Test Bank for Understanding Financial Accounting, 3rd Canadian Edition by Burnley
CHAPTER 1
OVERVIEW OF CORPORATE FINANCIAL REPORTING
CHAPTER LEARNING OBJECTIVES
1. Define financial accounting and understand its relationship to economic decision-making.
• Financial accounting is the process by which information on the transactions of an
organization is captured, analyzed, and reported to external decision makers.
• These decision makers are referred to as financial statement users and include investors and
creditors.
• The primary purpose of financial accounting information is to aid these users in making
economic decisions related to the reporting organization, such as whether to invest in it or
lend it money.
2. Identify the main users of financial accounting information and explain how they use this
information.
• The main users of financial accounting information include shareholders, the board of
directors, potential investors, creditors (bankers and suppliers), regulators (stock exchanges),
taxing authorities (governments), securities analysts, and others.
• Shareholders, the board of directors, and potential investors will use financial accounting
information to enable them to assess how well management has run the company; determine
whether they should buy, sell, or continue to hold shares in the company; assess the
company’s share price relative to the financial accounting information; and so on.
• Creditors will use financial accounting information to determine whether they should lend
funds to the company, establish credit terms for it, assess a company’s ability to meets its
obligations, and so on.
• Regulators will use financial accounting information to determine whether a company has
met its listing requirements.
• Taxing authorities will use this information in assessing the taxes owed by the organization.
3. Describe the major forms of business organization and explain the key distinctions between each
form.
• There are three major forms of business organization: (1) proprietorships, (2) partnerships,
and (3) corporations.
• There are public corporations (whose shares trade on a public stock exchange and are widely
held) and private corporations (whose shares do not trade on a public exchange and are
generally owned by a small number of people).
• Corporations are separate legal entities, whereas proprietorships and partnerships are not.
This means the personal assets of owners are protected in the event of legal action against
corporations, whereas they are at risk in the case of proprietorships and partnerships. It also
,1-2 Test Bank for Understanding Financial Accounting, Third Canadian Edition
means corporations file separate tax returns, whereas the income from proprietorships and
partnerships is reported on the personal tax returns of their owners.
4. Explain the three categories of business activities and identify examples of transactions related
to each category.
• The three categories of business activities are: (1) operating, (2) investing, and (3) financing
activities.
• Operating activities are related to the company’s revenues and expenses, such as sales to
customers, collections from customers, purchases of inventory, and payments of wages and
other expenses.
• Investing activities include buying and selling property, plant, and equipment and buying and
selling the shares of other companies.
• Financing activities include borrowing money, issuing shares, repaying loan principal, and
paying dividends.
5. Identify and explain the content and reporting objectives of the four basic financial statements
and the notes to the financial statements.
• There are four basic financial statements: (1) the statement of income, (2) the statement of
changes in equity, (3) the statement of financial position, and (4) the statement of cash flows.
• The objective of the statement of income is to measure the company’s operating performance
(its profit) for a period of time. This is measured by subtracting the expenses incurred during
the period from the income earned (revenues) in the same period.
• The objective of the statement of changes in equity is to provide details on how each
component of shareholders’ equity changed during the period. The components of
shareholders’ equity include share capital (the shares issued by the company) and retained
earnings (the company’s earnings that have been kept and not distributed as dividends).
• The objective of the statement of financial position is to present information on a company’s
assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the
company and embody a future benefit. Examples include cash; accounts receivable;
inventory; property, plant, and equipment; land; and so on. Liabilities are obligations of a
company that will result in an outflow of resources. Examples include accounts payable,
deferred revenue, long-term debt, and so on. Shareholders’ equity represents the
shareholders’ interest in the assets of the company and is referred to as net assets. Examples
include common shares and retained earnings.
• The objective of the statement of cash flows is to enable financial statement users to assess
the company’s inflows and outflows of cash related to its operating, investing, and financial
activities for a period of time.
• The notes to a company’s financial statements are used to provide additional detail and
context for items in the financial statements. They enable the financial statements themselves
to remain uncluttered, while increasing their usefulness.
, Overview of Corporate Financial Reporting
1-3
TRUE-FALSE STATEMENTS
1. Decision makers are often referred to as users of the financial statements and include investors and
creditors.
Answer: True
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
2. The primary purpose of financial accounting information is to aid users in their economic decision-
making relative to the organization.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
3. The section of an annual report that contains management’s discussion of the company’s operating
results is referred to as the Statement of Management’s Responsibility.
Answer: False
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
Learning Objective: Identify and explain the content and reporting objectives of the four basic
financial statements and the notes to the financial statements.
CPA: Financial Reporting
AACSB: Analytic
4. The shareholders are an example of an internal user of annual report information.
, 1-4 Test Bank for Understanding Financial Accounting, Third Canadian Edition
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
5. Information contained in the financial statements of a company is of use to both internal and
external users.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
6. There may be a single shareholder in the case of a public company or many shareholders in the case
of a private company.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
7. A firm's activities can be divided into borrowing, investing, and operating.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain the three categories of business activities and identify examples of
transactions related to each category.
CPA: Financial Reporting
AACSB: Analytic
Copyright © 2022
CHAPTER 1
OVERVIEW OF CORPORATE FINANCIAL REPORTING
CHAPTER LEARNING OBJECTIVES
1. Define financial accounting and understand its relationship to economic decision-making.
• Financial accounting is the process by which information on the transactions of an
organization is captured, analyzed, and reported to external decision makers.
• These decision makers are referred to as financial statement users and include investors and
creditors.
• The primary purpose of financial accounting information is to aid these users in making
economic decisions related to the reporting organization, such as whether to invest in it or
lend it money.
2. Identify the main users of financial accounting information and explain how they use this
information.
• The main users of financial accounting information include shareholders, the board of
directors, potential investors, creditors (bankers and suppliers), regulators (stock exchanges),
taxing authorities (governments), securities analysts, and others.
• Shareholders, the board of directors, and potential investors will use financial accounting
information to enable them to assess how well management has run the company; determine
whether they should buy, sell, or continue to hold shares in the company; assess the
company’s share price relative to the financial accounting information; and so on.
• Creditors will use financial accounting information to determine whether they should lend
funds to the company, establish credit terms for it, assess a company’s ability to meets its
obligations, and so on.
• Regulators will use financial accounting information to determine whether a company has
met its listing requirements.
• Taxing authorities will use this information in assessing the taxes owed by the organization.
3. Describe the major forms of business organization and explain the key distinctions between each
form.
• There are three major forms of business organization: (1) proprietorships, (2) partnerships,
and (3) corporations.
• There are public corporations (whose shares trade on a public stock exchange and are widely
held) and private corporations (whose shares do not trade on a public exchange and are
generally owned by a small number of people).
• Corporations are separate legal entities, whereas proprietorships and partnerships are not.
This means the personal assets of owners are protected in the event of legal action against
corporations, whereas they are at risk in the case of proprietorships and partnerships. It also
,1-2 Test Bank for Understanding Financial Accounting, Third Canadian Edition
means corporations file separate tax returns, whereas the income from proprietorships and
partnerships is reported on the personal tax returns of their owners.
4. Explain the three categories of business activities and identify examples of transactions related
to each category.
• The three categories of business activities are: (1) operating, (2) investing, and (3) financing
activities.
• Operating activities are related to the company’s revenues and expenses, such as sales to
customers, collections from customers, purchases of inventory, and payments of wages and
other expenses.
• Investing activities include buying and selling property, plant, and equipment and buying and
selling the shares of other companies.
• Financing activities include borrowing money, issuing shares, repaying loan principal, and
paying dividends.
5. Identify and explain the content and reporting objectives of the four basic financial statements
and the notes to the financial statements.
• There are four basic financial statements: (1) the statement of income, (2) the statement of
changes in equity, (3) the statement of financial position, and (4) the statement of cash flows.
• The objective of the statement of income is to measure the company’s operating performance
(its profit) for a period of time. This is measured by subtracting the expenses incurred during
the period from the income earned (revenues) in the same period.
• The objective of the statement of changes in equity is to provide details on how each
component of shareholders’ equity changed during the period. The components of
shareholders’ equity include share capital (the shares issued by the company) and retained
earnings (the company’s earnings that have been kept and not distributed as dividends).
• The objective of the statement of financial position is to present information on a company’s
assets, liabilities, and shareholders’ equity at a specific date. Assets must be controlled by the
company and embody a future benefit. Examples include cash; accounts receivable;
inventory; property, plant, and equipment; land; and so on. Liabilities are obligations of a
company that will result in an outflow of resources. Examples include accounts payable,
deferred revenue, long-term debt, and so on. Shareholders’ equity represents the
shareholders’ interest in the assets of the company and is referred to as net assets. Examples
include common shares and retained earnings.
• The objective of the statement of cash flows is to enable financial statement users to assess
the company’s inflows and outflows of cash related to its operating, investing, and financial
activities for a period of time.
• The notes to a company’s financial statements are used to provide additional detail and
context for items in the financial statements. They enable the financial statements themselves
to remain uncluttered, while increasing their usefulness.
, Overview of Corporate Financial Reporting
1-3
TRUE-FALSE STATEMENTS
1. Decision makers are often referred to as users of the financial statements and include investors and
creditors.
Answer: True
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
2. The primary purpose of financial accounting information is to aid users in their economic decision-
making relative to the organization.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
CPA: Financial Reporting
AACSB: Analytic
3. The section of an annual report that contains management’s discussion of the company’s operating
results is referred to as the Statement of Management’s Responsibility.
Answer: False
Bloomcode: Knowledge
Difficulty: Medium
Learning Objective: Define financial accounting and understand its relationship to economic decision-
making.
Learning Objective: Identify and explain the content and reporting objectives of the four basic
financial statements and the notes to the financial statements.
CPA: Financial Reporting
AACSB: Analytic
4. The shareholders are an example of an internal user of annual report information.
, 1-4 Test Bank for Understanding Financial Accounting, Third Canadian Edition
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
5. Information contained in the financial statements of a company is of use to both internal and
external users.
Answer: True
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
6. There may be a single shareholder in the case of a public company or many shareholders in the case
of a private company.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Identify the main users of financial accounting information and explain how they
use this information.
CPA: Financial Reporting
AACSB: Analytic
7. A firm's activities can be divided into borrowing, investing, and operating.
Answer: False
Bloomcode: Knowledge
Difficulty: Easy
Learning Objective: Explain the three categories of business activities and identify examples of
transactions related to each category.
CPA: Financial Reporting
AACSB: Analytic
Copyright © 2022
