File: Chapter 001 A Framework for Financial Accounting

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1. Accounting is a system of maintaining records of a company’s operations and communicating this information to decision makers.

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2. Accounting information is used by investors to decide whether to invest in a company’s stock.

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3. Accounting information is used by creditors to decide whether to invest in a company’s stock.

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4. The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes.

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5. Financing activities are transactions involving externals sources of funding.

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6. Investing activities include the purchase and sale of (1) long-term resources and (2) any resources not directly related to a company’s normal operations.

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7. Operating activities include transactions that relate to the primary operations of the company.

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8. A corporation is an entity that is legally separate from its owners.

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9. Cash, inventory, supplies, and buildings are examples of liabilities.

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10. Amounts owed to suppliers, workers, governments, and utility companies are examples of liabilities.

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11. If total assets of a company equal $12,000 and total stockholders’ equity equals $4,000, then total liabilities equal $8,000.

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12. If total liabilities of a company equal $16,000 and total stockholders’ equity equals $9,000, then total assets equal $7,000.

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13. The accounting equation shows that a company’s resources equal creditors’ and owners’ claims to those resources.

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14. The costs of advertising, utilities, and salaries in the current reporting period are examples of liabilities.

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15. The difference between revenues and expenses is referred to as net income or net loss.

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16. If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000.

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