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 business 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 interest 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 business 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
specific 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
business. 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
subdivided 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 provides management‘s interpretation 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 financial 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.
Accounting is a popular major because there are many different types of jobs, with unlimited
potential for career advancement
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
,2-2 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
Difficulties:
Easy: 143
Medium: 101
Hard: 12
Question List by Section
Business Organization and Accounting Information Uses:
Forms of Business Organization; 47, 48, 202, 246
Sole Proprietorship: 5, 44, 49, 58, 59
Partnership: 1, 4, 46, 56
Corporation: 2, 3, 45, 50, 51, 52, 53, 55, 57, 233, 245
Hybrid Forms of Organization: 60, 61
Users and Uses of Financial Information: 6, 7, 11, 74, 87
Internal Users: 62, 63, 64, 75, 77, 82, 234
External Users: 8, 9, 10, 12, 65, 76, 78, 79, 80, 81, 83, 84, 85, 86, 88, 89
Data Analytics: 66, 67, 68, 69, 70, 235, 236
Ethics in Financial Reporting: 71, 72, 73, 237, 255
The Three Types of Business Activity: 97
Financing Activities: 13, 15, 18, 90, 91, 93, 94, 95, 96, 97, 102, 109, 117, 118, 119, 238
Investing Activities: 14, 16, 98, 99, 115, 116
Operating Activities: 17, 19, 20, 100, 101, 103, 104, 105, 106, 107, 108, 110, 111, 112, 113,
114
The Four Financial Statements:
Income Statement: 21, 22, 23, 24,127, 128, 132, 133, 134, 138, 142, 143
Retained Earnings Statement: 120, 122, 123, 124, 125, 126, 129, 130, 131, 135, 137, 139, 140,
141, 144, 145, 146, 147, 148, 149, 150, 154, 164, 169, 178, 181, 252
Balance Sheet: 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 136, 151, 152, 153, 163, 165, 166, 168,
170, 173, 177, 179, 180, 182, 185, 186, 187, 188, 199, 200, 201, 207, 208, 213, 214, 215, 216,
217, 218, 219, 220, 221, 222, 225, 229, 239, 240, 241, 253
Statement of Cash Flows: 26, 121, 171, 174, 183, 242, 249
Interrelationships of Statements: 155, 156, 157, 158, 159, 160, 161, 162, 167, 175, 176, 184,
250, 251, 256
Elements of an Annual Report: 36, 41, 192, 196, 197
Management Discussion and Analysis: 40, 191
Notes to the Financial Statements: 37, 42, 190, 193, 194, 198, 254
Auditor‘s Report: 38, 39, 195
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
, A Further Look at Financial Statements 2-3
TRUE-FALSE STATEMENTS
1. A business organized as a separate legal entity and owned by stockholders is a
partnership.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
2. Corporate stockholders have no personal liability for the debts of the corporation.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
3. The liability of corporate stockholders is limited to the amount of their investment.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Corporation, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
4. The majority of U.S. business is transacted by partnerships.
Ans: F, LO: 1, Bloom: K, Section: Business Organization and Accounting Information Uses, Subsection: Partnership, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
5. Sole proprietorships in the United States generate more revenue than the other two forms
of business enterprise.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Sole Proprietorship, Bloom: K, Difficulty: Easy, Min: 1,
AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
6. Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
7. Some users of accounting information are internal to the company while others are
external.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
8. Management of a business enterprise is the major external user of accounting
information.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
9. External users of accounting information include managers who plan, organize, and run a
business.
Ans: F, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
10. The accounting information needs and questions of external users vary considerably.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
11. Accounting communicates financial information about a business to both internal and
external users.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: Users and Uses of Financial Information, Bloom: K,
Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
12. Two primary external users of accounting information are investors and creditors.
Ans: T, LO: 1, Section: Business Organization and Accounting Information Uses, Subsection: External Users, Bloom: K, Difficulty: Easy, Min: 1, AACSB:
Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
13. Financing activities for corporations include borrowing money and selling shares of their
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
, 2-4 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
own stock.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
14. Investing activities involve collecting the necessary funds to support the business.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
15. The purchase of equipment is an example of a financing activity.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
16. Assets are resources owned by a business that provide future services or benefits to the
business.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Investing Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
17. Payments by the business to its owners are operating activities.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
18. The economic resources owned by a business are called stockholders‘ equity.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Financing Activities Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
19. Operating activities involve putting the resources of the business into action to generate a
profit.
Ans: T, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
20. A business is usually involved in only two types of activities—financing and investing.
Ans: F, LO: 2, Section: The Three Types of Business Activity, Subsection: Operating Activities, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
21. Net income for the period is determined by subtracting expenses and dividends from
revenues.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
22. A different set of financial statements is usually prepared for each user.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
23. The heading for an income statement prepared for the year ending December 31, 2025
will include the line ―As of December 31, 2025.‖
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
24. Net income is another term for revenue.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Income Statement, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
25. Cash is another term for stockholders‘ equity.
Ans: F, LO: 3, Section: The Four Financial Statements, Subsection: Balance Sheet, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC:
None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control
26. The primary purpose of the statement of cash flows is to provide information about the
Copyright © 2022 John Wiley & Sons, Inc. (For Instructor Use Only)
