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Chapter 01
Financial Statements and Business Decisions True / False Questions
1. Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers.
True False
2. Assets on the balance sheet are recorded at market value or replacement cost.
True False
3. 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.
True False
4. The accounting period in which service revenue is recognized (i.e., revenue for services rendered) is generally the period in which the cash is collected.
True False
5. Total assets are $70,000, total liabilities, $40,000 and contributed capital is $20,000; therefore, retained earnings are $15,000.
True False
6. The payment of a cash dividend to stockholders increases stockholders' equity.
True False
7. The accounting model for the balance sheet is: 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 its liabilities is the statement of cash flows.
True False
10. Companies prepare financial statements at the end of each year and more often as needed. True False
11. A note payable is a borrowing instrument that generally does not involve the payment of interest.
True False
12. The amount of cash paid by a business for office utilities would be reported on the statement of cash flows as an operating activity.
True False
13. The income statement equation is Expenses - Revenues = Net Income.
True False
14. Generally accepted accounting principles almost never change once created.
True False
15. The Financial Accounting Standards Board (FASB) is an agency of the federal government that establishes generally accepted accounting principles for businesses.
True False
16. Since 2002, there has been substantial movement to develop international financial reporting standards.
True False
17. An audit guarantees that the financial statements are free of all misstatements.
True False
18. An auditor who fails to detect a material misstatement of a business's financial statements may be sued by anyone who suffered a loss from relying on the financial statements.
True False
19. In terms of economic importance, partnerships are the dominant form of organization in the U.S. because of their ease of formation.
True False
20. One of the advantages of a corporation when compared to a partnership is the limited liability of the owners.
True False