Question

Explain for right option

Multiple Choice Questions

1. The primary objective of financial reporting is to provide information

a. Useful for making investment and credit decisions.

b. About the profitability of the enterprise.

c. To the federal government.

d. On the cash flows of the company.

2. Which type of business organization provides the least amount of protection for bankers and other creditors of the company?

a. Partnership

b. Proprietorship

c. Corporation

d. Both a and b

3. Assets are usually reported at their

a. Historical cost.

b. Current market value.

c. Appraised value.

d. None of the above (fill in the blank).

4. During March, assets increased by $19,000 and liabilities increased by $6,000. Stockholders equity must have

a. Increased by $13,000.

b. Decreased by $13,000.

c. Increased by $25,000.

d. Decreased by $25,000.

5. The amount a company expects to collect from customers appears on the

a. Statement of cash flows.

b. Balance sheet in the current assets section.

c. Income statement in the expenses section.

d. Balance sheet in the stockholders equity section.

6. All of the following are current assets except

a. Inventory.

b. Sales Revenue.

c. Cash.

d. Accounts Receivable.

7. Revenues are

a. Decreases in liabilities resulting from paying off loans.

b. Increases in paid-in capital resulting from the owners investing in the business.

c. Increases in retained earnings resulting from selling products or performing services.

d. All of the above.

8. The financial statement that reports revenues and expenses is called the

a. Statement of cash flows.

b. Income statement.

c. Statement of retained earnings.

d. Balance sheet.

Answer 1

1. a. Useful for making investment and credit decisions.

According to International Accounting Standard Board, the objective of financial reporting is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to wide range of users in making economic decisions.

Economic Decisions mainly consist of Investments and Credit Decisions. Although Financial reporting fulfills all the purposes stated in the four options but the Primary Objective is to help Investment and Credit (Economic) decision making.

2. c. Corporation

Since the liability of the shareholders of the corporation is limited to the extent of amount unpaid by them on shares.

Whereas in proprietorship and partnership, liability of the proprietor or partner is unlimited and his personal assets can be sold to pay the debts but this is not possible in corporation form.

3. a. Historical Cost

This is as per the relevant IFRS/ US GAAP/ other standards

4. a. Increased by $13,000.

Stock holder's Equity = Assets - Liabilities = Net Assets

Increase in Stock holder's equity = Increase in Net Assets

Increase in Net Assets= 19000-6000= 13000

5. b. Balance sheet in the current assets section.

This is called Accounts Receivable which a company expects to collect from customers within a definite period of time as per credit terms which are generally for less than 1 year, thus it is a current asset in the Balance Sheet.

6. b. Sales revenue

Sales revenue is not an Asset at all. It is an item of Income Statement.

7. c. Increases in retained earnings resulting from selling products or performing services.

8. b. Income Statement