of Business Activity: 97
Financing Activities: 13, 15, 18, 90, 91, 93, 94, 95, 96, 97, 102, 109, 117, 118, 119, 238
Investing Activities: 14, 16, 98, 99, 115, 116
Operating Activities: 17, 19, 20, 100, 101, 103, 104, 105, 106, 107, 108, 110, 111, 112, 113,
114
The Four Financial Statements:
Income Statement: 21, 22, 23, 24,127, 128, 132, 133, 134, 138, 142, 143
Retained Earnings Statement: 120, 122, 123, 124, 125, 126, 129, 130, 131, 135, 137, 139,
140, 141, 144, 145, 146, 147, 148, 149, 150, 154, 164, 169, 178, 181, 252
Balance Sheet: 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 136, 151, 152, 153, 163, 165, 166, 168,
170, 173, 177, 179, 180, 182, 185, 186, 187, 188, 199, 200, 201, 207, 208, 213, 214, 215, 216,
217, 218, 219, 220, 221, 222, 225, 229, 239, 240, 241, 253
Statement of Cash Flows: 26, 121, 171, 174, 183, 242, 249
Interrelationships of Statements: 155, 156, 157, 158, 159, 160, 161, 162, 167, 175, 176, 184,
250, 251, 256
Elements of an Annual Report: 36, 41, 192, 196, 197
Management Discussion and Analysis: 40, 191
Notes to the Financial Statements: 37, 42, 190, 193, 194, 198, 254
Auditor‘s Report: 38, 39, 195
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
, A Further Look at Financial Statements 2-3
TRUE-FALSE STATEMENTS
1. A business organized as a separate legal entity and owned by stockholders is a
partnership.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
2. Corporate stockholders have no personal liability for the debts of the corporation.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
3. The liability of corporate stockholders is limited to the amount of their investment.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
4. The majority of U.S. business is transacted by partnerships.
Ans: F, LO: 1, Bloom: K, Section: Business Organization and Accounting Information Uses, Subsection: Partnerships, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
5. Sole proprietorships in the United States generate more revenue than the other two
forms of business enterprise.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1,
AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
6. Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None,
IMA: Reporting
7. Some users of accounting information are internal to the company while others are
external.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None,
IMA: Reporting
8. Management of a business enterprise is the major external user of accounting
information.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
9. External users of accounting information include managers who plan, organize, and run
a business.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
10. The accounting information needs and questions of external users vary considerably.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
11. Accounting communicates financial information about a business to both internal and
external users.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None,
IMA: Reporting
12. Two primary external users of accounting information are investors and creditors.
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
, 2-4 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
None, AICPA BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
13. Financing activities for corporations include borrowing money and selling shares of their
own stock.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
14. Investing activities involve collecting the necessary funds to support the business.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
15. The purchase of equipment is an example of a financing activity.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
16. Assets are resources owned by a business that provide future services or benefits to the
business.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
17. Payments by the business to its owners are operating activities.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
18. The economic resources owned by a business are called stockholders‘ equity.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
19. Operating activities involve putting the resources of the business into action to generate
a profit.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
20. A business is usually involved in only two types of activities—financing and investing.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA
BC: Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
21. Net income for the period is determined by subtracting expenses and dividends from
revenues.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BC:
Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
22. A different set of financial statements is usually prepared for each user.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
23. The heading for an income statement prepared for the year ending December 31, 2025
will include the line ―As of December 31, 2025.‖
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
24. Net income is another term for revenue.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC:
Process and Resource Management Perspectives, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
25. Cash is another term for stockholders‘ equity.
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
