Deck 2: Financial Statements: a Window on an Entity

Question 1

What does the term "consolidated" mean when used to describe financial statements?

A)Consolidated means that financial statements are presented for two years.
B)Consolidated means that the financial statements have been approved by an auditor.
C)Consolidated means that the five financial statements have been totalled together.
D)Consolidated means that the financial statements contain the information of more than one company.

Answer 1

D

Question 2

Which of the following is an objective of general purpose financial reporting?

A)To provide information about an entity's economic resources, obligations, and equity/net assets.
B)To provide information that is helpful to investors, creditors and other users in making resource allocation decisions and/or assessing management stewardship.
C)To provide information that is useful in assessing the economic performance of the entity.
D)All of these are objectives of financial reporting.

Answer 2

D

Question 3

Which of the following statements about general purpose financial statements is correct?

A)General purpose financial statements are designed to meet the information needs of
B)every stakeholder in every situation.
C)General purpose financial statements provide information to all stakeholders.
D)General purpose financial statements are intended for specific use only.
E)The financial statements of non-public companies are general purpose financial statements.

Answer 3

C

Question 4

Anvilles Inc.manufactures metal sheets for construction.Mr.Anvilles, the sole shareholder, arranges to transport two hundred metal sheets to the family cottage in Mont Orford.He tells the bookkeeper to record the cost of the metal sheets as cost of goods sold. Which of the following qualitative characteristics of accounting information has not been respected?

A)Both verifiability and the entity concept
B)Both the unit of measure assumption and faithful representation
C)Both faithful representation and the entity concept
D)Both relevance and the unit of measure assumption

Question 5

One drawback to the unit-of-measure assumption is:

A)it inhibits an assessment of going concern.
B)information about individual items being measured is lost.
C)it makes it easier to measure certain assets, such as intellectual property, human capital, and social costs.
D)it makes it harder to measure transactions.

Question 6

The best description of the financial statements that a public company prepares is:

A)tax-based financial statements.
B)specific purpose financial statements.
C)general principle financial statements.
D)general purpose financial statements.

Question 7

The transition to International Financial Reporting Standards can be seen as enhancing which of the following qualitative characteristics?

A)Verifiability
B)Comparability
C)Understandability
D)Timeliness

Question 8

Mr.Switch, a local business man, owns two different businesses-a lumber sawmill and a restaurant.The price of lumber has declined and therefore sawmill is in financial difficulty.However, the restaurant is thriving, and Mr.Switch would like to start paying two of the sawmill employees under the restaurant's payroll.His accountant explains that this is not in accordance with certain basic principles in accounting.Which principle is he referring to?

A)Full disclosure
B)Periodic-reporting assumption
C)Entity concept
D)Unit-of-measure assumption

Question 9

Financial information is relevant for all of the following reasons except:

A)for making predictions about the future cash flows
B)for making comparisons with industry data.
C)to determine the liquidation values of capital assets
D)for confirming or correcting past evaluations.

Question 10

How often do companies prepare general purpose financial statements?

A)At least once a year.
B)Only when asked for by a stakeholder.
C)Every time management needs to make a financial decision.
D)As often as GAAP requires.

Question 11

Which of the following statements about a fiscal year is true?

A)It is the same for all companies in the same industry.
B)It is the financial accounting term used to describe the calendar year.
C)It is a 12-month period ending any time in the calendar year.
D)It is the period covered by the balance sheet.

Question 12

The assumption that a business enterprise will not be sold or liquidated in the near future is known as the:

A)entity concept.
B)unit-of-measure assumption.
C)going-concern assumption.
D)periodic-reporting assumption.

Question 13

Financial information does not demonstrate comparability when:

A)companies in the same industry use different accounting policies to account for the same type of transaction.
B)one company changes its estimate of the residual value of a fixed asset while the other company does not change it.
C)one company fails to adjust its financial statements for changes in the fair value of short term investments, while the other company makes the adjustment.
D)both companies use different suppliers.

Question 14

Sun Company owns 75% of Moon Inc., how would Sun's financial statements be prepared?

A)On a consolidated basis.
B)On a specific purpose basis.
C)On a subsidiary basis.
D)On a financial basis.

Question 15

Which of the following statements best describes the IFRS conceptual framework?

A)It provides a set of rules for accountants to follow.
B)It provides concepts, since accounting is based on nature of law.
C)It helps equity investors interpret the earnings per share.
D)It provides a basis for preparing and presenting financial statements.

Question 16

When assessing general purpose financial statements, the financial analyst takes into consideration the fact that many important assets may not be included in the company's statement of financial position, such as human resource capital, intellectual property and social responsibility.This limitation is the result of applying which of the following characteristics of financial information?

A)Entity concept
B)Unit-of-measure assumption
C)Going-concern assumption
D)Periodic-reporting assumption

Question 17

General purpose financial statements include which of the following sets of statements?

A)Balance statement, income statement, statement of long-term debt, cash flow statement
B)Balance sheet, income statement, statement of shareholders' equity, cash flow statement
C)Balance sheet, income statement, statement of shareholders' equity, statement of long-term debt
D)Balance statement, income statement, statement of retained earnings, cash balance

Question 18

Why are financial statements prepared on a comparative basis?

A)To provide users with easy comparison with the industry.
B)To provide users with a perspective on the economy.
C)Because making comparisons using accounting information can be difficult and misleading.
D)Because making comparisons significantly contributes to the interpretation of accounting information.

Question 19

Which financial statement is a snapshot at a point in time?

A)Balance sheet
B)Income statement
C)Statement of changes in equity
D)Cash flow statement

Question 20

The use of a company's financial statements to assess a new share offering would rely most heavily on which of the following characteristics of information?

A)Verifiability
B)Relevance
C)Going concern assumption
D)Unit of measure assumption

Question 21

Which of the following statements best describes the cash flow statement?

A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Question 22

Which of the following correctly describes an asset?

A)An obligation of the entity
B)An investment the owners have made
C)An economic resource that provides future benefits
D)An economic sacrifice made to earn revenue

Question 23

Which of the following statements best describes the statement of comprehensive income?

A)It provides information about the financial position of an entity at a specific point in time.
B)It measures economic events that involve non-owners but affect equity.
C)It summarizes the changes to shareholders' equity during a period.
D)It is an extension of the balance sheet.

Question 24

Which of the following correctly describes a liability?

A)An obligation of the entity
B)An investment the owners have made
C)An economic resource that provides future benefits
D)An economic sacrifice made to earn revenue

Question 25

Which of the following statements best describes the balance sheet?

A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes only the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Question 26

Which of the following statements about the cash flow statement is true?

A)The cash flow statement reports what the net income would be if the cash basis of accounting had been followed.
B)The cash flow statement deals with cash, an asset; therefore, the cash flow statement is a snapshot statement just like the balance sheet.
C)The cash flow statement does not have to be included in general purpose financial statements.
D)The cash flow statement shows how the company managed its money for the period from more than just operations.

Question 27

A shareholder invested $75,000, made up of $50,000 in cash and a vehicle worth $25,000, in a new company and received shares in exchange.What is the effect of this transaction on the accounting equation?

A)Assets increases by $75,000 and owners' equity increases by $75,000.
B)Assets increases by $75,000 owners' equity increases by $50,000, and liabilities increases by $25,000.
C)Assets increases by $50,000 and owners' equity increases by $50,000.
D)Assets increases by $50,000 and liabilities increases by $50,000.

Question 28

What is the accounting equation?

A)Assets + Liabilities = Owners' Equity
B)Assets = Liabilities - Owners' Equity
C)Assets = Liabilities + Owners' Equity
D)Assets + Owners' Equity = Liabilities

Question 29

Brantford Business Ltd.(BBL) has a loan outstanding from a Canadian bank.It uses the loan to finance its working capital.The bank has asked for BBL to provide it with monthly listings of their accounts receivables and inventory items.The requested listing is an example of:

A)a special purpose report.
B)a general purpose report.
C)a balance sheet report.
D)a cash flow report.

Question 30

Trout Co.ordered and received inventory worth $45,000 on credit.What is the effect of this transaction on the accounting equation?

A)Assets increases by $45,000 and liabilities increases by $45,000.
B)Assets increases by $45,000 and liabilities decreases by $45,000.
C)Assets decreases by $45,000 and liabilities increases by $45,000.
D)Assets decreases by $45,000 and liabilities decreases by $45,000.

Question 31

Which of the following statements best describes the Statement of Changes in Equity?

A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to shareholders' equity during a period.
D)It shows how an entity managed its cash during the reporting period.

Question 32

Whitefish Inc.bought a building worth $750,000.They paid $150,000 in cash and borrowed the remainder from a bank.What is the effect of this transaction on the accounting equation?

A)Assets increases by $750,000 and liabilities increases by $750,000.
B)Assets increases by $750,000 and liabilities increases by $660,000.
C)Assets increases by $600,000 and liabilities increases by $750,000.
D)Assets increases by $600,000 and liabilities increases by $600,000.
Both assets and liabilities increased by $600,000 ($750,000 - $150,000)

Question 33

The bookkeeper at Walin Ltd.has prepared a list of all the property, plant and equipment the company owns, including their original cost to the company and how much has been depreciated to date.Where will this information most likely be included in the company's general purpose financial statements?

A)On the balance sheet.
B)In the cash flow statement.
C)In the notes to the financial statements.
D)This information will not be included in the company's general purpose financial statements.

Question 34

If an entity receives cash from a customer for payment of an amount owing to them, what is the effect on the accounting equation?

A)Assets and liabilities both increase.
B)Assets and liabilities both decrease.
C)Assets and owners' equity both decrease
D)There is no effect on the accounting equation.

Question 35

If an entity pays off an amount owed to a supplier, what is the effect on the accounting equation?

A)Assets and liabilities both increase.
B)Assets and liabilities both decrease.
C)Assets and owners' equity both decrease
D)There is no effect on the accounting equation.

Question 36

Sam's Snow Removal received $500 at the beginning of the winter to cover the fees for the entire winter for cleaning a customer's driveway while they went to Florida for the season.What is the effect of this transaction on the accounting equation?

A)Assets increases by $500 and owners' equity increases by $500.
B)Assets increases by $500 and liabilities increases by $500.
C)Liabilities increases by $500 and owners' equity increases by $500.
D)The increase and decrease in assets offset each other.

Question 37

Mats owns and operates a small advertising business from an office.His home is worth $400,000, his business assets are worth $275,000, and his business obligations total $65,000.How much equity does he have in his advertising business?

A)$210,000
B)$335,000
C)$340,000
D)$610,000

Question 38

If a company pays rent for the next period in advance, what is the effect of the transaction on the accounting equation?

A)Assets decrease, and liabilities decrease.
B)Assets decrease, and owners' equity decrease.
C)Assets increase, and liabilities increase.
D)There is no effect on the accounting equation.

Question 39

In 2012, Smith's Corner Store had an increase in gross margin of $28,000; however, the gross margin percentage decreased.This is most likely caused by:

A)a decrease in volume and a decrease in selling price
B)an increase in volume and an increase in selling price.
C)an increase in volume and a decrease in selling price.
D)a decrease in volume and an increase in selling price.

Question 40

Which of the following statements best describes the income statement?

A)It provides information about the financial position of an entity at a specific point in time.
B)It measures the economic performance of the entity over a period of time.
C)It summarizes the changes to retained earnings during a period.
D)It shows how an entity managed its cash during the reporting period.

Question 41

Which of the following statements about an operating cycle is true?

A)For all businesses the operating cycle is a year or less.
B)The operating cycle is useful in defining current assets.
C)The operating cycle is the difference between revenues and operating expenses.
D)An operating cycle is the time it takes from the sale of inventory until the collection of cash.

Question 42

Which of the following statements about current liabilities is true?

A)Current liabilities are always less than current assets.
B)Current liabilities are amounts from non-operating activities only.
C)Current liabilities will be paid or satisfied within an operating cycle.
D)Current liabilities are legal obligations of the company.

Question 43

Pike Ltd.bought a new delivery truck for its business.The truck sells for $75,000, because Pike bought a demonstrator model, they paid $65,000 only.While driving it home from the sales lot, the driver had an accident, and damages were estimated at $1,000.At what value should the truck be recorded on Pike's statement of financial position?

A)$64,000
B)$65,000
C)$66,000
D)$75,000

Question 44

What does the term "deficit" mean in the context of general purpose financial statements?

A)A deficit is when the net income is negative.
B)A deficit is when the retained earnings balance is negative.
C)A deficit is when the current liabilities exceed the current assets.
D)A deficit is when a company borrows money.

Question 45

Bass Ltd.borrowed $100,000 from a bank.They will repay $10,000 a year for the next ten years plus 5% interest.How would the loan be initially recorded on Bass's statement of financial position?

A)$100,000 non-current liability
B)$100,000 current liability
C)$10,000 current liability and $90,000 non-current liability
D)$15,000 current liability and $90,000 non-current liability

Question 46

Yamaska just purchased a restaurant from a company that went out of business.They are going to sell off all the furniture, tables and chairs that came with it, because they are going to redecorate it with a new theme.How would the building and the furniture be reported on the balance sheet?
$\begin{array}{ll}&\text { Building } & \text { Furniture } \\A.&\text { Current asset } & \text { Current asset } \\B.&\text { Current asset } & \text { Non-current asset } \\C.&\text { Non-current asset } & \text { Current asset } \\D.&\text { Non-current asset } & \text { Non-current asset }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 47

Which of the following statements about the payment of dividends is true?

A)They are reported in the cash from operations.
B)They are reported in the cash from financing activities.
C)They are reported in the cash from investing activities.
D)They are reported as an expense on the income statement.

Question 48

What are direct investments by shareholders in a company called?

A)Dividends
B)Capital stock
C)Retained earnings
D)Investments

Question 49

Which of the following is a non-current asset?

A)Accounts receivable
B)Inventory
C)Prepaid rent
D)Intangible assets

Question 50

Which of the following industries would most likely have an operating cycle longer than a year?

A)A grocery store
B)A wine producer
C)A soft drinks producer
D)A car manufacturer

Question 51

Massawippi Inc.owes a supplier $10,000.They have signed a note payable for the amount, promising to repay it in six months with interest.They also have a loan outstanding that, starting next year, they will repay in annual instalments over the next five years.How would the note payable and the loan be reported on the balance sheet? $\begin{array}{ll}&\text { Note Payable } &\text { Loan } \\A.&\text { Current liability } & \text { Current liability } \\B.&\text { Current liability } & \text { Non-current liability } \\C.&\text { Non-current liability } & \text { Current liability } \\D.&\text { Non-current liability } & \text { Non-current liability }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 52

Which of the following is an indirect investment by a shareholder?

A)The cash paid for shares.
B)A plot of land exchanged for shares.
C)The net income retained by the company.
D)The dividends paid to shareholders.

Question 53

If a company made a principal repayment on a long-term loan, which of the following statements about the repayment is true?

A)It is reported in the cash from operations.
B)It is reported in the cash from financing activities.
C)It is reported in the cash from investing activities.
D)It is reported as an expense on the income statement.

Question 54

Which of the following can you find in the notes to the financial statements?

A)A list of all the stakeholders of the entity.
B)A summary of the entity's significant accounting policies.
Of the special purpose reports prepared
D)Management's discussion of the results of the entity.

Question 55

Gifts Galore is a souvenir shop.They have just paid $2,000 for the exclusive rights to sell the latest hot fad "Talking Toads".They estimate the fad should last about six months.They also paid $250,000 to be the exclusive carrier of Olympic souvenirs for the next four years.How would each of these intangible assets be reported on the balance sheet?
$\begin{array}{ll}&\text { Talking } & \text { Olympic } \\&\text { Toads } & \text { Souvenirs } \\A.&\text { Current asset } & \text { Current asset } \\B.&\text { Current asset } & \text { Non-current asset } \\C.&\text { Non-current asset } & \text { Current asset } \\D.&\text { Non-current asset } & \text { Non-current asset }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 56

Which of the following would be considered as an asset for accounting purposes?

A)Employees who work for the company
B)Research into new products for the company
C)A building owned by the company but rented out
D)Advertising spent on attracting customers to the company

Question 57

Which of the following is not a liability?

A)The amount owing to a supplier
B)A warranty sold with a product
C)The amount owing for next month's rent
D)A cash deposit received on a sale for next month

Question 58

Which of the following correctly describes an expense?

A)An obligation of the entity.
B)An investment the owners have made in the business.
C)An economic resource that provides future benefits.
D)An economic sacrifice made to earn revenue.

Question 59

Which of the following would be classified as inventory?

A)Cars in the fleet of a car rental company
B)Cars in the fleet of a pizza delivery company
C)Land held for expansion by a retail company
D)Land on which a retail company owns a building

Question 60

What is a payment of cash to a corporation's shareholders called?

A)A liability
B)A dividend
C)A deficit
D)An expense

Question 61

The opening balance of retained earnings for Musicala Inc.was $325,000.During the year, it earned net income of $52,400 and paid dividends of $16,000.What is the closing balance of retained earnings?

A)$256,600
B)$309,000
C)$361,400
D)$377,400

Question 62

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What was their net income for the year?

A)$240,000
B)$400,000
C)$1,800,000
D)$3,200,000

Question 63

Today, a company sold $1,000 of goods on credit.The customer took the goods with him, but will only pay in 30 days.When would the sale be reflected under the cash basis of accounting and the accrual basis of accounting? $\begin{array}{ll}&\text { Cash Basis }&\text { Accrual Basis }\\A.&\text { today } & \text { today } \\B.&\text { today } & \text { at collection } \\C.&\text { at collection } & \text { today } \\D.&\text { at collection } & \text { at collection }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 64

The opening balance of shareholders' equity for Sedona Transport was $530,000.During the year, Sedona issued 50,000 common shares at market price of $3.50 per share.The company earned net income of $152,400, recorded other comprehensive income of ($2,300), and paid dividends of $10,000.What is the closing balance of shareholders' equity?

A)$670,100
B)$847,400
C)$845,100
D)$877,400

Question 65

During the past year Ascot Company made credit sales of $450,000, cash sales of $275,000, and collected $50,000 of deposits on future orders.What amount should they report as revenue on their income statement?

A)$275,000
B)$325,000
C)$725,000
D)$775,000

Question 66

A company has current assets of $200,000 and current liabilities of $150,000.If they used cash to pay off some accounts payable, what would the effect be on their current ratio?

A)The current ratio would increase.
B)The current ratio would decrease.
C)The current ratio would stay the same.
D)The effect on the current ratio would depend on the amount paid.

Question 67

When a sale on credit is made under the cash basis of accounting, at the time of the sale, how is the transaction recorded?

A)An increase in assets and an increase in liabilities
B)An increase in assets and an increase in revenues
C)An increase in liabilities and an increase in revenues
D)It is not recorded.

Question 68

The opening balances of capital stock and retained earnings for a company were $2,200,000 and $1,325,000, respectively.During the year, they earned net income of $425,000, the shareholders invested an additional $500,000 for shares and the company paid dividends of $42,000.What was the closing amount of shareholders' equity?

A)$1,708,000
B)$2,208,000
C)$3,908,000
D)$4,408,000

Question 69

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What is the gross profit for the year?

A)$240,000
B)$400,000
C)$1,800,000
D)$3,200,000

Question 70

An employee worked for a small business during the current month but he will not be paid until the next month.If the business uses accrual accounting, what would be the effect on the accounting equation in the current month?

A)Assets decrease and liabilities decrease.
B)Liabilities increase and owners' equity increases.
C)Liabilities increase and owners' equity decreases.
D)There is no effect at this time.

Question 71

An employee worked for a small business during the current month but will not be paid until the next month.If the business uses cash accounting, what would be the effect on the accounting equation in the current month?

A)Assets decrease and liabilities decrease.
B)Liabilities increase and owners' equity increases.
C)Liabilities increase and owners' equity decreases.
D)There is no effect at this time.

Question 72

When a sale on credit is made under the accrual basis of accounting, at the time of the sale, how is the transaction recorded?

A)An increase in assets and an increase in liabilities
B)An increase in assets and an increase in revenues
C)An increase in liabilities and an increase in revenues
D)It is not recorded.

Question 73

If an entity suffered a $2,000 loss for the month, which of the following statements is most likely true?

A)The company's cash decreased $2,000.
B)The company's shareholders need to invest $2,000.
C)The costs incurred during the month exceeded the benefits.
D)Not all of the revenues were collected during the month.

Question 74

When a company makes a sale under accrual accounting, what is the impact on the balance sheet?

A)Assets increase
B)Assets decrease
C)Assets and owners' equity both increase
D)The increase and decrease in assets offset each other

Question 75

Creditors who are expecting to be paid are most interested in which of the following for an entity?

A)Liquidity
B)Operating cycle
C)Gross margin
D)Profitability

Question 76

Because of the links among financial statements, they must be prepared in order.Which of the following correctly describes the order of preparation?

A)Income statement, statement of comprehensive income, statement of changes in equity, and balance sheet.
B)Income statement, balance sheet, statement of comprehensive income, and statement of changes in equity.
C)Balance sheet, income statement, and statement of changes in equity.
D)Balance sheet, statement of changes in equity, income statement, and statement of comprehensive income.

Question 77

Which of the following correctly identifies one of the links among the four financial statements?

A)Net income from the income statement goes directly to the balance sheet.
B)Net income from the income statement goes to the statement of changes in equity.
C)Other comprehensive income goes to the statement of cash flows.
D)Retained earnings from the balance sheet goes to the income statement.

Question 78

Which of the following statements about depreciation is true?

A)Depreciation is the allocation of the cost of equipment to expense.
B)Depreciation represents the reduction in the market value of the asset.
C)Depreciation is the cash paid each month to use a piece of equipment.
D)Depreciation is the same under both cash-based and accrual-based accounting.

Question 79

What would a creditor calculate to assess liquidity?

A)Operating cycle
B)Gross margin
C)Current ratio
D)Debt-to-equity ratio

Question 80

Sherbrooke Inc.reported sales of $10,000,000, net income of $800,000, and dividends of $200,000.What is the increase in their retained earnings for the year?

A)$600,000
B)$800,000
C)$1,000,000
D)$10,000 000