Financial Accounting ISM Chapter 2

OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 2: Introduction to Financial Statements
Principles of Accounting, Volume 1: Financial Accounting
Chapter 2: Introduction to Financial Statements

Multiple Choice

1. LO 2.1 Which of these statements is not one of the financial statements?
A. income statement
B. balance sheet
C. statement of cash flows
D. statement of owner investments
Solution
D
2. LO 2.1 Stakeholders are less likely to include which of the following groups?
A. owners
B. employees
C. community leaders
D. competitors
Solution
D
3. LO 2.1 Identify the correct components of the income statement.
A. revenues, losses, expenses, and gains
B. assets, liabilities, and owner’s equity
C. revenues, expenses, investments by owners, distributions to owners
D. assets, liabilities, and dividends
Solution
A
4. LO 2.1 The balance sheet lists which of the following?
A. assets, liabilities, and owners’ equity
B. revenues, expenses, gains, and losses
C. assets, liabilities, and investments by owners
D. revenues, expenses, gains, and distributions to owners
Solution
A
5. LO 2.1 Assume a company has a $350 credit (not cash) sale. How would the transaction appear
if the business uses accrual accounting?
A. $350 would show up on the balance sheet as a sale.
B. $350 would show up on the income statement as a sale.
C. $350 would show up on the statement of cash flows as a cash outflow.
D. The transaction would not be reported because the cash was not exchanged.
Solution
B
6. LO 2.2 Which of the following statements is true?
A. Tangible assets lack physical substance.
B. Tangible assets will be consumed in a year or less.
C. Tangible assets have physical substance.
D. Tangible assets will be consumed in over a year.



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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 2: Introduction to Financial Statements
Solution
C
7. LO 2.1 Owners have no personal liability under which legal business structure?
A. a corporation
B. a partnership
C. a sole proprietorship
D. There is the potential for some personal liability in every business structure, though that
liability varies with the type of structure.
Solution
D
8. LO 2.2 The accounting equation is expressed as ________.
A. Assets + Liabilities = Owner’s Equity
B. Assets – Noncurrent Assets = Liabilities
C. Assets = Liabilities + Investments by Owners
D. Assets = Liabilities + Owner’s Equity
Solution
D
9. LO 2.2 Which of the following decreases owner’s equity?
A. investments by owners
B. losses
C. gains
D. short-term loans
Solution
B
10. LO 2.2 Exchanges of assets for assets have what effect on equity?
A. increase equity
B. no impact on equity
C. decrease equity
D. There is no relationship between assets and equity.
Solution
B
11. LO 2.2 All of the following increase owner’s equity except for which one?
A. gains
B. investments by owners
C. revenues
D. acquisitions of assets by incurring liabilities
Solution
D
12. LO 2.3 Which of the following is not an element of the financial statements?
A. future potential sales price of inventory
B. assets
C. liabilities
D. equity
Solution
A. The future sales price of an asset is not an element of a financial statement until it is actually
sold.



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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 2: Introduction to Financial Statements
13. LO 2.3 Which of the following is the correct order of preparing the financial statements?
A. income statement, statement of cash flows, balance sheet, statement of owner’s equity
B. income statement, statement of owner’s equity, balance sheet, statement of cash flows
C. income statement, balance sheet, statement of owner’s equity, statement of cash flows
D. income statement, balance sheet, statement of cash flows, statement of owner’s equity
Solution
B
14. LO 2.3 The three heading lines of financial statements typically include which of the
following?
A. company, statement title, time period of report
B. company headquarters, statement title, name of preparer
C. statement title, time period of report, name of preparer
D. name of auditor, statement title, fiscal year end
Solution
A
15. LO 2.3 Which financial statement shows the financial performance of the company on a cash
basis?
A. balance sheet
B. statement of owner’s equity
C. statement of cash flows
D. income statement
Solution
C. While all four statements can be used to reflect financial performance, all but the cash flow
statement use accrual accounting. The cash flow statement is the only financial statement that
uses the cash basis.
16. LO 2.3 Which financial statement shows the financial position of the company?
A. balance sheet
B. statement of owner’s equity
C. statement of cash flows
D. income statement
Solution
A
17. LO 2.3 Working capital is an indication of the firm’s ________.
A. asset utilization
B. amount of noncurrent liabilities
C. liquidity
D. amount of noncurrent assets
Solution
C

Questions

1. LO 2.1 Identify the four financial statements and describe the purpose of each.
Solution
Income statement shows the financial performance of a business for a period of time; statement
of owner’s equity shows the change in net worth of a business for a period of time; balance sheet



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