Deck 1: Financial Accounting and Its Economic Context

Question 1

The amount which a company's customers owe the company for products delivered or services rendered is found in the

A) footnotes only.
B) income statement.
C) balance sheet.
D) statement of cash flows.

Answer 1

C

Question 2

Who prepares financial reports for a particular company?

A) The Securities and Exchange Commission
B) The Board of Directors
C) The company's management
D) The company's auditors

Answer 2

C

Question 3

Dividends declared and paid to the owners are found in the

A) management letter.
B) income statement.
C) dividends statement.
D) statement of shareholders' equity.

Answer 3

D

Question 4

The income statement communicates

A) assets, liabilities, and shareholders' equity as of a certain date.
B) how much cash the owner received during the period.
C) information about dividends the company paid to its owners.
D) revenues less expenses during a period of time.

Question 5

Liabilities may be described as

A) amounts that will be used for future growth.
B) the amounts owed that must be paid in the future.
C) the total measured past growth of a firm less the amount distributed to the owners.
D) amounts the company paid during the past year.

Question 6

Footnotes to financial statements

A) more fully explain certain items in the financial statements.
B) reflect financial notes personalized by the company's executive team.
C) show the detail of salaries of every employee.
D) justify fraudulent business practices.

Question 7

An investor wants to find the amount of cash and land that a company has. Where will the investor look?

A) Statement of shareholders' equity
B) Income statement
C) Balance sheet
D) Statement of cash flows

Question 8

The statement of cash flows communicates

A) assets, liabilities, and owners' equity at a point of time.
B) operating, investing, and financing activities.
C) beginning balance plus income less dividends.
D) how much cash the company owes its employees.

Question 9

An internal control system

A) is maintained to ensure that transactions of a company are properly recorded and reported and the assets are safeguarded.
B) is included in the set of footnotes to the financial statements.
C) is an estimate of the profits a company expects to earn in the future.
D) measures how much control management has over its staff.

Question 10

The balance sheet communicates

A) proof to the investor that the company is profitable.
B) assets, liabilities, and shareholders' equity with all transactions reflected through the year.
C) assets, liabilities, and shareholders' equity as of a certain date.
D) operating, investing, and financing activities.

Question 11

The cash paid during the year to satisfy a company's debt is found in its

A) statement of cash flows.
B) income statement.
C) statement of shareholders' equity.
D) auditor's report.

Question 12

Solvency may be described as

A) an amount owed that must be paid in the future.
B) amounts that can be distributed to owners only.
C) the amount invested in the firm by its owners.
D) the ability to generate enough cash to pay its debt as the amounts become due.

Question 13

A Certified Public Accountant

A) reviews every transaction that a company conducts during any given year.
B) performs a company's audit.
C) is one of the investors of a company.
D) is responsible for the preparation and integrity of a company's financial statements.

Question 14

Retained earnings may be described as

A) the total past profits retained in the business.
B) a company's future growth.
C) the amount invested in the firm by its owners.
D) amounts retained for payments to vendors.

Question 15

Considering and understanding how business decisions affect the financial statements is

A) the sole responsibility of the Securities and Exchange Commission.
B) provided in the auditor's report.
C) referred to as an economic consequence perspective.
D) interpreted strictly by the company's suppliers.

Question 16

The retained earnings section of the statement of shareholders' equity communicates

A) beginning balance plus income less dividends.
B) revenues less expenses during a period of time.
C) how much cash that management has paid for bonuses.
D) operating, investing, and financing activities.

Question 17

Cash received by a company from its regular operations during the year is found in its

A) balance sheet.
B) statement of cash flows.
C) statement of shareholders' equity.
D) auditor's report.

Question 18

Where would you find information on the amount of net income for the year?

A) Factory production reports on units produced
B) Auditor's report
C) Income statement
D) Internal Revenue Service

Question 19

A company's profits during its most recent year are found in its

A) balance sheet and income statement.
B) statement of cash flows only.
C) statement of shareholders' equity only.
D) income statement and statement of shareholders' equity.

Question 20

To run a company effectively, which one of the following might be a source from which management might acquire capital?

A) Customers
B) FASB
C) Debt and equity investors
D) Auditors

Question 21

Which one of the following statements is true?

A) Financial accounting is the only accounting used in the United States.
B) Companies that have a profit objective use not-for-profit accounting.
C) Managerial accounting targets operating decisions.
D) Financial and tax accounting are virtually the same.

Question 22

Which of the following statements is true?

A) Shopping for favorable audit opinions is permitted by the SEC.
B) No formal reporting of auditor switches is required by the SEC.
C) The SEC has enacted rules to help ensure financial literacy among audit committee members.
D) Since management constructs the financial statements, auditors have no legal liability to those who rely upon these reports.

Question 23

A statement that financial statement information "is the responsibility of the company" issuing the statements is found in the

A) footnotes to the financial statements.
B) loan contract.
C) management letter.
D) board of directors' report.

Question 24

Which one of the following is an equity investor?

A) A supplier of inventory waiting for payment
B) A person who purchases common stock of a corporation
C) A bank that loans money to a firm
D) A person who has a savings account in a bank
E) An employee that plans on investing in the company 10 years from now

Question 25

A debt investor is

A) a person who provides money to a company with the expectation that it will be paid back with interest.
B) a person who provides money to a company and expects periodic cash payments in return, though the original money never has to be repaid.
C) a person who provides money to a company as a gift with a stipulation that it will be used as agreed.
D) often referred to as a stockholder.

Question 26

Equity investments are bought and sold

A) only on the first day of each year.
B) in stock exchanges such as the NASDAQ.
C) by a company's independent auditors.
D) from and to the SEC.

Question 27

GAAP is an acronym for

A) General Asset Accounting Procedures.
B) Government Agency Accounting Procedures.
C) Generally Accepted Accounting Principles.
D) Global Accounting Activity Principles.

Question 28

As used in accounting, SEC is an abbreviation for

A) Securities and Exchange Commission.
B) South Eccentric Commissioners.
C) Shareholders' Equity Commission.
D) Southeastern Conference.

Question 29

CPA is an abbreviation for

A) Certified Public Accountant.
B) Certified Production Accountant.
C) Consumer Protection Agency.
D) Certified Permissible Accounting.

Question 30

The board of directors

A) provides money to a company with the expectation that it will be paid back with interest.
B) makes corporate decisions such as hiring and firing management and setting company policy.
C) is responsible for the future profits of a company.
D) is in charge of accounting and human resources on a daily basis.

Question 31

An explanation about the assumptions, estimates, and choices of alternative accounting methods used in the financial statements is found in the

A) footnotes to the balance sheet.
B) auditor's report.
C) statement of shareholders' equity.
D) president's letter to the shareholders.

Question 32

A bank that loans money to a company is called

A) a supplier.
B) a creditor.
C) an equity investor.
D) a shareholder.

Question 33

As a potential creditor, you are interested in a company's ability to pay loan interest and principal as they come due. Which of the following would be of the greatest interest to you in your analysis?

A) statement of shareholders' equity.
B) income statement.
C) statement of cash flows.
D) Statement of Financial Accounting Standards.

Question 34

Debt investments

A) require payments to the shareholders for periodic dividends.
B) are found on a company's income statement.
C) may be secured with collateral.
D) return payments at the discretion of the board of directors.

Question 35

Public stock exchanges

A) are operated by managers of a company.
B) are markets that sell annual reports.
C) provide a forum for buying and selling of equity interests in other companies.
D) are used to evaluate debt and equity investments.

Question 36

The advantage to the user of financial accounting statements that are audited by independent certified public accountants is assurance that the

A) statements are produced in accordance with generally accepted accounting principles.
B) company will be solvent for at least one more year.
C) company cannot remain profitable for more than 2 to 3 years.
D) company pays its fair share of income taxes.

Question 37

Annual reports of public companies

A) are published once per year.
B) include financial statements adjusted for inflation.
C) are also known as Form 10-K.
D) are published by companies 4 times per year.

Question 38

A statement that "the financial statements were prepared in accordance with generally accepted accounting principles" is found in the

A) collateral.
B) stock market.
C) footnotes to the balance sheet.
D) auditor's report.

Question 39

The independence of the auditor is subject to question when the

A) auditor is paid by the management of the company being audited.
B) auditor is independent.
C) audit firm is also responsible for preparing the tax return.
D) auditor is paid 1% of the company's profits for the audit services provided.

Question 40

An equity investor is

A) a person who provides money to a company with the expectation that it will be paid back with interest.
B) a creditor that has a regular trade relationship.
C) a person who provides money to a company as a gift with a stipulation that it will be used as agreed.
D) a person who provides money to a company, though the original money never has to be repaid, and who may be entitled to receive periodic cash payments.

Question 41

Which of the following statements is true?

A) Dividend payments are determined by management.
B) Dividend payments are specified by a contract.
C) Dividend payments are based on company collateral.
D) Dividend payments are paid at the board of director's discretion.

Question 42

All of the following are functions of the board of directors except:

A) Attending quarterly meetings.
B) Conducting performance review for management.
C) Declaring dividends.
D) Firing staff personnel.

Question 43

Where would you most likely find a detailed explanation about estimates used in the financial statements of a company?

A) management letter
B) financial footnotes
C) debt restrictions
D) debt contracts

Question 44

What encourages management to refrain from pressuring auditors too strongly?

A) Possible legal liability
B) Outside investors and creditors
C) Prospects of higher net income
D) Economic incentives from outsiders

Question 45

Financial accounting practices and standards used in other countries

A) are the same as practices used by United States companies.
B) have different systems of financial accounting.
C) are more progressive than those used by United States companies.
D) will often have common practices similar to U.S. GAAP.

Question 46

Generally accepted accounting principles are determined by

A) annual voting by all certified public accountants.
B) a privately financed body known as the FASB.
C) the SEC.
D) a congressional committee that passes laws governing accounting practice.

Question 47

Select the name that doesn't fit with the others on the list.

A) PricewaterhouseCoopers
B) Sarbanes-Oxley
C) Deloitte & Touche
D) KPMG Peat Marwick

Question 48

Which of the following best describes assets paid to owners of a company as a return for their initial investment?

A) payables
B) compensation contracts
C) dividends
D) interest

Question 49

Shareholders

A) and employees are the owners of a company.
B) receive repayment of the cash they have invested in a business.
C) receive payment from a company regardless if the company is profitable or not.
D) may benefit from increases in the value of their investment of a company.

Question 50

Generally accepted accounting principles

A) are laws created and enacted by Congress.
B) define the standards for internal management reporting.
C) increase the level of credibility in financial statements.
D) are created by the Securities and Exchange Commission.

Question 51

Which of the following is a measure of past profits that have been retained in a business? a liabilities
B) common stock.
C) retained earnings.
D) assets

Question 52

The auditors are charged with responsibility

A) to detect financial fraud committed by employees during the course of their audit
B) to conduct a thorough and independent audit
C) to correct all errors in the financial statements
D) for the accuracy and completeness of the financial statements

Question 53

All of the following might be found in the auditor's report except:

A) A statement about conformity with GAAP.
B) A statement about the fair presentation of the financial conditions and operations of the audited company.
C) A statement about the effectiveness of the company's internal control system.
D) A statement about the function of the company's board of directors.

Question 54

International Financial Reporting Standards (IFRS) are promulgated by

A) the United Nations.
B) the World Bank.
C) the Big Four accounting firms.
D) the IASB.

Question 55

Which of the following best describes the two perspectives of the financial reporting process that managers need to understand in investing decisions?

A) Economic consequences and user orientation.
B) Corporate governance and user orientation.
C) User orientation and debt covenants.
D) Economic consequences and corporate governance.

Question 56

When management goes beyond ethical boundaries in its attempt to make financial statements appear attractive, management

A) should be commended for its creativity.
B) will not need an annual audit.
C) should pay its employees larger bonuses.
D) is perpetrating fraud or possible criminal activity.

Question 57

Which of the following is least likely to be a by-product of ethical business practices?

A) fewer lawsuits.
B) higher profits.
C) higher audit fees.
D) public trust.

Question 58

International Financial Reporting Standards (IFRS) are recognized as acceptable by major stock exchanges throughout the world except in

A) England.
B) Japan.
C) The United States.
D) France.

Question 59

Which one of the following is true concerning the International Accounting Standards Board?

A) It is the international accounting standards setting body that is attempting to bring greater uniformity to worldwide accounting practices.
B) It approves all financial statements before they are distributed to users.
C) It consistently disagrees with the FASB on its rulemaking.
D) It requires both national and international companies around the world apply the same accounting principles.

Question 60

All of the following would likely be part of a loan contract except:

A) maturity date
B) earning power
C) collateral
D) annual interest

Question 61

All of the following are false regarding international accounting standards (IAS) except which of the following?

A) The SEC requires all companies to use IAS.
B) There are no substantive differences between U.S. GAAP and IFRS.
C) The SEC prohibits U.S. stock exchanges from listing non-U.S. companies who follow IFRS.
D) All public companies in the European Union are required to report using IFRS and IAS.

Question 62

What financial statement shows where the money came from and where it went?

Question 63

What financial statement communicates profits retained and distributions to shareholders?

Question 64

Which financial statement would you review to determine the amount of cash a company received from an issue of capital stock during the year?

Question 65

What financial statement communicates cash flows from operating activities?

Question 66

Which financial statement would you review to determine if a company's operating cash flow is sufficient to pay day-to-day obligations?

Question 67

What independent party attests that the balance sheet and income statement present fairly the financial position of the company?

Question 68

Which source would you review to determine that the financial statements are fairly stated in accordance with GAAP?

Question 69

What financial statement lists and measures assets, liabilities, and shareholders' equity at a certain date?

Question 70

Which of the following factors is least likely to encourage managers and auditors to act professionally?

A) professional reputation.
B) tax structure
C) legal liability
D) ethics

Question 71

Ownership of an equity security entitles the holder to which basic right?

A) The right to management outstanding loans.
B) The right to pay dividends.
C) The right to vote for company directors at the annual shareholders' meeting.
D) The right to certify financial report reviews.

Question 72

Identify the financial statement in which revenues less expenses are reported.

Question 73

Which of the following is a public exchange for equity and debt securities?

A) The Federal Trade Commission.
B) The New York Stock Exchange.
C) The Securities and Exchange Commission.
D) The Financial Accounting Standards Board.

Question 74

Which financial statement would best help you understand the increases and decreases in cash over a period of time?

Question 75

Which of the following groups enacted the Sarbanes Oxley Act?

A) FASB
B) AICPA
C) U.S. Congress
D) PCAOB

Question 76

Which of the following groups make up a company's audit committee?

A) Auditors.
B) Outside directors from the Board.
C) Company officers.
D) All of the individuals in (a), (b), and (c) are included in the audit committee.

Question 77

What financial statement would you review to determine if a company's payroll exceeds $1,000,000?

Question 78

Which financial statement would you review to determine a company's interest expense?

Question 79

What financial statement would you review to determine the profitability ratio?

Question 80

Identify which financial statement you would review to determine the amount of cash a company paid to retire its debt.