MAB1033 Phillips Chapter 1 Bus Decision & FA

Public corporations are businesses:

• owned by two or more people, each of whom is personally liable for the debts of the business.

• whose stock is bought and sold on a stock exchange.

• whose stock is bought and sold privately.

• where stock is not used as evidence of ownership.

Answer explanation

The owners of a company's stock (stockholders) can buy and sell stock privately or publicly on a stock exchange if the company has legally registered to do so. Most corporations start out as private companies and will apply to become public companies ("go public").

The owner(s) of a business are not taxed on the profits of the business if the business is a:

• sole proprietorship.

• partnership.

• corporation.

• public partnership.

Answer explanation

A corporation, not its owners, is legally responsible for its own taxes and debts. In sole proprietorships and partnerships, the owners are taxed on the profits of the business. A sole proprietorship is considered a part of the owner's life, with all profits becoming part of the taxable income of the owner. A partnership is similar to a sole proprietorship in this regard, except that the taxes are the responsibility of two or more owners instead of just one.

Which of the following is typically considered a disadvantage of sole proprietorships?

• Income taxes are paid by both the business and its owner.

• The business is considered a separate legal entity from its owner.

• Establishing the business usually requires legal assistance.

• Owner is personally liable for all debts of the business.

Answer explanation

Sole proprietorships are easy to establish and the business is considered a part of the owner's life with all profits and losses becoming part of the taxable income of the owner. However, a sole proprietor is personally liable for all debts of the business.

With respect to the audience targeted for financial accounting reports, which of the parties below is not an external user?

• Customers of the company issuing the reports

• Creditors of the company issuing the reports

• Managers of the company issuing the reports

• Stockholders of the company issuing the reports

Answer explanation

External users of financial accounting reports include creditors, investors, directors, and government. Managers are considered internal users.

Accounting systems:

• are summarized in publicly published reports.

• analyze, record, and summarize the activities affecting its financial condition and performance.

• monitor business activities only in financial terms.

• capture only the information that is needed by the owners of the company.

Answer explanation

Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization.

People or organizations to whom a business owes money are considered:

• owners of a business.

• creditors of a business.

• stockholders of a business.

• customers of a business.

Answer explanation

Creditors include suppliers, banks, and anyone to whom money is owed.

The main goal of an accounting system is to:

• capture information about a business so that it can be reported to decision makers.

• earn a profit for the company's stockholders.

• prove that assets equal liabilities plus stockholders' equity.

• provide initial financing for a new startup.

Answer explanation

Managerial accounting reports include detailed financial plans and continually updated reports about the operating performance of the company. These reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance.

Financing that individuals or institutions have provided to a corporation is:

• always classified as a liability.

• classified as a liability when provided by creditors and as stockholders' equity when provided by owners.

• always classified as equity.

• classified as a stockholders' equity when provided by creditors and a liability when provided by owners.

Answer explanation

Financing can be provided by creditors (classified as liabilities) or owners (classified as stockholders' equity).

An investor who is looking at a company's financial statements cannot determine whether the:

• company's earnings are rising or falling.

• company pays a dividend.

• company has positive cash flow.

• company's owners are financially sound.

Answer explanation

As set forth in the separate entity assumption, the financial reports of a business are assumed to include the results of only that business's activities. A company's financial statements do not contain information about the company's owners.

Which of the following expressions of the accounting equation is correct?

• Liabilities + Assets = Stockholders' Equity

• Stockholders' Equity + Assets = Liabilities

• Assets = Liabilities – Stockholders' Equity

• Stockholders' Equity = Assets – Liabilities

Answer explanation

Assets = Liabilities + Stockholders' Equity

Stockholders' Equity = Assets – Liabilities