Question 1

A high working capital ratio is always a favourable situation from the shareholders' viewpoint.

Accepted Answer

A high working capital ratio can indicate that a company has too much inventory or is not investing its excess cash efficiently, which may not always be favorable from the shareholders' viewpoint as it could suggest inefficiency in managing resources.

Question 2

A statement of accounting policies is required to be clearly enunciated in the notes to the financial statements.

Accepted Answer

A statement of accounting policies is an important disclosure that helps users of financial statements understand the accounting principles and methods followed by the company. It must be clearly stated in the notes to the financial statements, in order to ensure transparency and comparability of financial information.

Question 3

All companies are required to have audits.

Accepted Answer

Not all companies are required to have audits. It depends on the legal structure, size, and industry of the company, as well as local laws and regulations. However, many companies choose to have voluntary audits as a way to improve transparency and accountability.

Question 4

Ratios that measure current position are useful for assessing the ability of a company to pay its short-term obligations.

Accepted Answer

Current position ratios, such as the current ratio and the quick ratio, are used to evaluate a company's ability to meet its short-term obligations. These ratios measure the company's current assets compared to its current liabilities.

Question 5

Published financial statements are always the best source of timely information on practically all financial items relevant to investors and creditors.

Accepted Answer

Published financial statements, while comprehensive, are not always the most timely source of information as they are released periodically (quarterly, annually) and may not reflect the most current financial conditions or events of a company.

Question 6

A prospective investor in common shares is primary interested in the long-run profitability of the company.

Accepted Answer

A prospective investor in common shares is interested in the long-term profitability of the company as it will impact the value of their investment over time.

Question 7

Information about the significant accounting policies of an entity is not necessary because GAAP prescribes uniform accounting treatment of all items,and it is widely understood.

Accepted Answer

While GAAP does provide general guidelines for accounting treatment, there are often several acceptable methods for recognizing and measuring different items. The significant accounting policies of an entity provide transparency and clarity about how the entity applies GAAP, and are therefore necessary for users of the financial statements.

Question 8

Financial statement analysis is only used to determine whether a company is worth investing in.

Accepted Answer

Financial statement analysis is not only used to determine whether a company is worth investing in, but also to evaluate a company's performance, identify strengths and weaknesses, and make informed business decisions.

Question 9

The current ratio is one measure of the adequacy of a company's working capital.

Accepted Answer

The current ratio compares a company's current assets to its current liabilities, providing insight into the company's ability to pay off its short-term debts. A current ratio of 1 or higher is generally considered acceptable, indicating that a company has enough current assets to cover its current liabilities. Therefore, the current ratio is one measure of the adequacy of a company's working capital.

Question 10

A qualified auditors' opinion is given when the financial statements present information in conformity with GAAP.

Accepted Answer

A qualified auditor's opinion is issued when the auditor concludes that most of the financial statements are presented fairly, but there is a certain area or exception that does not conform to GAAP (Generally Accepted Accounting Principles).

Question 11

A clean opinion is another term to describe a company that has received an unqualified audit report.

Accepted Answer

A clean opinion means that the auditor has concluded that the company's financial statements are free from material misstatements and have been prepared in accordance with generally accepted accounting principles (GAAP). Therefore, a clean opinion is synonymous with an unqualified audit report.

Question 12

One of the most important aspects of analysis of financial statements is the wording of the auditors' report.

Accepted Answer

The auditors' report provides information on the reliability and accuracy of the financial statements, which is crucial for analysis.

Question 13

Vertical analysis of financial statements refers to the development of percentages indicating the proportionate changes in selected financial statements for two or more reporting periods.

Accepted Answer

Vertical analysis is a method where each entry for each of the three major categories of accounts (assets, liabilities, and equity) in a balance sheet is represented as a proportion of the total account. It's not about comparing changes over different periods but analyzing the structure of a single financial statement at a point in time.

Question 14

In horizontal analysis of financial statements,the base amounts used for purposes of comparison are the financial results of a previous time period.

Accepted Answer

In horizontal analysis, the financial results of a previous time period, also known as the base period, are used as the basis for comparison to analyze changes and trends in financial performance over time.

Question 15

A statement of accounting policies must be included in the annual financial statements.

Accepted Answer

A statement of accounting policies is a requirement for annual financial statements to provide information to users about the significant accounting policies used by the organization in preparing its financial statements. It helps in ensuring consistency in the application of accounting policies from one year to the next and also provides transparency in financial reporting.

Question 16

GAAP requires the presentation of financial statements for the current year and the two immediately preceding reporting periods.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) typically requires the presentation of comparative financial statements for the current year and the immediately preceding year, not for two preceding years.

Question 17

The statement of significant accounting policies,which is included in the notes to the financial statements,must include reasons for the selection of one generally accepted accounting method over another generally accepted accounting method.

Accepted Answer

The answer of The statement of significant accounting policies,which is...

Question 18

A trade creditor will be primarily interested in the long-run profitability of the company.

Accepted Answer

A trade creditor is mainly concerned about the company's ability to pay its bills on time and does not focus on the long-term profitability of the company.

Question 19

Examination of comparative financial statements does not enable financial statement users to better identify long-term trends.

Accepted Answer

Comparative financial statements allow users to analyze trends over multiple periods, helping in identifying long-term trends in financial performance and position.

Question 20

A primary reason for the analysis of financial statements is identification of major changes and to provide relative relationships among dollar amounts.

Accepted Answer

The analysis of financial statements helps in identifying major changes and providing relative relationships among dollar amounts, which is essential for decision-making purposes.

Quiz 11: Financial Instruments: Investments in Bonds and Equity Securities