Question 1

Current assets include all of the following: cash,inventory,equipment,supplies,and accounts receivable.

Accepted Answer

Equipment is not considered a current asset; it is classified as a long-term asset because it is expected to be used for more than one year.

Question 2

The statement of cash flows,like the income statement,reports only operating activities and other activities of a company.

Accepted Answer

The statement of cash flows reports operating, investing, and financing activities of a company.

Question 3

The company's annual report includes a section called Management's Discussion and Analysis.

Accepted Answer

The Management's Discussion and Analysis (MD&A) section is a required part of a company's annual report, and provides an overview and analysis of the company's financial performance, operations and future outlook.

Question 4

Current liabilities are typically listed in the order in which they will be paid.

Accepted Answer

Current liabilities are typically listed in order of their maturity, with the obligations whose payment is due earliest listed first. This is known as the order of liquidity.

Question 5

Independent auditors render an opinion that the financial statements do or do not fairly present a company's financial position,operating results,and cash flows.

Accepted Answer

Independent auditors are responsible for expressing an opinion on whether the financial statements of a company are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Question 6

An independent auditor's report is a guarantee that the financial statements are free from fraud or material error.

Accepted Answer

An independent auditor's report provides assurance that the financial statements are presented fairly in all material respects in accordance with the applicable financial reporting framework, but it does not provide a guarantee that the financial statements are free from fraud or material error. Auditors conduct their work in accordance with professional standards and aim to obtain reasonable assurance about whether the financial statements are free from material misstatement. However, they cannot provide absolute certainty or detect all instances of fraud or error.

Question 7

Income from operations includes interest revenue and interest expense because these items are considered to be operating in nature.

Accepted Answer

Income from operations only includes revenues and expenses that are directly related to the company's main business activities. Interest revenue and expense are considered non-operating items because they are not generated by the normal operations of the business.

Question 8

A classified balance sheet is to help users determine how a company obtained its resources.

Accepted Answer

A classified balance sheet provides more detailed information about a company's assets, liabilities, and equity, by categorizing them into current and noncurrent, allowing users to better understand how the company obtained its resources and its financial position.

Question 9

Three common categories of long-term assets are: 1)property,plant,and equipment; 2)long-term investments; and 3)intangibles.

Accepted Answer

These are the three commonly recognized categories of long-term assets.

Question 10

Net loss reduces a company's retained earnings balance.

Accepted Answer

Net loss is the result of a company's expenses exceeding its revenue, which reduces its overall profits. This reduction in profits is reflected in the retained earnings balance, which is the portion of a company's profit that is not distributed as dividends to shareholders. Therefore, a net loss will decrease the retained earnings balance.

Question 11

In the shareholders' equity section of a classified balance sheet,a distinction is made between amounts invested by owners and amounts financed by creditors.

Accepted Answer

The shareholders' equity section of a classified balance sheet specifically reflects the amounts invested by owners and retained earnings, not amounts financed by creditors, which are shown under liabilities.

Question 12

The current ratio is useful in determining a company's ability to pay obligations when they become due.

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its current obligations using its current assets. Therefore, it is a useful tool for evaluating a company's short-term financial health and its ability to meet its current obligations when they become due.

Question 13

A company with healthy cash flows from operating activities is in a good position to repay its debts.

Accepted Answer

When a company has positive cash flows from operating activities, it means that it is generating enough cash from its core business operations. This cash flow can be used to repay the debts of the company, which is a positive sign for the creditors. Therefore, a company with healthy cash flows from operating activities is in a good position to repay its debts.

Question 14

Dividend payments appear on the statement of retained earnings.

Accepted Answer

Dividend payments to shareholders reduce the amount of retained earnings, so they will appear on the statement of retained earnings.

Question 15

One primary purpose of a classified balance sheet is to help users evaluate the working capital of a company.

Accepted Answer

A classified balance sheet separates current assets and current liabilities from non-current assets and non-current liabilities, making it easier for users to evaluate a company's working capital. Working capital is calculated by subtracting current liabilities from current assets, so this information is necessary for users to make this evaluation.

Question 16

Creditors use accounting information to evaluate whether to loan money to a company.

Accepted Answer

Creditors rely on accounting information to assess the financial health of a company before deciding whether to lend them money or not. This includes financial statements such as balance sheets, income statements, and cash flow statements, as well as other relevant financial ratios and metrics.

Question 17

In the independent auditors' report included with the annual report,management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements.

Accepted Answer

In the independent auditors' report, it is the auditors who discuss the financial statements and provide their opinion on whether they are presented fairly in all material respects. Management may provide explanations for certain amounts reported in the statements in the notes to the financial statements, but not in the auditors' report.

Question 18

The ending cash balance is shown on the balance sheet and the statement of retained earnings.

Accepted Answer

The ending cash balance is shown on the balance sheet under current assets and on the cash flow statement, not on the statement of retained earnings.

Question 19

The purpose of financial reporting is to provide economic information to investors,creditors,and other financial statement users.

Accepted Answer

Financial reporting is designed to provide economic information to a variety of stakeholders, including investors, creditors, and other financial statement users, such as regulatory agencies and management. The goal is to facilitate informed decision-making and improve transparency in financial transactions.

Question 20

The owners of a sole proprietorship,partnership,and corporations have limited liability.

Accepted Answer

In a sole proprietorship and partnership, the owners have unlimited liability, meaning they are personally responsible for the debts and obligations of the business. Only in a corporation do the owners (shareholders) have limited liability, protecting their personal assets from the business's debts.

Quiz 1: Accounting and the Financial Statements