Test Bank Fundamentals of Financial Accounting, 6e (Phillips)

,Fundamentals of Financial Accounting, 6e (Phillips)
Chapter 1 Business Decisions and Financial Accounting

1) Stockholders are owners of a corporation.

Answer: TRUE
Explanation: Stockholders are the owners of a corporation.
Difficulty: 1 Easy
Topic: Accounting for Business Decisions
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

2) All corporations acquire financing by issuing stock for sale on public stock exchanges.

Answer: FALSE
Explanation: Most corporations start out as private companies and will apply to become public
companies ("go public") if they need a lot of financing. Financing can also be acquired by
borrowing from banks.
Difficulty: 2 Medium
Topic: Organizational Forms
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

3) You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The company
owes $10 million dollars to its creditors. As a result of the bankruptcy, you are responsible for
paying $100,000 (or $10 million × 1%) of the amount owed to the creditors.

Answer: FALSE
Explanation: Unlike sole proprietorships and partnerships, a corporation is a separate entity from
both legal and accounting perspectives. This means that a corporation, not its owners, is legally
responsible for its own taxes and debts.
Difficulty: 2 Medium
Topic: Organizational Forms
Learning Objective: 01-01 Describe various organizational forms and business decision makers.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

,4) Cash paid for wages is an example of an operating activity on the statement of cash flows.

Answer: TRUE
Explanation: Cash flows from running the business, including cash paid for wages, are operating
activities on the statement of cash flows.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

5) Borrowing money from a bank is a financing activity on the statement of cash flows.

Answer: TRUE
Explanation: On the statement of cash flows, borrowing and repaying bank loans are financing
activities.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

6) The daily activities involved in running a business, such as buying supplies and paying
salaries and wages, are classified as operating activities on the statement of cash flows.

Answer: TRUE
Explanation: Buying supplies and paying salaries and wages are normal operating costs on the
statement of cash flows.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

, 7) Stockholders' equity is the difference between a company's assets and its liabilities.

Answer: TRUE
Explanation: Assets = Liabilities + Stockholders' Equity; therefore, Assets – Liabilities =
Stockholders' Equity
Difficulty: 2 Medium
Topic: The Basic Accounting Equation
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

8) A company owes $200,000 on a bank loan. It will be reported by the company as Accounts
Payable.

Answer: FALSE
Explanation: Formal debt, evidenced by a written contract or note, is reported as Notes Payable.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

9) Amounts reported on financial statements are sometimes rounded to the nearest million.

Answer: TRUE
Explanation: Large businesses often round the numbers on their financial statements to the
nearest thousand or million.
Difficulty: 1 Easy
Topic: Financial Statements
Learning Objective: 01-02 Describe the purpose, structure, and content of the four basic
financial statements.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation