Deck 5: Financial Reporting and Analysis

Question 1

The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.

Answer 1

False

Question 2

The convention of materiality has led to an increase in the notes to financial statements.

Answer 2

False

Question 3

For accounting information to be useful, it must be both relevant and reliable.

Answer 3

True

Question 4

The conservatism convention should not be used when the accountant is certain of a particular measure.

Question 5

Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.

Question 6

An advantage of accounting information is that it provides exact and completely reliable measures.

Question 7

Investors and creditors use financial statements to evaluate a company's ability to pay dividends and interest.

Question 8

Only the chief financial officer and the company's CPAs are responsible for the accuracy of financial statements. The chief executive officer is not expected to understand financial information.

Question 9

A different set of financial statements usually is prepared for each user.

Question 10

Financial statements are general-purpose in Nature because of their wide audience.

Question 11

Both investors and creditors have an interest in a company's ability to generate favorable cash flows.

Question 12

Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.

Question 13

One of the three objectives of financial reporting established by the FASB is to provide information useful in assessing cash flow prospects.

Question 14

To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.

Question 15

Financial statements are often audited by management to increase confidence in the statements' reliability.

Question 16

Full disclosure of all important facts aids in overcoming the limitations of accounting information.

Question 17

Financial statements are generally prepared for a limited number of users.

Question 18

The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.

Question 19

The relevance of accounting information is also an indication of its reliability.

Question 20

One of the three objectives of financial reporting established by the FASB is to provide information that is useful to potential customers.

Question 21

Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and additional paid-in capital.

Question 22

Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.

Question 23

In accounting, $1,000 is considered the dividing line between material and immaterial amounts.

Question 24

The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

Question 25

General-purpose external financial statements that are divided into subcategories are called classified financial statements.

Question 26

The term net worth is a preferred over the term owner's equity because assets are recorded at original cost rather than at current value.

Question 27

Illegal acts of a small dollar amount can be ignored because they are immaterial.

Question 28

A material item is one that is likely to affect a user's decision.

Question 29

The investments category on the balance sheet normally includes investments that are intended to be held for a short period of time.

Question 30

The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.

Question 31

The convention of full disclosure requires that financial statements present all the information relevant to users' understanding of the statements.

Question 32

The two parts of a corporation's stockholders' equity section are contributed capital and retained earnings.

Question 33

Although a stapler that costs $10 is a long-term asset, can be expensed because the amount is immaterial and will not affect anyone's decision making.

Question 34

Operating expenses include cost of goods sold.

Question 35

Classified balance sheets list accounts in alphabetical order.

Question 36

Natural resources, such as coal mines and oil wells, are classified as intangible assets.

Question 37

It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.

Question 38

The cost-benefit convention holds that the benefits to be gained from providing accounting information should be less than the costs of providing it.

Question 39

The main difference among the balance sheets of the sole proprietorship, the partnership, and the corporation is found in the owner's equity section.

Question 40

The main difference between intangible assets and property, plant, and equipment is the length of the asset's life.

Question 41

Freight paid on goods shipped to customers is classified as a selling expense.

Question 42

Provision for income taxes appears in the income statements of sole proprietorships and partnerships.

Question 43

General and administrative expenses are a category of operating expense.

Question 44

Cost of goods sold is a type of expense.

Question 45

On a multistep income statement, other revenues and expenses are a component of income from operations.

Question 46

On the income statement of a merchandising company, net income is the amount by which net sales exceed operating expenses.

Question 47

An advantage of the single-step income statement is that it is less complex than the multistep form.

Question 48

Dividend income and interest income are examples of nonoperating revenues.

Question 49

Delivery expense is a selling expense on the income statement.

Question 50

Interest paid on bank loans is classified as cost of goods sold.

Question 51

The matching rule precludes the cost of inventory from being expensed until the inventory has been sold.

Question 52

Another term for cost of goods sold is cost of sales.

Question 53

Income from operations is the difference between gross margin and operating expenses.

Question 54

Sales returns and allowances are deducted from gross sales on the balance sheet.

Question 55

The single-step and multistep income statements result in different net income amounts.

Question 56

Cost of goods sold would not be found on a single-step income statement.

Question 57

Advertising expense appears as a general and administrative expense on the income statement.

Question 58

Other revenues and expenses appears as a separate section on a single-step income statement.

Question 59

The income statement of a company that provides a service only will contain gross margin.

Question 60

For a merchandising company, the difference between net sales and operating expenses is called gross margin.

Question 61

A company with a profit margin of 6 percent earns six cents profit for every dollar of net sales.

Question 62

Profit margin and gross margin are the same thing.

Question 63

Return on assets is a measure of liquidity.

Question 64

According to the FASB, the usefulness of accounting is judged by which of the following two prime qualitative characteristics of accounting information?

A) Comparability and neutrality
B) Understandability and comparability
C) Verifiability and timeliness
D) Relevance and reliability

Question 65

Financial statements are audited by outside accountants

A) because it is a requirement stated in the Internal Revenue Code.
B) only when fraudulent financial reporting is suspected.
C) who then report on whether or not the company is a good investment.
D) to increase the users' confidence in the statements' reliability.

Question 66

The lower-of-cost-or-market method of accounting for inventories follows the convention of

A) full disclosure.
B) materiality.
C) conservatism.
D) cost-benefit.

Question 67

All of the following must certify that a public company's financial statements are accurate, complete, and not misleading, except for the

A) chief financial officer.
B) director of human resources.
C) chief executive officer.
D) independent auditor.

Question 68

A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors.

Question 69

The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?

A) Relevance
B) Faithful representation
C) Understandability
D) Timeliness

Question 70

Asset turnover measures how efficiently assets are used to produce sales.

Question 71

Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of

A) reliability.
B) relevance.
C) understandability.
D) verifiability.

Question 72

All the following are standards of accounting information except

A) flexibility.
B) reliability.
C) understandability.
D) relevance.

Question 73

Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.

Question 74

A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.

Question 75

The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are

A) 100 percent accurate and contain no misstatements, errors, or mistakes.
B) accurate and complete.
C) subject to interpretation due to the many accounting rules and regulations.
D) not to be used except by individuals working for the company.

Question 76

A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.

Question 77

Profitability means having enough cash on hand to pay bills when they become due.

Question 78

The qualitative characteristic of faithful representation contains all the following features except

A) complete.
B) verifiability.
C) neutral.
D) free from material error.

Question 79

Both return on assets and working capital are profitability measures.

Question 80

General-purpose external financial statements are not primarily intended for

A) management.
B) investors.
C) suppliers of goods and services.
D) lending institutions.