Question 1

Which of the following statements about the Sarbanes-Oxley Act is incorrect?
A) The act was passed in 1996.
B) Because the act is complex, compliance is more expensive and time consuming for corporate management.
C) Because of the act, the SEC was required to establish a federal oversight board.
D) Because of the act, a corporation's chief executive and financial officers must certify financial reports.
E) The act strengthened the penalty for destroying financial documents related to an audit.

Accepted Answer

The Sarbanes-Oxley Act was actually passed in 2002, not 1996.

Question 2

A public corporation must change its lead auditing firm
A) every year.
B) every two years.
C) every five years.
D) every ten years.
E) whenever it wants to.

Accepted Answer

According to the Sarbanes-Oxley Act, public corporations must rotate their lead auditing firms every five years in order to promote independence and objectivity in the auditing process.

Question 3

The purpose of an audit is to ensure that financial statements have been prepared according to
A) the particular company's standards.
B) the industry's standards.
C) generally accepted accounting principles.
D) international accounting standards.
E) the standards of certified public accountants.

Accepted Answer

The purpose of an audit is to ensure that financial statements have been prepared according to generally accepted accounting principles (GAAP). GAAP includes specific guidelines and standards that companies must follow when preparing their financial statements, and an audit helps ensure that these guidelines have been followed accurately. While companies may have their own internal standards or industry-specific standards, GAAP is the universal standard that all companies must adhere to.

Question 4

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-Refer to Christine's First Job.To help the owners understand how effectively the firm is transforming sales into profits, Christine should address which of the following ratios?
A) return on sales
B) earnings per share
C) acid-test ratio
D) return of owners' equity
E) inventory turnover

Accepted Answer

Return on sales, also known as net profit margin, measures the company's profitability by showing how much profit is generated for each dollar of sales. This ratio will help the owners understand how effective the firm is at transforming sales into profits.

Question 5

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-The process of systematically collecting, analyzing, and reporting financial information is called _____.
A) accounting
B) bookkeeping
C) auditing
D) journalizing
E) revenues

Accepted Answer

The process described in the passage is that of accounting, which involves collecting, analyzing, and reporting financial information. Bookkeeping refers specifically to the recording of financial transactions, while auditing is an independent examination of financial records. Journalizing refers to the process of recording transactions in a journal, and revenues are a type of financial information that would be included in accounting processes.

Question 6

Because of the Sarbanes-Oxley Act, accountants must maintain financial documents and audit work for _____.
A) six months
B) one year
C) three years
D) five years
E) ten years

Accepted Answer

The Sarbanes-Oxley Act requires accountants to maintain financial documents and audit work for a period of 5 years.

Question 7

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-Refer to Christine's First Job.If the owners did not recognize the term "statement of financial position," Christine could use which of the following more common terms?
A) income statement
B) balance sheet
C) statement of cash flow
D) statement of retained earnings
E) statement of financial ratios

Accepted Answer

The more common term for "statement of financial position" is "balance sheet."

Question 8

Ridgley, Cooper, and Ross (RCR)
Katie is the CEO of Ridgley, Cooper, and Ross (RCR), a regional accounting firm.RCR offers services in most areas of accounting, including auditing and consulting services.The firm must follow the GAAP rules, just like any other accounting firm.If there are information gaps that are not addressed and resolved by the firm, RCR could be considered a violator of the Sarbanes-Oxley Act.Katie understands what must be done and wants every employee of the firm to understand that they have to follow all the rules and regulations.Like any other industry, accounting is a competitive industry and employees of accounting firms must be productive, progressive, and well trained.
-Refer to Ridgley, Cooper, and Ross.If you applied for a job at RCR and were asked to state the accounting equation, which of these would you state?
A) Assets = liabilities -owners' equity
B) Assets + liabilities = owners' equity
C) Assets /liabilities = owners' equity
D) Assets = liabilities + owners' equity
E) Assets = liabilities * owners' equity

Accepted Answer

The accounting equation is Assets = Liabilities + Owners' Equity, which means that the total assets of a company must equal the sum of its liabilities and the owners' equity. This is the best and correct choice.

Question 9

Ridgley, Cooper, and Ross (RCR)
Katie is the CEO of Ridgley, Cooper, and Ross (RCR), a regional accounting firm.RCR offers services in most areas of accounting, including auditing and consulting services.The firm must follow the GAAP rules, just like any other accounting firm.If there are information gaps that are not addressed and resolved by the firm, RCR could be considered a violator of the Sarbanes-Oxley Act.Katie understands what must be done and wants every employee of the firm to understand that they have to follow all the rules and regulations.Like any other industry, accounting is a competitive industry and employees of accounting firms must be productive, progressive, and well trained.
-Refer to Ridgley, Cooper, and Ross.In order to be successful in the accounting industry, RCR employees must
A) know all areas of accounting and marketing.
B) have complete human resources training.
C) be able to communicate in multiple languages.
D) know how to do accounting the old fashioned way-using the manual, double-entry system.
E) have a strong background in financial management.

Accepted Answer

The passage states that employees of accounting firms must be productive, progressive, and well trained, and that RCR offers services in most areas of accounting, including auditing and consulting services. Therefore, having a strong background in financial management would be the best choice for RCR employees to be successful in the accounting industry. The other choices are not mentioned in the passage as necessary for success in accounting.

Question 10

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-Refer to Christine's First Job.When Christine explained the asset side of the statement, she included which of the following?
A) retained earnings
B) notes payable
C) merchandise inventory
D) long-term liabilities
E) stockholders' equity

Accepted Answer

The merchandise inventory is an asset and would be included on the asset side of the statement of financial position. Retained earnings, notes payable, long-term liabilities and stockholders' equity are all different types of accounts but they would not be included on the asset side of the statement.

Question 11

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-Refer to Christine's First Job.If the owners were interested in obtaining their working capital figures, Christine should do which of the following?
A) divide current assets by current liabilities
B) multiply current assets by current liabilities
C) divide net income after taxes by net sales
D) get the difference between current assets and current liabilities
E) subtract inventory from current assets

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets.

Question 12

Ridgley, Cooper, and Ross (RCR)
Katie is the CEO of Ridgley, Cooper, and Ross (RCR), a regional accounting firm.RCR offers services in most areas of accounting, including auditing and consulting services.The firm must follow the GAAP rules, just like any other accounting firm.If there are information gaps that are not addressed and resolved by the firm, RCR could be considered a violator of the Sarbanes-Oxley Act.Katie understands what must be done and wants every employee of the firm to understand that they have to follow all the rules and regulations.Like any other industry, accounting is a competitive industry and employees of accounting firms must be productive, progressive, and well trained.
-Refer to Ridgley, Cooper, and Ross.One of RCR's clients is ABC Electronics.RCR develops ABC Electronics' statements and reports for ABC's stockholders, financial analysts, and bankers.These services can be classified as which of the following?
A) non-accounting services
B) tax accounting
C) financial accounting
D) managerial accounting
E) cost accounting

Accepted Answer

Developing statements and reports for a client's stockholders, financial analysts, and bankers is a service related to financial accounting.

Question 13

When Nathan applied for a loan to expand his sailboat business, the bank required that his financial statements be carefully examined by a CPA.The bank is requiring Nathan to have his financial statements _____.
A) verified
B) audited
C) affirmed
D) certified
E) insured

Accepted Answer

The bank is requesting that Nathan have his financial statements audited, which involves a thorough examination of the financial records by a certified public accountant (CPA). Verification, affirmation, and certification are all related to verifying the accuracy of the financial statements, but only auditing involves a comprehensive evaluation by a CPA. Insurance is not relevant in this context.

Question 14

The president of Universal Foods Corporation is seeking your advice on the kinds of information provided by an accounting system that would be helpful to her.Since the president is developing a new, company-wide strategy, she would be most interested in the
A) performance appraisals of employees in one of the three customer service centers.
B) total sales for all of the company's products.
C) sales for one of the company's products.
D) payroll figures for employees at one of the ten warehouse facilities.
E) lists of primary and secondary suppliers for one of the five production plants.

Accepted Answer

The president is developing a company-wide strategy, so she would be most interested in information that provides an overview of the company's performance. Total sales for all of the company's products would give her a good indication of the overall financial health of the company. The other options are too specific and may not be relevant to the president's overall strategy development.

Question 15

After the Sarbanes-Oxley Act was signed by the president, auditors and accountants can be imprisoned for up to ____ years for destroying financial documents and willful violations of the securities laws.
A) fifty
B) thirty
C) twenty
D) ten
E) five

Accepted Answer

The Sarbanes-Oxley Act, enacted in response to major corporate and accounting scandals, includes provisions for up to twenty years of imprisonment for the destruction of financial documents and willful violations of securities laws, aiming to enhance corporate accountability.

Question 16

When Joan Newport attended the orientation for new employees in the accounting department at Madison Oil and Energy Exploration, she was told that the primary users of accounting information are _____.
A) investors
B) managers
C) lenders
D) suppliers
E) government agencies

Accepted Answer

The orientation for new employees in the accounting department at Madison Oil and Energy Exploration stated that the primary users of accounting information are managers. While investors, lenders, suppliers, and government agencies may also use accounting information, the primary focus in this question is on the primary users, and managers would be considered the most primary user group.

Question 17

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-Refer to Christine's First Job.When Christine explained the steps in the accounting cycle, she identified which of the following as the first step in the accounting cycle?
A) analyzing the source documents
B) preparing financial statements
C) posting
D) preparing the trial balance
E) recording

Accepted Answer

The first step in the accounting cycle is analyzing the source documents, which involves reviewing and interpreting the documents that provide evidence of business transactions.

Question 18

Christine's First Job
Christine has just earned her undergraduate degree in accounting and has successfully completed the CPA exam.She recently interviewed with a relatively small and new company and was offered a job.The offer sounded very promising; the job had opportunities to grow with the company and provided diverse challenges.Christine accepted the job.
Once Christine started working, she realized that the owners and employees did not have a general understanding of accounting.She had to teach them the steps in an accounting cycle so they would be able to understand how she was going to create reports.When she talked about the statement of financial position, they had no idea what she was talking about.She was the qualified individual responsible for accounting.No one else working with her had much knowledge.They did not even know the different financial ratios that someone could use to understand the financial standing of a company.Christine knows it will be a challenge to keep everyone on the same page when it comes to numbers and reports.
-From an executive's viewpoint, which of the following statements does not describe an executive's motivation to "cook" a firm's books?
A) the desire to look good in the local newspapers or financial publications
B) the desire to impress Wall Street analysts
C) the desire to impress the firm's investors
D) the desire to be ethical
E) the desire to inflate the company's stock value

Accepted Answer

The desire to be ethical is not a motivation for "cooking" a firm's books. "Cooking" the books refers to fraudulent practices in accounting and is considered unethical. Therefore, an executive who desires to be ethical would not engage in such practices. The other options listed describe motivations that could lead to "cooking" the books in order to present a false image of the firm's financial standing.

Question 19

Which of the following statements is false?
A) When the SEC began to look for accounting irregularities, Andersen employees shredded documents.
B) The accounting firm of Arthur Andersen was convicted of obstruction of justice.
C) Less than a month after admitting accounting errors, Enron filed for bankruptcy.
D) Enron inflated earnings by almost $600 million.
E) To date, Arthur Andersen is the only major accounting firm that has been targeted by trial lawyers, government regulators, and the IRS for providing questionable audit work for major corporations.

Accepted Answer

This statement is false as other major accounting firms such as KPMG and Deloitte have also faced scrutiny and legal action for questionable audit work.

Question 20

An audit is
A) performed by the firm's private bookkeepers.
B) not necessary if the firm used generally accepted bookkeeping procedures.
C) required by many bankers and lenders who are trying to validate a firm's accounting statements.
D) a waste of the firm's resources.
E) a guarantee that a firm hasn't "cooked" the books.

Accepted Answer

Audits are typically required by banks and other lenders to ensure the accuracy of a firm's accounting statements. This provides a level of assurance to the lender that the firm is financially stable and can pay back any loans. It also helps prevent fraud and other ethical violations.

Quiz 15: Using Accounting Information

Which of the following statements about the Sarbanes-Oxley Act is incorrect?

A public corporation must change its lead auditing firm

The purpose of an audit is to ensure that financial statements have been prepared according to

Because of the Sarbanes-Oxley Act, accountants must maintain financial documents and audit work for _____.

When Nathan applied for a loan to expand his sailboat business, the bank required that his financial statements be carefully examined by a CPA.The bank is requiring Nathan to have his financial statements _____.

The president of Universal Foods Corporation is seeking your advice on the kinds of information provided by an accounting system that would be helpful to her.Since the president is developing a new, company-wide strategy, she would be most interested in the

After the Sarbanes-Oxley Act was signed by the president, auditors and accountants can be imprisoned for up to ____ years for destroying financial documents and willful violations of the securities laws.

When Joan Newport attended the orientation for new employees in the accounting department at Madison Oil and Energy Exploration, she was told that the primary users of accounting information are _____.

Which of the following statements is false?

An audit is