Financial & Managerial Accounting for Decision Makers Test Bank
(5th Edition) – Dyckman, Magee, Pfeiffer, Hartgraves & Morse
Chapter 1: Introducing Financial Accounting
True/False
Topic: Cost and benefits of disclosure
LO: 1
1. One reason companies are motivated to disclose financial information to external decision makers is
that it may lower financing and operating costs.
Answer: True
Rationale: For example, when a company applies for a loan, the bank uses the company’s financial
statements to help determine the appropriate interest rate. Without this financial information, a
company may have a higher cost of borrowing or not obtain the loan at all.
Topic: Demand for accounting information
LO: 1
2. Financial accounting is designed primarily for decision makers within the company.
Answer: False
Rationale: Financial accounting is designed primarily to provide information to decision makers
outside of the company, while managerial accounting is designed primarily for decision makers within
the company.
Topic: Investing activities
LO: 2
3. Investing activities are the acquiring and disposing of liabilities that a company needs in order to
finance its operating activities.
Answer: False
Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the
production and sale of a company’s products and services.
Topic: Accounting equation
LO: 2
4. Assets must always equal liabilities plus stockholders’ equity.
Answer: True
Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must
always stay in balance.
,Topic: Financing activities
LO: 2
5. Other than operating profit, there are three main sources of external financing.
Answer: False
Rationale: There are two main sources of financing: owner (also called shareholder or equity)
financing and nonowner (also called creditor or lender) financing.
Topic: Financing and investing activities
LO: 2
6. Financing activities are defined as the acquiring and disposing of resources for the purpose
of selling products and services.
Answer: False
Rationale: Financing activities are defined as methods a company uses to raise funds to pay for
resources. Investing activities are defined as the acquiring and disposing of resources for the
purpose of selling products and services.
Topic: Statement of cash flows
LO: 3
7. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
activities over a period of time.
Topic: Retained earnings
LO: 3
8. Retained earnings are present on both the income statement and the statement of stockholders’
equity.
Answer: False
Rationale: Retained earnings are present in the statement of stockholders’ equity and the balance
sheet. The income statement represents current period earnings.
Topic: Balance sheet
LO: 3
9. If Beatty Company reports retained earnings of $242.6 million on its balance sheet, it will
also report $242.6 million in cash.
Answer: False
Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’
equity. That does not imply, however, that liability and equity accounts relate directly to specific
assets.
, Topic: Regulation and Oversight
LO: 4
10. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external
users have in the financial statements.
Answer: True
Rationale: In the wake of scandals, like those that took down Enron, the U.S. Congress passed the
Sarbanes-Oxley Act to improve external user confidence in financial statement reporting.
Topic: Global accounting perspective
LO: 4
11. The International Accounting Standards Board (IASB) has legal authority to impose accounting
standards on any country.
Answer: False
Rationale: The IASB works with standard setters within many countries, but does not have legal
authority to impose IASB standards on any country. It was charged with creating International
Financial Reporting Standards with the intention of unifying all public companies under one global set
of reporting standards.
Topic: IFRS
LO: 4
12. Foreign companies using international accounting standards must reconcile their financial statements
to American rules if they wish to sell securities in the U.S.
Answer: False
Rationale: The SEC adopted a rule in 2007 that allows foreign companies to stop reconciling to
American rules.
Topic: Financial statement analysis
LO: 5
13. One key measure of profitability is the debt-to-equity ratio.
Answer: False
Rationale: Return on equity is a key profitability metric. The debt-to-equity ratio is a measure of long-
term solvency when looking at credit risk.
Topic: Credit risk analysis
LO: 5
14. The greater the risk of any decision, the greater the expected return.
Answer: True
Rationale: The riskier an investment is, the greater the return demanded by investors.
(5th Edition) – Dyckman, Magee, Pfeiffer, Hartgraves & Morse
Chapter 1: Introducing Financial Accounting
True/False
Topic: Cost and benefits of disclosure
LO: 1
1. One reason companies are motivated to disclose financial information to external decision makers is
that it may lower financing and operating costs.
Answer: True
Rationale: For example, when a company applies for a loan, the bank uses the company’s financial
statements to help determine the appropriate interest rate. Without this financial information, a
company may have a higher cost of borrowing or not obtain the loan at all.
Topic: Demand for accounting information
LO: 1
2. Financial accounting is designed primarily for decision makers within the company.
Answer: False
Rationale: Financial accounting is designed primarily to provide information to decision makers
outside of the company, while managerial accounting is designed primarily for decision makers within
the company.
Topic: Investing activities
LO: 2
3. Investing activities are the acquiring and disposing of liabilities that a company needs in order to
finance its operating activities.
Answer: False
Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the
production and sale of a company’s products and services.
Topic: Accounting equation
LO: 2
4. Assets must always equal liabilities plus stockholders’ equity.
Answer: True
Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must
always stay in balance.
,Topic: Financing activities
LO: 2
5. Other than operating profit, there are three main sources of external financing.
Answer: False
Rationale: There are two main sources of financing: owner (also called shareholder or equity)
financing and nonowner (also called creditor or lender) financing.
Topic: Financing and investing activities
LO: 2
6. Financing activities are defined as the acquiring and disposing of resources for the purpose
of selling products and services.
Answer: False
Rationale: Financing activities are defined as methods a company uses to raise funds to pay for
resources. Investing activities are defined as the acquiring and disposing of resources for the
purpose of selling products and services.
Topic: Statement of cash flows
LO: 3
7. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
activities over a period of time.
Topic: Retained earnings
LO: 3
8. Retained earnings are present on both the income statement and the statement of stockholders’
equity.
Answer: False
Rationale: Retained earnings are present in the statement of stockholders’ equity and the balance
sheet. The income statement represents current period earnings.
Topic: Balance sheet
LO: 3
9. If Beatty Company reports retained earnings of $242.6 million on its balance sheet, it will
also report $242.6 million in cash.
Answer: False
Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’
equity. That does not imply, however, that liability and equity accounts relate directly to specific
assets.
, Topic: Regulation and Oversight
LO: 4
10. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external
users have in the financial statements.
Answer: True
Rationale: In the wake of scandals, like those that took down Enron, the U.S. Congress passed the
Sarbanes-Oxley Act to improve external user confidence in financial statement reporting.
Topic: Global accounting perspective
LO: 4
11. The International Accounting Standards Board (IASB) has legal authority to impose accounting
standards on any country.
Answer: False
Rationale: The IASB works with standard setters within many countries, but does not have legal
authority to impose IASB standards on any country. It was charged with creating International
Financial Reporting Standards with the intention of unifying all public companies under one global set
of reporting standards.
Topic: IFRS
LO: 4
12. Foreign companies using international accounting standards must reconcile their financial statements
to American rules if they wish to sell securities in the U.S.
Answer: False
Rationale: The SEC adopted a rule in 2007 that allows foreign companies to stop reconciling to
American rules.
Topic: Financial statement analysis
LO: 5
13. One key measure of profitability is the debt-to-equity ratio.
Answer: False
Rationale: Return on equity is a key profitability metric. The debt-to-equity ratio is a measure of long-
term solvency when looking at credit risk.
Topic: Credit risk analysis
LO: 5
14. The greater the risk of any decision, the greater the expected return.
Answer: True
Rationale: The riskier an investment is, the greater the return demanded by investors.
