Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition Test Bank

Financial Accounting: Tools for Business Decision-Making, 6th Canadian Edition Test Bank

CHAPTER 1

THE PURPOSE AND USE OF FINANCIAL STATEMENTS

Summary of Question TYPEs by STUDY Objective and Level of difficulty

Note: E = Easy M = Medium H = HardSUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False Ma = Matching

MC = Multiple ChoiceEx =  Exercise SAE = Short-Answer Essay

CHAPTER STUDY OBJECTIVES

1. Identify the users and uses of accounting. The purpose of accounting is to provide useful information for decision-making. There are two types of user groups who use accounting information: internal and external users. Internal users work for the business and need accounting information to plan, organize, and run operations. The primary external users are investors, lenders and other creditors. Investors (existing and potential shareholders) use accounting information to help decide whether to buy, hold, or sell shares. Lenders (such as bankers) and other creditors (such as suppliers) use accounting information to evaluate the risk of granting credit or lending money to a business. In order for financial information to have value to its users, both internal and external, it must be prepared by individuals with high standards of ethical behaviour.

2. Describe the primary forms of business organizations. There are three types of organizations that use accounting information: proprietorships, partnerships, and corporations. A proprietorship is a business owned by one person. A partnership is a business owned by two or more people. A corporation is a separate legal entity whose shares provide evidence of ownership. Corporations can be public or private, which means their shares are closely held.

Generally accepted accounting principles are a common set of guidelines, which can differ depending on the form of business organization, that are used to record and report economic events. Public corporations follow International Financial Reporting Standards (IFRS) and private corporations have the choice of using IFRS or Accounting Standards for Private Enterprises (ASPE). Proprietorships and partnerships generally follow ASPE.

3. Explain the three main types of business activity. Financing activities involve raising the necessary funds (through debt or equity) to support the business. Investing activities involve acquiring the resources (such as property, plant, and equipment) that are needed to run the business. Operating activities involve putting the resources of the business into action to generate a profit.

4. Describe the purpose and content of each of the financial statements. The income statement presents the revenues and expenses of a company for a specific period of time. The statement of changes in equity summarizes the changes in shareholders’ equity that have occurred for a specific period of time. The statement of financial position reports the assets, liabilities, and shareholders’ equity of a business at a specific date. The statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. Notes to the financial statements add explanatory detail where required. The financial statements are included in an annual report, along with nonfinancial and other financial information.

TRUE-FALSE STATEMENTS

1. Accounting identifies and records economic events of a business.

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

3. Accounting information is not important to marketing managers.

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

5. The Canada Revenue Agency is the major external user of information.

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

7. The information needs and questions of external users vary considerably.

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

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

10. Two internal users of accounting information are investors and managers.

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

12. A proprietor has unlimited liability.

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

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

15. A proprietorship is usually operated by the owner.

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

17. Financing activities for corporations include borrowing money and selling shares.

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

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

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

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

22. Payments to shareholders are called dividends.

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

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

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

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

27. Profit is another term for revenue.

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

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

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

31. 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.

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

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

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

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

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

37. The accounting equation can be expressed as: Assets – Shareholders’ Equity = Liabilities.

38. The accounting equation can be expressed as: Assets Liabilities = Shareholders’ Equity.

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

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

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

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

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

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

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

46. A negative balance in retained earnings is called a deficit.