APPENDIX INTERNATIONAL FINANCIAL
1 REPORTING STANDARDS
MULTIPLE-CHOICE QUESTIONS
A1-1. c
A1-2. b
A1-3. d
A1-4. c
A1-5. d
A1-6. a
A1-7. b
A1-8. d
A1-9. a
A1-10. b
A1-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,
, ACCOUNTING AND THE
1 FINANCIAL STATEMENTS
DISCUSSION QUESTIONS
1. Accounting is a system for identifying, measuring, recording, and communicating financial
information about an organization’s activities to permit informed decisions by users of the
information. Bookkeeping is the process—made up of mechanical “steps”—of recording
transactions and maintaining accounting records. While bookkeeping is part of accounting,
accounting is viewed as the complete information system that communicates the economic
activities of a company to interested parties. Accounting is often referred to as the “language
of business” because it communicates information about economic activities of a company
that help people make decisions.
2. Accounting information is demanded or needed by decision-makers both inside and outside the
business to provide information about business activities and finances so that informed decisions
can be made. Five groups that create the demand for accounting information and their uses of
accounting information are described below.
(1) Managers need accounting information to plan and make decisions about the business
(e.g., predicting the consequences of their actions and deciding on which actions to take)
and to control its operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers
(e.g., judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future
prospects of a business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or
extend credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by
businesses, to implement a variety of regulatory objectives, and to make national economic
policy decisions.
3. An accounting entity is a company that has an identity separate from that of its owners and
managers and for which accounting records are kept. There are three main forms that
accounting entities take: a sole proprietorship, a partnership, and a corporation.
4. A sole proprietorship is a business entity owned by one person. A partnership is a business entity
owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate
from the personal affairs of the owners. That is, the owners are responsible for the debts of the
business. A corporation is a separate legal entity formed by one or more persons called
stockholder(s). A corporation is legally separate from the affairs of its owners, which limits the
stockholders’ legal responsibility for the debt of the business to the amount that the stockholders
invested in the business. Corporate shareholders generally pay more taxes than owners of sole
proprietorships or partnerships. Although the combined number of sole proprietorships and
partnerships greatly outnumber the number of corporations, the majority of business in the
United States is conducted by corporations.
1-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Accounting and the Financial Statements
5. The three main types of business activities are financing activities, investing activities, and
operating activities. Financing activities involve obtaining the funds necessary to begin and
operate a business. These funds come from either issuing stock or borrowing money. Investing
activities involve buying and selling assets that enable a corporation to operate. Operating
activities are the normal business activities that a company engages in as it conducts its
business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
6. Assets are the economic resources or future economic benefits obtained or controlled by a
business. Liabilities are the creditors’ claims on the resources of a business. Stockholders’ equity
is the ownership claim on the resources of a business. Stockholders’ equity is considered a
residual interest in the assets of a business that remain after deducting the business’s liabilities.
All three items appear on the balance sheet, forming the following equation:
Assets = Liabilities + Stockholders’ Equity
7. Revenues are the increases in assets (resources) that result from the sale of products or services.
Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of
the business. If revenues are greater than expenses, a corporation has earned net income. If
expenses are greater than revenues, a corporation has incurred a net loss.
8. The four primary financial statements are:
(1) Balance sheet: a presentation of information about a company’s economic resources
(assets) and the claims against those resources by creditors and owners (liabilities and
stockholders’ equity) at a specific point in time
(2) Income statement: a report on how well a company has performed its operations—
the profitability of a company—over a period of time
(3) Retained earnings statement: a report on how much of the company’s income was
retained in the business and how much was distributed to owners over a period of time
(4) Statement of cash flows: a report on the changes in a company’s cash during a period
of time. The statement of cash flows provides information about the company’s cash inflows
(sources) and outflows (uses) from operating, investing, and financing activities.
9. There are many questions that can be answered based on each of the financial statements:
(1) Balance sheet:
a. What is the total amount of assets (economic resources) of a corporation? What is
the total amount of liabilities (claims against the resources) for a corporation?
b. How much equity do the owners of the corporation have in its assets?
c. Is the corporation able to pay its debts as they become due?
(2) Income statement:
a. How much revenue was earned last month? Last quarter? Last year?
b. What was the total amount of expenses incurred to earn that revenue?
c. How much better off is the corporation at the end of the year than it was at the
beginning of the year?
d. Was the corporation profitable, and what are the prospects for the corporation’s
future profitability?
e. What are the prospects for the future growth of the corporation?
1-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 REPORTING STANDARDS
MULTIPLE-CHOICE QUESTIONS
A1-1. c
A1-2. b
A1-3. d
A1-4. c
A1-5. d
A1-6. a
A1-7. b
A1-8. d
A1-9. a
A1-10. b
A1-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,
, ACCOUNTING AND THE
1 FINANCIAL STATEMENTS
DISCUSSION QUESTIONS
1. Accounting is a system for identifying, measuring, recording, and communicating financial
information about an organization’s activities to permit informed decisions by users of the
information. Bookkeeping is the process—made up of mechanical “steps”—of recording
transactions and maintaining accounting records. While bookkeeping is part of accounting,
accounting is viewed as the complete information system that communicates the economic
activities of a company to interested parties. Accounting is often referred to as the “language
of business” because it communicates information about economic activities of a company
that help people make decisions.
2. Accounting information is demanded or needed by decision-makers both inside and outside the
business to provide information about business activities and finances so that informed decisions
can be made. Five groups that create the demand for accounting information and their uses of
accounting information are described below.
(1) Managers need accounting information to plan and make decisions about the business
(e.g., predicting the consequences of their actions and deciding on which actions to take)
and to control its operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers
(e.g., judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future
prospects of a business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or
extend credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by
businesses, to implement a variety of regulatory objectives, and to make national economic
policy decisions.
3. An accounting entity is a company that has an identity separate from that of its owners and
managers and for which accounting records are kept. There are three main forms that
accounting entities take: a sole proprietorship, a partnership, and a corporation.
4. A sole proprietorship is a business entity owned by one person. A partnership is a business entity
owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate
from the personal affairs of the owners. That is, the owners are responsible for the debts of the
business. A corporation is a separate legal entity formed by one or more persons called
stockholder(s). A corporation is legally separate from the affairs of its owners, which limits the
stockholders’ legal responsibility for the debt of the business to the amount that the stockholders
invested in the business. Corporate shareholders generally pay more taxes than owners of sole
proprietorships or partnerships. Although the combined number of sole proprietorships and
partnerships greatly outnumber the number of corporations, the majority of business in the
United States is conducted by corporations.
1-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 1 Accounting and the Financial Statements
5. The three main types of business activities are financing activities, investing activities, and
operating activities. Financing activities involve obtaining the funds necessary to begin and
operate a business. These funds come from either issuing stock or borrowing money. Investing
activities involve buying and selling assets that enable a corporation to operate. Operating
activities are the normal business activities that a company engages in as it conducts its
business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
6. Assets are the economic resources or future economic benefits obtained or controlled by a
business. Liabilities are the creditors’ claims on the resources of a business. Stockholders’ equity
is the ownership claim on the resources of a business. Stockholders’ equity is considered a
residual interest in the assets of a business that remain after deducting the business’s liabilities.
All three items appear on the balance sheet, forming the following equation:
Assets = Liabilities + Stockholders’ Equity
7. Revenues are the increases in assets (resources) that result from the sale of products or services.
Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of
the business. If revenues are greater than expenses, a corporation has earned net income. If
expenses are greater than revenues, a corporation has incurred a net loss.
8. The four primary financial statements are:
(1) Balance sheet: a presentation of information about a company’s economic resources
(assets) and the claims against those resources by creditors and owners (liabilities and
stockholders’ equity) at a specific point in time
(2) Income statement: a report on how well a company has performed its operations—
the profitability of a company—over a period of time
(3) Retained earnings statement: a report on how much of the company’s income was
retained in the business and how much was distributed to owners over a period of time
(4) Statement of cash flows: a report on the changes in a company’s cash during a period
of time. The statement of cash flows provides information about the company’s cash inflows
(sources) and outflows (uses) from operating, investing, and financing activities.
9. There are many questions that can be answered based on each of the financial statements:
(1) Balance sheet:
a. What is the total amount of assets (economic resources) of a corporation? What is
the total amount of liabilities (claims against the resources) for a corporation?
b. How much equity do the owners of the corporation have in its assets?
c. Is the corporation able to pay its debts as they become due?
(2) Income statement:
a. How much revenue was earned last month? Last quarter? Last year?
b. What was the total amount of expenses incurred to earn that revenue?
c. How much better off is the corporation at the end of the year than it was at the
beginning of the year?
d. Was the corporation profitable, and what are the prospects for the corporation’s
future profitability?
e. What are the prospects for the future growth of the corporation?
1-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
