Deck 5: Foundations of Financial Reporting and the Classified Balance Sheet

Question 1

The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

The relevance of accounting information means that the information has a direct bearing on a decision.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

To be useful for decision making,financial reporting must enable the user to assess cash flow prospects and assess management's stewardship.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

In practice,accounting information is quite simple and precise.

Question 20

Only the chief financial officer and the company's CPAs must certify that,to their knowledge,the statements are accurate and complete.

Question 21

Return on assets is a measure of liquidity.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

The conventions of consistency and conservatism require that financial statements present all the information relevant to users' understanding of the statements.

Question 28

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

Question 29

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

Question 30

The main difference between intangible assets and property,plant,and equipment is physical substance.

Question 31

Classified balance sheets list accounts in alphabetical order.

Question 32

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 33

Although a garbage can that costs $25 is a long-term asset,it can be expensed because the amount is immaterial and will not affect anyone's decision making.

Question 34

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

Question 35

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

Question 36

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

Question 37

Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.

Question 38

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

Question 39

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

Question 40

The main differences among the balance sheets of the sole proprietorship,the partnership,and the corporation are found in the current assets and current liabilities sections.

Question 41

Return on assets is a combination of the profit margin and the asset turnover.

Question 42

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

Question 43

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 44

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 45

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 46

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 47

General-purpose external financial statements are not primarily intended for

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

Question 48

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

Question 49

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 50

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

A)faithful representation.
B)relevance.
C)consistency.
D)understandability.

Question 51

A company with a low asset turnover uses its assets more productively than one with a high asset turnover.

Question 52

Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.

Question 53

A debt to equity ratio of 0.5 means that one-third of a company's total assets are financed by creditors.

Question 54

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

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

Question 55

Financial statements have faithful representation when the information has all of the following except

A)Complete information.
B)Information that is free from error.
C)Neutral information.
D)Material information.

Question 56

A company's management can improve overall profitability by decreasing the profit margin,
the asset turnover,or both.

Question 57

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

Question 58

Profit margin and gross margin are the same thing.

Question 59

The qualitative characteristic of faithful representation includes

A)materiality
B)confirmative value.
C)timeliness.
D)neutral information.

Question 60

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

Question 61

Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?

A)Understandability
B)Conservatism
C)Materiality
D)Verifiability

Question 62

Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?

A)Full disclosure
B)Cost-benefit
C)Conservatism
D)Consistency

Question 63

Which of the following is not an enhancing qualitative characteristic?

A)Verifiability
B)Timeliness
C)Understandability
D)Neutrality

Question 64

Which of the following would not appear in the owner's equity section of a corporation?

A)I.Muller,Capital
B)Retained earnings
C)Additional paid-in capital
D)Common stock

Question 65

The accounting convention that is most responsible for the increase in the number of notes to financial statements is

A)materiality.
B)full disclosure.
C)consistency.
D)conservatism.

Question 66

Which accounting convention could cause an overload of information for the financial statement user?

A)Consistency
B)Conservatism
C)Full disclosure
D)Materiality

Question 67

On a corporate balance sheet,earned capital is also known as

A)common stock.
B)paid-in capital.
C)retained earnings.
D)contributed capital.

Question 68

Use this information to answer the following question. The total dollar amount of assets to be classified as current assets is

A)$105,000.
B)$145,000.
C)$95,000.
D)$120,000.

Question 69

___________ is related to both the nature of an item and its size.

A)Neutrality
B)Materiality
C)Verifiability
D)Timeliness

Question 70

Which of the following should be classified as an intangible asset?

A)Land held for future use
B)Long-term notes receivable
C)Special funds established to pay off a debt
D)Copyright

Question 71

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 72

Which accounting convention requires a note to the financial statements explaining the company's method of revenue recognition?

A)Comparability and consistency
B)Materiality
C)Conservatism
D)Full disclosure

Question 73

A company should classify land held for a planned manufacturing facility as

A)an intangible asset.
B)an investment.
C)a current asset.
D)property,plant,and equipment.

Question 74

Use this information to answer the following question. The total dollar amount of assets to be classified as investments is

A)$125,000.
B)$95,000.
C)$60,000.
D)$40,000.

Question 75

Faithful representation is comprised of all of the following except

A)Verifiability
B)Completeness
C)Neutrality
D)Free from error

Question 76

A practical decision to expense a $120 printer rather than record it as property,plant,and equipment and depreciate it probably is made on the basis of the convention of

A)conservatism.
B)consistency.
C)materiality.
D)full disclosure.

Question 77

Relevance is comprised of all of the following except

A)Neutrality
B)Materiality
C)Predictive value
D)Confirmative value

Question 78

Which of the following statements best describes predictive value?

A)Helps capital providers make decisions about future actions.
B)Provides all information necessary for a reliable decision.
C)Enables users to identify similarities and differences.
D)Enables users to comprehend the meaning of the information.

Question 79

The convention of consistency refers to consistent use of accounting principles

A)among firms.
B)within a given accounting period.
C)within industries.
D)among accounting periods.

Question 80

__________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.

A)Verifiability.
B)Consistency.
C)Comparability.
D)Neutrality.