Deck 1: Financial Statements: an Overview

Question 1

The FASB was given Congressional authority to write accounting rules.

Answer 1

False

Question 2

Financial statements are currently prepared according to generally accepted accounting principles in the U.S.

Answer 2

True

Question 3

The SEC requires all companies, both public and private, to file annually a Form 10-K report.

Answer 3

False

Question 4

A corporate annual report contains three basic financial statements.

Question 5

The goal of the International Accounting Standards Board is the adoption of uniform international accounting standards.

Question 6

Annual reports of public companies can only be found on the SEC's EDGAR database.

Question 7

The notes to financial statements, while helpful, are not an integral part of the statements.

Question 8

The Sarbanes-Oxley Act of 2002 requires all members of management as well as directors to certify the accuracy of the financial statements.

Question 9

Management is responsible for the preparation of the financial statements, including the notes, and the auditor's report attests to the fairness of the presentation.

Question 10

Publicity in the media can impact a firm's financial performance.

Question 11

Despite the enactment of the Sarbanes-Oxley Act of 2002, corruption and unethical behavior continued in the 2000s.

Question 12

An unqualified auditor's report states that the financial statements present fairly the financial position, results of operation, and the cash flows of the entity.

Question 13

The proxy statement offers information about such items as corporate governance, audit-related matters, directors and executive compensation, and related party transactions.

Question 14

Conglomerates operating in diversified lines of business are required to create separate annual reports for each line of business.

Question 15

The management discussion and analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data.

Question 16

A basic understanding of financial statements is needed due to ongoing financial turmoil and major corporate failures.

Question 17

The shareholders' letter from the CEO of a firm offers factual information needed to analyze the financial statements.

Question 18

The management discussion and analysis should contain a discussion of the commitments for capital expenditures, the purpose of such commitments, and expected sources of funding.

Question 19

In 2006, the IASB and the FASB agreed to work on all major projects jointly.

Question 20

The Sarbanes-Oxley Act eliminated the need for internal auditors.

Question 21

What type of audit report indicates that the financial statements have been presented fairly?

A) An unqualified report.
B) A disclaimer of opinion.
C) A qualified report.
D) An adverse opinion.

Question 22

Which of the following items would not be discussed in the management discussion and analysis?

A) Commitments for capital expenditures.
B) The market value of all assets.
C) The internal and external sources of liquidity.
D) A breakdown of sales increases into price and volume components.

Question 23

United States accounting rules have been perceived as being less complex than international standards.

Question 24

Why does the management discussion and analysis help the analyst?

A) It contains information that cannot be found in the financial data.
B) It provides predictions of all future financial statement numbers.
C) It outlines the accounting choices made by the firm.
D) It explains the market valuation of the firm's stock.

Question 25

What basic financial statements can be found in a corporate annual report?

A) Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.
B) Balance sheet, auditor's report and income statement.
C) Earnings statement and statement of retained earnings.
D) Statement of cash flows and five-year summary of key financial data.

Question 26

Which report is not required to be filed by public companies to the SEC?

A) Annual reports (Form 10-K).
B) Financial Reporting Rulings.
C) A prospectus for any new security offering.
D) Quarterly reports (From 10-Q).

Question 27

What information can be found on a statement of stockholders' equity?

A) A reconciliation of the cash account and the retained earnings account.
B) A reconciliation of the beginning and ending balances of all accounts that appear in the stockholders' equity section of the balance sheet.
C) A reconciliation of the operating, investing and financing activities of a firm.
D) A reconciliation of net profit or loss and the cash account.

Question 28

What type of audit report indicates that the financial statements have not been presented fairly?

A) A disclaimer of opinion.
B) An unqualified report.
C) A qualified report.
D) An adverse opinion.

Question 29

What types of information cannot be found in the financial statements?

A) Details about officer and employee retirement, pension, and stock option plans.
B) Pending legal proceedings.
C) Reputation of the firm, morale of employees and prestige in the community.
D) Disclosures about segments of an enterprise.

Question 30

The globalization of business activity has resulted in which of the following?

A) Increased corruption and unethical behavior.
B) A uniform set of accounting rules in all countries.
C) The FASB and IASB working jointly on a project to converge accounting standards.
D) The requirement that U.S. firms use international accounting rules as of 2006.

Question 31

What does Section 404 of the Sarbanes-Oxley Act of 2002 require?

A) The external auditors must create an adequate internal control structure for the firm being audited.
B) The external auditors must approve of all internal auditors hired by a firm.
C) The inclusion of an internal control report in the annual report.
D) The external auditors need to perform internal audit services.

Question 32

Accounting choices and estimates rarely have a significant impact on financial statement numbers.

Question 33

What information can be found on a balance sheet?

A) Information to support that assets equal liabilities.
B) The profit or loss for the accounting period.
C) The reasons for changes in the cash account.
D) The financial position on a particular date; i.e. assets, liabilities and shareholders' equity.

Question 34

What information can be found on an income statement?

A) The financing and investing activities during an accounting period.
B) Cash inflows and cash outflows.
C) A reconciliation of the beginning and ending balances of all revenue accounts.
D) Revenues, expenditures, net profit or loss and net profit or loss per share.

Question 35

What document is required by the SEC to solicit shareholder votes?

A) Proxy statement.
B) Five-year summary.
C) Shareholders' letter.
D) Prospectus.

Question 36

What item is not included in the notes to the financial statements?

A) Details about inventory and property, plant and equipment.
B) Information about major acquisitions or divestitutures.
C) The management discussion and analysis.
D) A summary of the firm's accounting policies.

Question 37

The accrual basis of accounting means that revenues are recognized when the sale is made rather than when cash is received.

Question 38

The matching principle requires that expenses be matched with the generation of revenues in order to determine net income for an accounting period.

Question 39

Examples of discretionary items include repairs and maintenance, research and development and advertising.

Question 40

What item is probably the least useful when analyzing financial statements?

A) Management discussion and analysis.
B) The notes to the financial statements.
C) The statement of cash flows.
D) Public relations materials.

Question 41

How are revenues and expenses recognized under the accrual basis of accounting?

A) Revenues are recognized when cash is received and expenses are recognized when cash is paid.
B) Revenues and expenses are recognized equally over a twelve month period.
C) Revenues and expenses are recognized based on the choices of management.
D) Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

Question 42

Which of the following items is NOT discretionary in nature?

A) Union wages.
B) Repairs and maintenance.
C) Research and development.
D) Advertising.

Question 43

Which of the following statements is true?

A) GAAP-based financial statements are prepared according to the "cash" rather than the "accrual" basis of accounting.
B) Accounting choices and estimates can have a significant impact on the outcome of financial statement numbers.
C) The accrual method means that the expense is recognized after the cash is paid out.
D) The purpose of the accrual method is to attempt to "match" assets with liabilities in appropriate accounting periods.

Question 44

In what industries would it be expected that companies would spend a significant amount on research and development activities?

A) Health.
B) Clothes retailer.
C) Auto.
D) Both (a) and (c).