Chapter 2: Basic Financial Statements

The accounting principle that assumes that a company will operate in the foreseeable future is: a. Going concern. b. Objectivity. c. Liquidity. d. Disclosure.

a. Going concern.

True/False: A net profit results from having more revenues than liabilities.

false

True/False: Decision makers outside the organization base their credit decisions on weekly, or even daily, financial statements.

false

True/False: Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford.

false

Which business organization is recognized as a separate legal entity under the law? a. Corporation. b. Sole proprietorship. c. Partnership. d. Allbusiness organizations are separate legal entities.

a. Corporation.

Which of the following statements regarding liquidity and profitability is not true? a. If a business is unable to pay its debts as they come due, it is operating unprofitably. b. A business may be liquid, yet operate unprofitably for several years. c. A business may operate profitably, yet be unable to meet its obligations. d. In order to survive in the long run, a business must both remain liquid and operate profitably

a. If a business is unable to pay its debts as they come due, it is operating unprofitably.

A strong statement of financial position shows: a. Large amounts of liquid assets relative to the liabilities due in the near future. b. Large amounts of debt relative to stockholders' equity. c. That cash is being generated by operations. d. That profits are being generated by operations.

a. Large amounts of liquid assets relative to the liabilities due in the near future.

Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bob's Bazaar, the accounting principle most relevant to the presentation of Bob's home is: a. The concept of the business entity. b. The cost principle. c. The concept of the business entity.The cost principle.The going-concern assumption. d. The objectivity principle.

a. The concept of the business entity.

The amount of owner's' equity in a business is not affected by: a. The percentage of total assets held in cash. b. The investments made in the business by the owner. c. The profitability of the business. d. The amount of dividends paid to stockholders.

a. The percentage of total assets held in cash.

Waldorf Company had the following transactions during the month of October Year 1: (1) Cash received from bank loans was $60,000. (2) Dividends of $18,500 were paid to stockholders in cash. (3) Revenues earned and received in cash amounted to $100,500. (4) Expenses incurred and paid were $78,000. What amount of net income will be reported on an income statement for the month of October? a. $18,500. b. $22,500. c. $78,000. d. $100,500.

b. $22,500.

Astoria Company had the following transactions during the month of August Year 1: (1) Cash received from bank loans was $18,000. (2) Dividends of $9,300 were paid to stockholders in cash. (3) Revenues earned and received in cash amounted to $31,500 (4) Expenses incurred and paid were $25,000. What amount of net income will be reported on an income statement for the month of August? a. $18,000. b. $6,500. c. $0. d. $31,500.

b. $6,500.

Astoria Company had the following transactions during the month of August Year 1: (1) Cash received from bank loans was $20,000. (2) Dividends of $9,500 were paid to stockholders in cash. (3) Revenues earned and received in cash amounted to $33,500. (4) Expenses incurred and paid were $26,000. What amount of net income will be reported on an income statement for the month of August? a. $20,000. b. $7,500. c. $0. d. $33,500.

b. $7,500.

The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet. The reporting of this item in this manner violated the: a. Cost principle. b. Business entity concept. c. Objectivity principle. d. Going-concern assumption.

b. Business entity concept.

An expense is best defined as: a. Any payment of cash for the benefit of the company. b. Past, present, or future payments of cash required to generate revenues. c. Past payments of cash required to generate revenues. d. Future payments of cash required to generate revenues.

b. Past, present, or future payments of cash required to generate revenues.

Which of the following is the primary objective of an income statement? a. Providing managers with detailed information about where the enterprise stands at a specific date. b. Providing users outside the business organization with information about the company's operating results for a period of time. c. Reporting to the Internal Revenue Service the company's taxable income. d. Indicating to investors in a particular company the current market values of their investments.

b. Providing users outside the business organization with information about the company's operating results for a period of time.

The concept of adequate disclosure means that: a. The accounting department of a business must inform management of the accounting principles used in preparing the financial statements. b. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date. c. The independent auditors must disclose in the financial statements any and all errors detected in the company's accounting records. d. The financial statements should include a comprehensive list of each transaction that occurred during the year.

b. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.

The way in which financial statements relate is known as: a. Solvency. b. Objectivity. c. Articulation. d. Entity.

c. Articulation

Owners' equity in a business decreases as a result of which of the following? a. Investments of cash by the owners. b. Profits from operating the business. c. Losses from unprofitable operation of the business. d. Repaying a loan to a commercial bank.

c. Losses from unprofitable operation of the business.

Which of the following transactions would cause a change in owners' equity? a. Repayment of the principal on a bank loan. b. Purchase of a delivery truck on credit. c. Sale of land on credit for a price above cost. d. Borrowing money from a bank.

c. Sale of land on credit for a price above cost.

A balance sheet is designed to show: a. How much a business is worth. b. The profitability of the business during the current year. c. The assets, liabilities, and owners' equity of a business as of a particular date. d. The cost of replacing the assets and of paying off the liabilities at December 31.

c. The assets, liabilities, and owners' equity of a business as of a particular date.

Retained earnings is: a. The positive cash flows of a company. b. The net worth of a company. c. The owners' equity that has accumulated as a result of profitable operations. d. Equal to the total assets of a company.

c. The owners' equity that has accumulated as a result of profitable operations.

From an accounting viewpoint, when is a business considered as an entity separate from its owner(s)? a. Only when organized as a sole proprietorship. b. Only when organized as a partnership. c. Only when organized as a corporation. d. A business is always considered as an accounting entity separate from the activities of the owner(s).

d. A business is always considered as an accounting entity separate from the activities of the owner(s).

A revenue transaction may result in all of the following except: a. An increase in assets. b. An increase in owners' equity. c. A positive cash flow in either the past, present, or future. d. An increase in liabilities.

d. An increase in liabilities.

A balance sheet: a. Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity. b. Shows the current market value of the owners' equity in the business at the balance sheet date. c. Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business, plus the assets and liabilities of its owner (or owners). d. Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles.

d. Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles.

Which one of the following is not considered as one of the three primary financial statements? a. Balance sheet. b. Income statement. c. Statement of cash flows. d. Statement of budgeting activities.

d. Statement of budgeting activities.

True/False: Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information.

true

True/False: In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet.

true

True/False: The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated.

true

True/False: The payment of a liability causes an increase in owners' equity.

true

True/False: Total assets must always equal total liabilities plus total owners' equity.

true

True/False: Window dressing occurs when management attempts to make a company look financially stronger than it actually is.

true