2. Assets need not always have physical characteristics such as buildings, machinery or inventory. True False
3. The going concern principle assumes that the business will continue indefinitely. True False
4. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts payable generally do not. True False
5. A net profit results from having more revenues than liabilities. True False
6. The sale of additional shares of capital stock will cause treasury stock to increase. True False
7. Articulation between the financial statements means that they relate closely to each other.
True False
8. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford. True False
9. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet. True False
10. Total assets always equal total liabilities plus total owners' equity. True False
11. A cash flow statement reports revenue and expense activities for a specific time period such as one month or one year. True False
12. Any business event that might affect the future profitability of a business should be reported in its balance sheet. True False
13. Total assets plus total liabilities equals total owners' equity. True False
14. The practice of showing assets on the balance sheet at their cost rather than at their current market value is explained in part by the fact that cost is supported by objective evidence that can be verified by independent experts. True False
15. The realization principle states that the activities of an entity should be kept separate from those of its owner. True False
16. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated. True False
17. The accounting equation may be stated as \"assets minus liabilities equals owners' equity.\" True False
18. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity. True False
19. The collection of an account receivable will cause total assets to decrease. True False
20. The payment of a liability causes an increase in owners' equity. True False
21. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners' equity. True False
22. The purchase of an asset such as office equipment, for cash will cause owners' equity to decrease. True False
23. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business. True False
24. If a company purchases equipment for cash, its total assets will increase. True False
25. If a company purchases equipment by issuing a note payable, its total assets will not change. True False
26. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash. True False
27. The cash flow statement provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next. True False
28. According to Sarbanes-Oxley, internal controls must be audited by the same accounting firm that audits the financial statements. True False
29. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession. True False
30. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act. True False
Chapter 02 Basic Financial Statements Answer Key
True / False Questions
1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation. TRUE
AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Reporting Learning Objective: 2 Learning Objective: 8
2. Assets need not always have physical characteristics such as buildings, machinery or inventory. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 2
3. The going concern principle assumes that the business will continue indefinitely. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 1 Learning Objective: 2
4. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts payable generally do not. TRUE
AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Learning Objective: 4
5. A net profit results from having more revenues than liabilities. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3 Learning Objective: 5
6. The sale of additional shares of capital stock will cause treasury stock to increase. FALSE
AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Measurement Learning Objective: 3 Learning Objective: 4
7. Articulation between the financial statements means that they relate closely to each other. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 7
8. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford. FALSE
AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Measurement Learning Objective: 8
9. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet. TRUE
AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Reporting Learning Objective: 8
10. Total assets always equal total liabilities plus total owners' equity. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
11. A cash flow statement reports revenue and expense activities for a specific time period such as one month or one year. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Learning Objective: 6
12. Any business event that might affect the future profitability of a business should be reported in its balance sheet. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Learning Objective: 3 Learning Objective: 4
13. Total assets plus total liabilities equals total owners' equity. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
14. The practice of showing assets on the balance sheet at their cost rather than at their current market value is explained in part by the fact that cost is supported by objective evidence that can be verified by independent experts. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 2
15. The realization principle states that the activities of an entity should be kept separate from those of its owner. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 2
16. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 2
17. The accounting equation may be stated as \"assets minus liabilities equals owners' equity.\" TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
18. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
19. The collection of an account receivable will cause total assets to decrease. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
20. The payment of a liability causes an increase in owners' equity. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
21. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners' equity. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
22. The purchase of an asset such as office equipment, for cash will cause owners' equity to decrease. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
23. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business. TRUE
AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Measurement Learning Objective: 8
24. If a company purchases equipment for cash, its total assets will increase. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
25. If a company purchases equipment by issuing a note payable, its total assets will not change. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 3
26. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash. TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 6
27. The cash flow statement provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next. FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Learning Objective: 6
28. According to Sarbanes-Oxley, internal controls must be audited by the same accounting firm that audits the financial statements. TRUE
AACSB: Ethics AICPA BB: Legal AICPA FN: Reporting Learning Objective: 9
29. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession. FALSE
AACSB: Ethics AICPA BB: Legal AICPA FN: Reporting Learning Objective: 9
30. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act. FALSE
AACSB: Ethics AICPA BB: Legal AICPA FN: Reporting Learning Objective: 9
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