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Module 1
Financial Accounting for MBAs
Learning Objectives – Coverage by question
True/False Multiple Choice Exercises Problems Essays
LO1 – Explain and assess the
1
four main business activities.
LO2 – Identify and discuss the
users and suppliers of financial 1- 4 1, 2 2
statement information.
LO3 – Describe and examine
the four financial statements,
5-10 3-19 1-8 1-5, 10 3, 4
and define the accounting
equation.
LO4 – Explain and apply the
11-13 20-25 1, 9, 10 6, 7 5
basics of profitability analysis.
LO5 – Assess business
operations within the context 14 26, 27 8
of a competitive environment.
LO6 – Access reports filed
with the SEC (Appendix 1A).
LO7 – Describe the
accounting principles and
15 28-30 9 6
regulations that frame financial
statements (Appendix 1B).
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1-1 Financial Accounting for MBAs, 7th Edition
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Module 1: Financial Accounting for MBAs
True/False
Topic: Users of Financial Statement Information
LO: 2
1. Shareholders demand financial information primarily to assess profitability and risk whereas bankers
demand information primarily to assess cash flows to repay loan interest and principal.
Answer: True
Rationale: While both shareholders and bankers are interested in all the information companies
provide, shareholders care about more about a company’s profitability and bankers care more about
solvency and creditworthiness.
Topic: Publicly Available Financial Reports
LO: 2
2. Publicly traded companies are required to provide quarterly financial reports directly to the public.
Answer: False
Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which
posts them to the Internet for the public to access them.
Topic: Users of Financial Statement Information
LO: 2
3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax
authorities (that is, the Internal Revenue Service).
Answer: False
Rationale: Demand for information extends to many users; the regulators such as the SEC and the
IRS are only one class of users.
Topic: SEC Filings
LO: 2
4. Publicly traded companies must provide to the Securities Exchange Commission annual audited
financial statements (10-K reports) and quarterly audited financial statements (10-Q reports).
Answer: False
Rationale: Quarterly reports do not need to be audited.
Topic: Balance Sheet
LO: 3
5. If a company reports retained earnings of $175.3 million on its balance sheet, it must also report
$175.3 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.
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Topic: Balance Sheet
LO: 3
6. A balance sheet shows a company’s position over a period of time, whereas an income statement,
statement of stockholders’ equity, and statement of cash flows show its position at a point in time.
Answer: False
Rationale: The statement is reversed: A balance sheet shows a company’s position at a point in time,
whereas an income statement, statement of equity, and statement of cash flows show its position
over a period of time.
Topic: Accounting Equation
LO: 3
7. Assets must always equal liabilities plus equity.
Answer: True
Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.
Topic: Income Statement
LO: 3
8. The income statement reports net income which is defined as the company’s profit after all expenses
and dividends have been paid.
Answer: False
Rationale: The statement contains two errors. First, net income does not include any dividends during
the period; these are a distribution of profits and not part of its calculation. Second, the income
statement is prepared on an accrual basis and thus includes expenses incurred (as opposed to paid).
Topic: Statement of Cash Flows
LO: 3
9. 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: Statement of Stockholders’ Equity
LO: 3
10. An increase in common stock would be reflected in the statement of stockholders’ equity.
Answer: True
Rationale: The statement of stockholders’ equity reports on changes in the accounts that make up
stockholders’ equity. This includes contributed capital, retained earnings, and other equity.
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1-3 Financial Accounting for MBAs, 7th Edition
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