Deck 1: Financial Statements and Business Decisions

Question 1

Brown Corporation reported the following amounts at the end of the first year of operations,December 31,20A: share capital $20,000; sales revenue $95,000; total assets $85,000,no dividends,and total liabilities $35,000.What would shareholders' equity and total expenses be?

A)Shareholders' equity,$50,000 and expenses $65,000.
B)Shareholders' equity,$60,000 and expenses $75,000.
C)Shareholders' equity,$80,000 and expenses $40,000.
D)Shareholders' equity,$80,000 and expenses $85,000.

Answer 1

A

Question 2

If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period of time,then total assets must change by what amount and direction during that same period?

A)$20,000 decrease
B)$20,000 increase
C)$25,000 increase
D)$30,000 increase

Answer 2

D

Question 3

Retained earnings at the end of the period is equal to

A)Retained earnings at the beginning of the period plus profit minus liabilities.
B)Retained earnings at the beginning of the period plus profit minus dividends.
C)Profit.
D)Assets plus liabilities.

Answer 3

B

Question 4

Which of the following might be included in the assets of a particular business?

A)cash,trade payables,and notes payable.
B)cash,retained earnings,and trade receivables.
C)cash,trade receivables,and inventory.
D)inventories,property and equipment,and share capital.

Question 5

External decision makers want answers to all of the following questions except

A)Will the company be able to pay its debts as they come due?
B)Will the company be able to afford employee pay raises this year?
C)How does the company compare in profitability with competitors?
D)Is the company earning satisfactory income?

Question 6

Which of the following is true of financial accounting?

A)It provides information primarily for external decision makers.
B)It is required for corporations but probably would not be done by other business entities.
C)It provides information primarily for the use of managers of the company.
D)It has been practiced in this country for approximately the last 15 years.

Question 7

What form does financial accounting information provided by an entity to decision makers generally take?

A)Financial statements.
B)Various forecasts and performance reports.
C)An analysis of changes in the price of a corporation's shares.
D)Comparisons between the company and its competitors.

Question 8

Which financial statement reports the financial position of a business?

A)Income statement.
B)Statement of financial position.
C)Statement of cash flows.
D)Footnotes to the financial statements.

Question 9

On January 1,20A,two individuals invested $150,000 each to form Hornbeck Corporation.Hornbeck had total revenues of $15,000 during 20A and $40,000 during 20B.Total expenses for the same periods were $8,000 and $22,000,respectively.Cash dividends paid out to shareholders totalled $6,000 in 20A and $12,000 in 20B.What was the ending balance in Hornbeck's retained earnings account at the end of 20A and 20B?

A)$1,000 and $6,000 respectively.
B)$1,000 and $7,000,respectively.
C)$7,000 and $19,000 respectively.
D)$301,000 and $306,000 respectively.

Question 10

The BAT Corporation had 20B revenues of $110,000,expenses of $85,000,and an income tax rate of 20 percent.What would profit after taxes be?

A)$5,000.
B)$15,000.
C)$20,000.
D)$25,000.

Question 11

What is the primary means that a corporation uses to communicate financial information to its shareholders and creditors?

A)News stories printed in the business press.
B)Financial statements.
C)Letters from management sent to the local newspaper editor.
D)Information circulated by fraud examiners.

Question 12

Which of the following is true about a business' assets?

A)They are equal to liabilities minus shareholders' equity.
B)They are the economic resources of the business.
C)They are initially reported on the statement of financial position at current market value.
D)They are reported on the income statement.

Question 13

Carrington Company owes you $500 on account due within 15 days.Which of the following amounts on its statement of financial position would help you to determine the likelihood that you will be paid in full and on time?

A)cash and trade receivables.
B)cash and property and equipment.
C)cash and inventory.
D)share capital and retained earnings.

Question 14

What is the primary purpose of the statement of financial position?

A)To measure the profit of a business up to a particular point in time.
B)To report the difference between cash inflows and cash outflows for the period.
C)To report the financial position of the reporting entity at a particular point in time.
D)To report assets at their current market value at a particular point in time.

Question 15

For a business,what is an example of an internal decision maker?

A)A loan officer at a bank.
B)A supplier who sells goods to the company on account.
C)One of the business's long-term customers.
D)One of the business's managers.

Question 16

Which financial statement is prepared first?

A)Statement of financial position.
B)Income statement.
C)Statement of changes in equity.
D)Statement of cash flows.

Question 17

If Bender Corporation recently purchased goods from you on account,which of Bender's financial statements would you look at to determine whether Bender has sufficient resources to be able to pay for the goods when payment is due in 30 days?

A)Income statement.
B)Statement of financial position.
C)Statement of changes in equity.
D)Statement of cash flows.

Question 18

What does the separate entity assumption state?

A)Assets should be recorded at their initial acquisition cost.
B)Each business is considered to be part of its owners.
C)The monetary unit should be Canadian dollars.
D)For measurement purposes,the resources,debts,and activities of a business should be kept separate from those of the owners.

Question 19

Which of the following reports the cash inflows,cash outflows,and change in cash for a period?

A)Income statement.
B)Statement of cash flows
C)Statement of financial position.
D)Auditor's report.

Question 20

What is accounting information developed primarily for external decision makers called?

A)Financial accounting.
B)Cost accounting.
C)Auditing.
D)Management accounting.

Question 21

Why would Parker Bank,in deciding whether to make a loan to Davis Company,be interested in the amount of liabilities Davis has on its statement of financial positiont?

A)The liabilities represent resources that could be used to repay the loan.
B)If Davis already has many other obligations,it might not be able to repay the loan.
C)Existing liabilities give an indication of how profitable Davis has been in the past.
D)Parker would be interested in the amount of Davis's assets but not the amount of liabilities.

Question 22

How do most businesses earn revenues?

A)When they collect trade receivables.
B)Through sales of goods or services to customers.
C)By borrowing money from a bank.
D)By selling shares to shareholders.

Question 23

On January 1,20A,Taylor Corporation had retained earnings of $6,500,000.During 20A,Taylor had profit of $1,050,000 and dividends of $450,000.What is the amount of Taylor's retained earnings at the end of 20A?

A)$6,050,000.
B)$6,950,000.
C)$7,100,000.
D)$7,550,000.

Question 24

What are the categories of cash flows that appear on a statement of cash flows?

A)cash flows from investing,financing,and service activities.
B)cash flows from operating,production,and internal activities.
C)cash flows from financing,production,and growth activities.
D)cash flows from operating,investing,and financing activities.

Question 25

What is the amount of revenue recognized in the income statement by a company that sells goods to customers?

A)The cash collected from customers during the current period.
B)Total sales,both cash and credit sales,for the period.
C)Total sales minus beginning amount of trade receivables.
D)The amount of cash collected plus the beginning amount of trade receivables.

Question 26

Which of the following is not a principal type of business activity?

A)Operating
B)Investing
C)Financing
D)Delivering

Question 27

Which financial statement for a business would you look at to determine the company's performance during an accounting period?

A)statement of financial position.
B)statement of cash flows.
C)income statement.
D)statement of changes in equity.

Question 28

During 20B,its second year in operation,Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000.The amount of cash collected from customers was $5,960,000.The amount of trade receivables at the beginning of 20B was $1,200,000.What is the amount of sales revenue that Banner should report on its income statement for 20B?

A)$4,650,000.
B)$4,760,000.
C)$5,850,000.
D)$5,960,000.

Question 29

Borrowing money is an example of a(n)

A)delivering activity.
B)financing activity.
C)investing activity.
D)operating activity.

Question 30

What are the two categories of shareholders' equity usually found on the statement of financial position of a corporation?

A)share capital and long-term liabilities.
B)share capital and property,plant,and equipment.
C)retained earnings and notes payable.
D)share capital and retained earnings.

Question 31

On the statement of cash flows,how would a company report the purchase of machinery?

A)As cash used in operating activities.
B)As cash used in financing activities.
C)As cash used in purchasing activities.
D)As cash used in investing activities.

Question 32

Kamil's Car Repair Shop Ltd.started the year with total assets of $70,000 and total liabilities of $40,000.During the year,the business recorded $100,000 in car repair revenues,$65,000 in expenses,and dividends of $5,000.Shareholders' equity at the end of the year was

A)$60,000.
B)$65,000.
C)$70,000.
D)$75,000.

Question 33

Why can't a business' statement of financial position be used to accurately predict what the business might be sold for?

A)it identifies all the revenues and expenses of the business.
B)assets are generally listed on the statement of financial position at their historical cost,not their current value.
C)it gives the results of operations for the current period.
D)some of the assets and liabilities on the statement of financial position may actually be those of another entity.

Question 34

Which of the following is the amount of rent expense reported on the income statement?

A)The amount of cash paid for rent in the current period.
B)The amount of cash paid for rent in the current period less any unpaid rent at the end of the period.
C)The amount of rent used up in the current period to earn revenue.
D)An increase in profit.

Question 35

The statement of cash flows and the statement of financial position are interrelated because

A)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity.
B)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position.
C)both disclose the corporation's profit.
D)the ending amount of cash on the statement of cash flows must agree with the amount on the income statement.

Question 36

What are business liabilities?

A)Amounts it expects to collect in the future from customers.
B)Debts or obligations resulting from past business events.
C)The amounts that owners have invested in the business.
D)The increases in assets that result from profitable operations.

Question 37

During 20B,its second year in operation,Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000.Assume all sales were on account and the amount of cash collected from customers was $5,960,000.The amount of trade receivables at the beginning of 20B was $1,200,000.Based on this information,what is the amount of trade receivables that Banner would report at the end of 20B?

A)$110,000.
B)$1,090,000.
C)$1,310,000.
D)$5,850,000.

Question 38

Allentown Corporation has on its statement of financial position the following amounts: What is the amount of retained earnings that should appear on Allentown's statement of financial position?

A)$2,000,000.
B)$3,000,000.
C)$4,000,000.
D)$5,000,000.

Question 39

What is the basic accounting equation?

A)Assets + Liabilities = Shareholders' equity.
B)Assets + Shareholders' equity = Liabilities.
C)Assets = Liabilities + Shareholders' equity.
D)Revenues - Expenses = Net income.

Question 40

When would a company report a net loss?

A)When retained earnings decreased due to paying dividends to shareholders.
B)When its assets decreased during an accounting period.
C)When its liabilities increased during an accounting period.
D)When its expenses exceeded its revenues for an accounting period.

Question 41

If you wanted to know what accounting rules a company follows related to its inventory,where would you look?

A)the statement of financial position.
B)the income statement.
C)the notes to the financial statements.
D)the headings to the financial statements.

Question 42

Why is the operating activities section often believed to be the most important part of a statement of cash flows?

A)it gives the most information about how operations have been financed.
B)it shows the dividends that have been paid to shareholders.
C)it indicates a company's ability to generate cash from sales to meet current cash needs.
D)it shows the net increase or decrease in cash during the period.

Question 43

Which of the following activities would cause investors to overpay for the acquisition of a company from its current owners?

A)Understated accounts payable and overstated inventory.
B)Understated revenues and overstated expenses.
C)Understated assets and overstated expenses.
D)Understated assets and overstated revenues.

Question 44

The ending retained earnings balance of the Brown Hat restaurant chain increased by $4.3 billion from the beginning of the year.The company had declared a dividend of $1.5 billion.What was the profit earned during the year?

A)$2.8 billion.
B)$3.0 billion.
C)$5.8 billion.
D)There is no way to determine net income as not enough information was given.

Question 45

Which government regulatory agency has the legal authority to prescribe financial reporting requirements for corporations that sell their securities in commerce in the province of Ontario?

A)AcSB.
B)CRA.
C)OSC.
D)CICA.

Question 46

Which securities regulator in the province of Ontario has broad powers to determine measurement rules for financial statements of publicly traded companies on the Toronto Stock Exchange?

A)the Canada Revenue Agency.
B)the Ontario Securities Commission.
C)the Federal Accounting Office.
D)the Supreme Court.

Question 47

How are the differing claims of creditors and investors recognized by a corporation?

A)The claims of creditors are liabilities; those of investors are assets.
B)The claims of both creditors and investors are liabilities,but only the claims of investors are considered to be long term.
C)The claims of creditors are liabilities; the claims of investors are recorded as shareholders' equity.
D)The claims of creditors and investors are considered to be essentially equivalent.

Question 48

If you wanted to know how much of its profit a corporation distributed as dividends,which financial statement would you look at?

A)statement of financial position.
B)income statement.
C)statement of cash flows.
D)statement of changes in equity.

Question 49

Which of the following statements is true about the price earnings (P/E)ratio?

A)It is a ratio of importance to creditors.
B)A high P/E ratio indicates investors have little confidence in the future profit potential of the company.
C)The P/E ratio could be used to approximate the value investors would be willing to pay for the company's acquisition from existing owners.
D)The P/E ratio increases as profit increases.

Question 50

Which of the following statements is TRUE?

A)Publicly traded enterprises must use IFRS for external reporting for fiscal years that start on or after January 1,2011.
B)The Accounting Standards Board is a government body.
C)The SEC is the most influential Canadian regulator of the flow of financial information provided by publicly traded companies in Canada.
D)Publicly traded enterprises must use the accounting standards prescribed for private enterprises for external reporting.

Question 51

In what order would the assets of Mertz Company be listed on their statement of financial positiont?

A)Cash,Trade Receivables,Inventory,Plant and Equipment.
B)Cash,Inventory,Trade Receivables,Plant and Equipment.
C)Cash,Trade Receivables,Marketable Securities,Inventory.
D)Cash,Trade Receivables,Plant and Equipment,Inventory.

Question 52

With whom does primary responsibility for the information in a corporation's financial statements rest?

A)the shareholders of the corporation.
B)the managers of the corporation.
C)the Ontario Securities Commission.
D)the public accountant who audited the financial statements.

Question 53

What term is used for probable future economic benefits owned by an entity as a result of past transactions?

A)assets.
B)liabilities.
C)revenues.
D)retained earnings.

Question 54

What results from the purchase of goods or services on credit and from borrowing?

A)Assets.
B)Liabilities.
C)Share capital.
D)Revenues.

Question 55

What events cause changes in a corporation's retained earnings?

A)profit or loss and declaration of dividends.
B)declaration of dividends and issuance of shares to new shareholders.
C)profit issuance of shares,and borrowing from a bank.
D)declaration of dividends and purchase of new machinery.

Question 56

At the beginning of 20B,Rodriguez Corporation had assets of $820,000 and liabilities of $340,000.During the year,assets increased by $40,000 and liabilities decreased by $8,000.What was the total amount of shareholders' equity at the end of 20B?

A)$432,000.
B)$480,000.
C)$528,000.
D)$1,208,000.

Question 57

During 20A,Burton Company delivered products to customers for which customers paid or promised to pay $3,820,000.The company collected $3,670,000 in cash from customers during the year.Indicate which of these amounts will appear on the income statement and which on the statement of cash flows.

A)$3,670,000 appears on both the income statement and the statement of cash flows.
B)$3,670,000 appears on the statement of cash flows,and $3,820,000 appears on the income statement.
C)$3,820,000 appears on both the income statement and the statement of cash flows.
D)$3,820,000 appears on the statement of cash flows,and $3,670,000 appears on the income statement.

Question 58

The statement of financial position

A)reports the changes in assets,liabilities,and shareholders' equity over a period of time.
B)reports the assets,liabilities,and shareholders' equity at a specific date.
C)presents the revenues and expenses for a specific period of time.
D)summarizes the changes in retained earnings for a specific period of time.

Question 59

What section of the statement of cash flows do bankers consider to be the most important?

A)Investing.
B)Operating.
C)Financing.
D)All the sections are equally important.

Question 60

In what order are assets are listed on a statement of financial position?

A)dollar amount (largest first).
B)date of acquisition (earliest first).
C)ease of conversion to cash.
D)importance to the operation of the business.

Question 61

In accounting and reporting for a business entity,the accounting and reporting for the business must be kept separate from other economic affairs of its owners.

Question 62

Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers.

Question 63

If expenses are understated on the income statement,shareholders' equity is overstated on the statement of financial position.

Question 64

The payment of a cash dividend to shareholders reduces shareholders' equity.

Question 65

The purpose of the statement of financial position is to report the financial position (amount of assets,liabilities,and shareholders' equity)of an accounting entity at a particular point in time.

Question 66

For what reason might a group of people establishing a business prefer to set it up as a corporation rather than a partnership?

A)to have limited liability.
B)to avoid double taxation.
C)because of ease of formation.
D)to avoid complex reporting procedure for government agencies

Question 67

For a business organized as a general partnership,which statement is true?

A)The owners and the business are separate legal entities.
B)Each partner is potentially responsible for the debts of the business.
C)Formation of a partnership requires getting a charter from the province of incorporation.
D)A partnership is not considered to be a separate accounting entity.

Question 68

Why do the managers of a corporation hire independent auditors?

A)To guarantee annual and quarterly financial statements.
B)To handle some personnel issues and problems.
C)To audit and report on the fairness of financial statement presentation.
D)To lobby the AcSB for changes in generally accepted accounting principles.

Question 69

The accounting period in which service revenue is recognized (i.e.,revenue for services rendered)is generally the period in which the cash is collected.

Question 70

Total assets are $60,000,total liabilities,$30,000,and share capital is $20,000; therefore,retained earnings is $5,000.
Calculation: $60,000 - $30,000 - $20,000 = $10,000

Question 71

The debts of a corporation can be generally viewed as debts of its owners.

Question 72

A statement of financial position should be dated for a period (such as "For the year ended December 31,20A"),whereas an income statement should be dated at a point in time (such as "December 31,20A").

Question 73

What is an examination of the financial statements of a business to ensure that they conform with international financial reporting standards called?

A)a certification.
B)an audit.
C)a verification.
D)a validation.

Question 74

Which of the following statements is true about a sole proprietorship?

A)The owner and the business are separate legal entities but not separate accounting entities.
B)The owner and the business are separate accounting entities but not separate legal entities.
C)The owner and the business are separate legal entities and separate accounting entities.
D)Most large businesses in this country are organized as sole proprietorships.

Question 75

What is the purpose of an audit?

A)to prove the accuracy of an entity's financial statements.
B)to lend credibility to an entity's financial statements.
C)to endorse the quality of leadership that managers provide for a corporation.
D)to establish that a corporation's shares are a sound investment.

Question 76

Why is the auditor's role in performing audits important to our society?

A)auditors provide direct financial advice to potential investors.
B)auditors have the primary responsibility for the information contained in financial statements.
C)auditors issue reports on the accuracy of each financial transaction.
D)an audit of financial statements helps investors and others to know that they can rely on the information presented in the financial statements.

Question 77

What is one of the disadvantages of a corporation when compared to a partnership?

A)the shareholders have limited liability.
B)the shareholders are treated as a separate legal entity from the corporation.
C)the corporation and its shareholders are potentially subject to double taxation.
D)the corporation provides continuity of life.

Question 78

The organization for which financial data are to be collected and reported is called an accounting entity.

Question 79

The management certification indicates management's primary responsibility for financial statement information and the steps to ensure the accuracy of the company's records.

Question 80

Assets are initially measured and reported on the statement of financial position at their current market value at the date of the statement of financial position.