Question 1

Financial statements are accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.

Accepted Answer

Financial statements do provide information on the past performance of the firm and a summary of the firm's assets and the financing of those assets, but they do not include predictions of the firm's future performance.

Question 2

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that Australia will report according to IFRS before the second half of the 21st century.

Accepted Answer

This statement is not accurate. Australia has already adopted IFRS and has been reporting according to these standards since 2005.

Question 3

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?

Accepted Answer

D

Question 4

Which of the following amounts would be included on the right side of a balance sheet?

Accepted Answer

Deferred tax liability is a liability and would be included on the right side of a balance sheet, which lists liabilities and equity.

Question 5

Which of the following best describes why firms produce financial statements?

Accepted Answer

Financial statements are produced to provide interested parties, both inside and outside the company, with an overview of the short- and long-term financial condition of a business. This includes information such as revenues, expenses, profits or losses, and assets and liabilities. The information provided in financial statements helps stakeholders make informed decisions about their involvement with the company.

Question 6

Which of the following best describes why the left and right sides of a balance sheet are equal?

Accepted Answer

This is because the balance sheet equation is Assets = Liabilities + Shareholders' equity. Therefore, the sum of the assets must always be equal to the sum of the liabilities and shareholders' equity. It is a fundamental accounting principle known as the accounting equation.

Question 7

Shareholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet.

Accepted Answer

Shareholders' equity is indeed calculated as the difference between a company's assets and liabilities, representing the residual interest of the company's owners in the assets of the business after all obligations have been met. This can include common stock, retained earnings, and other forms of equity.

Question 8

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the

Accepted Answer

The third party who checks annual financial statements to ensure that they are prepared according to GAAP and verifies that the information reported is reliable is the auditor. The Australian Securities and Investments Commission (ASIC) oversees financial reporting and enforces compliance with accounting standards, but they are not the ones who perform the actual audit. The Australian Securities Exchange and the Australian Accounting Standards Board are also not responsible for performing audits of financial statements.

Question 9

A small company has current assets of $1 112 000 and current liabilities of $717 000. Which of the following statements about that company is most likely to be true?

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. In this case, the net working capital is $395,000 ($1,112,000 - $717,000). A positive net working capital indicates that the company has enough current assets to meet its current obligations. Therefore, choice C is the most likely statement to be true. Choices A, B, and D are not accurate.

Question 10

Which of the following is NOT one of the financial statements that must be produced by a public company?

Accepted Answer

The statement of activities is not one of the financial statements that must be produced by a public company. The other three options (the statement of cash flows, the income statement, and the balance sheet) are all required financial statements for public companies.

Question 11

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?

Accepted Answer

Revenue received for the delivery of items that have not yet been delivered is considered a short-term liability because the delivery company has not yet fulfilled its obligation to deliver the items, and therefore owes the customer the service.

Question 12

The International Financial Reporting Standards set out by the International Accounting Standards Board are NOT accepted by the exchanges in which of the following countries or regions?

Accepted Answer

The United States is the only country or region listed that does not accept International Financial Reporting Standards (IFRS). Instead, the US uses Generally Accepted Accounting Principles (GAAP) for financial reporting.

Question 13

What are the four financial statements that all public companies must produce?

Accepted Answer

The answer of What are the four financial statements that...

Question 14

The balance sheet shows the assets, liabilities, and shareholders' equity of a firm at a given point in time.

Accepted Answer

The balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.

Question 15

Which of the following is NOT a financial statement that every public company is required to produce?

Accepted Answer

While the statement of sources and uses of cash is an important financial statement, it is not required for every public company to produce. The three financial statements that are required for every public company are the income statement, balance sheet, and statement of changes in equity.

Question 16

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP)when creating financial statements?

Accepted Answer

GAAP provides a standardized framework for financial reporting, making it easier to compare the financial results of different firms.

Question 17

What is the role of an auditor in financial statement analysis?

Accepted Answer

The answer of What is the role of an auditor...

Question 18

In Australia, publicly traded companies can choose whether or not they wish to release periodic financial statements.

Accepted Answer

In Australia, publicly traded companies are required by law to release periodic financial statements to the public. Failure to do so can result in penalties and regulatory action.

Question 19

Use the table for the question(s)below. 
-The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital?

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. In this case, the current assets are $150 million and the current liabilities are $90 million. Therefore, the net working capital is $150 million - $90 million = $60 million.

Question 20

A company that produces pharmaceutical drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?

Accepted Answer

A patent for a drug held by the company would be considered a long-term asset as it represents the legal right to exclusively produce and sell a particular drug for a certain period of time. The inventory of chemicals used to produce the drugs would be considered a current asset as it is expected to be used up in the near future. Commercial paper and cash reserves would also be considered current assets, as they can be easily converted to cash within a year.

Quiz 2: Introduction to Financial Statement Analysis