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File: ch01, Chapter 1: Introduction to Financial Statements
Multiple Choice
1. Which is not one of the three forms of business organization?
a) Sole proprietorship.
b) Creditorship.
c) Partnership.
d) Corporation.
Ans: b
Response A: This is one of three forms of business organization discussed in the chapter.
Response B: Correct!
Response C: This is one of three forms of business organization discussed in the chapter.
Response D: This is one of three forms of business organization discussed in the chapter.
2. Which is an advantage of corporations relative to partnerships and sole proprietorships?
a) Lower taxes.
b) Harder to transfer ownership.
c) Reduced legal liability for investors.
d) Most common form of organization.
Ans: c
Response A: Corporations generally have higher taxes than partnerships and proprietorships because
corporate income is taxed twice, once at the corporate level and once at the individual level.
Response B: Ownership is easier to transfer in a corporation than in a partnership or proprietorship.
Response C: Correct!
Response D: A corporation is not the most common form of business organization.
3. Which statement about users of accounting information is incorrect?
a) Management is considered an internal user.
b) Taxing authorities are considered external users.
c) Present creditors are considered external users.
d) Regulatory authorities are considered internal users.
Ans: d
Response A: People involved in the management of the firm, like the chief executive officer (CEO) are
considered internal users of accounting information.
Response B: Taxing authorities like the Internal Revenue Service or State Department of Revenue are
considered external users of account information.
Response C: Businesses or individuals to whom a firm owes money are considered external users of
account information.
Response D: Correct!
4. Which is not one of the three primary business activities?
a) Financing.
b) Operating.
c) Advertising.
d) Investing.
Ans: c
Response A: Financing is one of the three primary business activities.
Response B: Operating is one of the three primary business activities.
Response C: Correct!
Response D: Investing is one of the three primary business activities.
5. Net income will result during a time period when:
a) assets exceed liabilities.
b) assets exceed revenues.
c) expenses exceed revenues.
d) revenues exceed expenses.
Ans: d
Response A: Net income results when revenues exceed expenses, not when assets exceed liabilities.
Response B: Net income results when revenues exceed expenses, not when assets exceed revenues.
Response C: Net income results when revenues exceed expenses, not when expenses exceed revenues.
Response D: Correct!
6. What section of a cash flow statement indicates the cash spent on new equipment during the past
accounting period?
a) The investing section.
b) The operating section.
c) The financing section.
d) The cash flow statement does not give this information.
Ans: a
Response A: Correct!
Response B: The investing section, not the operating section of the statement of cash flows gives
information about long-term asset accounts like equipment.
Response C: The investing section, not the financing section of the statement of cash flows gives
information about long-term asset accounts like equipment.
Response D: The investing section (one of the main sections) of the statement of cash flows gives
information about long-term asset accounts like equipment.
7. Which financial statement reports assets, liabilities, and stockholders’ equity?
a) Income statement.
b) Retained earnings statement.
c) Balance sheet.
d) Statement of cash flows.
Ans: c
Response A: The balance sheet, not the income statement, reports a company’s assets, liabilities and
stockholders’ equity.
Response B: The balance sheet, not the retained earnings statement, reports a company’s assets,
liabilities and stockholders’ equity.
Response C: Correct!
Response D: The balance sheet, not the statement of cash flows, reports a company’s assets, liabilities
and stockholders’ equity.
8. Stockholders’ equity represents:
a) claims of creditors.
b) claims of employees.
c) The difference between revenues and expenses.
d) claims of owners.
Ans: d
Response A: Stockholders’ equity is the difference between assets and liabilities and represents claims
of owners.
Response B: Stockholders’ equity is the difference between assets and liabilities and represents claims of
owners.
Response C: Stockholders’ equity is the difference between assets and liabilities and represents claims
of owners.
Response D: Correct!
9. As of December 31, 2007, Stoneland Corporation has assets of $3,500 and stockholders’ equity of
$2,000. What are the liabilities for Stoneland Corporation as of December 31, 2007?
a) $1,500.
b) $1,000.
c) $2,500.
d) $2,000.
Ans: a
Response A: Correct!
Response B: Using the accounting equation, liabilities can be computed by subtracting stockholders’
equity from assets, or $3,500 - $2,000 = $1,500.
Response C: Using the accounting equation, liabilities can be computed by subtracting stockholders’
equity from assets, or $3,500 - $2,000 = $1,500.
Response D: Using the accounting equation, liabilities can be computed by subtracting stockholders’
equity from assets, or $3,500 - $2,000 = $1,500.
10. The segment of a corporation’s annual report that describes the corporation’s accounting methods is
the:
a) notes to the financial statements.
b) management discussion and analysis.
c) auditor’s report.
d) income statement.
Ans: a
Response A: Correct!
Response B: The description of a firm’s accounting methods is found in the notes to the financial
statements, not in the management discussion and analysis.
Response C: The description of a firm’s accounting methods is found in the notes to the financial
statements, not in the auditor’s report.
Response D: The description of a firm’s accounting methods is found in the notes to the financial
statements, not in the income statement.