,
,1-2 Test Bank for Understanding Financial Accounting, Third Canadian Edition
corporations, whereas they are at risk in the case of proprietorships and partnerships. It also
means corporations file separate tax returns, whereas the income from proprietorships and
partnerships is reported on the personal tax returns of their owners.
4. Explain the three categories of business activities and identify examples of transactions related
to each category.
• The three categories of business activities are: (1) operating, (2) investing, and (3) financing
activities.
• Operating activities are related to the company’s revenues and expenses, such as sales to
customers, collections from customers, purchases of inventory, and payments of wages and
other expenses.
• Investing activities include buying and selling property, plant, and equipment and buying and
selling the shares of other companies.
• Financing activities include borrowing money, issuing shares, repaying loan principal, and
paying dividends.
5. Identify and explain the content and reporting objectives of the four basic financial statements
and the notes to the financial statements.
• There are four basic financial statements: (1) the statement of income, (2) the statement of
changes in equity, (3) the statement of financial position, and (4) the statement of cash flows.
• The objective of the statement of income is to measure the company’s operating performance
(its profit) for a period of time. This is measured by subtracting the expenses incurred during
the period from the income earned (revenues) in the same period.
• The objective of the statement of changes in equity is to provide details on how each
component of shareholders’ equity changed during the period. The components of
shareholders’ equity include share capital (the shares issued by the company) and retained
earnings (the company’s earnings that have been kept and not distributed as dividends).
• The objective of the statement of financial position is to present information on a company’s
assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the
company and embody a future benefit. Examples include cash; accounts receivable;
inventory; property, plant, and equipment; land; and so on. Liabilities are obligations of a
company that will result in an outflow of resources. Examples include accounts payable,
deferred revenue, long-term debt, and so on. Shareholders’ equity represents the
shareholders’ interest in the assets of the company and is referred to as net assets. Examples
include common shares and retained earnings.
• The objective of the statement of cash flows is to enable financial statement users to assess
the company’s inflows and outflows of cash related to its operating, investing, and financial
activities for a period of time.
• The notes to a company’s financial statements are used to provide additional detail and
context for items in the financial statements. They enable the financial statements themselves
to remain uncluttered, while increasing their usefulness.
, Overview of Corporate Financial Reporting
1-3
TRUE-FALSE STATEMENTS
1. Decision makers are often referred to as users of the financial statements and include investors and
creditors.
Answer: True
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
2. The primary purpose of financial accounting information is to aid users in their economic decision-
making relative to the organization.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
3. The section of an annual report that contains management’s discussion of the company’s operating
results is referred to as the Statement of Management’s Responsibility.
Answer: False
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
Learning Objective: Identify and explain the content and reporting objectives of the four basic
financial statements and the notes to the financial statements.
CPA: Financial Reporting
AACSB: Analytic
4. The shareholders are an example of an internal user of annual report information.
,1-2 Test Bank for Understanding Financial Accounting, Third Canadian Edition
corporations, whereas they are at risk in the case of proprietorships and partnerships. It also
means corporations file separate tax returns, whereas the income from proprietorships and
partnerships is reported on the personal tax returns of their owners.
4. Explain the three categories of business activities and identify examples of transactions related
to each category.
• The three categories of business activities are: (1) operating, (2) investing, and (3) financing
activities.
• Operating activities are related to the company’s revenues and expenses, such as sales to
customers, collections from customers, purchases of inventory, and payments of wages and
other expenses.
• Investing activities include buying and selling property, plant, and equipment and buying and
selling the shares of other companies.
• Financing activities include borrowing money, issuing shares, repaying loan principal, and
paying dividends.
5. Identify and explain the content and reporting objectives of the four basic financial statements
and the notes to the financial statements.
• There are four basic financial statements: (1) the statement of income, (2) the statement of
changes in equity, (3) the statement of financial position, and (4) the statement of cash flows.
• The objective of the statement of income is to measure the company’s operating performance
(its profit) for a period of time. This is measured by subtracting the expenses incurred during
the period from the income earned (revenues) in the same period.
• The objective of the statement of changes in equity is to provide details on how each
component of shareholders’ equity changed during the period. The components of
shareholders’ equity include share capital (the shares issued by the company) and retained
earnings (the company’s earnings that have been kept and not distributed as dividends).
• The objective of the statement of financial position is to present information on a company’s
assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the
company and embody a future benefit. Examples include cash; accounts receivable;
inventory; property, plant, and equipment; land; and so on. Liabilities are obligations of a
company that will result in an outflow of resources. Examples include accounts payable,
deferred revenue, long-term debt, and so on. Shareholders’ equity represents the
shareholders’ interest in the assets of the company and is referred to as net assets. Examples
include common shares and retained earnings.
• The objective of the statement of cash flows is to enable financial statement users to assess
the company’s inflows and outflows of cash related to its operating, investing, and financial
activities for a period of time.
• The notes to a company’s financial statements are used to provide additional detail and
context for items in the financial statements. They enable the financial statements themselves
to remain uncluttered, while increasing their usefulness.
, Overview of Corporate Financial Reporting
1-3
TRUE-FALSE STATEMENTS
1. Decision makers are often referred to as users of the financial statements and include investors and
creditors.
Answer: True
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
2. The primary purpose of financial accounting information is to aid users in their economic decision-
making relative to the organization.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
3. The section of an annual report that contains management’s discussion of the company’s operating
results is referred to as the Statement of Management’s Responsibility.
Answer: False
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
Learning Objective: Identify and explain the content and reporting objectives of the four basic
financial statements and the notes to the financial statements.
CPA: Financial Reporting
AACSB: Analytic
4. The shareholders are an example of an internal user of annual report information.
