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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1)What is the primary purpose of the statement of financial position? A)To measure the profit of a business up to a particular point in time. B)To report assets at their current market value at a particular point in time. C)To report the financial position of the reporting entity at a particular point in time. D)To report the difference between cash inflows and cash outflows for the period. Answer: C 2)On January 1, 20X1, two individuals invested $150,000 each to form Hornbeck Corporation. Hornbeck had total revenues of $15,000 during 20X1 and $40,000 during 20X2. Total expenses for the same periods were $8,000 and $22,000, respectively. Cash dividends paid out to shareholders totaled $6,000 in 20X1 and $12,000 in 20X2. What was the ending balance in Hornbeck's retained earnings account at the end of 20X1 and 20X2? A)$1,000 and $6,000 respectively. B)$7,000 and $19,000 respectively. C)$1,000 and $7,000, respectively. D)$301,000 and $306,000 respectively. Answer: C 3)The BAT Corporation had revenues of $110,000, expenses of $85,000, and an income tax rate of 20 percent in 20X2. What would profit after taxes be? A)$25,000. B)$15,000. C)$5,000. D)$20,000. Answer: D 4)Brown Corporation reported the following amounts at the end of the first year of operations, December 31, 20X1: Share capital $20,000; Sales revenue $95,000; Total assets $85,000, No dividends, and Total liabilities $35,000. What would shareholders' equity and total expenses be? A)Shareholders' equity, $80,000 and expenses $40,000. B)Shareholders' equity, $80,000 and expenses $85,000. C)Shareholders' equity, $50,000 and expenses $65,000. D)Shareholders' equity, $60,000 and expenses $75,000. Answer: C 5)Which of the following would not be considered an internal user of accounting data? A)A creditor of a company. B)The controller of a company. C)A salesperson of a company. D)The president of a company. Answer: A 6)If total liabilities increased by $25,000 and shareholders' equity increased by $5,000 during a period, then total assets must change by what amount and direction during that same period? A)$20,000 decrease. B)$25,000 increase. C)$30,000 increase. D)$20,000 increase. Answer: C 7)Which of the following activities involves raising the necessary funds to support the business? A)Operating. B)Marketing. C)Financing. D)Investing. Answer: C 18)Buying assets needed to operate a business is an example of a(n) A)purchasing activity. B)investing activity. C)operating activity. D)financing activity. Answer: B 9)The common characteristic possessed by all assets is A)tangible nature. B)long life. C)great monetary value. D)future economic benefit. Answer: D 10)Expenses are incurred A)to generate revenues. B)to produce assets. C)to produce liabilities. D)only on rare occasions. Answer: A 11)The financial statement that summarizes the changes in contributed capital and retained earnings for a specific period of time is the A)statement of earnings. B)statement of changes in equity. C)statement of cash flows. D)statement of financial position. Answer: B 12)Retained earnings at the end of the period is equal to A)assets plus liabilities. B)retained earnings at the beginning of the period plus net earnings minus liabilities. C)retained earnings at the beginning of the period plus net earnings minus dividends. D)net earnings for the period Answer: C 13)What form does financial accounting information provided by an entity to decision makers generally take? A)Various forecasts and performance reports. B)An analysis of changes in the price of a corporation's shares. C)Financial statements. D)Comparisons between the company and its competitors. Answer: C 14)If the retained earnings account increases from the beginning of the year to the end of the year, then A)additional investments are less than reported losses. B)dividends were paid. C)a loss is less than dividends. D)profit is greater than dividends. Answer: D 215)Shareholders' equity can be described as claims of A)debtors on total assets. B)creditors on total assets. C)customers on total assets. D)owners on total assets. Answer: D 16)Which financial statement would indicate whether the company relies more on debt or shareholders' equity to finance its assets? A)Statement of earnings. B)Statement of changes in equity. C)Statement of financial position. D)Statement of cash flows. Answer: C 17)The statement of financial position and statement of changes in equity are related because A)the ending amount on the statement of changes in equity is transferred to the statement of cash flows. B)both contain information for the corporation. C)the ending amount on the statement of changes in equity is reported on the statement of financial position. D)the total assets on the statement of financial position is reported on the statement of changes in equity. Answer: C 18)Carrington Company owes you $500 on account due within 15 days. Which of the following amounts on its statement of financial position would help you to determine the likelihood that you will be paid in full and on time? A)Cash and inventory. B)Contributed capital and retained earnings. C)Cash and property and equipment. D)Cash and trade receivables. Answer: D 19)The statement of cash flows and the statement of financial position are interrelated because A)the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings. B)both disclose the corporation's profit. C)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. D)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. Answer: C 20)Which of the following are the two primary components of shareholders' equity? A)Short term debt and retained earnings B)Long-term debt and retained earnings. C)Contributed capital and Retained earnings. D)Non-current assets and liabilities Answer: C 321)The statement of changes in equity is dependent on the results from A)a company's share capital. B)the statement of financial position. C)the statement of earnings. D)the statement of cash flows. Answer: C 22)The primary purpose of the statement of cash flows is to report A)information about cash receipts and cash payments of a company. B)a company's financing transactions. C)the net increase or decrease in cash. D)a company's investing transactions. Answer: A 23)Kamil's Car Repair Shop Ltd. started the year with total assets of $70,000 and total liabilities of $40,000. During the year, the business recorded $100,000 in car repair revenues, $65,000 in expenses, and dividends of $5,000. Shareholders' equity at the end of the year was A)$70,000. B)$75,000. C)$65,000. D)$60,000. Answer: D 24)The most significant expense for a merchandising company is A)income taxes B) cost of goods sold C)equipment maintenance D)salaries expense Answer: B 25)On the statement of financial position, assets may be presented A)in alphabetical order B)in order of liquidity C)in order of reverse liquidity D)either in order of liquidity or in order of reverse liquidity Answer: D 26)Retained earnings are A)the amount of profit kept in the corporation for future use. B)equal to revenues. C)equal to cash. D)the shareholders' claim on total assets. Answer: A 27)What are business liabilities? A)Debts or obligations resulting from past business events. B)Amounts it expects to collect in the future from customers. C)The amounts that owners have invested in the business. D)The increases in assets that result from profitable operations. Answer: A 428)Why would Parker Bank, in deciding whether to make a loan to Davis Company, be interested in the amount of liabilities, Davis has on its statement of financial position? A)Parker would be interested in the amount of Davis's assets but not the amount of liabilities. B)Existing liabilities give an indication of how profitable Davis has been in the past. C)If Davis already has many other obligations, it might not be able to repay the loan. D)The liabilities represent resources that could be used to repay the loan. Answer: C 29)What are the two categories of shareholders' equity usually found on the statement of financial position of a corporation? A)Share capital and property, plant, and equipment. B)Share capital and long-term liabilities. C)Retained earnings and notes payable. D)Contributed capital and retained earnings. Answer: D 30)Jameson & Johnson Inc., recorded $250,000 of depreciation expense in December 20X6. The most likely effect on the company's accounting equation is A)no effect on assets. B)a decrease in assets of $250,000. C)an increase in assets of $250,000. D)an increase in liabilities of $250,000. Answer: B 31)Allentown Corporation has on its statement of financial position the following amounts: Total assets of $3,500,000 Total liabilities of $500,000 Contributed capital of $1,000,000. What is the amount of retained earnings that should appear on Allentown's statement of financial position? A)$4,000,000. B)$3,000,000. C)$2,000,000. D)$5,000,000. Answer: C 32)Which financial statement for a business would you look at to determine the company's performance during an accounting period? A)Statement of financial position. B)Statement of earnings. C)Statement of cash flows. D)Statement of changes in equity. Answer: B 33)Which of the following is not a principal type of business activity? A)Delivering B)Investing C)Operating D)Financing Answer: A 534)How do most businesses earn revenues? A)Through sales of goods or services to customers. B)By selling shares to shareholders. C)By borrowing money from a bank. D)When they collect trade receivables. Answer: A 35)A group of individuals formed a new company with an investment of $100,000. The most likely effect of this transaction on the company's accounting equation at the time of the formation is an increase in cash and A)an increase in liabilities. B)an increase in revenue. C)an increase in owners' capital. D)an increase in assets. Answer: C 36)During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. The amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. What is the amount of sales revenue that Banner should report on its statement of earnings for 20X2? A)$5,960,000. B)$4,760,000. C)$5,850,000. D)$4,650,000. Answer: C 37)During 20X2, its second year in operation, Banner Company delivered goods to customers for which customers paid or promised to pay $5,850,000. Assume all sales were on account and the amount of cash collected from customers was $5,960,000. The amount of trade receivables at the beginning of 20X2 was $1,200,000. Based on this information, what is the amount of trade receivables that Banner would report at the end of 20X2? A)$1,090,000. B)$110,000. C)$1,310,000. D)$5,850,000. Answer: A 38)What is the amount of revenue recognized in the statement of earnings by a company that sells goods to customers? A)The amount of cash collected plus the beginning amount of trade receivables. B)Total sales, both cash and credit sales, for the period. C)The cash collected from customers during the current period. D)Total sales minus beginning amount of trade receivables. Answer: B 639)The statement of cash flows and the statement of financial position are interrelated because A)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of changes in equity. B)the ending amount of cash on the statement of cash flows must agree with the amount in the statement of financial position. C)the ending amount of cash on the statement of cash flows must agree with the amount on the statement of earnings. D)both disclose the corporation's profit. Answer: B 40)On January 1, 20X1, Taylor Corporation had retained earnings of $6,500,000. During 20X1, Taylor had profit of $1,050,000 and dividends of $450,000. What is the amount of Taylor's retained earnings at the end of 20X1? A)$6,050,000. B)$7,550,000. C)$6,950,000. D)$7,100,000. Answer: D 41)What are the categories of cash flows that appear on a statement of cash flows? A)Cash flows from investing, financing, and service activities. B)Cash flows from operating, investing, and financing activities. C)Cash flows from financing, production, and growth activities. D)Cash flows from operating, production, and internal activities. Answer: B 42)Borrowing money is an example of a(n) A)financing activity. B)investing activity. C)operating activity. D)delivering activity. Answer: A 43)On the statement of cash flows, how would a company report the purchase of machinery? A)As cash used in financing activities. B)As cash used in operating activities. C)As cash used in purchasing activities. D)As cash used in investing activities. Answer: D 44)When would a company report a net loss? A)When its liabilities increased during an accounting period. B)When its expenses exceeded its revenues for an accounting period. C)When its assets decreased during an accounting period. D)When retained earnings decreased due to paying dividends to shareholders. Answer: B 745)Which of the following is the amount of rent expense reported on the statement of earnings? A)The amount of rent used up in the current period to earn revenue. B)The amount of cash paid for rent for the future period. C)The amount of cash paid for rent in the current period less any unpaid rent at the end of the period. D)The amount of cash paid for rent in the current period. Answer: A 46)What events cause changes in a corporation's retained earnings? A)Declaration of dividends and purchase of new machinery. B)Profit issuance of shares, and borrowing from a bank. C)Declaration of dividends and issuance of shares to new shareholders. D)Profit or loss and declaration of dividends. Answer: D 47)The statement of financial position A)summarizes the changes in retained earnings for a specific period of time. B)presents the revenues and expenses for a specific period of time. C)reports the assets, liabilities, and shareholders' equity at a specific date. D)reports the changes in assets, liabilities, and shareholders' equity over a period of time. Answer: C 48)If you wanted to know how much of its profit a corporation distributed as dividends, which financial statement would you look at? A)Statement of earnings. B)Statement of changes in equity. C)Statement of cash flows. D)Statement of financial position. Answer: B 49)Why is the operating activities section often believed to be the most important part of a statement of cash flows? A)It shows the net increase or decrease in cash during the period. B)It shows the dividends that have been paid to shareholders. C)It gives the most information about how operations have been financed. D)It indicates a company's ability to generate cash from sales to meet current cash needs. Answer: D 50)If you wanted to know what accounting rules a company follows related to its inventory, where would you look? A)The statement of financial position. B)The statement of earnings. C)The headings to the financial statements. D)The notes to the financial statements. Answer: D 851)During 20X1, Burton Company delivered products to customers for which customers promised to pay $3,820,000. The company collected $3,670,000 in cash from customers during the year. Indicate which of these amounts will appear on the statement of earnings and which on the statement of cash flows. A)$3,820,000 appears on both the statement of earnings and the statement of cash flows. B)$3,670,000 appears on the statement of cash flows, and $3,820,000 appears on the statement of earnings. C)$3,670,000 appears on both the statement of earnings and the statement of cash flows. D)$3,820,000 appears on the statement of cash flows, and $3,670,000 appears on the statement of earnings. Answer: B 52)At the beginning of 20X2, Rodriguez Corporation had assets of $820,000 and liabilities of $340,000. During the year, assets increased by $40,000 and liabilities decreased by $8,000. What was total shareholders' equity at the end of 20X2? A)$480,000. B)$1,208,000. C)$432,000. D)$528,000. Answer: D 53)What term is used for probable future economic benefits owned by an entity, and obtained as the result of past transactions? A)Retained earnings. B)Assets. C)Liabilities. D)Revenues. Answer: B 54)What results from the purchase of goods or services on credit and from borrowing? A)Liabilities. B)Revenues. C)Assets. D)Share capital. Answer: A 55)How are the differing claims of creditors and investors recognized by a corporation? A)The claims of creditors are liabilities; those of investors are assets. B)The claims of creditors are liabilities; the claims of investors are recorded as shareholders' equity. C)The claims of creditors and investors are essentially equivalent. D)The claims of both creditors and investors are liabilities, but only the claims of investors are long term. Answer: B 56)In what order are assets are listed on a statement of financial position? A)Dollar amount (largest first). B)Importance to the operation of the business. C)Ease of conversion to cash. D)Date of acquisition (earliest first). Answer: C 957)In what order, would the assets of Any Company be listed on their statement of financial position? A)Cash, Inventory, Trade Receivables, Plant and Equipment. B)Cash, Trade Receivables, Plant and Equipment, Inventory. C)Cash, Trade Receivables, Marketable Securities, Inventory. D)Cash, Trade Receivables, Inventory, Plant and Equipment. Answer: D 58)The ending retained earnings balance of the Brown Hat restaurant chain increased by $4.3 billion from the beginning of the year. The company had declared a dividend of $1.5 billion. What was the profit earned during the year? A)$2.8 billion. B)$5.8 billion. C)$3.0 billion. D)There is no way to determine net income as not enough information was given. Answer: B 59)What section of the statement of cash flows do bankers consider to be the most important? A)Operating. B)Investing. C)Financing. D)All the sections are equally important. Answer: A 60)Which of the following statements is TRUE? A)The Accounting Standards Board is a government body. B)The SEC is the most influential Canadian regulator of the flow of financial information provided by publicly traded companies in Canada. C)Publicly traded enterprises must use the accounting standards prescribed for private enterprises for external reporting. D)Publicly traded enterprises must use IFRS for external reporting purposes. Answer: D 61)Which of the following activities would cause investors to overpay for the acquisition of a company from its current owners? A)Understated trade payables and overstated inventory. B)Understated assets and overstated expenses. C)Understated assets and overstated revenues. D)Understated revenues and overstated expenses. Answer: A 1062)Which of the following statements is true about the price earnings (P/E) ratio? A)The P/E ratio increases as profit increases. B)It is a ratio of importance to creditors. C)A high P/E ratio indicates investors have little confidence in the future profit potential of the company. D)The P/E ratio could be used to approximate the value investors would be willing to pay for the company's acquisition from existing owners. Answer: D 63)Which government regulatory agency has the legal authority to prescribe financial reporting requirements for corporations that sell their securities in Canadian stock exchanges in the province of Ontario? A)OSC. B)CICA. C)CRA. D)AcSB. Answer: A 64)Under IFRS, income includes increases in economic benefits from A)All increases related to owners' contributions. B)increases in owners' equity related to owners' contributions C)increases in liabilities not related to owners' contributions D)enhancements of assets not related to owners' contributions Answer: D 65)Which securities regulator in the province of Ontario has broad powers to determine measurement rules for financial statements of publicly traded companies on the Toronto Stock Exchange? A)The Supreme Court. B)The Canada Revenue Agency. C)The Federal Accounting Office. D)The Ontario Securities Commission. Answer: D 66)Financial statements are prepared for the user. Which of the following best describes the responsibility for the preparation of financial statements? A)It is the responsibility of management. B)It is the responsibility of shareholders. C)It is the responsibility of external auditors. D)It is the responsibility of standard setters. Answer: A 67)With whom does primary responsibility for the information in a corporation's financial statements rest? A)The public accountant who audited the financial statements. B)The Ontario Securities Commission. C)The managers of the corporation. D)The shareholders of the corporation. Answer: C 1168)What is an examination of the financial statements of a business to ensure that they conform with international financial reporting standards called? A)A validation. B)An audit. C)A certification. D)A verification. Answer: B 69)What is the purpose of an audit? A)To establish that a corporation's shares are a sound investment. B)To lend credibility to an entity's financial statements. C)To prove the accuracy of an entity's financial statements. D)To endorse the quality of leadership that managers provide for a corporation. Answer: B 70)Why do the managers of a corporation hire independent auditors? A)To lobby the AcSB for changes in generally accepted accounting principles. B)To guarantee annual and quarterly financial statements. C)To handle some personnel issues and problems. D)To audit and report on the fairness of financial statement presentation. Answer: D 71)Why is the auditor's role in performing audits, important to our society? A)Auditors have the primary responsibility for the information contained in financial statements. B)Auditors issue reports on the accuracy of each financial transaction. C)An audit of financial statements helps investors and others to know that they can rely on the information presented in the financial statements. D)Auditors provide direct financial advice to potential investors. Answer: C 72)What is one of the disadvantages of a corporation, when compared to a partnership? A)The corporation and its shareholders are potentially subject to double taxation. B)The shareholders have limited liability. C)The corporation provides continuity of life. D)The shareholders are treated as a separate legal entity from the corporation. Answer: A 73)Which of the following statements is true about a sole proprietorship? A)The owner and the business are separate legal entities but not separate accounting entities. B)The owner and the business are separate legal entities and separate accounting entities. C)The owner and the business are separate accounting entities but not separate legal entities. D)Most large businesses in this country are organized as sole proprietorships. Answer: C 1274)For a business organized as a general partnership, which statement is true? A)Formation of a partnership requires getting a charter from the province of incorporation. B)A partnership is not considered to be a separate accounting entity. C)The owners and the business are separate legal entities. D)Each partner is potentially responsible for the debts of the business. Answer: D 75)For what reason might a group of people establishing a business prefer to set it up as a corporation rather than a partnership? A)To avoid complex reporting procedure for government agencies B)To avoid double taxation. C)Because of ease of formation. D)To have limited liability. Answer: D TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 76)Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers. Answer: True False 77)External users of accounting information include the managers who plan, organize, and run a business. Answer: True False 78)In accounting and reporting for a business entity, the accounting and reporting for the business must be kept separate from other economic affairs of its owners. Answer: True False 79)Accounting communicates financial information about a business to both internal and external users. Answer: True False 80)A statement of financial position should be dated for a period (such as "For the year ended December 31, 20X1"), whereas a statement of earnings should be dated at a point in time (such as "At December 31, 20X1"). Answer: True False 81)Expenses are the cost of assets consumed or services used in the process of generating revenue. Answer: True False 82)Financing activities for corporations include borrowing money and selling shares. Answer: True False 1383)Total assets are $60,000, total liabilities, $30,000, and share capital is $20,000; therefore, retained earnings is $5,000. Answer: True False 84)Investing activities involve collecting the necessary funds to operate the business. Answer: True False 85)The purchase of equipment is an example of a financing activity. Answer: True False 86)The reasons for a decrease in cash can be determined by examining the statement of earnings. Answer: True False 87)Economic resources that are owned by a business are called shareholders' equity. Answer: True False 88)The accounting model for the statement of financial position is: Assets + Liabilities - Shareholders' Equity. Answer: True False 89)Assets are resources owned by a business that provide current services or benefits to the business. Answer: True False 90)Profit is the excess of total revenues over total expenses incurred to generate revenue during a specific period. Answer: True False 91)The financial statements prepared by a corporation include a statement of financial position, statement of earnings, statement of cash flows, and statement of money. Answer: True False 92)A banker who is considering making a loan to a corporation would be one of the corporation's internal decision makers. Answer: True False 93)Assets are economic resources controlled by the entity as a result of past transactions or events and from which future economic benefits can be obtained. Answer: True False 94)The financial statement that shows an entity's economic resources and its liabilities is the statement of retained earnings. Answer: True False 95)The statement of comprehensive income reports the change in shareholders' equity during a period from business activities other than investments by shareholders or distributions to shareholders. Answer: True False 1496)A note payable is a borrowing instrument that generally does not involve the payment of interest. Answer: True False 97)If a corporation does not pay its obligations when they are due, its creditors may be able to force the sale of the business's assets to pay their claims. Answer: True False 98)When a company ships products to a customer and bills the customer, the company should recognize revenue as earned. Answer: True False 99)The amount of cash paid by a business for office rent would be reported on the statement of cash flows as a financing activity. Answer: True False 100)Repayment of a bank loan is classified on the statement of cash flows as an operating activity. Answer: True False 101)Liabilities are the entity's legal obligations that result from past business events. Answer: True False 102)International Financial Accounting Standards are produced by the International Accounting Standards Board (IASB), which is an independent standard-setting board consisting of 15 members from twelve countries. Answer: True False 103)Accounting is based on man-made rules that sometimes undergo change. Answer: True False 104)Primary responsibility for the information in the financial statements lies with management. Answer: True False 105)The AcSB is currently the body responsible for establishing accounting standards. Answer: True False 106)The Accounting Standards Board (AcSB) is an agency of the federal government that establishes generally accepted accounting principles for businesses. Answer: True False 107)Generally accepted accounting principles are essentially identical in most developed countries. Answer: True False 108)One of the disadvantages of a corporation when compared to a partnership is the limited liability of the owners. Answer: True False 15