Deck 1: The Purpose and Use of Financial Statements

Question 1

Expenses are the cost of assets consumed or services used in the process of generating revenue.

Answer 1

True

Question 2

Assets are resources owned by a business that provide current services or benefits to the business.

Answer 2

False

Question 3

The liability of corporate shareholders is limited to the amount of their investment.

Answer 3

True

Question 4

A proprietorship is usually operated by the owner.

Question 5

Accounting communicates financial information about a business to both internal and external users.

Question 6

Financing activities for corporations include borrowing money and selling shares.

Question 7

Canada Revenue Agency is the major external user of information.

Question 8

A proprietor has unlimited liability.

Question 9

A private corporation is one whose shares are traded on an organized stock exchange, like the Toronto Stock Exchange.

Question 10

External users of accounting information include the managers who plan, organize, and run a business.

Question 11

Two internal users of accounting information are investors and managers.

Question 12

The information needs and questions of external users vary considerably.

Question 13

The purchase of equipment is an example of a financing activity.

Question 14

Accounting information is not important to marketing managers.

Question 15

Shareholders and creditors are the only people who need accounting information.

Question 16

High standards of ethics are not required for preparers of financial information.

Question 17

Investing activities involve collecting the necessary funds to operate the business.

Question 18

Accounting identifies and records economic events of a business.

Question 19

A partnership is a business organized as a separate legal entity.

Question 20

Authorities, such as the Canada Revenue Agency, want to know whether a business complies with the tax laws.

Question 21

Financial statement users are interested in profit because it may be a predictor of future profit.

Question 22

The basic accounting equation subdivides liabilities into two categories: claims of creditors and claims of the Canada Revenue Agency.

Question 23

The statement of financial position reports assets and claims to those assets at a specific point in time.

Question 24

Expenses are identified by the type of liability associated with them.

Question 25

The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a business for a specific period of time.

Question 26

The issue of shares and distribution of dividends are used in determining profit.

Question 27

Payments to shareholders are called dividends.

Question 28

The accounting equation can be expressed as: Assets - Shareholders' Equity = Liabilities.

Question 29

The accounting equation can be expressed as: Assets + Liabilities = Shareholders' Equity.

Question 30

The statement of cash flows shows how cash was used during the period.

Question 31

Revenues are increases in economic resources that result from a business's operating activities.

Question 32

Shareholder's equity consists of two parts: share capital and retained earnings.

Question 33

Profit for the period is determined by subtracting total expenses and dividends from revenues.

Question 34

If the assets owned by a business total $100,000 and liabilities total $52,000, shareholders' equity totals $48,000.

Question 35

Shareholders' equity is always equal to the cash on hand at any given date.

Question 36

Creditors use the statement of financial position as another source of information to determine the likelihood they will be repaid.

Question 37

The statement of changes in equity reflects a different time period than that covered by the income statement.

Question 38

Economic resources that are owned by a business are called shareholders' equity.

Question 39

Profit is another term for revenue.

Question 40

Claims of creditors and shareholders on the assets of a business are called liabilities.

Question 41

A business organized as a corporation:
(a)is not a separate legal entity in most provinces.
(b)requires that shareholders be personally liable for the debts of the business.
(e)is owned by its shareholders.
(f)has income tax disadvantages over a proprietorship or partnership.

Question 42

Which of the following would not be considered an external user of accounting data?
(a)Canada Revenue Agency
(b)Management
(c)Creditors
(d)Customers

Question 43

A negative balance in retained earnings is called a deficit.

Question 44

The reasons for a decrease in cash can be determined by examining the income statement.

Question 45

Any deficiency in cash from operating activities must be made up by issuing shares.

Question 46

Which of the following groups uses accounting information primarily to ensure the entity is operating within prescribed rules?
(a)Taxing authorities
(b)Regulatory agencies
(c)Labour unions
(d)Management

Question 47

The partnership form of business organization:
(a)is a separate legal entity.
(b)is a common form of organization for service-type businesses.
(c)enjoys an unlimited life.
(d)has limited liability.

Question 48

Depreciation is the cost of certain long-lived assets allocated to expense for each period.

Question 49

Which of the following is the most appropriate definition of accounting?
(a)The information system that identifies, records, and communicates the economic events of an organization to interested users.
(b)A means of collecting information.
(c)The interconnected network of subsystems necessary to operate a business.
(d)Electronic collection, organization, and communication of vast amounts of information.

Question 50

Which of the following uses accounting information to determine whether a marketing proposal will be cost effective?
(a)Shareholders
(b)Marketing managers
(c)Creditors
(d)Chief Financial Officer

Question 51

Which form of business would have its shares listed on a stock exchange?
(a)Proprietorship
(b)Partnership
(c)Private corporation
(d)Public corporation

Question 52

The proprietorship form of business organization:
(a)in most provinces, must have at least two owners.
(b)is often chosen for small owner operated businesses.
(c)is difficult to set up.
(d)is classified as a separate legal entity.

Question 53

The statement of financial position is always the first statement prepared and presented.

Question 54

The world's economic systems depend on financial reporting that is:
(a)highly transparent.
(b)accurate.
(c)reliable.
(d)all of the above.

Question 55

The statement of changes in equity is not dependent on the results from the income statement.

Question 56

Which of the following would not be considered an internal user of accounting data?
(a)The president of a company
(b)The controller of a company
(c)A creditor of a company
(d)A salesperson of a company

Question 57

Which of the following would not be considered an internal user of accounting data for XYZ Inc.?
(a)The company president
(b)Production manager
(c)Merchandise inventory clerk
(d)Receptionist of the employees' labour union

Question 58

Which of the following uses accounting information to determine whether a company's profit will result in a share price increase?
(a)Shareholders
(b)Marketing managers
(c)Creditors
(d)Chief Financial Officer

Question 59

External users want answers to all of the following questions except:
(a)Is the company earning satisfactory income?
(b)Will the company be able to pay its debts as they come due?
(c)Will the company be able to afford employee pay raises this year?
(d)How does the company compare in profitability with competitors?

Question 60

Which of the following uses accounting information to determine whether a company can pay its obligations?
(a)Shareholders
(b)Marketing managers
(c)Creditors
(d)Chief Financial Officer

Question 61

Buying assets needed to operate a business is an example of a(n):
(a)purchasing activity.
(b)financing activity.
(c)investing activity.
(d)operating activity.

Question 62

The cost of assets consumed or services used is also known as a(n):
(a)revenue.
(b)expense.
(c)liability.
(d)asset.

Question 63

Allocating the cost of using long-term assets over their useful lives is called:
(a)allocation expense.
(b)depreciation expense.
(c)a general expense.
(d)asset use expense.

Question 64

The purchase of manufacturing equipment for a factory is what type of business activity?
(a)Manufacturing
(b)Financing
(c)Investing
(d)Operating

Question 65

A small neighbourhood barber shop that is operated by its owner would likely be organized as a:
(a)public corporation.
(b)partnership.
(c)private corporation.
(d)proprietorship.

Question 66

The concept that economic activity which can be identified with a particular company must be kept separate and distinct from the owner(s) and from all other economic entities is known as:
(a)the separation concept.
(b)the reporting entity concept.
(c)the economic concept.
(d)the business organization concept.

Question 67

Resources owned by a corporation are referred to as:
(a)shareholders' equity.
(b)liabilities.
(c)assets.
(d)revenues.

Question 68

Which of the following is not a principal type of business activity?
(a)Operating
(b)Investing
(c)Financing
(d)Marketing

Question 69

A corporation has which of the following set of characteristics?
(a)Shareholder control, income tax disadvantages, increased skills and resources
(b)Simple to set up and maintains control with founder
(c)Harder to raise funds and gives shareholders control
(d)Easier to transfer ownership and raise funds, no personal liability

Question 70

Which of the following activities involves raising the necessary funds to support the business?
(a)Operating
(b)Investing
(c)Financing
(d)Marketing

Question 71

Buying and selling products are examples of:
(a)operating activities.
(b)investing activities.
(c)financing activities.
(d)manufacturing activities.

Question 72

The common characteristic possessed by all assets is:
(a)long life.
(b)great monetary value.
(c)tangible nature.
(d)future economic benefit.

Question 73

A business organized as a separate legal entity is a:
(a)corporation.
(b)proprietorship.
(c)government unit.
(d)partnership.

Question 74

Expenses are incurred:
(a)only on rare occasions.
(b)to produce assets.
(c)to produce liabilities.
(d)to generate revenues.

Question 75

Liabilities:
(a)are future economic benefits.
(b)are debts and obligations.
(c)possess service potential.
(d)are things of value owned by a business.

Question 76

Cost of goods sold is a(n):
(a)liability.
(b)financing activity.
(c)asset.
(d)expense.

Question 77

Debt and obligations of a business are referred to as:
(a)assets.
(b)equities.
(c)liabilities.
(d)expenses

Question 78

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is called a(n):
(a)account payable.
(b)account receivable.
(c)revenue.
(d)expense.

Question 79

The right to receive money in the future is called a(n):
(a)account payable.
(b)account receivable.
(c)liability.
(d)revenue.

Question 80

An advantage of the corporate form of business is that:
(a)it has limited life.
(b)its shareholders' personal resources are at stake.
(c)its ownership is easily transferable via the sale of shares.
(d)it is simple to establish.