1.4 End-of-Chapter Exercises

Questions

  1. What is financial accounting?
  2. How does financial accounting differ from managerial accounting?
  3. List the potential users of the information provided by financial accounting.
  4. What is a corporation?
  5. How does a business become a corporation?
  6. Why would a business want to become a corporation?
  7. What is the board of directors of a corporation?
  8. Why do individuals or entities choose to invest in the capital stock of corporations?
  9. How does an investor differ from a creditor?
  10. What is financial information?

True or False

  1. ____ Financial accounting helps with decisions made inside an organization.
  2. ____ Typically, a sole proprietor will be able to raise money easier than a corporation.
  3. ____ Employees are not users of the information provided by financial accounting.
  4. ____ The board of directors of a corporation is elected by its shareholders.
  5. ____ Investors who hold investments in a stock longer than a year may enjoy a tax benefit.
  6. ____ Corporations are required by law to pay dividends to their shareholders.
  7. ____ Purchasing stock is typically a riskier investment than opening a savings account.
  8. ____ Financial information is communicated in monetary terms but may be explained verbally.
  9. ____ Accountants are the only users of the information provided by financial accounting.
  10. ____ An entity that loans a company money is referred to as a “shareholder.”

Multiple Choice

  1. Ramon Sanchez is a loan officer at Washington Bank. He must decide whether or not to loan money to Medlock Corporation. Which of the following would Ramon most likely consider when making this decision?

    1. Medlock had positive cash flows last year.
    2. Medlock paid dividends last year.
    3. Medlock’s stock price increased last year.
    4. The number of stockholders in Medlock increased last year.
  2. Which of the following is not a reason an investor would purchase stock in a corporation?

    1. To receive dividend payments
    2. To sell the stock for a gain if the share price increases
    3. To earn a return on their investment
    4. To participate in the day-to-day operations of the business
  3. Which of the following would not be considered an example of a decision made using financial accounting information?

    1. An investor decided to invest in the stock of Rayburn Corporation.
    2. A credit analyst at Mayfield Corporation rejected a request for credit from Rayburn Corporation.
    3. A Rayburn Corporation manager decided to increase production of widgets.
    4. A loan officer at Fairburn Bank chose to grant a loan request made by Rayburn Corporation.
  4. Which of the following is most likely to have a say in the policy decision of a large corporation?

    1. A stockholder
    2. A member of the board of directors
    3. An employee
    4. A creditor
  5. Leon Williams is an investor in Springfield Corporation. On September 1, Year One, he purchased 150 shares of stock at a price of $45 per share. On October 15, Year One, Springfield distributed dividends of $1.50 per share. On December 31, Year One, Springfield’s stock is selling for $47 per share. Which of the following is the value of Leon’s investment on December 31, Year One?

    1. $6,750
    2. $6,975
    3. $7,050
    4. $7,275

Problems

  1. Explain how each of the following might use the information provided by the financial accounting of Nguyen Company.

    1. Bank loan officer considering loaning money to Nguyen Company
    2. Current employee of Nguyen Company
    3. Potential employee of Nguyen Company
    4. Current investor in Nguyen Company
    5. Potential investor in Nguyen Company
    6. A credit analyst of company wanting to sell inventory to Nguyen Company
  2. Mark each of the following with an (F) to indicate if it is financial information or an (N) to indicate if it is nonfinancial information.

    Metro Corporation has:

    1. ____ Cash of $4,000,000
    2. ____ A building that cost $50,000,000
    3. ____ 2,000 employees
    4. ____ Inventory worth $16,000,000
    5. ____ 500 shares of capital stock
    6. ____ 1,000 trucks
    7. ____ Sales of $45,000,000

Research

  1. The chapter introduced several forms of business, including a corporation, sole proprietorship, and partnership. Other forms of business exist as well. Do research to compare and contrast the following business forms:

    • Sole proprietorship
    • Partnership
    • Limited partnership
    • C corporation
    • S corporation
    • Limited liability company (LLC)

    Examine the following areas for each form of business: ease of organization and maintenance of form, number of people involved, government involvement, liability to owners, ease of exit, taxation, day-to-day management, and funding sources.

  2. Corporations usually provide a good amount of financial information on their Web sites. Visit http://www.starbucks.com to access information about Starbucks. You will need to click “about us” at the top and then “investor relations” on the left.

    1. For what amount is Starbucks stock currently selling?
    2. Give the year for the most current annual report listed.
    3. Name three members of Starbucks’ board of directors.
    4. Click on “investor FAQ” on the left. Choose a question that interests you. Write it here and summarize the answer given.
  3. Go the U.S. Department of Labor Web site at http://www.bls.gov/oco/ocos001.htm. Here you can learn about the profession of accounting.

    1. In general, what functions do accountants perform?
    2. Briefly list the different types of accountants and what they do.
    3. What education is required?
    4. What is a CPA?
    5. What are the typical requirements to become a CPA?
    6. What other certifications are available for accountants?
    7. What is the current job outlook for the accounting profession?

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