Question 1

The primary responsibility for the content of the financial statements lies with the external auditor.

Accepted Answer

The primary responsibility for the content of the financial statements lies with the management of the company. The external auditor's role is to provide an independent opinion on the fairness and accuracy of the financial statements.

Question 2

Revenue is recognized within the income statement during the period in which cash is collected.

Accepted Answer

Revenue is recognized within the income statement when it is earned, regardless of when cash is collected. This principle is known as the accrual basis of accounting.

Question 3

An audit is an examination of the financial statements provided by management to ensure that they represent what they claim and to make sure that they are in compliance with generally accepted accounting principles.

Accepted Answer

An audit is indeed an examination of the financial statements provided by management to ensure that they represent what they claim and to make sure that they are in compliance with generally accepted accounting principles.

Question 4

The Financial Accounting Standards Board (FASB) has been given the authority by the Securities and Exchange Commission (SEC) to develop generally accepted accounting principles.

Accepted Answer

This statement is true. The FASB is responsible for developing and issuing generally accepted accounting principles in the United States, and it has been given authority by the SEC to do so. These principles are used by companies to prepare and present financial information to stakeholders, including investors, regulators, and the public.

Question 5

The amount of cash paid by a business for dividends would be reported as an operating activity cash flow on the statement of cash flows.

Accepted Answer

The amount of cash paid for dividends is considered a financing activity cash flow on the statement of cash flows. Operating activities relate to the main revenue-generating activities of a business.

Question 6

A business entity's accounting system creates financial accounting reports which are provided to external decision makers.

Accepted Answer

Financial accounting reports are used by external decision makers such as investors, creditors, regulators, and the general public to make informed decisions about the business entity.

Question 7

The statement of stockholders' equity explains the change in the retained earnings balance caused by stockholder investments and dividend declarations.

Accepted Answer

The statement of stockholders' equity explains changes in equity, including retained earnings, but it encompasses more than just stockholder investments and dividend declarations. It also includes net income, issuance of stock, and other comprehensive income.

Question 8

A company's retained earnings balance increased $50,000 last year; therefore, net income last year must have been $50,000.

Accepted Answer

The increase in retained earnings can come from sources other than net income, such as capital contributions, sale of assets at a gain, or decrease in dividends paid out. Therefore, it cannot be assumed that net income was exactly $50,000.

Question 9

The income statement is a measure of an entity's economic performance for a period of time.

Accepted Answer

The income statement summarizes a company's revenues and expenses for a specific period of time, typically one year or one quarter, to show its net profit or loss. It is a common financial statement used to assess an entity's economic performance.

Question 10

One of the advantages of a corporation when compared to a partnership is the limited liability of the owners.

Accepted Answer

In a corporation, the owners (shareholders) have limited liability, meaning that they are not personally responsible for the debts and obligations of the corporation. This is not the case in a partnership, where the partners have unlimited liability and are personally responsible for the partnership's debts and obligations.

Question 11

The accounting equation states that Assets = Liabilities + Stockholders' Equity.

Accepted Answer

This is a fundamental concept in accounting and is always true.

Question 12

In the United States, the Securities and Exchange Commission (SEC) is considering requiring the use of International Financial Reporting Standards (IFRS) by U.S. companies for their financial reporting in the U.S.

Accepted Answer

The SEC is considering requiring the use of IFRS by U.S. companies for their financial reporting in the U.S.

Question 13

A decision maker who wants to understand a company's financial statements must carefully read the notes to the financial statements because these disclosures provide useful supplemental information.

Accepted Answer

The notes to the financial statements provide additional information beyond the basic financial statements, such as accounting policies, contingencies, and other disclosures that can impact financial performance. Therefore, reading the notes is important for a comprehensive understanding of a company's financial position and performance.

Question 14

Business managers utilize managerial accounting reports to plan and manage the daily operations.

Accepted Answer

Managerial accounting reports provide information on costs, revenues, profits, and other key performance indicators that are needed to make informed decisions about daily business operations. Business managers use this information to plan and manage their activities effectively.

Question 15

Due to the relationships among financial statements, the statement of stockholders' equity links the income statement to the balance sheet.

Accepted Answer

The statement of stockholders' equity shows changes in the company's common stock, preferred stock, paid-in capital, retained earnings, and other comprehensive income, which are all linked to the income statement and balance sheet.

Question 16

Total assets are $37,500, total liabilities are $20,000 and common stock is $10,000; therefore, retained earnings are $7,500.

Accepted Answer

Total assets minus total liabilities and common stock equals retained earnings. In this case, $37,500 - $20,000 - $10,000 = $7,500.

Question 17

Stockholders' equity on the balance sheet includes common stock and retained earnings.

Accepted Answer

Stockholders' equity on the balance sheet typically includes common stock and retained earnings, along with other possible items such as preferred stock and additional paid-in capital.

Question 18

The financial statement that shows an entity's economic resources and claims against those resources is the balance sheet.

Accepted Answer

The balance sheet shows an entity's assets (economic resources) and liabilities (claims against those resources).

Question 19

The balance sheet includes assets, liabilities, and stockholders' equity as of a point in time.

Accepted Answer

This is a true statement about the balance sheet. It presents a snapshot of a company's financial position at a specific date, showing what it owns (assets), what it owes (liabilities), and what is left over for owners (stockholders' equity).

Question 20

The auditor can be held liable for malpractice in situations where the investors suffered losses while relying on the financial statements.

Accepted Answer

The auditor has a duty of care to the investors who rely on the financial statements to make investment decisions. If the financial statements are found to be inaccurate or misleading, and the investors suffer losses as a result, the auditor may be held liable for malpractice.

Quiz 1: Financial Statements and Business Decisions