Question 1

Private companies are not required to use GAAP but they should because following GAAP makes:&#10;A) training new employees easier&#10;B) obtaining outside equity financing easier&#10;C) obtaining loans from banks easier&#10;D) obtaining independent audit possible&#10;E) all of the above

Accepted Answer

Following GAAP (Generally Accepted Accounting Principles) makes training new employees easier because they likely learned these standards in their education. It also makes obtaining outside equity financing and loans from banks easier because financial statements prepared according to GAAP are more credible and understandable to external parties. Additionally, obtaining an independent audit is facilitated by the use of GAAP, as auditors typically audit financial statements prepared in accordance with these principles.

Question 2

Factors to consider when setting up a chart of accounts include the following except&#10;A) time and efforts involved in training employees and the entrepreneur&#10;B) level of details needed to make informed decisions&#10;C) flexibility and comprehensiveness for growth&#10;D) industry norms&#10;E) initial set-up costs

Accepted Answer

Initial set-up costs are not a primary factor in setting up a chart of accounts, which focuses more on the structure and functionality needed for financial management and reporting.

Question 3

Which of the following accounting methods is recommended for management?&#10;A) cash accounting method&#10;B) accrual accounting method&#10;C) modified cash accounting method&#10;D) modified accrual accounting method&#10;E) hybrid accounting method

Accepted Answer

The accrual accounting method is recommended for management because it provides a more accurate picture of a company's financial position by recognizing revenues when earned and expenses when incurred, regardless of when cash transactions occur. This method aligns with the matching principle, ensuring that revenues and related expenses are recorded in the same accounting period, which aids in better decision-making and financial analysis.

Question 4

Which of the following financial statements contains gross profit?&#10;A) Income statement&#10;B) Balance Sheet&#10;C) Statement of cash flows&#10;D) Statement of equity&#10;E) None of the above

Accepted Answer

Gross profit is calculated by subtracting the cost of goods sold from revenue and is typically reported on the income statement.

Question 5

Which of the following financial statements contains retained earnings?&#10;A) Income statement&#10;B) Balance Sheet&#10;C) Statement of cash flows&#10;D) Statement of equity&#10;E) None of the above

Accepted Answer

Retained earnings are reported in the equity section of the balance sheet.

Question 6

A common size income statement expresses all items as a percentage of&#10;A) Total Assets&#10;B) Total Equity&#10;C) Total Liabilities&#10;D) Revenues&#10;E) Net Income

Accepted Answer

A common size income statement expresses all items as a percentage of revenues, allowing for easier comparison across time periods and with other companies by standardizing the size of various line items.

Question 7

Outside investors tend to focus more on&#10;A) Gross Margin&#10;B) Profit Margin&#10;C) ROA&#10;D) ROE&#10;E) Debt Ratio

Accepted Answer

The answer of Outside investors tend to focus more on&#10;A)...

Question 8

A balance sheet is arranged in order of&#10;A) relative importance of an item&#10;B) book values&#10;C) market values&#10;D) liquidity&#10;E) taxability

Accepted Answer

A balance sheet is arranged in order of liquidity, meaning assets are listed from most liquid (easiest to convert into cash) to least liquid, and liabilities are listed from those due soonest to those due latest.

Question 9

Advantages of the indirect method of computing cash flows from operating activities include the following except&#10;A) more intuitive and easier to understand&#10;B) connecting back to the income statement and balance sheets&#10;C) satisfies the reconciliation requirement of GAAP&#10;D) shows cash receipts and disbursement clearly&#10;E) all of the above are advantages of the indirect method

Accepted Answer

The indirect method of computing cash flows from operating activities does not show cash receipts and disbursements clearly.

Question 10

The main categories of equity include&#10;A) contributions from owners&#10;B) accumulated earnings&#10;C) accumulated dividends&#10;D) A and B&#10;E) A, B, and C

Accepted Answer

Equity mainly consists of contributions from owners (or shareholders) and accumulated earnings (retained earnings). Accumulated dividends are not considered a category of equity; instead, they reduce retained earnings.

Deck 4: Financial Statements and Analysis