Question 1

Which of the following amounts would be included on the right side of a balance sheet?
A) the value of government bonds held by the company
B) the cash held by the company
C) the amount of deferred tax liability held by the company
D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received

Accepted Answer

C

Question 2

Which of the following best describes why a firm produces financial statements?
A) to use as a tool when planning future investments within a firm
B) to increase the intrinsic value of a firm
C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
D) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

Accepted Answer

Financial statements are primarily produced to provide interested outside parties, such as shareholders and creditors, with an overview of the financial condition of a business in both the short and long term. This information helps these parties make investment and lending decisions. While financial statements can be used as a planning tool within a firm, they are not primarily produced for this purpose. Financial statements do not directly increase the intrinsic value of a firm, but providing useful financial information to investors and creditors may indirectly lead to an increase in value. Financial statements do not show daily activities, but rather present a summary of a firm's financial performance over a defined period of time.

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?
A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.
B) The balance sheet does not accurately represent the book value of assets held by the company.
C) The equity shown on the balance sheet does not reflect the market capitalization of the company.
D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

Accepted Answer

The main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity is that valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. These assets are intangible and difficult to quantify, but they can have a significant impact on the value of a company's equity.

Question 4

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

Accepted Answer

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

Question 5

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
A) Germany
B) France
C) United States
D) United Kingdom

Accepted Answer

The United States does not fully accept IFRS set out by the International Accounting Standards Board. Instead, the country has its own set of accounting standards known as Generally Accepted Accounting Principles.

Question 6

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
A) Since net working capital is negative, the company will not have enough funds to meet its obligations.
B) Since net working capital is high, the company will likely have little difficulty meeting its obligations.
C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations.
D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

Accepted Answer

The company has a negative net working capital, which means it does not have enough current assets to cover its current liabilities. This indicates that the company may struggle to meet its obligations and may face financial difficulties.

Question 7

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?
A) It ensures that the market value of assets and debt are reported accurately.
B) It ensures that information on the performance of public companies is reported on cash-basis accounting.
C) It ensures that important budgetary information is not omitted.
D) It makes it easier to compare the financial results of different firms.

Accepted Answer

Following the GAAP creates consistency and standardization in financial reporting, which allows for easier comparison of financial results among different companies. This is essential for investors, analysts, and regulators to make informed decisions about the companies they are interested in.

Question 8

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
A) 10-A
B) 10-K
C) 10-Q
D) 10-SEC

Accepted Answer

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on Form 10-K. This form includes detailed information about the company's financial performance, operations, and executive compensation. Form 10-A, 10-Q, and 10-SEC are not required for annual financial statements.

Question 9

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 ________.
A) NYSE Enforcement Board
B) Accounting Standards Board
C) Securities and Exchange Commission (SEC)
D) auditor

Accepted Answer

The auditor is 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. The NYSE Enforcement Board and SEC have regulatory oversight roles, while the Accounting Standards Board establishes accounting standards.

Question 10

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

Accepted Answer

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm at a specific point in time, not over a length of time.

Question 11

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

Accepted Answer

Publicly traded companies in the United States are required by law to release periodic financial statements to the Securities and Exchange Commission (SEC) and make them available to the public. Failure to do so can result in penalties and legal action.

Question 12

Which of the following is NOT one of the financial statements that must be produced by a public company?
A) the balance sheet
B) the income statement
C) the statement of cash flows
D) the statement of activities

Accepted Answer

The statement of activities is not one of the financial statements required by public companies. The three financial statements required by public companies are the balance sheet, income statement, and statement of cash flows. The statement of activities is a financial statement used by nonprofit organizations to show revenue and expenses.

Question 13

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

Accepted Answer

Stockholders' equity is indeed the difference between a firm's assets and liabilities.

Question 14

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?
A) the depreciation over the last year in the value of the vehicles owned by the company
B) revenue received for the delivery of items that have not yet been delivered
C) a loan which must paid back in two years
D) prepaid rent on the offices occupied by the company

Accepted Answer

Revenue received for the delivery of items that have not yet been delivered is considered a short-term liability since the company has an obligation to fulfill the delivery and complete the service for which they have already received payment. The other options are not considered short-term liabilities. Depreciation is a non-current asset and not a liability. A loan that is to be paid back in two years is a long-term liability. Prepaid rent is a prepayment and is considered an asset.

Question 15

Financial statements are optional 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 are mandatory for public companies and provide information on past performance and the current financial position of the firm, but they do not predict future performance.

Question 16

Which of the following is NOT a financial statement that every public company is required to produce?
A) income statement
B) statement of sources and uses of cash
C) balance sheet
D) statement of stockholders' equity

Accepted Answer

While the income statement, balance sheet, and statement of stockholders' equity are all required financial statements for public companies, the statement of sources and uses of cash is not. However, many companies do choose to produce this statement as part of their financial reporting.

Question 17

Which of the following best describes why the left and right sides of a balance sheet are equal?
A) In a properly run business, the value of liabilities will not exceed the assets held by the company.
B) By definition, the assets plus the liabilities will be the same as the stockholders' equity.
C) The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities.
D) By accounting convention, the assets of a company must be equal to the liabilities of that company.

Accepted Answer

The left and right sides of a balance sheet are equal because assets must equal liabilities plus stockholders' equity. This is a fundamental principle of accounting known as the accounting equation. Assets are the resources that a company owns, liabilities are the obligations that a company owes to others, and stockholders' equity is the residual interest in the assets of the company after deducting liabilities. The equation shows that the two sides of the balance sheet must be in balance in order for the company's financial statements to be accurate.

Question 18

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.

Accepted Answer

While it is true that the U.S. has not fully adopted IFRS, it is unlikely that it will take until the second half of the twenty-first century for this to happen. The U.S. Securities and Exchange Commission has already made significant progress in the convergence of U.S. Generally Accepted Accounting Principles and IFRS, and many U.S. companies have already adopted IFRS voluntarily. However, there is still no specific timeline for full adoption in the U.S.

Question 19

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 20

A company that produces 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?
A) commercial paper held by the company
B) the inventory of chemicals used to produce the drugs made by the company
C) a patent for a drug held by the company
D) the cash reserves of the company

Accepted Answer

A patent for a drug is a long-term asset because it provides exclusive rights to manufacture and sell the drug for a period of time, typically 20 years. The commercial paper held by the company is likely to be a current asset that can be easily converted into cash within one year. The inventory of chemicals used to produce drugs is also likely to be a current asset because it will be used up in the production process within a short period of time. The cash reserves of the company may also be considered a current asset because it can be easily converted into cash within one year.

Quiz 2: Introduction to Financial Statement Analysis

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

Which of the following best describes why a firm produces financial statements?

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

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

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

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?

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?

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?

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 ________.

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

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

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

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

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?

Financial statements are optional 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.

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

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

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.

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

A company that produces 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?