ACCT 205

What is the definition of sales revenue?

A) Increases to a company's resources that result when goods or services are provided to customers

The obligations that an entity must pay in money or services at some time in the future because of past transactions or events are called?

A) Liabilities

Which of the following activities is an example of a financing activity?

A) Receiving a loan from a bank

An income statement:

A) Reports the results of operations for a period

Equity financing involves:

A) Selling shares of stock to investors

A major function of managerial accounting is to provide general purpose financial statements for parties outside the organization. True or False

Answer: False Rationale: A major function of managerial accounting is to provide management with accounting data for decisions related to a firm's operations. Providing general purpose financial statements for parties outside an organization is a function of financial accounting.

A statement of cash flows reports on the cash flows for operating, investing and financing activities at a point in time.

Answer: False Rationale: A statement of cash flows reports on the cash flows for operating, investing, and financing activities over a period of time.

Financial accounting is designed primarily for decision makers within a company.

Answer: False Rationale: Financial accounting is designed primarily to provide information to decision makers outside of a company, while managerial accounting is designed primarily to provide accounting information for decision makers within a company.

Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services.

Answer: False Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services.

Investing activities involve the acquiring and disposing of liabilities that a company needs in order to finance its operating activities.

Answer: False Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company's products and services.

Retained earnings are reported on both the income statement and the statement of stockholders' equity.

Answer: False Rationale: Retained earnings are reported on the statement of retained earnings and the balance sheet. The income statement represents current period earnings.

If a company reports retained earnings of $22.4 million on its balance sheet, it will also report $22.4 million in cash.

Answer: False Rationale: The accounting equation requires total assets to equal the sum of total liabilities plus stockholders' equity. That does not imply, however, that liability and stockholders' equity accounts relate directly to specific assets.

The statement of cash flows reports information about cash flows in two categories: cash received and cash disbursed.

Answer: False Rationale: The cash flows are grouped into the three business activities of operating, investing, and financing.

When financial statements are prepared, the balance sheet is usually prepared first.

Answer: False Rationale: The income statement is prepared first, followed by the statement of stockholders' equity, the balance sheet, and finally the statement of cash flows.

The net assets of an entity are equal to the assets minus the stockholders' equity.

Answer: False Rationale: The net assets of an entity are equal to its stockholders' equity.

The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by an entity.

Answer: True Rationale: Assets are the economic resources of a business that can be expressed in monetary form. Assets take many forms, but the key characteristic is that an asset represents a probable future economic benefit owned or controlled by an entity.

Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization.

Answer: True Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles.

The income statement, statement of stockholders' equity, and statement of cash flows are referred to as period-in-time statements.

Answer: True Rationale: Specific periods of time are reported on all financial statements, except the balance sheet. The balance sheet is referred to as a point-in-time statement.

Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board.

Answer: True Rationale: The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States.

Assets must always equal the sum of liabilities plus stockholders' equity.

Answer: True Rationale: The accounting equation is Assets = Liabilities + Stockholders' Equity. This relation must always exist.

The accounting equation states that the economic resources of an entity are equal to the claims on those resources.

Answer: True Rationale: The accounting equation: Assets = Liabilities + Stockholder's equity, states that a firm's assets equal the sum of its liabilities plus its stockholders' equity. Throughout the accounting process, the accounting equation must always remain in balance.

The basic purpose of accounting is to provide useful financial information.

Answer: True Rationale: The purpose of accounting is to provide useful financial information. Accordingly, the accounting process (1) prepared financial reports to meet the needs of the user and (2) helps interpret the financial results for the user.

Which one of the following is not an internal user of financial information?

B) Creditors

Which of the following statements about operating activities is not correct?

B) Creditors and stockholders beliefs about a company's ability to generate a profit are unimportant.

Which of the following is not a component of the accounting equation?

B) Income statement

Which of the four basic financial statements would contain a line item for expenses?

B) Income statement

Which of the following is not presented in a statement of stockholders' equity? A) Stockholders' equity at the beginning of the year B) Revenues C) Net income D) Dividends E) None of the above

B) Revenues

Which of the following activities is an example of an operating activity?

B) Selling merchandise online

Which of the following forms of business organizations exists as a legal entity for tax purposes?

C) A corporation

The three principal forms of business organization are:

C) A corporation, a partnership, and a sole proprietorship

The accounting equation states:

C) Assets = Liabilities + Stockholders' Equity

Which of the following is not an advantage of the corporate form of business organization?

C) Both the business and the owners are taxed

What is the definition of expenses?

C) Decreases in a company's resources that a firm incurs in the process of earning revenues

Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the:

C) Financial Accounting Standards Board

Which of the following is presented in a statement of stockholders' equity?

C) Net income

A balance sheet:

C) Presents a firm's assets, liabilities, and stockholders' equity as of a given date

Which of the following activities is an example of an investing activity?

C) Purchasing a delivery truck

An income statement does not include which of the following? A) Operating expenses B) Cost of goods sold C) Retained earnings D) Sales

C) Retained earnings

Which of the following is not a basic financial statement? A) Income statement B) Statement of cash flows C) Statement of common stock D) Balance sheet E) None of the above

C) Statement of common stock

Which of the following is correct? A) Ownership is an essential test for an asset. B) An example of an asset is notes payable. C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity. D) Liabilities represent the interest of the owners in the assets of an entity. E) None of the above

C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity.

Which of the following is an example of a liability?

C) Wages owed to employees for work already performed

Stockholders' equity: A) Is equal to assets minus liabilities B) Represents the interest of the owners in the assets of an entity C) Is equal to the net assets of an entity D) All of the above E) None of the above

D) All of the above

The economic resources of an entity that can be usually expressed in monetary terms are called?

D) Assets

Financing activities are generally categorized as:

D) Either debt or equity financing

The three types of business activities in which every business, regardless of organizational form, its industry or its size, is involved are:

D) Financing activities, operating activities, investing activities

Generally accepted accounting principles are:

D) Guides to action that apply primarily to the process of financial accounting.

Which one of the following is not an external user of financial information?

D) Senior company management