Answers
CHAPTER 1
Self-Test
1.
a
(LO3)
2.
a
(LO2)
3.
b
(LO3)
4.
b
(LO4)
5.
c
(LO5)
6.
d
(LO6)
7.
a
(LO7)
8.
c
(LO7)
9.
d
(LO2)
10. b
(LO6)
Matching
1.
h
2.
f
3.
o
4.
r
5.
w
6.
n
7.
s
8.
c
9.
j
10. v
11. i
12. b
13. u
14. e
15. l
16. q
17. m
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Answers
351
18. t
19. d
20. g
21. y
22. p
23. k
24. x
25. a
Short Answer
1.
(LO6)
Tolan Company
Income Statement
For the Year Ended July 31, 20xx
2.
(LO1) Bookkeeping deals only with the mechanical and repetitive recordkeeping process.
Accounting involves bookkeeping as well as the design of an accounting system, its use, and the
analysis of its output.
3.
(LO7)
a.
Integrity—The accountant is honest, regardless of consequences.
b.
Objectivity—The accountant is impartial in performing his or her job.
c.
Independence—The accountant avoids all relationships or situations that could impair or
appear to impair his or her objectivity.
d.
Due care—The accountant carries out his or her responsibilities with competence and
diligence.
4.
(LO2) Management, outsiders with a direct financial interest, and outsiders with an indirect
financial interest
5.
(LO1) Profitability (earning enough income to attract and hold investment capital) and liquidity
(keeping sufficient funds on hand to pay debts as they fall due)
6.
(LO6)
Statement
a.
Income statement
b.
Statement of owner’s equity
c.
Balance sheet
d.
Statement of cash flows
Purpose
a.
Measures net income during a certain period
b.
Shows how owner’s capital changed during the period
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352
Answers
c.
Shows financial position at a point in time
d.
Discloses the cash flows that result from the business’s operating, investing, and financing
activities during the period
True-False
1.
T
(LO6)
2.
F
(LO7) The IRS interprets and enforces tax laws.
3.
T
(LO5)
4.
T
(LO5)
5.
F
(LO5) It indicates that the company has one or more debtors.
6.
T
(LO5)
7.
F
(LO7) It is expressed as a percentage.
8.
F
(LO6) Withdrawals are a deduction on the statement of owner’s equity.
9.
F
(LO7) The FASB dictates accounting practice.
10. T
(LO4)
11. T
(LO6)
12. T
(LO6)
13. F
(LO7) That is the GASB’s responsibility.
14. F
(LO4) A corporation is managed by its board of directors.
15. T
(LO7)
16. F
(LO5) Net assets equal assets minus liabilities.
17. F
(LO6) Balance sheets do not list revenues and expenses.
18. F
(LO3) Nonexchange transactions, such as the accumulation of interest, do exist.
19. T
(LO1)
20. T
(LO6)
21. T
(LO3)
22. F
(LO2) Economic planners have an indirect financial interest in accounting information.
23. T
(LO5)
24. F
(LO1) Cash flow is a measure of liquidity.
25. T
(LO1)
26. F
(LO6) They appear as a financing activity.
Multiple Choice
1.
a
(LO6) The income statement reports revenues and expenses. Utilities Expense would
therefore appear on that statement rather than on the balance sheet.
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Answers
353
2.
c
(LO7) Public corporations must file various reports containing specific financial
information with the SEC (Securities and Exchange Commission), the agency that regulates the
issuance and trading of stock in the United States. The SEC makes these reports available to the
public, thus helping to ensure that investors have complete and accurate information on which to
base their decisions.
3.
b
(LO4) The owners of a corporation—the stockholders—can easily transfer their shares to
other investors.
4.
b
(LO6) The balance sheet is in a sense a “snapshot” of a business on a given date. The
account balances on the statement are a report of the ultimate effect of financial transactions
during an accounting period, not a report of the actual transactions.
5.
a
(LO7) The principal purpose of an audit is to verify the quality of the information that a
company’s management presents in its financial statements. Fairness refers to the ability of users
of the financial statements to rely on the information as presented.
6.
c
(LO1) Recording an expense when incurred is actually in accordance with GAAP. The
other three choices are listed in the text as examples of fraudulent financial reporting.
7.
d
(LO4) The partners are the partnership (i.e., there is no separate legal entity in this form of
business organization). When a partner leaves the partnership, the original partnership is
dissolved, although a new partnership may then be formed by replacing the exiting partner.
8.
a
(LO6) “Assets” is a major heading found on the balance sheet; Accounts Receivable is a
type of asset.
9.
b
(LO6) The statement of cash flows does not list any “funding” activities.
10. c
(LO3) The wear and tear on an asset does not create an exchange of anything tangible. The
other choices, however, do involve a physical exchange.
Exercises
1.
2.
(LO2)
a.
Potential investors need all recent financial statements to assess the future profitability of a
company to determine whether they should invest in it.
b.
The principal goal of the SEC is to protect the investing public. Insisting that Pacific make
its statements public as well as examining the statements for propriety certainly will help the
public make decisions regarding Pacific.
c.
The bank would have difficulty in determining Pacific’s ability to repay the loan if it does
not have access to Pacific’s most recent financial statements.
d.
Present stockholders will wish to see the statements in order to decide whether to sell,
maintain, or increase their investments.
e.
Management will want to see the statements because the statements should help them
pinpoint the weaknesses that caused the year’s loss.
(LO5) $55,000
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354
3.
Answers
(LO6)
Philo’s TV Repair Company
Balance Sheet
December 31, 20xx
Assets
Cash
Accounts receivable
Equipment
Land
Buildings
Truck
Total assets
$ 2,950
1,500
850
1,000
8,000
4,500
$18,800
Liabilities
Accounts payable
$ 1,300
Owner’s Equity
P. Farnsworth, Capital
Total liabilities and owner’s equity
17,500
$18,800
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