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1.4: End-of-Chapter Exercises

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    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?


    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.”


    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