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

Accounting provides financial comparisons of operating alternatives, projections of income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for external users.

Answer 2

False

Question 3

Two internal users of accounting information are investors and managers.

Answer 3

False

Question 4

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

Question 5

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

Question 6

As labour unions represent employees they are also regarded as internal users.

Question 7

Potential employees who use annual reports to learn about the company and evaluate job prospects are regarded as external users.

Question 8

A proprietor has unlimited liability.

Question 9

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

Question 10

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

Question 11

Accounting information is not important to marketing managers.

Question 12

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

Question 13

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

Question 14

The users of private company financial statements do not have access to financial information beyond that available to the users of public company financial statements.

Question 15

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

Question 16

Payments to shareholders are called dividends.

Question 17

Companies present summarized financial information in the form of financial statements for both internal and external use.

Question 18

A proprietorship is usually operated by the owner.

Question 19

Accounting identifies and records economic events of a business.

Question 20

Anyone who works for a company but does not necessarily have access to accounting information to assist them in managing and operating the company is still considered to be an internal user.

Question 21

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

Question 22

Which of the following groups uses accounting information primarily to ensure the company is operating within prescribed rules?
(a)taxing authorities
(b)regulatory agencies
(c)labour unions
(d)management

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

A negative balance in retained earnings is called a deficit.

Question 30

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

Question 31

Net income for the period is determined by subtracting total expenses and dividends declared from revenues.

Question 32

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

Question 33

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 34

Which of the following uses accounting information to determine whether a company can pay its obligations?
(a)shareholders
(b)marketing managers
(c)creditors
(d)Canada Revenue Agency

Question 35

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

Question 36

Net income is another term for revenue.

Question 37

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

Question 38

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)purchasing clerk
(d)receptionist of the employees' labour union

Question 39

Which of the following uses accounting information to determine whether a company's net income will result in a share price increase?
(a)shareholders
(b)marketing managers
(c)creditors
(d)Chief Financial Officer

Question 40

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

Question 41

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 42

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 sales manager of a company

Question 43

The reporting entity concept applies to
(a)sole proprietorships only.
(b)partnerships only.
(c)corporations only.
(d)all three forms of business organizations.

Question 44

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, limited liability

Question 45

Which form of business would have its shares listed on a stock exchange?
(a)proprietorship
(b)partnership
(c)private corporation
(d)public corporation

Question 46

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.
(c)is owned by its shareholders.
(d)has income tax disadvantages over a proprietorship or partnership.

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

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.

Question 49

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 50

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 51

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

Question 52

Which of the following is not a principal type of business activity?
(a)operating
(b)investing
(c)financing
(d)marketing

Question 53

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

Question 54

Which of the following statements regarding external users is true?
(a)Shareholders and creditors are the only people who need accounting information.
(b)Canada Revenue Agency is the primary external user of financial information.
(c)External users of accounting information include the managers who plan, organize, and run a business.
(d)The information needs and questions of external users vary considerably.

Question 55

An internal user
(a)is not involved in managing a company.
(b)does not have access to internal accounting information.
(c)is any employee in the company.
(d)includes company officers.

Question 56

Which of the following statements is not true?
(a)Public corporations must use International Financial Reporting Standards.
(b)Private corporations can choose to use either International Financial Reporting Standards (IFRS)or Accounting Standards for Private Enterprises (ASPE).
(c)Both public and private corporations issue shares.
(d)All private corporations are small.

Question 57

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

Question 58

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)How many employees can the company hire this year?
(d)How does the company compare in profitability with competitors?

Question 59

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)Human Resource managers

Question 60

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 61

Net income results when
(a)Assets > Liabilities.
(b)Assets < Liabilities.
(c)Revenues > Expenses.
(d)Revenues < Expenses.

Question 62

The statement of cash flows does not provide information related to
(a)the cash used during the period.
(b)the change in the cash balance during the period.
(c)the change in income during the period.
(d)where cash came from during the period.

Question 63

Dividends declared
(a)increase assets.
(b)increase expenses.
(c)decrease revenues.
(d)decrease retained earnings.

Question 64

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

Question 65

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

Question 66

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

Question 67

Which of the following activities involves raising the necessary funds to support the business?
(a)operating
(b)investing
(c)financing
(d)marketing

Question 68

Which of the following is true regarding the statement of cash flows?
(a)Financing activities for corporations include lending money and buying shares.
(b)Investing activities involve collecting the necessary funds to operate the business.
(c)The purchase of equipment is an example of a financing activity.
(d)Revenues are increases in economic resources that result from a business's operating activities.

Question 69

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

Question 70

Liabilities of a company are owed to
(a)debtors.
(b)owners.
(c)creditors.
(d)shareholders.

Question 71

The financial statement that summarizes the changes in common shares and retained earnings for a specific period of time is the
(a)statement of financial position.
(b)statement of income.
(c)statement of cash flows.
(d)statement of changes in equity.

Question 72

Which of the following would be create a cash inflow?
(a)issue common shares
(b)cash dividends paid
(c)repurchase common shares
(d)purchase of equipment

Question 73

If a company borrows funds and subsequently ceases operations,
(a)shareholders have immediate claim on the assets of the corporation.
(b)shareholders have no claim on the assets of the corporation.
(c)shareholders have to pay all debt first before claiming the assets of the corporation.
(d)shareholders have only a residual claim on the assets of the corporation.

Question 74

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 75

Dividends declared are reported on
(a)the statement of income.
(b)the statement of changes in equity.
(c)the statement of financial position.
(d)both the statement of income and statement of financial position.

Question 76

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

Question 77

Allocating and recording the cost of using property, plant & equipment over its useful life is called
(a)allocation expense.
(b)depreciation expense.
(c)a general expense.
(d)amortization expense.

Question 78

Retained earnings at the end of the period is equal to
(a)retained earnings at the beginning of the period plus net income minus liabilities.
(b)retained earnings at the beginning of the period plus net income minus dividends declared.
(c)net income for the period.
(d)assets plus liabilities.

Question 79

When an expense is incurred
(a)an asset increases.
(b)a liability decrease.
(c)an asset will decrease or a liability will increase.
(d)an asset will increase or a liability will decrease.

Question 80

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