Exam 11: Understanding Accounting

Due to a downturn in the local economy, Bob is concerned about converting his assets to cash quickly. In accounting terms, he is apprehensive about current assets. liquidity. turnover. net income. marketable securities.

What is the formula for the current ratio?

Streeter & Sons is a regional service company that has been in business for a few years, but has not employed a controller or anyone else full-time to keep track of its financial state. The company needs to take a good look at its financial state to determine whether it needs to make any changes in its practices, in order to prevent possible financial meltdown. Which of the following, if true, would strengthen the case that an income statement would show Streeter & Sons where its problems lie? The company does not have enough shareholders. The company's expenses are too high. The company's owners' equity is too low. The company needs to hire more service specialists. The company has few intangible assets.

Activity ratios are used to determine the amount of sales the company generates each year.

At the end of the fiscal year for Santos Industrial Machinery, management raised concerns about the company's financial performance. The company's accountants have been asked to analyze the current financial state of the company by using ratio analysis. Santos needs to assess its debt situation with respect to the value of the company. Which of the following, if true, would most strengthen the case that Santos's debt is manageable? Santos has a high profitability ratio. Santos has a high inventory turnover ratio. Santos has a low inventory turnover ratio. Santos has a high debt to owners' equity ratio. Santos has a low debt to owners' equity ratio.

The amount of profit or loss will be reflected in the balance sheet. cost of goods sold. quick ratio. income statement. statement of cash flow.

Which of the following is correct with regard to auditing? An audit focuses specifically on whether the inventory the company claims it has is actually there. Companies do not normally have to supply audited financial statements when they apply for loans or when selling stock. Audits determine if the firm has controls in place to prevent errors or fraud from going undetected. Auditors generally do not have to examine documents such as cancelled cheques, payroll record, and cash receipts in order to conduct their audit. Auditors ensures that the financial state of the company will be accurately reported.

Julie, a recent college graduate, is interested in business and is considering pursuing a career in accounting. Her parents are supportive, with her mother recommending that Julie become a public accountant and her father recommending that she become a private accountant. Which of the following, if true, supports the father's position? Julie has said she wants to work for one of the accounting firms like Ernst & Young. The demand for external auditors is expected to grow in the near future. Many accountants flooded the job market when the Arthur Andersen firm went out of business. Accountants for nonprofits are more concerned with efficiency than with profit. Julie has said that she wants to work as an in-house accountant for a large public interest group like Sierra Club or Greenpeace.

Owners' equity consists of two sources of capital. They are the amount that the owners originally invested and profits earned by and reinvested in the company. bank loans and money received from factoring accounts receivable. bank loans and proceeds from the sale of stock. trade credit and bank loans. dividends received by investors and bank loans.

Corporation L has debt of $50 million and equity of $100 million. Its debt-to-equity ratio is therefore 0.50.

An audit involves an examination of a firm's accounting system to determine whether the financial reports fairly present its financial operations.

Kershner says: "Our income statement should be looking good this year. We've been doing excellent business this year, so we have a lot of gross sales. The company should be in good shape." Michaels replies: "It remains to be seen how our income statement will look overall. In spite of strong sales revenue, the overall income statement might not be as good as we might hope." Which of the following points out a flaw in Kershner's reasoning? Kershner is not accounting for all of the possible sources of revenue for the company. Kershner is not including owners' equity as part of sales revenue. Income statements are not as important as balance sheets in determining a company's fiscal health. Many employees are not happy with the direction the company is headed. Kershner is not accounting for the contribution that expenses will make to the income statement.

If a firm has $1 000 000 in retained earnings, what does this mean? That the firm paid out $1 000 000 this year in dividends That the company is owed $1 000 000 by its creditors but has not yet collected the money That the firm has $1 000 000 in the bank That the company's net profits less its dividend payments equals $1 000 000 That the company has saved $1 000 000 during the period since the last balance sheet was made up

Accountants have historically used generally accepted accounting principles when preparing financial reports, but in 2011 many companies switched to the new international accounting standards.

Rent for the period to come is included in which account on the balance sheet? Inventory Cost of goods sold Merchandise inventory Accounts payable Prepaid expenses

The current ratio is used to determine if the firm can meet its current obligations with its current assets.

Owners' equity is the profits earned by and reinvested in the company. the amount of money that owners would receive if they sold all of a firm's assets and paid all of its liabilities. the amount of money originally invested in a business by its owners. a debt owed by a firm to an outside organization or individual. any economic resource expected to benefit a firm or an individual who owns it.

If the following facts were known, which one would strengthen the argument that a company is profitable? The company's sales revenue is low relative to its cost of goods sold. The company's cost of goods sold is low relative to its sales revenue. The number of customers has remained stable for some time. The company has had the same owners over its lifetime. The company's selling expenses are high compared to its administrative expenses.

Aardvark is a small pest-control business that has 30 employees. The company started business within the past year and needs to make a decision on how best to make sure its finances are managed well as the company continues to grow its customer base and its business. Which of the following questions would be LEAST relevant to a controller as he or she develops a financial forecast for Aardvark? What are the future plans of the company? What is the current state of the local economy? What is the future state of the local economy likely to be? What subcontractors should the company use? What is the company's competition likely to do?

A chartered accountant receives an operating license from the federal government that must be renewed every three years.