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, CHAPTER 1
INTRODUCTION TO FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the forms of business organization and the uses of accounting information. A
sole proprietorship is a business owned by one person. A partnership is a business owned by
two or more people associated as partners. A corporation is a separate legal entity for which
evidence of ownership is provided by shares of stock.
Internal users are managers who need accounting information to plan, organize, and run busi-
ness operations. The primary external users are investors and creditors. Investors
(stockholders) use accounting information to decide whether to buy, hold, or sell shares of a
company’s stock. Creditors (suppliers and bankers) use accounting information to assess the
risk of granting credit or loaning money to a business. Other groups who have an indirect inter-
est in a business are taxing authorities, customers, labor unions, and regulatory agencies.
2. Explain the three principal types of business activity. Financing activities involve collecting
the necessary funds to support the business. Investing activities involve acquiring the resources
necessary to run the business. Operating activities involve putting the resources of the busi-
ness into action to generate a profit.
3. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses of a company for a specific period of time. A retained
earnings statement summarizes the changes in retained earnings that have occurred for a spe-
cific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of
a business at a specific date. A statement of cash flows summarizes information concerning
the cash inflows (receipts) and outflows (payments) for a specific period of time.
Assets are resources owned by a business. Liabilities are the debts and obligations of the busi-
ness. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity
represents the claims of owners on the assets of the business. Stockholders’ equity is subdi-
vided into two parts: common stock and retained earnings. The basic accounting equation is:
Assets = Liabilities + Stockholders’ Equity.
Within the annual report, the management discussion and analysis provide management’s in-
terpretation of the company’s results and financial position as well as a discussion of plans for
the future. Notes to the financial statements provide additional explanation or detail to make
the financial statements more informative. The auditor’s report expresses an opinion as to
whether the financial statements present fairly the company’s results of operations and finan-
cial position.
*4. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting. Account-
ing is a popular major because there are many different types of jobs, with unlimited potential
for career advancement.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-2 Test Bank for Kimmel, Financial Accounting for Managers, 1e
TRUE-FALSE STATEMENTS
1.A business organized as a separate legal entity owned by stockholders is a partnership.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
2.Corporate stockholders generally pay higher taxes but have no personal liability.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
3.The liability of corporate stockholders is limited to the amount of their investment.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
4.The majority of U.S. business is transacted by proprietorships.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
5.Proprietorships in the United States generate more revenue than the other two forms of business
enterprise.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
6.Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
7.Management of a business enterprise is the major external user of information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
8.External users of accounting information are managers who plan, organize, and run a business.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
9.The information needs and questions of external users vary considerably.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
10.Accounting communicates financial information about a business to both internal and external
users.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
11.Two primary external users of accounting information are investors and creditors.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
12.Financing activities for corporations include borrowing money and selling shares of their own
stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
13.Investing activities involve collecting the necessary funds to support the business.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-3 Introduction to Financial Statements
14.The purchase of equipment is an example of a financing activity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
15.Assets are resources owned by a business that provide future services or benefits to the busi-
ness.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
16.Payments to owners are operating activities.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
17.The economic resources that are owned by a business are called stockholders’ equity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
18.Operating activities involve putting the resources of the business into action to generate a profit.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
19.A business is usually involved in two types of activity—financing and investing.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
20.Net income for the period is determined by subtracting total expenses and dividends from rev-
enues.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
21.A different set of financial statements usually is prepared for each user.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
22.The heading for the income statement might include the line “As of December 31, 20xx.”
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
23.Net income is another term for revenue.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
24.Cash is another term for stockholders’ equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
25.The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company for a specific period of time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
26.The balance sheet reports assets and claims to those assets at a specific point in time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
27.The basic accounting equation states that Assets = Liabilities.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-4 Test Bank for Kimmel, Financial Accounting for Managers, 1e
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
28.One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
29.The accounting equation can be expressed as Assets - Stockholders’ Equity = Liabilities.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
30.The accounting equation can be expressed as Assets - Liabilities = Stockholders’ Equity.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
31.If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders’
equity totals $45,000.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics
32.If the assets owned by a business total $100,000 and liabilities total $65,000, stockholders’
equity totals $25,000.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics
33.Claims of creditors and owners on the assets of a business are called liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
34.Creditors’ rights to assets supersede owners’ rights to the assets.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
35.All publicly traded U.S. companies must provide their stockholders with an annual report each
year.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
36.Information in the notes to the financial statements has to be quantifiable (numeric).
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
37.An auditor is an accounting professional who conducts an independent examination of the ac-
counting data presented by a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
Demeanor, IMA: Reporting
38.The management discussion and analysis (MD&A) section of an annual report covers various
financial aspects of a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
39.Explanatory notes and supporting schedules are an optional part of an annual report.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-5 Introduction to Financial Statements
40.Examples of notes are descriptions of the significant accounting policies and methods used in
preparing the statements, explanations of contingencies, and various statistics.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
41.ESG reporting includes reports prepared by a company to highlight its performance regarding
environmental, social, and governance issues.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
MULTIPLE CHOICE QUESTIONS
42.The proprietorship form of business organization
a. must have at least two owners in most states.
b. generally receives favorable tax treatment relative to a corporation.
c. combines the records of the business with the personal records of the owner.
d. is classified as a separate legal entity.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
43.A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
44.The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
45.Which of the following is not one of the three forms of business organization?
a. Corporations
b. Partnerships
c. Proprietorships
d. Investors
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
46. Most business enterprises in the United States are
a. proprietorships and partnerships.
b. partnerships.
c. corporations.
d. government units.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
47.A business organized as a separate legal entity is a
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-6 Test Bank for Kimmel, Financial Accounting for Managers, 1e
a. corporation.
b. proprietor.
c. government unit.
d. partnership.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
48.Which of the following is not an advantage of the corporate form of business organization?
a. no personal liability
b. easy to transfer ownership
c. favorable tax treatment
d. easy to raise funds
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
49.An advantage of the corporate form of business is that
a. it has a limited life.
b. its owner’s personal resources are at stake.
c. its ownership is easily transferable via the sale of shares of stock.
d. it is simple to establish.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
50.Which of the following is an advantage of corporations relative to partnerships and sole propri-
etorships?
a. reduced legal liability for investors
b. harder to transfer ownership
c. lower taxes
d. most common form of organization
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
51.A corporation has which of the following set of characteristics?
a. shared control, tax advantages, increased skills, and resources
b. simple to set up and maintains control with founder
c. easier to transfer ownership and raise funds, no personal liability
d. harder to raise funds and gives the owner control
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
52. A small neighborhood barber shop that is operated by its owner would likely be organized
as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
53.A local retail shop has been operating as a sole proprietorship. The business is growing and
now the owner wants to incorporate. Which of the following is not a reason for this owner
to incorporate?
a. ability to raise capital for expansion
b. desire to limit the owner’s personal liability
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Copyright © John Wiley & Sons, Inc.
,1-7 Introduction to Financial Statements
c. the prestige of operating as a corporation
d. the ease in transferring shares of the corporation’s stock
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
54.All of the following are advantages for choosing a proprietorship for a business except
a. a proprietorship is a simple form of business to set up.
b. a proprietorship gives the owner control of the business.
c. a proprietorship receives more favorable tax treatment.
d. transfer of ownership is easily achieved through stock sales.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
55.Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in
Hawaii. During the time Jill is away from the business, Jack increases the debts of the busi-
ness by $20,000. Which of the following statements is true regarding this debt?
a. Only Jack is personally liable for the debt since he has been the managing partner dur-
ing that time.
b. Only Jill is personally liable for the debt of the business since Jack has been working
and she has not.
c. Both Jack and Jill are personally liable for the business debt.
d. Neither Jack nor Jill is personally liable for the business debt since the partnership is a
separate legal entity.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
56.Which one of the following questions is most likely asked by an internal human resources di-
rector
for the company?
a. Which product line is most profitable?
b. What price for our product will maximize the company's income?
c. What average pay raise is affordable for employees this year?
d. Should any product lines be eliminated?
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
57.Which of the following are internal reports that accounting provides to internal users?
a. forecasts of cash needs for next year, but not financial comparisons of operating activ-
ity alternatives
b. financial comparisons of operating activity alternatives, but not forecasts of cash needs
for next year
c. Both forecasts of cash needs and financial comparisons are internal reports.
d. Neither forecasts of cash needs nor financial comparisons are internal reports.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
58.Which of the following is the best definition of an internal user of accounting information?
a. investors who use accounting information to decide whether to buy or sell stock
b. creditors like banks that use accounting information to evaluate the risk of lending
money
c. labor unions who use accounting information to examine the ability of the company to
pay increased wages and benefits
d. managers who use accounting information to plan, organize, and run a business.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
, 1-8 Test Bank for Kimmel, Financial Accounting for Managers, 1e
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
59.The Internal Revenue Service is an external user of accounting information and a
a. taxing authority.
b. labor union.
c. customer.
d. regulatory agency.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
60.Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?
a. The Act calls for increased oversight responsibilities for boards of directors.
b. The Act has resulted in increased penalties for financial fraud by top management.
c. The Act calls for decreased independence of outside auditors reviewing corporate fi-
nancial statements.
d. The Act is meant to decrease the likelihood of unethical corporate behavior.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
61.Which of the following is not a step for solving an ethical dilemma?
a. identifying the alternatives and weighing the impact of each alternative on various stake-
holders
b. certifying the ethical accuracy of the financial information
c. identifying and analyzing the principal elements in the situation
d. recognizing the ethical situation and issues involved
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
Demeanor, IMA: Reporting
62.Which of the following is the most appropriate definition of accounting?
a. The information system that identifies, records, and communicates the economic events
of an organization to interested users
b. A means of collecting information
c. The interconnected network of subsystems necessary to operate a business
d. Electronic collection, organization, and communication of vast amounts of information
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
63.Which of the following would not be considered an internal user of accounting data for the
Xanadu Company?
a. President of the company
b. Production manager
c. Merchandise inventory clerk
d. President of the employees' labor union
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
64.Which of the following groups uses accounting information primarily to ensure the entity is op-
erating within prescribed rules?
a. Taxing authorities
b. Regulatory agencies
c. Labor Unions
d. Management
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
Managers 1e Kimmel
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, CHAPTER 1
INTRODUCTION TO FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the forms of business organization and the uses of accounting information. A
sole proprietorship is a business owned by one person. A partnership is a business owned by
two or more people associated as partners. A corporation is a separate legal entity for which
evidence of ownership is provided by shares of stock.
Internal users are managers who need accounting information to plan, organize, and run busi-
ness operations. The primary external users are investors and creditors. Investors
(stockholders) use accounting information to decide whether to buy, hold, or sell shares of a
company’s stock. Creditors (suppliers and bankers) use accounting information to assess the
risk of granting credit or loaning money to a business. Other groups who have an indirect inter-
est in a business are taxing authorities, customers, labor unions, and regulatory agencies.
2. Explain the three principal types of business activity. Financing activities involve collecting
the necessary funds to support the business. Investing activities involve acquiring the resources
necessary to run the business. Operating activities involve putting the resources of the busi-
ness into action to generate a profit.
3. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses of a company for a specific period of time. A retained
earnings statement summarizes the changes in retained earnings that have occurred for a spe-
cific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of
a business at a specific date. A statement of cash flows summarizes information concerning
the cash inflows (receipts) and outflows (payments) for a specific period of time.
Assets are resources owned by a business. Liabilities are the debts and obligations of the busi-
ness. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity
represents the claims of owners on the assets of the business. Stockholders’ equity is subdi-
vided into two parts: common stock and retained earnings. The basic accounting equation is:
Assets = Liabilities + Stockholders’ Equity.
Within the annual report, the management discussion and analysis provide management’s in-
terpretation of the company’s results and financial position as well as a discussion of plans for
the future. Notes to the financial statements provide additional explanation or detail to make
the financial statements more informative. The auditor’s report expresses an opinion as to
whether the financial statements present fairly the company’s results of operations and finan-
cial position.
*4. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting. Account-
ing is a popular major because there are many different types of jobs, with unlimited potential
for career advancement.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-2 Test Bank for Kimmel, Financial Accounting for Managers, 1e
TRUE-FALSE STATEMENTS
1.A business organized as a separate legal entity owned by stockholders is a partnership.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
2.Corporate stockholders generally pay higher taxes but have no personal liability.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
3.The liability of corporate stockholders is limited to the amount of their investment.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
4.The majority of U.S. business is transacted by proprietorships.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
5.Proprietorships in the United States generate more revenue than the other two forms of business
enterprise.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
6.Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
7.Management of a business enterprise is the major external user of information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
8.External users of accounting information are managers who plan, organize, and run a business.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
9.The information needs and questions of external users vary considerably.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
10.Accounting communicates financial information about a business to both internal and external
users.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
11.Two primary external users of accounting information are investors and creditors.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
12.Financing activities for corporations include borrowing money and selling shares of their own
stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
13.Investing activities involve collecting the necessary funds to support the business.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-3 Introduction to Financial Statements
14.The purchase of equipment is an example of a financing activity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
15.Assets are resources owned by a business that provide future services or benefits to the busi-
ness.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
16.Payments to owners are operating activities.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
17.The economic resources that are owned by a business are called stockholders’ equity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
18.Operating activities involve putting the resources of the business into action to generate a profit.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
19.A business is usually involved in two types of activity—financing and investing.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
20.Net income for the period is determined by subtracting total expenses and dividends from rev-
enues.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
21.A different set of financial statements usually is prepared for each user.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
22.The heading for the income statement might include the line “As of December 31, 20xx.”
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
23.Net income is another term for revenue.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
24.Cash is another term for stockholders’ equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
25.The primary purpose of the statement of cash flows is to provide information about the cash
receipts and cash payments of a company for a specific period of time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
26.The balance sheet reports assets and claims to those assets at a specific point in time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
27.The basic accounting equation states that Assets = Liabilities.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-4 Test Bank for Kimmel, Financial Accounting for Managers, 1e
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
28.One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
29.The accounting equation can be expressed as Assets - Stockholders’ Equity = Liabilities.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
30.The accounting equation can be expressed as Assets - Liabilities = Stockholders’ Equity.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
31.If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders’
equity totals $45,000.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics
32.If the assets owned by a business total $100,000 and liabilities total $65,000, stockholders’
equity totals $25,000.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem
Solving, IMA: Business Economics
33.Claims of creditors and owners on the assets of a business are called liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
34.Creditors’ rights to assets supersede owners’ rights to the assets.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
35.All publicly traded U.S. companies must provide their stockholders with an annual report each
year.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
36.Information in the notes to the financial statements has to be quantifiable (numeric).
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
37.An auditor is an accounting professional who conducts an independent examination of the ac-
counting data presented by a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
Demeanor, IMA: Reporting
38.The management discussion and analysis (MD&A) section of an annual report covers various
financial aspects of a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
39.Explanatory notes and supporting schedules are an optional part of an annual report.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-5 Introduction to Financial Statements
40.Examples of notes are descriptions of the significant accounting policies and methods used in
preparing the statements, explanations of contingencies, and various statistics.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
41.ESG reporting includes reports prepared by a company to highlight its performance regarding
environmental, social, and governance issues.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Commu-
nications, IMA: Reporting
MULTIPLE CHOICE QUESTIONS
42.The proprietorship form of business organization
a. must have at least two owners in most states.
b. generally receives favorable tax treatment relative to a corporation.
c. combines the records of the business with the personal records of the owner.
d. is classified as a separate legal entity.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
43.A business organized as a corporation
a. is not a separate legal entity in most states.
b. requires that stockholders be personally liable for the debts of the business.
c. is owned by its stockholders.
d. has tax advantages over a proprietorship or partnership.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
44.The partnership form of business organization
a. is a separate legal entity.
b. is a common form of organization for service-type businesses.
c. enjoys an unlimited life.
d. has limited liability.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
45.Which of the following is not one of the three forms of business organization?
a. Corporations
b. Partnerships
c. Proprietorships
d. Investors
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
46. Most business enterprises in the United States are
a. proprietorships and partnerships.
b. partnerships.
c. corporations.
d. government units.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
47.A business organized as a separate legal entity is a
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
,1-6 Test Bank for Kimmel, Financial Accounting for Managers, 1e
a. corporation.
b. proprietor.
c. government unit.
d. partnership.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
48.Which of the following is not an advantage of the corporate form of business organization?
a. no personal liability
b. easy to transfer ownership
c. favorable tax treatment
d. easy to raise funds
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
49.An advantage of the corporate form of business is that
a. it has a limited life.
b. its owner’s personal resources are at stake.
c. its ownership is easily transferable via the sale of shares of stock.
d. it is simple to establish.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
50.Which of the following is an advantage of corporations relative to partnerships and sole propri-
etorships?
a. reduced legal liability for investors
b. harder to transfer ownership
c. lower taxes
d. most common form of organization
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
51.A corporation has which of the following set of characteristics?
a. shared control, tax advantages, increased skills, and resources
b. simple to set up and maintains control with founder
c. easier to transfer ownership and raise funds, no personal liability
d. harder to raise funds and gives the owner control
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
52. A small neighborhood barber shop that is operated by its owner would likely be organized
as a
a. joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
53.A local retail shop has been operating as a sole proprietorship. The business is growing and
now the owner wants to incorporate. Which of the following is not a reason for this owner
to incorporate?
a. ability to raise capital for expansion
b. desire to limit the owner’s personal liability
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Copyright © John Wiley & Sons, Inc.
,1-7 Introduction to Financial Statements
c. the prestige of operating as a corporation
d. the ease in transferring shares of the corporation’s stock
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
54.All of the following are advantages for choosing a proprietorship for a business except
a. a proprietorship is a simple form of business to set up.
b. a proprietorship gives the owner control of the business.
c. a proprietorship receives more favorable tax treatment.
d. transfer of ownership is easily achieved through stock sales.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
55.Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in
Hawaii. During the time Jill is away from the business, Jack increases the debts of the busi-
ness by $20,000. Which of the following statements is true regarding this debt?
a. Only Jack is personally liable for the debt since he has been the managing partner dur-
ing that time.
b. Only Jill is personally liable for the debt of the business since Jack has been working
and she has not.
c. Both Jack and Jill are personally liable for the business debt.
d. Neither Jack nor Jill is personally liable for the business debt since the partnership is a
separate legal entity.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
56.Which one of the following questions is most likely asked by an internal human resources di-
rector
for the company?
a. Which product line is most profitable?
b. What price for our product will maximize the company's income?
c. What average pay raise is affordable for employees this year?
d. Should any product lines be eliminated?
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Business Economics
57.Which of the following are internal reports that accounting provides to internal users?
a. forecasts of cash needs for next year, but not financial comparisons of operating activ-
ity alternatives
b. financial comparisons of operating activity alternatives, but not forecasts of cash needs
for next year
c. Both forecasts of cash needs and financial comparisons are internal reports.
d. Neither forecasts of cash needs nor financial comparisons are internal reports.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
58.Which of the following is the best definition of an internal user of accounting information?
a. investors who use accounting information to decide whether to buy or sell stock
b. creditors like banks that use accounting information to evaluate the risk of lending
money
c. labor unions who use accounting information to examine the ability of the company to
pay increased wages and benefits
d. managers who use accounting information to plan, organize, and run a business.
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
, 1-8 Test Bank for Kimmel, Financial Accounting for Managers, 1e
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
59.The Internal Revenue Service is an external user of accounting information and a
a. taxing authority.
b. labor union.
c. customer.
d. regulatory agency.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
60.Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)?
a. The Act calls for increased oversight responsibilities for boards of directors.
b. The Act has resulted in increased penalties for financial fraud by top management.
c. The Act calls for decreased independence of outside auditors reviewing corporate fi-
nancial statements.
d. The Act is meant to decrease the likelihood of unethical corporate behavior.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
61.Which of the following is not a step for solving an ethical dilemma?
a. identifying the alternatives and weighing the impact of each alternative on various stake-
holders
b. certifying the ethical accuracy of the financial information
c. identifying and analyzing the principal elements in the situation
d. recognizing the ethical situation and issues involved
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
Demeanor, IMA: Reporting
62.Which of the following is the most appropriate definition of accounting?
a. The information system that identifies, records, and communicates the economic events
of an organization to interested users
b. A means of collecting information
c. The interconnected network of subsystems necessary to operate a business
d. Electronic collection, organization, and communication of vast amounts of information
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
63.Which of the following would not be considered an internal user of accounting data for the
Xanadu Company?
a. President of the company
b. Production manager
c. Merchandise inventory clerk
d. President of the employees' labor union
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
64.Which of the following groups uses accounting information primarily to ensure the entity is op-
erating within prescribed rules?
a. Taxing authorities
b. Regulatory agencies
c. Labor Unions
d. Management
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional
FOR INSTRUCTOR USE ONLY
Copyright © John Wiley & Sons, Inc.
