FINANCIAL ACCOUNTING III Introduction to Financial Statements January 2020

TRUE OR FALSE. Only write TRUE in your answer sheet if the statement is correct and leave it blank if the statement is not
correct.

1. An auto repair company is an example of a manufacturer.

2. A department store is an example of a wholesaler.
3. The Bureau of Internal Revenue (BIR) is an external user that has the authority of the law to obtain certain accounting
information.
4. A partnership is a business owned by two individuals; if three or more individuals organize a business, it must be
established as a corporation.
5. Business entities and non-business entities are both organized to earn a profit.
6. Someone to whom a company has a debt is known as an investor.
7. All assets are tangible in nature.
8. A liability is a future economic benefit to a business.
9. An expense is an inflow of assets resulting from the sale of goods and services.
10. Capital stock indicates the owners’ contributions to a partnership.
11. Financial accounting is the branch of accounting concerned with communication with internal management.
12. External users of accounting information include present and potential stockholders, bankers and other creditors, and
management.
13. Bondholders are internal users of company’s accounting information.
14. The income statement is sometimes called the statement of financial position.
15. The balance sheet is a statement that summarizes revenues and expenses for a period.
16. Assets may be used to satisfy business obligations and to carry on business operations.
17. The amount of earnings distributed to stockholders can be found in the income statement.
18. Profits from operating activities distributed to business owners are called dividends.
19. An entity's assets come from three primary sources: creditors, investors, and profits retained in the business.
20. The balance sheet is linked to the retained earnings statement by the ending retained earnings balance.
21. A balance sheet provides information at one specific point in time, while the other basic financial statements provide
information on activities that occur over a period of time.
22. When an entity's revenues exceed its expenses for a period of time, the entity will report a net loss.
23. Owners' equity is the residual interest that remains after deducting liabilities from stockholders' equity.
24. If a company prepares a statement of stockholders' equity, net income is added to retained earnings on this statement.
25. Stockholders’ equity is owners’ equity in a corporation.
26. The time period assumption assumes a company prepares financial statements every month.
27. GAAP stands for Generally Accepted Auditing Procedures.
28. Because market values are subjective, many assets are carried on the balance sheet at their acquisition cost.
29. The term used to refer to an asset’s original cost is “historical cost.”
30. The going concern assumption infers that a company will continue to operate indefinitely.
31. A company in the process of liquidation meets the requirements under the going concern assumption.
32. The International Accounting Board (IASB) was created in order to develop worldwide accounting standards that must
be used for all financial statements prepared regardless of country.
33. The primary objective of external auditors is to provide assurance to stockholders and other users that the statements
are fairly presented.
34. The independent auditor's report conveys whether or not the business is a good investment.
35. The IASB is a branch of the IFRS.
36. Information must be timely to be relevant.
37. According to the accounting profession, the purpose of financial reporting is to provide information about a company
that investors, lenders, and other creditors can use when deciding whether to provide resources to the entity.
38. The three main business activities are financing, operating, and investing.
39. Internal users of accounting information include present creditors and management.
40. The income statement summarizes the assets, liabilities and stockholders’ equity for a period of time.
41. The four basic financial statements are the Income Statement, Statement of Retained Earnings, Balance Sheet, and
Statement of Cash Flows.
42. The amount of earnings distributed to stockholders can be found in the income statement as an expense.
43. Stockholders' equity is composed of two main sources: liabilities and contributed capital.
44. The first step in preparing the classified balance sheet is to list the assets in order of liquidity.
45. The only financial statement that reports the retained earnings balance at the end of the period is the Statement of
Retained Earnings.
46. An income statement provides information at one specific point in time, while the other basic financial statements
provide information on activities that occur over a period of time.
47. When an entity's stock issuances exceed its expenses for a period of time, the entity will report net income.
48. Contributed capital is the residual interest that remains after deducting liabilities from stockholders' equity.
49. The four steps in preparing the Income Statement are: 1) Prepare heading, 2) List the revenues of the company, 3) List
the expenses of the company, and 4) List the dividends of the company.
50. Stockholders equity is composed of contributed capital and retained earnings.
51. The primary objective of internal auditors who are employees of the company is to provide assurance to the
company’s stockholders that the financial statements are fairly presented.
52. The independent auditor's report conveys whether or not the business is a good investment.
53. The Statement of Cash Flows shows cash inflows and cash outflows for a period of time.
54. Because the four financial statements are interrelated (i.e., there is a natural progression from one financial statement
to another), the balance sheet should be prepared first.
55. The company's annual report includes an audit report, notes to the financial statements, but not management's
discussion and analysis.
56. Investing is the business activity that measures the company’s ability to generate cash from its revenue and expense
activities.
57. The owners of a sole proprietorship, partnership and corporations have limited liability.
58. The purpose of financial reporting is to provide economic information to investors, creditors, and other financial
statement users.
59. Creditors use accounting information to evaluate whether to loan money to a company.
60. Current assets include all of the following: cash, inventory, equipment, supplies, and accounts receivable.
61. Current liabilities are typically listed in the order in which they will be paid.
62. Three common categories of long-term assets are: a) property, plant, and equipment, b) long-term investments, and
c) intangibles.
63. In the stockholders' equity section of a classified balance sheet, a distinction is made between amounts invested by
owners and amounts financed by creditors.
64. One primary purpose of a classified balance sheet is to help users evaluate the working capital of a company.
65. A classified balance sheet is to help users determine how a company obtained its resources.
66. The current ratio is useful in determining a company's ability to pay obligations when they become due.
67. Income from operations includes interest revenue and interest expense because these items are considered to be
operating in nature.
68. Net loss reduces a company's retained earnings balance.
69. Dividend payments appear on the Statement of Retained Earnings.
70. The Statement of Cash Flows, like the Income Statement, reports only operating activities and other activities of a
company.
71. The ending cash balance is shown on the Balance Sheet and the Statement of Retained Earnings.
72. The company's annual report is contained within the company's By-Laws with the Securities Exchange Commission.
73. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company's
financial position, operating results, and cash flows.
74. An independent auditor's (CPA's) report is a guarantee that the financial statements are free from fraud or material
error.
75. In the independent auditors' report included with the annual report, management discusses the financial statements
and provides the shareholders with explanations for certain amounts reported in the statements.
76. A company with healthy cash flows from operating activities is in a good position to repay its debts.
77. The outflow of assets resulting from the sale of goods and services best describes the term “expenses”.
78. The inflow of assets resulting from the sale of products and services is called a revenue.
79. The economic resources of a business entity best describes the term “assets”.
80. A stockholder invest funds into a business and is considered an owner.