Question 1

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.

Accepted Answer

An unqualified report, also known as a clean report, indicates that the financial statements have been presented fairly in all material respects, in accordance with the applicable financial reporting framework. This is the best type of audit report a company can receive.

Question 2

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.

Accepted Answer

The market value of all assets is not typically discussed in the management discussion and analysis, as it is not as relevant to the company's performance or management strategies as the other options listed.

Question 3

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

Accepted Answer

International financial reporting standards (IFRS) are often seen as being more complicated than US Generally Accepted Accounting Principles (GAAP). This is because IFRS is used by a greater number of countries and covers a wider range of accounting issues, while US GAAP has a more narrow focus on topics relevant to US businesses.

Question 4

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.

Accepted Answer

The management discussion and analysis provides insight into a company's strategy, risks, and future plans that cannot be found in the numerical data. This information can help analysts better understand a company's performance and potential future performance.

Question 5

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.

Accepted Answer

The basic financial statements found in a corporate annual report are the balance sheet, income statement, statement of shareholders' equity, and statement of cash flows. These statements provide a comprehensive view of the company's financial health, including its assets, liabilities, revenue, expenses, and cash flow. The auditor's report may also be included, but it is not considered a basic financial statement. The earnings statement and statement of retained earnings are not separate statements, but rather components of the income statement and statement of shareholders' equity, respectively. A five-year summary of key financial data may be included, but it is not one of the basic financial statements.

Question 6

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).

Accepted Answer

Financial Reporting Rulings are not required to be filed with the SEC by public companies.

Question 7

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.

Accepted Answer

A statement of stockholders' equity provides a reconciliation of the beginning and ending balances of all accounts that appear in the stockholders' equity section of the balance sheet. It shows the changes that occurred in stockholders' equity during the period, such as the issuances and repurchases of stock, dividend payments, and changes in retained earnings. It does not provide information on the cash account or other accounts not related to stockholders' equity.

Question 8

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.

Accepted Answer

An adverse opinion is issued when the auditor concludes that the financial statements as a whole do not fairly present the financial position, results of operations, and cash flows of the company in accordance with GAAP. It is the worst type of opinion that can be issued by an auditor.

Question 9

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.

Accepted Answer

Financial statements primarily focus on financial information and do not capture intangible elements such as the reputation of the firm, morale of employees, and prestige in the community.

Question 10

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.

Accepted Answer

The globalization of business activity has resulted in the FASB (U.S. Financial Accounting Standards Board) and IASB (International Accounting Standards Board) working jointly on a project to converge accounting standards. This is to ensure that there is a common set of high-quality accounting standards that can be used globally. However, globalization has not necessarily resulted in increased corruption and unethical behavior, and while there have been efforts to harmonize accounting rules, there is not yet a uniform set of accounting rules in all countries. Additionally, while U.S. firms are required to follow International Financial Reporting Standards (IFRS) as of 2018, this is not the case for the earlier date mentioned in the option (2006).

Question 11

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.

Accepted Answer

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies include an internal control report in their annual report to provide assurance to investors and the public that the company has adequate internal controls in place to prevent fraud and financial misstatements. The report must include management's assessment of the effectiveness of internal controls and the external auditor's attestation to the accuracy of management's assessment.

Question 12

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

Accepted Answer

Accounting choices and estimates can have a significant impact on financial statement numbers, especially for items like depreciation, inventory valuation, and bad debt expense. The choices made can affect a company's reported profitability, liquidity, and solvency.

Question 13

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.

Accepted Answer

A balance sheet provides a snapshot of a company's financial position on a particular date by listing its assets, liabilities, and shareholders' equity. It does not show the profit or loss for the accounting period, nor does it provide information about changes in the cash account. The primary purpose of a balance sheet is to ensure that the company's assets equal its liabilities, which helps stakeholders understand the company's financial health and liquidity.

Question 14

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.

Accepted Answer

An income statement shows revenues, expenditures, net profit or loss, and net profit or loss per share for a specific period of time. Choice A refers to a statement of cash flows, while choice B refers to a cash flow statement. Choice C refers to a revenue reconciliation statement.

Question 15

What document is required by the SEC to solicit shareholder votes?
A) Proxy statement.
B) Five-year summary.
C) Shareholders' letter.
D) Prospectus.

Accepted Answer

A proxy statement is required by the SEC to solicit shareholder votes. It includes information about the issues to be voted on, voting procedures, and information about the company's management and directors. A five-year summary and shareholders' letter may be included in the proxy statement, but they are not the primary document required by the SEC. A prospectus is a document required for securities offerings, but not for shareholder voting.

Question 16

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.

Accepted Answer

The management discussion and analysis is typically included in the annual report, but it is not considered a part of the notes to the financial statements. The other items listed are commonly included in the notes to the financial statements.

Question 17

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

Accepted Answer

The statement correctly describes the accrual basis of accounting, where revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.

Question 18

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

Accepted Answer

The matching principle is a fundamental concept in accounting that requires expenses to be recognized in the same period as the revenues they help generate, in order to accurately determine net income for that period. This means that expenses are matched with their corresponding revenues, even if the cash for those expenses hasn't been paid yet. This is a key principle that helps ensure that financial statements accurately reflect a company's performance and profitability over time.

Question 19

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

Accepted Answer

Discretionary items are expenses that are optional or can be adjusted based on business needs, such as repairs and maintenance, research and development, and advertising.

Question 20

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.

Accepted Answer

Public relations materials are not part of the company's financial statements and do not provide any financial information. Therefore, they are the least useful when analyzing financial statements.

Quiz 1: Financial Statements: an Overview

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

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

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

Why does the management discussion and analysis help the analyst?

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

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

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

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

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

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

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

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

What information can be found on a balance sheet?

What information can be found on an income statement?

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

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

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

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

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

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