Question 1

The statement of stockholders' equity is more comprehensive than the statement of retained earnings.

Accepted Answer

The statement of stockholders' equity not only includes the changes in retained earnings but also other components of equity such as common stock, preferred stock, additional paid-in capital, and other comprehensive income. Therefore, it is more comprehensive than the statement of retained earnings.

Question 2

Westside Corporation had an investment in available-for-sale securities of $60,000. This investment experienced an unrealized loss of $7,000 during the year. Ignoring income taxes, the effect of this loss on comprehensive income will be:
A) $60,000 increase.
B) $60,000 decrease.
C) $7,000 increase.
D) $7,000 decrease.

Accepted Answer

The unrealized loss of $7,000 is reported as a component of other comprehensive income in the stockholders' equity section of the balance sheet. Therefore, the effect on comprehensive income is a decrease of $7,000, not $60,000.

Question 3

Publicly traded companies have to file their financial statements with the IRS.

Accepted Answer

Publicly traded companies have to file their financial statements with the Securities and Exchange Commission (SEC), not the IRS.

Question 4

Comprehensive income is:
A) used to determine earnings per share.
B) used to determine net income.
C) not used to determine net income or earnings per share.
D) used to determine net income or earnings per share.

Accepted Answer

Comprehensive income is a broader concept than net income and includes all changes in equity during a period from transactions and other events from non-owner sources. It includes items such as unrealized gains or losses on available-for-sale securities, foreign currency translation adjustments, and pension plan adjustments. Comprehensive income is reported in the statement of comprehensive income, but it is not used to determine net income or earnings per share.

Question 5

It is management's responsibility to issue a report on internal control.

Accepted Answer

According to the Sarbanes-Oxley Act, management is responsible for establishing and maintaining adequate internal control over financial reporting and must issue a report on the effectiveness of internal control.

Question 6

A statement of stockholders' equity reports all items affecting the balance sheet for a period.

Accepted Answer

A statement of stockholders' equity specifically reports changes in equity, such as retained earnings, common stock, and dividends, not all items affecting the balance sheet.

Question 7

A statement of stockholders' equity would include all of the following transactions EXCEPT:
A) Cash dividends declared by the board of directors.
B) Foreign exchange gain.
C) Cumulative translation adjustment.
D) Treasury stock reacquired by the corporation.

Accepted Answer

Foreign exchange gain is an income statement item and does not affect stockholders' equity. The other items listed (cash dividends, cumulative translation adjustment, and treasury stock) all affect stockholders' equity.

Question 8

The statement of management's responsibility, issued along with a company's financial statements, indicates all of the following EXCEPT that management:
A) is responsible for establishing and maintaining an adequate system of internal control.
B) conducted an assessment of internal control over financial reporting based on the framework established by COSO.
C) states that the internal controls of the company have been audited by the company's outside auditors.
D) has hired a new CEO in the current year.

Accepted Answer

The statement of management's responsibility typically focuses on management's responsibility for financial reporting, internal control, and compliance with laws and regulations. It would not typically include information about hiring decisions or personnel changes. Therefore, choice D is the correct answer. Choices A, B, and C are all typical components of the statement of management's responsibility.

Question 9

The financial statement that reports the changes in all categories of equity during the period is called the:
A) statement of changes in financial position.
B) statement of stockholders' equity.
C) net income statement.
D) statement of change in total equity.

Accepted Answer

The statement of stockholders' equity reports the changes in all categories of equity such as common stock, retained earnings, and any other comprehensive income during the period. The statement shows the beginning balance, any changes during the period (such as net income, dividends, or stock issuances), and the ending balance of each category of equity. Option A refers to the statement of changes in financial position, which reports changes in cash and cash equivalents, accounts receivable, inventory, accounts payable, and other current assets and liabilities. Option C refers to the net income statement, which reports the revenue, expenses, gains, and losses during the period to calculate the net income or loss. Option D is not a commonly used financial statement.

Question 10

It is NOT the independent auditor's responsibility to determine whether the company's financial statements comply with GAAP.

Accepted Answer

It is the independent auditor's responsibility to determine whether the company's financial statements comply with GAAP. This is a key aspect of the audit process.

Question 11

An audit report is addressed to the board of directors and stockholders of the company.

Accepted Answer

An audit report is intended for the use of the board of directors and stockholders to provide assurance about the accuracy of the financial statements.

Question 12

A company's change in total stockholders' equity from all sources other than from the owners of the business is:
A) comprehensive income.
B) earnings per share.
C) earnings quality.
D) investment capitalization.

Accepted Answer

Comprehensive income is the change in total stockholders' equity from all sources other than from the owners of the business. This includes items such as unrealized gains/losses on investments, foreign currency translation adjustments, and pension adjustments.

Question 13

A statement of stockholders' equity shows:
A) how profits are distributed to the stockholders.
B) the names of the board of directors.
C) the changes in each stockholders' equity account during the reporting period.
D) the number of shares of stock owned by each stockholder.

Accepted Answer

A statement of stockholders' equity presents the changes in each stockholders' equity account during the reporting period like retained earnings, common stock, and preferred stock. It shows how the balances in these accounts change due to activities like net income, payment of dividends, issuance of new shares, and changes in the company's financial position. The other options are not typically included in a statement of stockholders' equity.

Question 14

A statement of responsibility, issued along with a company's financial statements, indicates that the financial statements are the responsibility of:
A) the independent auditors.
B) the shareholders.
C) management.
D) the board of directors.

Accepted Answer

A statement of responsibility indicates that the financial statements are the responsibility of the management of the company. This is because management is responsible for preparing the financial statements and ensuring their accuracy. The independent auditors provide an opinion on the financial statements, but the ultimate responsibility for the statements lies with management. The shareholders and board of directors may have oversight responsibilities, but they are not typically responsible for the preparation and accuracy of the financial statements.

Question 15

Net income increases stockholders' equity while net loss decreases stockholders' equity.

Accepted Answer

This statement is true as net income is a profit that adds to the overall value of the company and thus increases the stockholders' equity, while a net loss represents a decrease in the overall value of the company and reduces the stockholders' equity.

Question 16

An unqualified opinion by independent auditors indicates the fairness of the company's financial statements and the effectiveness of its internal controls.

Accepted Answer

An unqualified opinion by independent auditors indicates that the financial statements of the company are presented fairly in all material respects and the effectiveness of its internal controls is satisfactory. This is the highest form of assurance that auditors can give on the financial statements.

Question 17

Comprehensive income is the company's change in total assets from one year to the next.

Accepted Answer

Comprehensive income is the change in equity from non-owner sources, such as changes in the fair value of certain investments, foreign currency translations, and unrealized gains/losses on certain derivatives. It includes net income and other comprehensive income.

Question 18

The audit report is signed-off by the corporation's management, confirming the audit was completed properly.

Accepted Answer

The audit report is signed-off by the auditor or audit firm, not by the corporation's management. The management may provide a management representation letter, but they do not sign-off on the audit report.

Question 19

The combined audit report on financial statements and internal control over financial reporting typically contains five paragraphs.

Accepted Answer

The combined audit report on financial statements and internal control over financial reporting typically contains five paragraphs, covering the scope of the audit, the auditor's opinion on the financial statements, the auditor's opinion on the effectiveness of internal control over financial reporting, an explanatory paragraph (if necessary), and the auditor's signature and date of the report.

Question 20

Publicly traded companies have the option to produce audited financial statements.

Accepted Answer

Publicly traded companies are required by law to produce audited financial statements to ensure transparency and accuracy for investors and regulators.

Quiz 11: The Income Statement, the Statement of Comprehensive Income, the Statement of Stockholders Equity

The statement of stockholders' equity is more comprehensive than the statement of retained earnings.

Westside Corporation had an investment in available-for-sale securities of $60,000. This investment experienced an unrealized loss of $7,000 during the year. Ignoring income taxes, the effect of this loss on comprehensive income will be:

Publicly traded companies have to file their financial statements with the IRS.

Comprehensive income is:

It is management's responsibility to issue a report on internal control.

A statement of stockholders' equity reports all items affecting the balance sheet for a period.

A statement of stockholders' equity would include all of the following transactions EXCEPT:

The statement of management's responsibility, issued along with a company's financial statements, indicates all of the following EXCEPT that management:

The financial statement that reports the changes in all categories of equity during the period is called the: