Question 1

Financial accounting:

Accepted Answer

Financial accounting is primarily concerned with providing information to external decision makers such as investors, creditors, regulators, and the general public. Its main purpose is to provide accurate and reliable financial information that can be used to analyze a company's financial position, performance, and prospects. This information is generally prepared in the form of financial statements, which are designed to meet the needs of external users.

Question 2

The accounting equation is defined as:

Accepted Answer

The accounting equation is Assets = Liabilities + Stockholders' Equity, which means that the assets of a company are equal to the combine total of its liabilities and stockholders' equity.

Question 3

Limited liability means:

Accepted Answer

Limited liability is a legal structure that limits the amount of liability that the shareholders of a corporation have for its debts or obligations. This means that the stockholders are not personally responsible for paying the corporation's debts out of their own pocket, which is the characteristic that distinguishes a corporation from a sole proprietorship or a partnership. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because they are either unrelated or inaccurate statements about limited liability.

Question 4

The primary focus for financial accounting information is to provide information useful for:
$\begin{array}{lll}&\text { Investing decisions  } & \text {Credit decisions }\
\text { a. } & \text { Yes } & \text { Yes } \
\text { b. } & \text { Yes } & \text { No } \
\text { c. } & \text { No } & \text { Yes } \
\text { d. } & \text { No } & \text { No }
\end{array}$

Accepted Answer

Financial accounting information is designed to be useful for both investing and credit decisions, as it provides insights into a company's financial health and performance.

Question 5

Stimpleton Company engages in the following cash payments: 
$$\begin{array} { l r } 
\text { Purchase equipment } & \$ 2,000 \
\text { Pay rent } & 500 \
\text { Repay loan to the bank } & 5,000 \
\text { Pay workers' salaries } & 1,000
\end{array}$$
What is the total amount of cash paid for operating activities?

Accepted Answer

Operating activities include cash payments for rent and salaries, totaling $500 + $1,000 = $1,500.

Question 6

Which statement below best describes the accounting equation?

Accepted Answer

The accounting equation states that Assets = Liabilities + Equity, which means that the resources of the company (assets) must equal the creditors' and owners' claims to those resources (liabilities and equity). This is the best description of the accounting equation among the given choices. Option A describes the relationship between retained earnings, net income, and dividends, which is only one part of the accounting equation. Option B refers to the concept of accrual accounting, which does not fully explain the accounting equation. Option D wrongly equates financing activities with investing and operating activities, which are different types of transactions.

Question 7

One disadvantage of the corporate form of business is:

Accepted Answer

Double taxation is a disadvantage of the corporate form of business. Corporations are taxed at both the corporate level and individual level, which can lead to a decrease in profits for shareholders. Limited liability, access to more capital, and smaller size can all be advantages of the corporate form of business.

Question 8

Transactions of a company that include the purchase and sale of long-term productive assets are referred to as:

Accepted Answer

Investing activities involve transactions related to the acquisition or disposal of long-term productive assets, such as property, plant, and equipment, or investments in other companies. Financing activities involve transactions related to borrowing or repaying debt, issuing or repurchasing stock, or paying dividends. Expenditure activities and operating activities are not commonly used accounting terms.

Question 9

Transactions of a company involving external sources of funding are referred to as:

Accepted Answer

Transactions involving external sources of funding are known as financing activities. These activities involve borrowing money or issuing stocks or bonds to raise capital for the company. Examples of financing activities include taking out loans, issuing new shares of stock, and issuing bonds.

Question 10

Emmitt had the following final balances after the first year of operations: assets,$55,000; stockholders' equity,$25,000; dividends,$3,000; and net income,$10,000.What is the amount of Emmitt's liabilities?

Accepted Answer

The accounting equation is Assets = Liabilities + Stockholders' Equity. Given assets are $55,000 and stockholders' equity is $25,000, liabilities can be calculated as $55,000 - $25,000 = $30,000. Dividends and net income are not needed to calculate liabilities in this context.

Question 11

Transactions related to the primary business activities of the company,such as selling goods and services to customers,are referred to as:

Accepted Answer

Operating activities refer to transactions related to the primary business activities of the company such as sales to customers, payments to suppliers, and salaries to employees. Investing activities involve the purchase or sale of long-term assets like property, plant, and equipment while financing activities involve transactions related to the company's funding like issuing debt or equity. Management activities are not a recognized category of activities.

Question 12

Financial accounting does not deal with which of the following?

Accepted Answer

Financial accounting provides information for decision-making but does not directly make business decisions.

Question 13

The primary purpose(s)of financial accounting is (are)to:

Accepted Answer

Financial accounting serves two primary purposes: measuring and recording business transactions, and communicating financial results to investors and creditors. It is not typically responsible for preparing federal and state tax returns, which is the realm of tax accountants.

Question 14

If a company has stockholders' equity of $60,000 at the end of the year,which of the following statements must be true?

Accepted Answer

Stockholders' equity is the residual interest in the assets of the company after deducting liabilities. Therefore, if the stockholders' equity is $60,000, it means that the assets exceed the liabilities by at least $60,000. None of the other options necessarily follow from this information.

Question 15

The form of business organization that is legally separate from its owners is a:

Accepted Answer

A corporation is a legal entity that is separate and distinct from its owners (shareholders). The corporation can enter into contracts, sue and be sued, and pay its own taxes. The owners have limited liability, meaning their personal assets are not at risk if the corporation incurs debts or is sued.

Question 16

Which of the following groups is not among the external users for whom financial statements are prepared?

Accepted Answer

Managers are not considered external users, since they are internal to the organization and have direct access to financial information. The other options, creditors, regulators, and investors, are external users who rely on financial statements to make decisions about their interactions with the company.

Question 17

Which business form has the advantage of limited liability?

Accepted Answer

A corporation has the advantage of limited liability, which means that the shareholders are only liable for the amount of money they have invested in the company. This means that their personal assets are protected if the company faces legal or financial problems. In contrast, a sole proprietorship and a partnership do not have limited liability, as the owners are personally responsible for the business's debts and legal issues. Therefore, a corporation is the best choice for those seeking limited liability protection.

Question 18

What is the primary purpose of financial accounting?

Accepted Answer

The primary purpose of financial accounting is to measure business transactions and communicate those measures to external users, such as investors and creditors, to make decisions. Financial accounting helps external users assess a company's financial performance and position. It includes preparing financial statements, such as the balance sheet, income statement, and cash flow statement, which provide important information to stakeholders.

Question 19

Which definition below best describes financial accounting?

Accepted Answer

Financial accounting is focused on measuring and communicating a company's financial performance and position to external parties, such as investors, creditors, and regulators. It involves the preparation of financial statements, including the balance sheet, income statement, and cash flow statement, which provide information about a company's assets, liabilities, revenues, expenses, and cash flows. Option A is incorrect because income taxes owed to the government are calculated by tax accounting, which is a separate field. Option B describes supply chain management or procurement, while option C refers to public relations or marketing.

Question 20

McGill purchases additional office equipment to better serves its customers.This purchase is classified as what type of activity?

Accepted Answer

The purchase of office equipment is classified as an investing activity, as it involves the acquisition of long-term assets that are expected to generate returns for the business over a period of time. This activity does not involve the day-to-day operations of the business (operating activities) or the financing of the business through debt or equity (financing activities).

Quiz 1: Accounting Information and Decision Making