1-4 Test Bank for Financial Accounting: Tools for Business Decision-Making, Ninth Canadian Edition
CHAPTER 1
THE PURPOSE AND USE OF FINANCIAL STATEMENTS
1. Identify the uses and users of accounting information. The purpose of accounting is to
provide useful information for decision-making. There are two types of decision makers who
use accounting information: internal users and external users. The primary internal users
are managers, who work for the business and need internal accounting information to
manage and run its operations. The primary external users are investors and creditors.
Investors (existing and potential shareholders) use accounting information to help decide
whether to buy, hold, or sell shares. Creditors, which include lenders such as bankers and
suppliers, use accounting information to evaluate the risk of lending money or granting
credit to a business. Other external users include non-management employees, potential
employees, customers, regulators, and taxing authorities.
2. Describe the primary forms of business organization. There are three types of business
organizations: 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, which means their shares trade on a stock exchange, or
private, which means their shares are closely held and do not trade on a stock exchange.
Generally accepted accounting principles are a common set of guidelines that are used to
record and report economic events. These can differ depending on the form of business
organization. Public corporations follow International Financial Reporting Standards (IFRS)
and private corporations have the choice of using Accounting Standards for Private
Enterprises (ASPE) or IFRS. Proprietorships and partnerships generally use ASPE.
3. Explain the three main types of business activity. Financing activities involve obtaining
the necessary funds (through the issue of equity or the assumption of debt) to support the
business. Repayments of debt, the declaration and payment of dividends, and share
repurchases are also financing activities. Investing activities primarily involve purchasing
the long-term assets (such as property, plant, and equipment) that are needed to run the
business, but also include the disposition of these items. Operating activities involve putting
the resources of the business into action to generate net income. These involve the day-to-
day activities of the business as it earns revenues and incurs expenses doing so.
4. Describe the purpose and content of each of the financial statements. The statement
of income 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 including those related to the issue of shares,
generation of net income, and distribution of dividends. 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 the management discussion and analysis (MD&A), the auditor’s report,
and the notes to the financial statements.
, The Purpose and Use of Financial Statements 1-5
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. Authorities, such as the Canada Revenue Agency, want to know whether a business
complies with the tax laws.
5. Accounting communicates financial information about a business to both internal and external
users.
6. Two internal users of accounting information are investors and managers.
7. Accounting provides financial comparisons of operating alternatives, projections of income
from new sales campaigns, analyses of sales costs, and forecasts of cash needs for external
users.
Solution: Accounting provides financial comparisons of operating alternatives, projections of
income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for
internal users.
8. Companies present summarized financial information in the form of financial statements for
both internal and external use.
9. Anyone who works for a company but does not necessarily have access to accounting
information to assist them in managing and operating the company is still considered to be an
internal user.
Solution: Anyone who works for a company but does not necessarily have access to accounting
information to assist them in managing and operating the company is considered to be an
external user.
10. Potential employees who use annual reports to learn about the company and evaluate job
prospects are regarded as external users.
11. As labour unions represent employees, they are also regarded as internal users.
Solution: Labour unions who represent employees are regarded as external users.
,1-6 Test Bank for Financial Accounting: Tools for Business Decision-Making, Ninth Canadian Edition
12. A partnership is a business organized as a separate legal entity.
13. A proprietor has unlimited liability.
14. The liability of corporate shareholders is limited to the amount of their investment.
15. The users of private company financial statements do not have access to financial
information beyond that available to the users of public company financial statements.
16. A proprietorship is usually operated by the owner.
17. Expenses are the cost of assets consumed or services used in the process of generating
revenue.
18. Assets are resources owned by a business that provide only current services or benefits to
the business.
19. Economic resources that are owned by a business are called shareholders’ equity.
20. Payments to shareholders are called dividends.
21. Expenses are identified by the type of liability associated with them.
22. Depreciation is the cost of certain long-lived assets allocated to expense for each period.
23. Net income for the period is determined by subtracting total expenses and dividends
declared from revenues.
24. Net income is another term for revenue.
25. The issue of shares and distribution of dividends are used in determining net income.
26. Financial statement users are interested in net income because it may be a predictor of
future net income.
, The Purpose and Use of Financial Statements 1-7
27. The statement of cash flows shows how cash was used during the period.
28. Claims of creditors and shareholders on the assets of a business are called liabilities.
29. Shareholder’s equity consists of at least two parts: share capital and retained earnings.
30. Any deficiency in cash from operating activities must be made up by issuing shares.
31. The statement of changes in equity is not dependent on the results from the statement of
income.
32. The statement of financial position is always the first statement prepared and presented.
33. The reasons for a decrease in cash can be determined by examining the statement of
income.
34. A negative balance in retained earnings is called a deficit.
Copyright © 2023
CHAPTER 1
THE PURPOSE AND USE OF FINANCIAL STATEMENTS
1. Identify the uses and users of accounting information. The purpose of accounting is to
provide useful information for decision-making. There are two types of decision makers who
use accounting information: internal users and external users. The primary internal users
are managers, who work for the business and need internal accounting information to
manage and run its operations. The primary external users are investors and creditors.
Investors (existing and potential shareholders) use accounting information to help decide
whether to buy, hold, or sell shares. Creditors, which include lenders such as bankers and
suppliers, use accounting information to evaluate the risk of lending money or granting
credit to a business. Other external users include non-management employees, potential
employees, customers, regulators, and taxing authorities.
2. Describe the primary forms of business organization. There are three types of business
organizations: 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, which means their shares trade on a stock exchange, or
private, which means their shares are closely held and do not trade on a stock exchange.
Generally accepted accounting principles are a common set of guidelines that are used to
record and report economic events. These can differ depending on the form of business
organization. Public corporations follow International Financial Reporting Standards (IFRS)
and private corporations have the choice of using Accounting Standards for Private
Enterprises (ASPE) or IFRS. Proprietorships and partnerships generally use ASPE.
3. Explain the three main types of business activity. Financing activities involve obtaining
the necessary funds (through the issue of equity or the assumption of debt) to support the
business. Repayments of debt, the declaration and payment of dividends, and share
repurchases are also financing activities. Investing activities primarily involve purchasing
the long-term assets (such as property, plant, and equipment) that are needed to run the
business, but also include the disposition of these items. Operating activities involve putting
the resources of the business into action to generate net income. These involve the day-to-
day activities of the business as it earns revenues and incurs expenses doing so.
4. Describe the purpose and content of each of the financial statements. The statement
of income 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 including those related to the issue of shares,
generation of net income, and distribution of dividends. 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 the management discussion and analysis (MD&A), the auditor’s report,
and the notes to the financial statements.
, The Purpose and Use of Financial Statements 1-5
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. Authorities, such as the Canada Revenue Agency, want to know whether a business
complies with the tax laws.
5. Accounting communicates financial information about a business to both internal and external
users.
6. Two internal users of accounting information are investors and managers.
7. Accounting provides financial comparisons of operating alternatives, projections of income
from new sales campaigns, analyses of sales costs, and forecasts of cash needs for external
users.
Solution: Accounting provides financial comparisons of operating alternatives, projections of
income from new sales campaigns, analyses of sales costs, and forecasts of cash needs for
internal users.
8. Companies present summarized financial information in the form of financial statements for
both internal and external use.
9. Anyone who works for a company but does not necessarily have access to accounting
information to assist them in managing and operating the company is still considered to be an
internal user.
Solution: Anyone who works for a company but does not necessarily have access to accounting
information to assist them in managing and operating the company is considered to be an
external user.
10. Potential employees who use annual reports to learn about the company and evaluate job
prospects are regarded as external users.
11. As labour unions represent employees, they are also regarded as internal users.
Solution: Labour unions who represent employees are regarded as external users.
,1-6 Test Bank for Financial Accounting: Tools for Business Decision-Making, Ninth Canadian Edition
12. A partnership is a business organized as a separate legal entity.
13. A proprietor has unlimited liability.
14. The liability of corporate shareholders is limited to the amount of their investment.
15. The users of private company financial statements do not have access to financial
information beyond that available to the users of public company financial statements.
16. A proprietorship is usually operated by the owner.
17. Expenses are the cost of assets consumed or services used in the process of generating
revenue.
18. Assets are resources owned by a business that provide only current services or benefits to
the business.
19. Economic resources that are owned by a business are called shareholders’ equity.
20. Payments to shareholders are called dividends.
21. Expenses are identified by the type of liability associated with them.
22. Depreciation is the cost of certain long-lived assets allocated to expense for each period.
23. Net income for the period is determined by subtracting total expenses and dividends
declared from revenues.
24. Net income is another term for revenue.
25. The issue of shares and distribution of dividends are used in determining net income.
26. Financial statement users are interested in net income because it may be a predictor of
future net income.
, The Purpose and Use of Financial Statements 1-7
27. The statement of cash flows shows how cash was used during the period.
28. Claims of creditors and shareholders on the assets of a business are called liabilities.
29. Shareholder’s equity consists of at least two parts: share capital and retained earnings.
30. Any deficiency in cash from operating activities must be made up by issuing shares.
31. The statement of changes in equity is not dependent on the results from the statement of
income.
32. The statement of financial position is always the first statement prepared and presented.
33. The reasons for a decrease in cash can be determined by examining the statement of
income.
34. A negative balance in retained earnings is called a deficit.
Copyright © 2023
