Chapter 1 Study Guide

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Student: ___________________________________________________________________________

1.

A business entity's accounting system creates financial accounting reports which are provided to external decision makers. True False

2.

Business managers utilize managerial accounting reports to plan and manage the daily operations. True False

3.

The balance sheet includes assets, liabilities and stockholders' equity as of a point in time. True False

4.

Revenue is recognized within the income statement during the period in which cash is collected. True False

5.

Total assets are $37,500, total liabilities are $20,000 and contributed capital is $10,000; therefore, retained earnings are $7,500. True False

6.

The income statement is a measure of an entity's economic performance for a period of time. True False

7.

The accounting equation states that Assets = Liabilities + Stockholders' Equity. True False

8.

A decision maker who wants to understand a company's financial statements must carefully read the notes to the financial statements because the notes provide useful supplemental information. True False

9.

The financial statement that shows an entity's economic resources and claims against those resources is the balance sheet. True False

10. Assets are initially recorded on the balance sheet at the total cost paid to acquire the asset. True False

11. Stockholders' equity on the balance sheet consists of contributed capital and retained earnings. True False

12. The amount of cash paid by a business for dividends would be reported on the statement of cash flows as an operating activity. True False

13. A company's retained earnings balance increased $50,000 last year; therefore, net income last year must have been $50,000. True False

14. The statement of retained earnings explains the change in the retained earnings balance caused by stockholder investments and dividend declarations. True False

15. The Financial Accounting Standards Board (FASB) has been given the authority by the Securities and Exchange Commission (SEC) to develop generally accepted accounting principles. True False

16. In the United States, the Securities and Exchange Commission (SEC) is considering the adoption of International Financial Reporting Standards (IFRS). True False

17. The primary responsibility for the content of the financial statements lies with the external auditor. True False

18. An audit examines the financial statements provided by management to ensure that they represent what they claim and to make sure that they are in compliance with Generally Accepted Accounting Principles. True False

19. The auditor can be held liable for malpractice in situations where the investors suffered losses while relying on the financial statements. True False

20. One of the advantages of a corporation when compared to a partnership is the limited liability of the owners. True False

21. Which of the following describes the primary objective of the balance sheet? A. B. C. D. To measure the net income of a business up to a particular point in time. To report the difference between cash inflows and cash outflows for the period. To report the financial position of the reporting entity at a particular point in time. To report the market value of assets, liabilities and stockholders' equity at a particular point in time.

22. During the fiscal year ended 2010, a company had revenues of $400,000, expenses of $280,000, and an income tax rate of 30 percent. What was the company's 2010 net income? A. B. C. D. $120,000 $36,000 $84,000 $400,000

23. Atlantic Corporation reported the following amounts at the end of the first year of operations: contributed capital $200,000; sales revenue $800,000; total assets $600,000; dividends declared $40,000; and total liabilities $320,000. What are Atlantics' retained earnings at the end of the year and how much expenses were incurred during the...
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