Question 1

Current assets, typically held and used for several years, include land, buildings, equipment, patents; and long-term investments in securities.

Accepted Answer

Current assets are held and used for a short period of time, typically within a year. Land, buildings, equipment, patents, and long-term investments in securities are considered non-current assets.

Question 2

Each firm makes financing decisions about the proportion of funds to obtain from owners, long-term creditors, and short-term creditors.

Accepted Answer

This statement is true. Financing decisions involve determining the appropriate mix of capital sources, including equity, long-term debt, and short-term debt, to fund the firm's operations and growth.

Question 3

Goals are the end results toward which the firm directs its energies, and strategies are the means for achieving those results.

Accepted Answer

Goals are the desired outcomes or results that a firm aims to achieve, while strategies are the action plans or methods the firm uses to achieve those goals. Therefore, the statement is true.

Question 4

Retained earnings represent the net assets (total assets - total liabilities) a firm derives from its earnings that exceed the dividends.

Accepted Answer

Retained earnings specifically represent the portion of net income that is retained by the corporation rather than distributed to its owners as dividends. It does not directly equate to net assets (total assets - total liabilities), but is a component of equity.

Question 5

Liabilities are creditors' claims for funds, usually because they have provided funds, or goods and services, to the firm.

Accepted Answer

Liabilities represent the debts or obligations that a company owes to its creditors, suppliers, or other parties. These claims can arise from loans, accounts payable, taxes owed, or other expenses that have not yet been paid. As such, liabilities represent a source of funding for the company and must be managed effectively to ensure the financial health and solvency of the business.

Question 6

The current replacement cost of an asset is the amount a firm would have to pay to obtain another asset with identical service potential; it is an entry value that reflects economic conditions at the measurement date.

Accepted Answer

The statement accurately defines the concept of current replacement cost.

Question 7

Patents, licenses, and other contractual rights are tangible, in the sense that the rights have a physical existence.

Accepted Answer

Patents, licenses, and other contractual rights are intangible assets, meaning they do not have a physical existence. They are considered intellectual property rather than tangible property.

Question 8

Management operates the productive capacity of the firm to generate earnings.

Accepted Answer

Management plays a crucial role in operating the productive capacity of a firm in order to generate earnings for the company. They are responsible for making strategic decisions to allocate resources, optimize production processes, manage costs, and drive revenue growth. Effective management is essential for the success of any business, as it helps to maximize profitability and ensure long-term sustainability.

Question 9

The mix of liabilities plus shareholders' equity reflects a firm's investing decisions, each measured at the balance sheet date.

Accepted Answer

The mix of liabilities plus shareholders' equity reflects a firm's financing decisions, not its investing decisions. Investing decisions are reflected in the assets side of the balance sheet.

Question 10

The managers of a business prepare financial statements to present meaningful information about that business's activities to external users.

Accepted Answer

The purpose of the financial statements is to provide information about the business's performance, financial position, cash flows, and other relevant information to external users such as investors, creditors, and regulators. It helps them make informed decisions about their investments or any interaction with the business.

Question 11

The independent external auditors of a business prepare financial statements to present meaningful information about that business's activities to external users.

Accepted Answer

Independent external auditors do not prepare financial statements; they audit the financial statements prepared by the business's management to ensure accuracy and compliance with accounting standards.

Question 12

A firm makes investments to obtain productive capacity to carry out its business activities.

Accepted Answer

Investing in productive capacity such as machinery, equipment, and buildings, is a common way for firms to grow and carry out their business activities. This can help increase efficiency, output, and profitability.

Question 13

Current liabilities and shareholders' equity are sources of funds where the supplier of funds does not expect to receive them all back within the next year.

Accepted Answer

Current liabilities are obligations a company expects to pay within the next year, while shareholders' equity represents ownership interest and does not have a repayment expectation like liabilities.

Question 14

The activities of a business include establishing goals and strategies, obtaining financing, making investments and conducting operations.

Accepted Answer

These are all fundamental activities of a business. Establishing goals and strategies sets the direction for the business. Obtaining financing provides the necessary resources to operate and invest in growth. Making investments helps the business expand or improve operations. Conducting operations generates revenue and delivers products or services to customers.

Question 15

Assets are economic resources with the potential to provide future economic benefits to a firm.

Accepted Answer

Assets are defined as economic resources that can generate future economic benefits, such as revenue or cost savings, for a firm. Examples of assets include cash, inventory, property, plant, and equipment, and intangible assets like patents or trademarks.

Question 16

Firms communicate the results of their business activities in the annual report to shareholders.

Accepted Answer

The annual report is a comprehensive report that contains a company's activities throughout the year, including financial statements, operations, and future plans. It is usually presented to shareholders at an annual general meeting.

Question 17

Current liabilities represent obligations a firm expects to pay within one year.

Accepted Answer

Current liabilities are those obligations that are due within one year, such as accounts payable, salaries payable, and short-term loans.

Question 18

A natural business year ends when most activities in an operating cycle have been substantially concluded.

Accepted Answer

A natural business year is determined by the completion of the operating cycle, which varies by industry but generally includes the purchase of raw materials, production of goods or services, and sale of those goods or services to customers. When these activities have been substantially concluded, it is considered the end of the natural business year.

Question 19

The amounts of individual assets that make up total assets, represented by accounts receivable, inventories, equipment, and other assets, reflect a firm's financing decisions, each measured at the balance sheet date.

Accepted Answer

The amounts of individual assets reflect a firm's investing decisions, not financing decisions. Financing decisions are related to how a firm raises capital, through debt or equity, and are reflected in the liabilities and equity sections of the balance sheet.

Question 20

The same asset can have different measurements for tax purposes, for financial reporting purposes, and for internal managerial decision-making purposes.

Accepted Answer

Different measurements are used for tax purposes, financial reporting purposes, and internal managerial decision-making purposes due to different regulations, standards, and objectives. For example, tax regulations may require a different depreciation method than financial accounting standards. Internal decision-making may require a different measurement that reflects the asset's value to the company rather than its market value or book value.

Quiz 1: Introduction to Business Activities and Overview of Financial Statements and the Reporting Process