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Chapter 2: Introduction to Financial Statements
15 problems · 0 figuresMultiple Choice 2.1 §2.1 source ↗
Which of these statements is not one of the financial statements?
- a.income statement
- b.balance sheet
- c.statement of cash flows
- d.statement of owner investments
Answer
D. statement of owner investments
Multiple Choice 2.3 §2.1 source ↗
Identify the correct components of the income statement.
- a.revenues, losses, expenses, and gains
- b.assets, liabilities, and owner’s equity
- c.revenues, expenses, investments by owners, distributions to owners
- d.assets, liabilities, and dividends
Answer
A. revenues, losses, expenses, and gains
Multiple Choice 2.5 §2.1 source ↗
Assume a company has a $350 credit (not cash) sale. How would the transaction appear if the business uses accrual accounting?
- a.$350 would show up on the balance sheet as a sale.
- b.$350 would show up on the income statement as a sale.
- c.$350 would show up on the statement of cash flows as a cash outflow.
- d.The transaction would not be reported because the cash was not exchanged.
Answer
B. $350 would show up on the income statement as a sale.
Multiple Choice 2.7 §2.2 source ↗
Owners have no personal liability under which legal business structure?
- a.a corporation
- b.a partnership
- c.a sole proprietorship
- d.There is the potential for some personal liability in every business structure, though that liability varies with the type of structure.
Answer
D. There is the potential for some personal liability in every business structure, though that liability varies with the type of structure.
Multiple Choice 2.9 §2.2 source ↗
Which of the following decreases owner’s equity?
- a.investments by owners
- b.losses
- c.gains
- d.short-term loans
Answer
B. losses
Multiple Choice 2.11 §2.2 source ↗
All of the following increase owner’s equity except for which one?
- a.gains
- b.investments by owners
- c.revenues
- d.acquisitions of assets by incurring liabilities
Answer
D. acquisitions of assets by incurring liabilities
Multiple Choice 2.13 §2.3 source ↗
Which of the following is the correct order of preparing the financial statements?
- a.income statement, statement of cash flows, balance sheet, statement of owner’s equity
- b.income statement, statement of owner’s equity, balance sheet, statement of cash flows
- c.income statement, balance sheet, statement of owner’s equity, statement of cash flows
- d.income statement, balance sheet, statement of cash flows, statement of owner’s equity
Answer
B. income statement, statement of owner’s equity, balance sheet, statement of cash flows
Multiple Choice 2.15 §2.3 source ↗
Which financial statement shows the financial performance of the company on a cash basis?
- a.balance sheet
- b.statement of owner’s equity
- c.statement of cash flows
- d.income statement
Answer
C. statement of cash flows
Multiple Choice 2.17 §2.3 source ↗
Working capital is an indication of the firm’s ________.
- a.asset utilization
- b.amount of noncurrent liabilities
- c.liquidity
- d.amount of noncurrent assets
Answer
C. liquidity
Question 2.1 §2.1 source ↗
Identify the four financial statements and describe the purpose of each.
Answer
Income statement shows the financial performance of a business for a period of time; statement of owner’s equity shows the change in net worth of a business for a period of time; balance sheet shows the financial position of a business on a specific date; statement of cash flows shows the cash inflows and outflows of the business for a period of time.
Question 2.3 §2.1 source ↗
Identify one similarity and one difference between revenues and gains. Why is this distinction important to stakeholders?
Answer
Both revenues and gains represent inflows to the business, making it more valuable. Revenues relate to the primary purpose of the business, while gains represent incidental or peripheral activities. This is important to stakeholders because revenues represent ongoing or permanent activities, while gains represent infrequent or transient activities. Stakeholders should focus on permanent earnings and put peripheral or incidental earnings into the proper context.
Question 2.5 §2.1 source ↗
Explain the concept of equity, and identify some activities that affect equity of a business.
Answer
Equity is the net worth of the business. It can also be thought of as the net assets (assets minus liabilities) of the business. Activities that affect equity include revenues, expenses, gains, losses, and investment by and distributions to owners.
Question 2.7 §2.2 source ↗
Identify/discuss one similarity and one difference between tangible and intangible assets.
Answer
Both tangible and intangible assets have value to the company and can be bought, sold, or impaired; tangible assets have physical substance, while intangible assets do not.
Question 2.9 §2.2 source ↗
What is the “accounting equation”? List two examples of business transactions, and explain how the accounting equation would be impacted by these transactions.
Answer
Assets = Liabilities + Owner’s Equity. Answers will vary and should include a combination of revenues/gains (increases), expenses/losses (decreases), investments (increases), and distributions (decreases). It is important to understand the following transactions/exchanges will not change equity: an asset for an asset, liability for liability, asset acquisitions by incurring liabilities, and asset reductions to reduce liabilities.
Question 2.11 §2.3 source ↗
Explain how the following items affect equity: revenue, expenses, investments by owners, and distributions to owners.
Answer
Revenues and investments increase equity, while expenses and distributions decrease equity.
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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.