Chapter 1—Accounting and the Financial Statements
TRUE/FALSE
1. There are more corporations than sole proprietorships and partnerships in the United States.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
2. The three main business activities are financing, operating, and investing.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-03-Business Forms KEY: Bloom's: Knowledge
NOT: 1 min.
3. Internal users of accounting information include present creditors and management.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
4. The income statement summarizes the assets, liabilities and stockholders’ equity for a period of time.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
5. The four basic financial statements are the Income Statement, Statement of Retained Earnings,
Balance Sheet, and Statement of Cash Flows.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
6. The amount of earnings distributed to stockholders can be found in the income statement as an
expense.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-5 | LO: 1-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
7. Stockholders' equity is composed of two main sources: liabilities and contributed capital.
ANS: F PTS: 1 DIF: Difficulty: Easy
, REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
8. The first step in preparing the classified balance sheet is to list the assets in order of liquidity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
9. The only financial statement that reports the retained earnings balance at the end of the period is the
Statement of Retained Earnings.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 | LO: 1-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
10. An income statement provides information at one specific point in time, while the other basic financial
statements provide information on activities that occur over a period of time.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
11. When an entity's stock issuances exceed its expenses for a period of time, the entity will report net
income.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-3 OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Measurement | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
12. Contributed capital is the residual interest that remains after deducting liabilities from stockholders'
equity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
13. The four steps in preparing the Income Statement are: 1) Prepare heading, 2) List the revenues of the
company, 3) List the expenses of the company, 4) List the dividends of the company.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-3 OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
14. Stockholders equity is composed of contributed capital and retained earnings.
, ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
15. The primary objective of internal auditors who are employees of the company is to provide assurance
to the company’s stockholders that the financial statements are fairly presented.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
16. The independent auditor's report conveys whether or not the business is a good investment.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
17. The Statement of Cash Flows shows cash inflows and cash outflows for a period of time.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
18. Because the four financial statements are interrelated (i.e., there is a natural progression from one
financial statement to another), the balance sheet should be prepared first.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-8 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
19. The company's annual report includes an audit report, notes to the financial statements, but not
management's discussion and analysis.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
20. Investing is the business activity that measures the company’s ability to generate cash from its revenue
and expense activities.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-03-Business Forms KEY: Bloom's: Knowledge
NOT: 1 min.
21. The owners of a sole proprietorship, partnership and corporations have limited liability.
, ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
22. The purpose of financial reporting is to provide economic information to investors, creditors, and other
financial statement users.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
23. Creditors use accounting information to evaluate whether to loan money to a company.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
24. Current assets include all of the following: cash, inventory, equipment, supplies, and accounts
receivable.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
25. Current liabilities are typically listed in the order in which they will be paid.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
26. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) long-term
investments, and 3) intangibles.
ANS: T PTS: 1 DIF: Difficulty: Easy
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
27. In the stockholders' equity section of a classified balance sheet, a distinction is made between amounts
invested by owners and amounts financed by creditors.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
28. One primary purpose of a classified balance sheet is to help users evaluate the working capital of a
company.
TRUE/FALSE
1. There are more corporations than sole proprietorships and partnerships in the United States.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
2. The three main business activities are financing, operating, and investing.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-03-Business Forms KEY: Bloom's: Knowledge
NOT: 1 min.
3. Internal users of accounting information include present creditors and management.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
4. The income statement summarizes the assets, liabilities and stockholders’ equity for a period of time.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
5. The four basic financial statements are the Income Statement, Statement of Retained Earnings,
Balance Sheet, and Statement of Cash Flows.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
6. The amount of earnings distributed to stockholders can be found in the income statement as an
expense.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-5 | LO: 1-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
7. Stockholders' equity is composed of two main sources: liabilities and contributed capital.
ANS: F PTS: 1 DIF: Difficulty: Easy
, REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
8. The first step in preparing the classified balance sheet is to list the assets in order of liquidity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
9. The only financial statement that reports the retained earnings balance at the end of the period is the
Statement of Retained Earnings.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 | LO: 1-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
10. An income statement provides information at one specific point in time, while the other basic financial
statements provide information on activities that occur over a period of time.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
11. When an entity's stock issuances exceed its expenses for a period of time, the entity will report net
income.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-3 OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Measurement | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
12. Contributed capital is the residual interest that remains after deducting liabilities from stockholders'
equity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
13. The four steps in preparing the Income Statement are: 1) Prepare heading, 2) List the revenues of the
company, 3) List the expenses of the company, 4) List the dividends of the company.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-3 OBJ: LO: 1-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
14. Stockholders equity is composed of contributed capital and retained earnings.
, ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
15. The primary objective of internal auditors who are employees of the company is to provide assurance
to the company’s stockholders that the financial statements are fairly presented.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
16. The independent auditor's report conveys whether or not the business is a good investment.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
17. The Statement of Cash Flows shows cash inflows and cash outflows for a period of time.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
18. Because the four financial statements are interrelated (i.e., there is a natural progression from one
financial statement to another), the balance sheet should be prepared first.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-8 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
19. The company's annual report includes an audit report, notes to the financial statements, but not
management's discussion and analysis.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-9 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
20. Investing is the business activity that measures the company’s ability to generate cash from its revenue
and expense activities.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-03-Business Forms KEY: Bloom's: Knowledge
NOT: 1 min.
21. The owners of a sole proprietorship, partnership and corporations have limited liability.
, ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
22. The purpose of financial reporting is to provide economic information to investors, creditors, and other
financial statement users.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
23. Creditors use accounting information to evaluate whether to loan money to a company.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-01-Purpose KEY: Bloom's: Knowledge
NOT: 1 min.
24. Current assets include all of the following: cash, inventory, equipment, supplies, and accounts
receivable.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
25. Current liabilities are typically listed in the order in which they will be paid.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
26. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) long-term
investments, and 3) intangibles.
ANS: T PTS: 1 DIF: Difficulty: Easy
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
27. In the stockholders' equity section of a classified balance sheet, a distinction is made between amounts
invested by owners and amounts financed by creditors.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS1-2 OBJ: LO: 1-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-09-Financial Statement
KEY: Bloom's: Knowledge NOT: 1 min.
28. One primary purpose of a classified balance sheet is to help users evaluate the working capital of a
company.
