Question 1

When auditors discover more serious and widespread problems with a firm's statements they will offer an adverse opinion.

Accepted Answer

When auditors discover significant problems with a firm's statements, they can offer either a qualified opinion (if the issues are limited in scope) or an adverse opinion (if the issues are pervasive and affect the overall accuracy and reliability of the statements).

Question 2

Ralph owns some stock in the Lottadoe Corporation,and wants to know whether this company earned a profit over the most recent year.This information would be available on the company's balance sheet.

Accepted Answer

The balance sheet provides information about a company's assets, liabilities, and equity at a specific point in time. It does not provide information about the company's profitability over a specific period of time. To find out if the Lottadoe Corporation earned a profit, Ralph would need to look at the company's income statement or profit and loss statement.

Question 3

Revenues are increases in a firm's assets resulting from the sale of goods,the provision of services,or other activities intended to earn income.

Accepted Answer

This statement is true as per the definition of revenues. Revenues refer to the money that a company earns from selling its products and services or other activities that generate income. It is a crucial measure of a company's financial performance, and it is recorded in the income statement.

Question 4

The accounting entity approach is an accounting method that recognizes revenue when it is earned and matches expenses to the revenues produced.

Accepted Answer

The accounting entity approach refers to treating a business as separate from its owners for accounting purposes, not to the recognition of revenue and matching of expenses. The description given aligns more closely with the accrual basis of accounting.

Question 5

Business expenses are available resources that stakeholders control.

Accepted Answer

Business expenses are the costs incurred by a business to earn revenue, such as salaries, rent, utilities, and supplies. These are not available resources that stakeholders control, but rather costs that must be managed and controlled to achieve profitability.

Question 6

A college student registers for classes and pays the tuition with a credit card.Because it uses accrual-basis accounting,the college will recognize the payment as revenue as soon as the transaction turns into cash in the school's bank account.

Accepted Answer

Accrual-basis accounting recognizes revenue when it is earned, not when it is received. In this case, the college earns the revenue when the student registers for classes, not when the transaction is turned into cash.

Question 7

The cash balance reported at the bottom of the statement of cash flows should equal the amount of cash reported for a balance sheet prepared at the end of the same accounting period.

Accepted Answer

The cash balance reported at the bottom of the statement of cash flows should equal the amount of cash reported for a balance sheet prepared at the end of the same accounting period. This is because the statement of cash flows is reconciling the opening and closing balances of cash from the beginning to the end of the accounting period, and the balance sheet reports the cash balance at the end of the same period. Any differences between the two amounts should be investigated and reconciled.

Question 8

The cash flows received from operations reported in the statement of cash flows should be exactly equal to the revenue the firm reports on its income statement.

Accepted Answer

The cash flows received from operations reported in the statement of cash flows may not always be exactly equal to the revenue reported on the income statement due to differences in timing of cash transactions and accrual accounting.

Question 9

If an auditor identifies limited problems with the firm's financial methods and statements,but believes that in all other aspects the statements are fair and accurate,the auditor's report will express an adverse opinion.

Accepted Answer

If the auditor identifies limited problems with the firm's financial methods and statements, but believes that in all other aspects the statements are fair and accurate, the auditor's report will express a qualified opinion or a disclaimer of opinion, depending on the severity of the issues identified. An adverse opinion is only expressed when the financial statements are not fairly presented in all material respects.

Question 10

Rosalyn owns stock in Munnymacher Inc.and just received her annual report from this company.If she wants to see the total value of Munnymacher's assets,she should look at the company's balance sheet.

Accepted Answer

The balance sheet of a company shows its assets, liabilities, and equity as of a specific date, and therefore, it is the appropriate place to look for the total value of a company's assets.

Question 11

Expenses are listed on the left side of a balance sheet.

Accepted Answer

Expenses are listed on the income statement, not on the balance sheet. The left side of the balance sheet lists assets, while the right side lists liabilities and shareholders' equity.

Question 12

A balance sheet is a financial statement reporting the financial position of a firm at a particular point in time by identifying and reporting the value of the firm's assets,liabilities,and owners' equity.

Accepted Answer

This statement accurately describes the purpose and contents of a balance sheet.

Question 13

Accrual-basis accounting is the method that recognizes revenue when it is earned and matches expenses to those revenues.

Accepted Answer

Accrual-basis accounting recognizes revenue and expenses when they are incurred, regardless of when cash is received or paid. This is in contrast to cash-basis accounting, which only records revenue when cash is received and expenses when cash is paid. Accrual-basis accounting gives a more accurate picture of a company's financial performance and is required by generally accepted accounting principles (GAAP) for certain businesses.

Question 14

Horizontal analysis is an analysis of financial statements comparing account values reported over a period of years.This information is used to serve as a basis of comparison and to identify trends.

Accepted Answer

Horizontal analysis compares financial data over a period of time to identify trends and changes.

Question 15

Liabilities could include bank loans and current payments owed to suppliers.

Accepted Answer

Liabilities are debts or obligations owed by a company to others, such as loans from banks or payments owed to suppliers.

Question 16

A company's balance sheet will "balance" even if it is on the verge of bankruptcy.

Accepted Answer

A balance sheet will always balance, regardless of the financial health of the company. This is because the balance sheet follows the accounting equation: Assets = Liabilities + Equity. Therefore, as long as all the assets, liabilities, and equity are accurately recorded, the balance sheet will balance even if the company is in financial trouble.

Question 17

An unqualified opinion should set off alarm bells to view the firm's financial statements with extreme skepticism.

Accepted Answer

An unqualified opinion in an audit report indicates that the auditor believes the financial statements present the firm's financial condition, results of operations, and cash flows accurately, in conformity with generally accepted accounting principles (GAAP). It is considered a clean opinion, suggesting the financial statements are reliable.

Question 18

When an external audit doesn't uncover any problems with the firm's financial methods and statements,the auditor will issue an unqualified opinion.

Accepted Answer

An unqualified opinion is issued when the external audit finds no issues with the financial methods and statements of the firm.

Question 19

Balance sheets only reflect the assets and liabilities of the cost of goods sold.

Accepted Answer

Balance sheets reflect all assets and liabilities of a company, not just those related to the cost of goods sold.

Question 20

The statement of retained earnings shows how retained earnings have changed from one accounting period to the next.By subtracting dividends paid to shareholders from net income,managers will see changes in this statement over time.

Accepted Answer

The statement of retained earnings shows the changes in retained earnings from one period to the next by subtracting dividends paid from net income. This helps managers track the accumulation of earnings over time.

Quiz 7: Accounting: Decision Making by the Numbers