Deck 5: Communicating and Interpreting Accounting Information

Question 1

Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill.

Answer 1

True

Question 2

Intangible assets are reported on the balance sheet as a current asset.

Answer 2

False

Question 3

The audit committee of the board of directors is responsible for maintaining the integrity of a company's financial statements and financial reporting.

Answer 3

True

Question 4

External users of accounting information include decision makers such as investors, creditors, and financial analysts.

Question 5

The form 10-Q contains an unaudited set of quarterly financial statements.

Question 6

Information on all contractual agreements is included in notes as a financial statement disclosure.

Question 7

The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independent auditors.

Question 8

The form 10-K is the annual report that publically traded companies must file with the Securities & Exchange Commission (SEC).

Question 9

Independent auditors are advisors who analyze financial statements and other economic information to formulate forecasts and stock recommendations.

Question 10

Sales by major product category is a required financial statement disclosure.

Question 11

Inventories are reported on the balance sheet as a current asset.

Question 12

The primary responsibility for the information in a corporation's financial statements lies with the chief executive officer (CEO) and the chief financial officer (CFO).

Question 13

The Securities & Exchange Commission (SEC) oversees the work of the Financial Accounting Standards Board (FASB).

Question 14

The mission of the Securities & Exchange Commission (SEC) is to develop generally accepted accounting principles.

Question 15

The fraud triangle conditions necessary for financial statement fraud to occur are the existence of a system of internal control, the ability to invade the system, and rationalization to commit the fraud.

Question 16

Comparative financial statements are those of a company in one industry presented with another company in the same industry.

Question 17

The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by their internal auditors.

Question 18

The Financial Accounting Standards Board (FASB) oversees the work of the Public Company Accounting Oversight Board (PCAOB).

Question 19

Corporate governance refers to the procedures designed to ensure that the company is managed in the interest of the board of directors who oversee management.

Question 20

Financial analysts utilize a company's financial reports to assist them in making earnings forecasts and earnings per share projections.

Question 21

Which of the following statements is false?

A) The board of directors meets with the external auditors to discuss management's compliance with their financial reporting obligations.
B) The external auditors are selected by the Securities & Exchange Commission (SEC).
C)The Securities & Exchange Commission (SEC) requires publically traded companies to have their financial statements audited by an independent accountant.
D)The external auditors assume some responsibility with respect to the fairness of the financial statements.

Question 22

The gross profit percentage decreases when operating expenses increase.

Question 23

The indirect method of reporting operating activities on the statement of cash flow begins with net income and adjusts for cash items.

Question 24

The essence of nonrecurring items on an income statement is that they are not useful in predicting the future income of the reporting company.

Question 25

Which of the following is not included as a primary part of the financial disclosure in Form 10-K?

A) Financial data for a 5-year period.
B) Management's opinion of the financial statements.
C)Business operations and strategy.
D)Four basic financial statements.

Question 26

Intangible assets have no physical existence and no life.

Question 27

The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio.

Question 28

The return on assets ratio may increase when sales increase.

Question 29

Which of the following tasks is not performed by the Securities & Exchange Commission (SEC)?

A) Overseeing the work of the Financial Accounting Standards Board (FASB).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C)Taking responsibility for protecting investors and maintaining the integrity of the securities markets.
D)The development of generally accepted accounting principles.

Question 30

The return on assets ratio is calculated by dividing income from continuing operations by average total assets.

Question 31

Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financial officer (CFO)?

A) Overseeing the financial statement external audit.
B) Ensuring the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).
C)The certification of the strength of the internal control system.
D)The disclosure to the auditor committee of any frauds they are aware of.

Question 32

The summary of significant accounting policies is a required financial statement disclosure.

Question 33

Net sales plus cost of goods sold is reported on the income statement as income from continuing operations.

Question 34

Discontinued operations and extraordinary items are reported on the income statement as a component of income from continuing operations.

Question 35

Which of the following are primarily responsible for the information provided in a company's financial statements?

A) The internal and external auditors.
B) The Securities & Exchange Commission (SEC) and the external auditors.
C)The chief executive officer (CEO) and the chief financial officer (CFO).
D)The external auditors and the board of directors.

Question 36

Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?

A) Overseeing the work of the Securities & Exchange Commission (SEC).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C)The responsibility for protecting investors and maintaining the integrity of the securities markets.
D)The development of generally accepted accounting principles.

Question 37

Which of the following is not true about the audit committee of the board of directors?

A) They meet with the auditors to discuss management's compliance with their financial reporting responsibilities.
B) They ensure the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).
C)They are responsible for ensuring that are in place for maintaining the integrity of the financial statement preparation and reporting.
D)They are responsible for hiring the company's external auditors.

Question 38

The gross profit percentage is calculated by dividing net sales by gross profit

Question 39

Which of the following is an objective of the external audit of a company's financial statements?

A) To provide a forecast of the company's future earnings.
B) To assure no fraud has been committed by the company's management.
C)To provide credibility that the financial statements are fairly presented.
D)To detect all accounting errors made by the accounting system and employees.

Question 40

Preparers of the statement of cash flow must choose the direct or indirect method for each activity section of the statement.

Question 41

Stockholders' equity, also called shareholders' equity, includes which of the following two accounts?

A) Common stock and Deferred revenue.
B) Common stock and Retained earnings.
C)Liabilities and Retained earnings.
D)Retained earnings and Cash.

Question 42

Which of the following would not be classified as a current asset?

A) Accounts receivable.
B) Goodwill.
C)Inventories.
D)Non-trade receivables.

Question 43

Kryton Corp. has provided the following information: Gross profit was $620,000;
Cost of goods sold was $380,000;
Net income was $400,000.
What was Kryton's gross profit percentage?

A) 40%
B) 61.3%
C)62%
D)155%

Question 44

The Nellie Company has provided the following information: Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.
What was Nellie's operating income?

A) $514,000.
B) $468,000.
C)$497,000.
D)$298,000.

Question 45

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's gross profit?

A) $564,000.
B) $188,000.
C)$333,000.
D)$232,000.

Question 46

Panmar Inc. is preparing a statement of stockholders' equity for 2014. On January 1, 2014, Panmar started the year with a $200,000 credit balance in its retained earnings account. During 2014, the company earned net income of $140,000. Panmar declared dividends of $80,000 and paid $50,000 of those dividends. Also, the company received cash of $100,000 for additional shares of common stock issued and then paid $30,000 to repurchase shares of common stock. What is the balance in retained earnings on December 31, 2014?

A) $260,000.
B) $290,000.
C)$330,000.
D)$390,000.

Question 47

Which of the following is not reported as an operating expense on the income statement?

A) Administrative expenses.
B) Research and development expense.
C)Interest expense.
D)Selling expenses.

Question 48

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.
What was Willie's income before taxes?

A) $144,000.
B) $57,000.
C)$215,000.
D)$812,000.

Question 49

The Statement of Comprehensive Income includes items in which order?

A) Net income, Other items of net income, Comprehensive income.
B) Comprehensive income, Net income, Other items of Comprehensive income.
C)Net income, Other Fair value items, Comprehensive income.
D)Net income, Other comprehensive income items, Comprehensive income.

Question 50

Which of the following are the criteria used to determine whether an item is extraordinary?

A) It is unusual in nature and occurs frequently.
B) It is unusual in nature and occurs infrequently.
C)It is unusual in nature or occurs infrequently.
D)It is infrequent in occurrence only.

Question 51

Brimmel Corp. has provided the following information: Sales were $780,000;
Cost of goods sold was $429,000;
Net income was $195,000.
What was Brimmel's gross profit percentage?

A) 55%
B) 45%
C)62%
D)222%

Question 52

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's income before taxes?

A) $564,000.
B) $188,000.
C)$377,000.
D)$232,000.

Question 53

Information disclosed in a balance sheet about shares of common stock includes the number of shares that are:

A) Authorized and Issued.
B) Issued and Outstanding.
C)Authorized, Issued, and Outstanding.
D)Authorized, Issued, Outstanding, and Not Outstanding.

Question 54

Which of the following best describes income from operations?

A) It includes the results of discontinued operations.
B) It includes extraordinary items.
C)It is sales minus cost of goods sold and income tax expense.
D)It is net sales minus cost of goods sold and operating expenses.

Question 55

Which of the following would not be used to calculate income from operations?

A) Gross profit.
B) Selling and administrative expenses.
C)Interest income.
D)Research and development expense.

Question 56

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's income from operations?

A) $333,000.
B) $188,000.
C)$156,000.
D)$232,000.

Question 57

The Nellie Company has provided the following information: Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.
What was Nellie's income before taxes?

A) $514,000.
B) $468,000.
C)$497,000.
D)$298,000.

Question 58

Which of the following is true about gross profit (gross margin)?

A) It is net sales minus operating expenses.
B) It is net sales minus cost of goods sold.
C)It is the same as income from continuing operations.
D)It is net sales minus cost of goods sold and operating expenses.

Question 59

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.
What was Willie's gross profit?

A) $540,000.
B) $469,000.
C)$618,000.
D)$560,000.

Question 60

Denmark Inc. is preparing a statement of stockholders' equity for 2014. On January 1, 2014, Denmark started the year with a $100,000 credit balance in its retained earnings account. During 2014, the company earned net income of $70,000 and declared dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. What is the balance in retained earnings on December 31, 2014?

A) $100,000.
B) $170,000.
C)$175,000.
D)$160,000.

Question 61

Which of the following are not part of disclosure notes to the financial statements?

A) Descriptions of the significant accounting methods applied in the company's financial statements.
B) Additional detail of income taxes payable reported in the balance sheet.
C)Names of executive officers and the salaries for each officer listed.
D)Commitments under long-term supply agreements to buy inventory and equipment.

Question 62

Which of the following would not be included within the operating activities section of a cash flow statement?

A) Cash paid for research and development.
B) Cash paid for insurance.
C)Cash paid for interest expense.
D)Cash paid to legalize a patent.

Question 63

Which of the following is true?

A) An extraordinary gain would increase income before taxes.
B) Discontinued operations would be shown as a component of continuing operations on the income statement.
C)Discontinued operations shown on the income statement will include that component's income or loss from operations from before its disposal.
D)Results from discontinued operations may be used to predict future company results.

Question 64

Which of the following statements does not accurately describe the effect of the sale of inventory at a profit on the financial statements?

A) Income from operations and current assets both increase.
B) Operating income and gross profit both increase.
C)Net income and earnings per share both increase.
D)Current assets do not change and stockholders' equity increases.

Question 65

Huron has provided the following year-end balances: Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000
How much are Huron's current assets?

A) $85,900.
B) $71,300.
C)$74,900.
D)$102,100.

Question 66

Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets the criteria for an extraordinary item. Where will the company present the extraordinary item on the income statement?

A) As a component of income from continuing operations.
B) As a component of gross profit.
C)After income from continuing operations but before net income.
D)Prior to income from continuing operations before taxes.

Question 67

Which of the following statements is false when a company sells inventory costing $700 for $1,200?

A) Cost of goods sold is $700.
B) Gross profit is $500.
C)Stockholders' equity does not change.
D)Net sales increases $500.

Question 68

Which of the following statements regarding international financial reporting standards (IFRS) is false?

A) The reporting of extraordinary items is prohibited.
B) Property, plant, and equipment can be reported on the balance sheet at either fair value or historical cost.
C)The last-in first-out inventory method is permitted.
D)Inventory write-downs are permitteD.The last-in first-out inventory method is prohibited under IFRS.

Question 69

Which of the following would not be included on an income statement?

A) Accumulated depreciation.
B) Insurance expense.
C)Cost of goods sold.
D)Extraordinary loss.

Question 70

In which of the following classifications would cash dividend payments to stockholders be reported?

A) Operating activities.
B) Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 71

Where are shares of the reporting company's common stock issued in exchange for cash reported on a statement of cash flows?

A) Operating activities.
B) Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 72

A company has paid cash to repurchase its common stock that was previously issued. Where will this cash flow be reported on the statement of cash flows?

A) Operating activities.
B) Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 73

Which of the following would not typically be disclosed in the notes to the financial statements?

A) Additional detail regarding reported numbers.
B) A summary of significant accounting policies.
C)Commitments under long-term supply agreements.
D)The net income earned for the reporting perioD.The net income earned for the reporting period is included in the financial statements.

Question 74

Which of the following statements regarding earnings per share is false?

A) It is reported on the income statement.
B) It increases when net income increases.
C)It is based on the average number of common shares outstanding.
D)It would not be affected by an extraordinary loss.

Question 75

Which of the following statements regarding international financial reporting standards (IFRS) is false?

A) Research and development costs are expensed.
B) Research costs are expensed and development costs are capitalized.
C)Cash payments for interest are reported on the cash flow statement as either an operating or financing cash flow.
D)Reversal of inventory write-downs is permitteD.Development costs are capitalized under IFRS.

Question 76

Which of the following statements is false when a company sells inventory costing $900 for $1,500 cash?

A) Current assets increase $600.
B) Gross profit increases $1,500.
C)Stockholders' equity increases $600.
D)Net sales increases $1,500.

Question 77

Huron has provided the following year-end balances: Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000
How much are Huron's net noncurrent assets?

A) $122,300.
B) $120,200.
C)$123,800.
D)$112,300.

Question 78

Which of the following would not be reported in the operating activities section of the statement of cash flows, which has been prepared using the indirect method?

A) Sales on account which have not yet been collected.
B) Net income.
C)Cash paid for income taxes.
D)Depreciation expense.

Question 79

Examples of nonoperating items that would appear on an income statement are:

A) Interest income, sales salaries, gain on sale of land.
B) Income taxes, interest expense, loss on sale of investments.
C)Interest expense, gain on sale of equipment, loss on sale of investments.
D)Depreciation expense, interest income, interest expense.

Question 80

Which of the following statements is false when a company sells inventory costing $900 for $1,500 cash?

A) Current assets increase $600.
B) Gross profit increases $1,500.
C)Stockholders' equity increases $600.
D)Net sales increases $1,500.