Question 1

The auditor will issue a disclaimer of opinion if the auditor's examination is severely restricted or the auditor finds some condition is present that prevents the application of generally accepted auditing standards.

Accepted Answer

A disclaimer of opinion is issued by an auditor when they are unable to obtain sufficient appropriate audit evidence on which to base the audit opinion, or when there is a limitation on the scope of the audit, preventing the auditor from completing the audit as planned.

Question 2

The objective of the financial statements is to provide information about an entity's financial performance and changes in financial position.

Accepted Answer

Financial statements aim to give a comprehensive overview of an entity's financial performance, including its profitability and cash flows, and changes in its financial position over a period, helping stakeholders make informed decisions.

Question 3

The method for measuring and reporting different monetary amounts for various elements in the financial statements that uses what it would cost to replace the asset or settle the liability would best be described as current cost.

Accepted Answer

Current cost accounting measures and reports monetary amounts for assets and liabilities based on the cost to replace the asset or settle the liability at the current time, rather than historical cost.

Question 4

The method for measuring and reporting different monetary amounts for various elements in the financial statements that uses the amount reasonably expected to be received for an asset, or settled in the case of a liability, between knowledgeable, willing parties to the transaction, which may be based on present value or market valuations is best described as current cost.

Accepted Answer

The description provided refers to fair value measurement, not current cost. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current cost, on the other hand, refers to the cost that would be incurred to replace an asset or settle a liability under current conditions.

Question 5

Three years ago ABC Company paid $4,500 for a new copier, which would cost $6,000 to replace today. If it is on the books at $4,500 this would be an example of using historical cost.

Accepted Answer

Historical cost accounting records assets at their original purchase price, without adjusting for changes in market value, so the copier being on the books at $4,500 reflects its historical cost.

Question 6

Sarbanes -Oxley Act (SOX) was passed in reaction to the financial crisis of 2007 - 2008.

Accepted Answer

The Sarbanes-Oxley Act (SOX) was passed in 2002 in response to a series of high-profile financial scandals that occurred in the early 2000s, such as those involving Enron and WorldCom, not the financial crisis of 2007-2008.

Question 7

As a result of the Sarbanes-Oxley Act, the audit committee must be composed of independent directors, who have the power to engage outside consultants.

Accepted Answer

The Sarbanes-Oxley Act mandates that the audit committee be composed of independent directors, enhancing the committee's independence from management. This provision allows them to engage outside consultants or advisors to assist in their oversight responsibilities, ensuring more effective and unbiased financial reporting and audit processes.

Question 8

Accounts payable are also known as trade payables, and represent the amounts owed the suppliers of the business.

Accepted Answer

The answer of Accounts payable are also known as trade...

Question 9

The difference between Gross Property, Plant, and Equipment, and Net Property, Plant, and Equipment is the debt on the Property, Plant, and Equipment.

Accepted Answer

The difference between Gross Property, Plant, and Equipment, and Net Property, Plant, and Equipment is the accumulated depreciation and impairment losses, not the debt on the assets.

Question 10

Patents, trademarks, and goodwill are examples of tangible assets.

Accepted Answer

Patents, trademarks, and goodwill are examples of intangible assets because they cannot be physically touched or seen, but they do represent value for a company.

Question 11

Capital leases are treated as liabilities.

Accepted Answer

Capital leases are recorded on the lessee's balance sheet as both an asset and a liability, reflecting the obligation to make future payments as if the asset were owned.

Question 12

The operating profit, which is calculated as gross profit, less operating expenses is called earnings before interest and taxes (EBIT).

Accepted Answer

Operating profit is indeed calculated as gross profit minus operating expenses, and this figure is also referred to as earnings before interest and taxes (EBIT).

Question 13

Depreciation is the reduction in value of a long-lived intangible asset over a specified period of time

Accepted Answer

Depreciation is the reduction in value of a long-lived tangible asset over its useful life; amortization is the term used for intangible assets.

Question 14

Straight-line, declining balance, and double declining balance are all reasonable methods for calculating depreciation.

Accepted Answer

These are all recognized methods of calculating depreciation, each with its own formula to allocate the cost of an asset over its useful life. Straight-line depreciation spreads the cost evenly across the life of the asset, while declining balance and double declining balance methods accelerate depreciation, allocating more cost to the earlier years of an asset's life.

Question 15

The choice of depreciations method chosen affects the balance sheet, but not the income statement.

Accepted Answer

The choice of depreciation method affects both the balance sheet (through the carrying amount of the asset and accumulated depreciation) and the income statement (through the depreciation expense).

Question 16

If an enterprise's cash flow for / from investing is negative this means the company on net is investing in long-lived assets.

Accepted Answer

A negative cash flow from investing activities indicates that a company is investing in capital assets, such as property, plant, and equipment, which suggests an investment in long-term growth.

Question 17

If an enterprise's cash flow for / from investing is negative this means the company on net is disposing of assets.

Accepted Answer

A negative cash flow from investing activities typically indicates that a company is investing in capital assets, such as equipment, buildings, or businesses, rather than disposing of them.

Question 18

Taxes that the company reasonably expects to pay in the future are called deferred tax liabilities.

Accepted Answer

Deferred tax liabilities are taxes that a company expects to pay in the future due to temporary differences between the tax basis of assets or liabilities and their carrying amount on the financial statements.

Question 19

Capital losses are generated when both depreciable and non-depreciable assets are sold below value.

Accepted Answer

The answer of Capital losses are generated when both depreciable...

Question 20

A loss generated when a company's tax deductions are greater than its taxable income is called a capital loss.

Accepted Answer

A loss generated when a company's tax deductions are greater than its taxable income is called a net operating loss, not a capital loss. Capital losses are specifically related to the loss incurred from the sale of a capital asset for less than its purchase price.

Quiz 3: Financial Statements