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Introduction to Financial Statements 1- 1
MULTIPLE CHOICE QUESTIONS
Correct answer in each question is underlined
- The proprietorship form of business organization
a. must have at least two owners in most states. b. generally receives favorable tax treatment relative to a corporation. c. combines the records of the business with the personal records of the owner. d. is classified as a separate legal entity.
- The partnership form of business organization
a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability.
- Which of the following is not one of the three forms of business organization? a. corporations. b. partnerships. c. proprietorships. d. investors.
- Most business enterprises in the United States are
a. proprietorships and partnerships. b. partnerships. c. corporations. d. government units.
- An advantage of the corporate form of business is that
a. it has limited life. b. its owner’s personal resources are at stake. c. its ownership is easily transferable via the sale of shares of stock. d. it is simple to establish.
- Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
a. Reduced legal liability for investors. b. Harder to transfer ownership. c. Lower taxes. d. Most common form of organization.
1-2 Introduction to Financial Statements
- A corporation has which of the following set of characteristics?
a. Shared control, tax advantages, increased skills and resources b. Simple to set up and maintains control with founder c. Easier to transfer ownership and raise funds, no personal liability d. Harder to raise funds and gives owner control
- A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate?
a. ability to raise capital for expansion b. desire to limit the owner’s personal liability c. the prestige of operating as a corporation d. the ease in transferring shares of the corporation’s stock
- All of the following are advantages for choosing a proprietorship for a business except:
a. A proprietorship is a simple form of business to set up. b. A proprietorship gives the owner control of the business. c. Proprietorship receive more favorable tax treatment. d. Transfer of ownership is easily achieved through stock sales.
- Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt?
a. Only Jack is personally liable for the debt, since he has been the managing partner during that time. b. Only Jill is personally liable for the debt of the business, since Jack has been working and she has not. c. Both Jack and Jill are personally liable for the business debt. d. Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.
- Which of the following are internal reports that accounting provides to internal users?
a. Forecasts of cash needs for next year. b. Financial comparisons of operating activity alternative. c. Both a and b are internal reports. d. Neither a or b is an internal report.
1-4 Introduction to Financial Statements
d. creditors.
- Which of the following groups uses accounting information to determine whether the company can pay its obligations?
a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
- Which of the following groups uses accounting information to determine whether the company’s net income will result in a stock price increase?
a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
- Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective?
a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
- Which of the following would not be considered an external user of accounting data for the Julian Company?
a. Internal Revenue Service Agent b. Management c. Creditors d. Customers
- Which of the following would not be considered an internal user of accounting data for a company?
a. The president of a company b. The controller of a company c. Creditor of a company d. Salesperson of a company
Introduction to Financial Statements 1- 5
- Which of the following is a primary user of accounting information with a direct financial interest in the business?
a. Taxing authority b. Creditor c. Regulatory agency d. Labor union
- Which of the following is a user of accounting information with an indirect financial interest in a business?
a. A financial adviser b. Management c. Investor d. Creditor
- Which type of corporate information is readily available to investors?
a. financial comparison of operating alternatives b. marketing strategies for a product that will be introduced in eighteen months c. forecasts of cash needs for the upcoming year d. amount of net income retained in the business
- External users want answers to all of the following questions except
a. Is the company earning satisfactory income? b. Will the company be able to pay its debts as they come due? c. Will the company be able to afford employee pay raises this year? d. How does the company compare in profitability with competitors?
- Which type of corporate information is not available to investors?
a. dividend history b. forecast of cash needs for the upcoming year c. cash provided by investing activities d. beginning cash balance
Introduction to Financial Statements 1- 7
- Which of the following activities involves collecting the necessary funds to support the business?
a. Operating b. Investing c. Financing d. Delivering
- Buying assets needed to operate a business is an example of a(n)
a. delivering activity. b. financing activity. c. investing activity. d. operating activity.
- Which activities involve acquiring the resources to run the business?
a. Delivering b. Financing c. Investing d. Operating
- Which activities involve putting the resources of the business into action to generate a profit?
a. Delivering b. Financing c. Investing d. Operating
- The statement of cash flows would disclose the payment of a dividend
a. nowhere on the statement. b. in the operating activities section. c. in the investing activities section. d. in the financing activities section.
39 Buying and selling products are examples of
a. operating activities. b. investing activities. c. financing activities. d. delivering activities.
1-8 Introduction to Financial Statements
- The common characteristic possessed by all assets is
a. long life. b. great monetary value. c. tangible nature. d. future economic benefit.
- Expenses are incurred
a. only on rare occasions. b. to produce assets. c. to produce liabilities. d. to generate revenues.
- The cost of assets consumed or services used is also known as
a. a revenue. b. an expense. c. a liability. d. an asset.
- Resources owned by a business are referred to as
a. stockholders’ equity. b. liabilities. c. assets. d. revenues.
- The best definition of assets is the
a. cash owned by the company. b. collections of resources belonging to the company and the claims on these resources. c. Owners’ investment in the business. d. resources belonging to a company have future benefit to the company.
- Gibson Company recorded the following cash transactions for the year:
Paid $180,000 for salaries. Paid $80,000 to purchase office equipment. Paid $20,000 for utilities. Paid $8,000 in dividends. Collected $300,000 from customers.
What was Gibson’s net cash provided by operating activities?
a. $100, b. $20, c. $120, d. $92,
1-10 Introduction to Financial Statements
- Retained earnings at the end of the period is equal to
a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities.
- The company’s policy toward dividends and growth could best be determined by examining the
a. Balance sheet. b. Income statement. c. Retained earnings statement. d. Statement of cash flows.
- If the retained earnings account increases from the beginning of the year to the end of the year, then
a. net income is less than dividends. b. a net loss is less than dividends. c. additional investments are less than net losses. d. net income is greater than dividends.
- The retained earnings statement would not show
a. the retained earnings beginning balance. b. revenues and expenses. c. dividends. d. the ending retained earning balance.
- If the retained earnings account decreases from the beginning of the year to the end of the year, then
a. net income is less than dividends. b. there was a net income and no dividends. c. additional investments are less than net losses. d. net income is greater than dividends.
- Which financial statement is prepared first?
a. Balance sheet b. Income statement c. Retained earnings statement d. Statement of cash flows
Introduction to Financial Statements 1- 11
- An income statement shows
a. revenues, liabilities, and stockholders’ equity. b. expenses, dividends, and stockholders’ equity. c. revenues, expenses, and net income. d. assets, liabilities, and stockholders’ equity.
- In a study session, a classmate makes this statement “Dividends are listed as expenses on the income statement.” What is your best response to this statement?
a. I’ve been struggling with that concept and I feel that dividends should be shown on the balance sheet as assets. b. You are right. Revenues and expenses are shown on the income statement. Dividends are a cost of generating revenues and that makes them an expense. Why else would a corporation pay dividends? c. Dividends represent a portion of corporate profits that are paid to the shareholders. They belong on the retained earnings statement. d. Dividends are deducted from retained earnings on the balance sheet.
- Henson Company began the year with retained earnings of $350,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Henson’s retained earnings at the end of the year?
a. $510, b. $430, c. $810, d. $470,
- Pinson Company began the year with retained earnings of $550,000. During the year, the company recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was Pinson’s retained earnings at the end of the year?
a. $910, b. $630, c. $1,010, d. $480,
- Finney Company began the year by issuing $20,000 of common stock for cash. The company recorded revenues of $185,000, expenses of $160,000, and paid dividends of $10,000. What was Finney’s net income for the year?
a. $15, b. $35, c. $25, d. $45,
Introduction to Financial Statements 1- 13
- Jimmy’s Repair Shop started the year with total assets of $150,000 and total liabilities of $120,000. During the year the business recorded $315,000 in revenues, $165,000 in expenses, and dividends of $30,000. Stockholders’ equity at the end of the year was
a. $180,000. b. $150,000. c. $120,000. d. $135,000.
- Jimmy’s Repair Shop started the year with total assets of $150,000 and total liabilities of $120,000. During the year the business recorded $315,000 in revenues, $165,000 in expenses, and dividends of $30,000. The net income reported by Jimmy’s Repair Shop for the year was
a. $120,000. b. $150,000. c. $90,000. d. $285,000.
- Ashley’s Accessory Shop started the year with total assets of $70,000 and total liabilities of $40,000. During the year the business recorded $110,000 in revenues, $55,000 in expenses, and dividends of $20,000. Stockholders’ equity at the end of the year was
a. $60,000. b. $55,000. c. $65,000. d. $35,000.
- Ashley’s Accessory Shop started the year with total assets of $70,000 and total liabilities of $40,000. During the year the business recorded $110,000 in revenues, $55,000 in expenses, and dividends of $20,000. The net income reported by Ashley’s Accessory Shop for the year was
a. $40,000. b. $50,000. c. $65,000. d. $55,000.
- If total liabilities increased by $45,000 and stockholders’ equity increased by $15, during a period of time, then total assets must change by what amount and direction during that same period?
a. $60,000 decrease b. $60,000 increase c. $75,000 increase d. $90,000 increase
1-14 Introduction to Financial Statements
- If total liabilities decreased by $45,000 and stockholders’ equity increased by $15, during a period of time, then total assets must change by what amount and direction during that same period?
a. $60,000 increase b. $30,000 decrease c. $30,000 increase d. $45,000 decrease
- If total liabilities decreased by $25,000 and stockholders’ equity increased by $5, during a period of time, then total assets must change by what amount and direction during that same period?
a. $20,000 decrease b. $20,000 increase c. $25,000 increase d. $30,000 increase
- If total liabilities decreased by $45,000 and stockholders’ equity decreased by $15, during a period of time, then total assets must change by what amount and direction during that same period?
a. $60,000 increase b. $30,000 decrease c. $60,000 decrease d. $30,000 decrease
- If total liabilities increased by $42,000 during a period of time and stockholders’ equity decreased by $18,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n)
a. $42,000 increase. b. $60,000 increase. c. $24,000 decrease. d. $24,000 increase.
- The balance sheet
a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.
1-16 Introduction to Financial Statements
- Stockholders’ equity
a. is usually equal to cash on hand. b. is equal to liabilities and retained earnings. c. includes retained earnings and common stock. d. is shown on the income statement.
- Retained earnings is
a. the stockholders’ claim on total assets. b. equal to cash. c. equal to revenues. d. the amount of net income kept in the corporation for future use.
- Which financial statement would best indicate whether the company relies on debt or stockholders’ equity to finance its assets?
a. Statement of Cash Flows b. Retained Earnings Statement c. Income Statement d. Balance Sheet
- The primary purpose of the statement of cash flows is to report
a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash.
- Claims of owners are called
a. dividends b. stockholders’ equity c. liabilities d. income payable
- Which of the following is not a common way that managers use the balance sheet?
a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period b. To determine if the cash balance is sufficient for future needs c. To analyze the balance between debt and common stock financing d. To analyze the balance of accounts receivable on the last day of the accounting period
- Why are financial statement users interested in the statement of cash flows?
a. It is the easiest financial statement to evaluate. b. It provides information about an important company resource.
Introduction to Financial Statements 1- 17
c. It is the first statement that is presented to users. d. It helps users decide whether assets such as office equipment should be replaced.
- Why should the income statement be prepared first?
a. The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. b. Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet. c. The income statement does not have to be prepared first. Financial statements can be prepared in any order. d. None of these statements is correct.
- Elston Company compiled the following financial information as of December 31, 2012:
Revenues $420, Common stock 90, Equipment 120, Expenses 375, Cash 105, Dividends 30, Supplies 15, Accounts payable 60, Accounts receivable 45, Retained earnings, 1/1/12 225,
Elston’s assets on December 31, 2012 are:
a. $705, b. $510, c. $240, d. $285,
- Elston Company compiled the following financial information as of December 31, 2012:
Revenues $420, Common stock 90, Equipment 120, Expenses 375, Cash 105, Dividends 30, Supplies 15, Accounts payable 60, Accounts receivable 45, Retained earnings, 1/1/12 225,
Elston’s retained earnings on December 31, 2012 are:
a. $225, b. $270, c. $240,
95. Elston Company compiled the following financial information as of December 31, 2012:
- Introduction to Financial Statements 1-
- Revenues $420,
- Common stock 90,
- Equipment 120,
- Expenses 375,
- Cash 105,
- Dividends 30,
- Supplies 15,
- Accounts payable 60,
- Accounts receivable 45,
- Retained earnings, 1/1/12 225,
- a. $315, Elston’s stockholders’ equity on December 31, 2012 is:
- b. $330,
- c. $240,
- d. $360,
- Revenues $280, 96. Benedict Company compiled the following financial information as of December 31, 2012:
- Common stock 60,
- Equipment 80,
- Expenses 250,
- Cash 70,
- Dividends 20,
- Supplies 10,
- Accounts payable 40,
- Accounts receivable 30,
- Retained earnings, 1/1/12 150,
- a. $470, Benedict’s assets on December 31, 2012 are:
- b. $340,
- c. $160,
- d. $190,
1-20 Introduction to Financial Statements
- Benedict Company compiled the following financial information as of December 31, 2012:
Revenues $280, Common stock 60, Equipment 80, Expenses 250, Cash 70, Dividends 20, Supplies 10, Accounts payable 40, Accounts receivable 30, Retained earnings, 1/1/12 150,
Benedict’s retained earnings on December 31, 2012 are:
a. $150, b. $180, c. $160, d. $ 10,
- Benedict Company compiled the following financial information as of December 31, 2012:
Revenues $280, Common stock 60, Equipment 80, Expenses 250, Cash 70, Dividends 20, Supplies 10, Accounts payable 40, Accounts receivable 30, Retained earnings, 1/1/12 150,
Benedict’s stockholders’ equity on December 31, 2012 is:
a. $210, b. $220, c. $160, d. $240,
- The heading on the statement of cash flows identifies all of the following except :
a. the preparer of the statement b. the company c. the time period covered by the statement d. the type of statement
