CHAPTER 1 - Business Decisions and Financial Accounting - End of Chapter Multiple Choice

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Which of the following is true regarding the income statement? a. The income statement is sometimes called the statement of operations. b. The income statement reports revenues, expenses, and liabilities. c. The income statement only reports revenue for which cash was received at the point of sale. d. The income statement reports the financial position of a business at a particular point in time.

ANSWER: A Explanation: b. The Income Statement reports Revenues, Expenses, and Net Income. Liabilities, along with Assets, and Stockholders' Equity are reported under the Balance Sheet c. The Income Statement reports total revenue regardless whether cash is received or not at the point of sale. d. The Income Statement reports the financial performance of a business during the current accounting period.

Which of the following is not one of the items required to be shown in the heading of a financial statement? a. The financial statement preparer's name. b. The title of the financial statement. c. The financial reporting date or period. d. The name of the business entity.

ANSWER: A Explanation: The heading of a financial statement shows the (1) Name of the business, (2) Title of the statement, and (3) Accounting Period

Which of the following is NOT one of the four basic financial statements? a. The balance sheet b. The audit report c. The income statement d. The statement of cash flows

ANSWER: B Explanation: The four basic financial statements are the Income Statement, Statement of Retained Earnings, Balance Sheet and Statement of Cash Flows.

Which of the following would not be a goal of external users reading a company's financial statements? a. Understanding the current financial state of the company. b. Assessing the company's contribution to social and environmental policies. c. Predicting the company's future financial performance. d. Evaluating the company's ability to generate cash from sales.

ANSWER: B Explanation: The main goal of GAAP and IFRS is to ensure companies produce financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the companies. Creditors are mainly interested in assessing whether a company is generating enough cash to pay what it owes, and whether the company have enough assets to cover its liabilities. Meanwhile, investors expect a return on their contributions to a company. Thus, they look closely for information regarding the company's ability to generate profits (and distribute dividends).

Which of the following statements regarding the statement of cash flows is false? a. The statement of cash flows separates cash inflows and outflows into three major categories: operating, investing, and financing. b. The ending cash balance shown on the statement of cash flows must agree with the amount shown on the balance sheet at the end of the same period. c. The total increase or decrease in cash shown on the statement of cash flows must agree with the "bottom line" (net income or net loss) reported on the income statement. d. The statement of cash flows covers a period of time.

ANSWER: C Explanation: Net income/loss is not necessarily equal to cash because revenues and expenses are reported when generated or incurred regardless of when is cash is received or paid.

Which of the following regarding retained earnings is false? a. Retained earnings is increased by net income. b. Retained earnings is a component of stockholders' equity on the balance sheet. c. Retained earnings is an asset on the balance sheet. d. Retained earnings represents earnings not distributed to stockholders in the form of dividends.

ANSWER: C Explanation: a. Ending Retained earnings is beginning retained earning plus net income less dividends declared. b. Ending retained earnings balance is the amount used for the retained earnings account shown on the Balance Sheet, under the stockholders' equity section. c. False, Retained earnings is a component of stockholders' equity on the balance sheet. d. A company's profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend.

Which of the following is false regarding the balance sheet? a. The accounts shown on a balance sheet represent the basic accounting equation for a particular business. b. The retained earnings balance shown on the balance sheet must agree with the ending retained earnings balance shown on the statement of retained earnings. c. The balance sheet summarizes the net changes in specific account balances over a period of time. d. The balance sheet reports the amount of assets, liabilities, and stockholders' equity of a business at a point in time.

ANSWER: C Explanation: a. True. The Balance Sheet reports Assets, Liabilities, and Stockholders' Equity, which represents the basic accounting equation: A = L + SE. b. True. Ending retained earnings balance is the amount used for the retained earnings account shown on the Balance Sheet, under the stockholders' equity section. c. False. The Balance Sheet reports the financial position of a business at a particular point in time. The Income Statement summarizes the net changes in specific account balances over a period of time. d. True. The balance Sheet reports the amount of assets, liabilities, and stockholders' equity of a business at a point in time.

Which of the following regarding GAAP is true? a. GAAP is an abbreviation for generally applied accounting principles. b. Changes in GAAP always affect the amount of income reported by a company. c. GAAP is the abbreviation for generally accepted accounting principles. d. Changes to GAAP must be approved by the Senate Finance Committee.

ANSWER: C Explanation: Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. As a group, these rules are called Generally Accepted Accounting Principles (GAAP).

Which of the following is not required by the Sarbanes-Oxley Act? a. Top managers of public companies must sign a report certifying their responsibilities for the financial statements. b. Public companies must maintain an audited system of internal control to ensure accuracy in accounting reports. c. Public companies must maintain an independent committee to meet with the company's independent auditors. d. Top managers of public companies must be members of the American Institute of Certified Public Accountants.

ANSWER: D Explanation: In response to frauds, the government introduced laws through the Sarbanes-Oxley Act (SOX). SOX requires top managers of public companies to sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal controls to ensure accuracy in the accounting reports, and maintain an independent committee to oversee top management and ensure they cooperate with auditors.

Which of the following is true? a. FASB creates SEC. b. GAAP creates FASB. c. SEC creates CPA. d. FASB creates GAAP.

ANSWER: D Explanation: Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. As a group, these rules are called Generally Accepted Accounting Principles (GAAP).


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