Deck 2: Financial Statements and the Annual Report

Question 1

Obligations related to operating activities that will be paid within the company's operating cycle must be reported as current liabilities on a classified balance sheet.

Answer 1

True

Question 2

The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is consistency.

Answer 2

False

Question 3

The purpose of financial reporting is to provide economic information to external decision makers only.

Answer 3

False

Question 4

An objective of financial reporting is to reflect economic information concerning a company's cash flows.

Question 5

The SEC created the objectives of financial reporting.

Question 6

Materiality deals with the insignificance of an error in accounting information.

Question 7

The operating cycle for all businesses is one year.

Question 8

The amount of a transaction may be immaterial by company standards but still be considered significant by financial statement users.

Question 9

The lack of a common depreciation method makes it impossible to compare the performance of companies using different methods.

Question 10

The quality of accounting information that allows a user to compare two or more accounting periods for a single company is known as consistency.

Question 11

In the Stockholders' Equity section of a classified balance sheet,a distinction is made between amounts invested by owners and amounts accumulated from business earnings.

Question 12

Three common categories of long-term assets are: (1)property,plant,and equipment, (2)investments,and (3)intangibles.

Question 13

The quality of accounting information that allows a user to analyze two or more companies and look for similarities and differences is known as understandability.

Question 14

Financial statements are intended to tell the reader the value of a company.

Question 15

A construction company that builds skyscrapers is likely to have an operating cycle longer than one year.

Question 16

Current assets,other than cash,are expected to be sold or consumed beyond a company's normal operating cycle.

Question 17

There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies.

Question 18

The concept of conservatism is the capacity of information to make a difference in a decision.

Question 19

Most businesses have an operating cycle of greater than one year.

Question 20

Accountants are the main reason financial statements are prepared.

Question 21

The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among their current assets.

Question 22

The statement of cash flows,like the income statement,reports only operating activities of a company.

Question 23

"Claims to economic resources" are known as

A)assets and liabilities.
B)liabilities and stockholders' equity.
C)owners' equity and stockholders' equity.
D)retained earnings and revenues.

Question 24

The purchase of inventory for cash will cause the current ratio to decrease.

Question 25

A balance sheet shows cash,$75,000;marketable securities,$115,000;accounts receivable,$150,000;and $222,500 of inventories.Current liabilities are $225,000.The current ratio is 2.5 to 1.

Question 26

Which of the following is not an objective of financial reporting?

A)To reflect prospective cash receipts to investors and creditors.
B)To reflect prospective cash flows to an enterprise.
C)To reflect resources and claims to resources.
D)To reflect current stock prices and information concerning stock markets.

Question 27

Some analysts properly refer to a company's profit margin as its return on assets.

Question 28

The excess of current assets over current liabilities is referred to as working capital.

Question 29

Income from operations does not include interest revenue and interest expense because these items are considered to be non-operating in nature.

Question 30

If a firm has a current ratio of 2,the subsequent receipt of a 60-day note receivable to settle an open account will cause the ratio to decrease.

Question 31

Dividends paid appear on both the income statement and the statement of retained earnings.

Question 32

What is the primary objective of financial reporting?

A)To help investors make credit decisions.
B)To help management assess cash flows.
C)To protect users from fraudulent financial information.
D)To provide useful information for decision making

Question 33

In the independent auditors' report included with the annual report,management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements.

Question 34

An advantage of the current ratio is that it considers the makeup of the current assets.

Question 35

One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company.

Question 36

An independent auditor's (CPA's)report is a guarantee that the financial statements are free from fraud or material error.

Question 37

The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company's independent accountants (CPAs).

Question 38

In preparing financial statements,accountants should consider all of the following except

A)the objectives of financial reporting.
B)the characteristics that make accounting information useful.
C)the most useful way to display the information found on the financial statements.
D)the presentation of the value of a company.

Question 39

Dividends declared and paid reduce a company's retained earnings balance.

Question 40

Independent auditors (CPAs)render an opinion that the financial statements do or do not fairly present a company's financial position,operating results,and cash flows.

Question 41

Which of the following includes only current assets?

A)Accounts receivable,cash,inventory,office supplies
B)Cash,accounts payable,inventory,office supplies
C)Cash,land,accounts receivable,inventory
D)Accounts receivable,cash,furniture,office supplies

Question 42

Which of the following is a current asset?

A)Building
B)Office Supplies
C)Land
D)Truck

Question 43

Relevant information can be quantitative or qualitative.In deciding whether to go to college part time or full time,which of the following is a qualitative factor for a student?

A)The cost of tuition
B)The opportunity to make friends
C)The price of football tickets
D)"Good Student" discounts on auto insurance rates

Question 44

Which of the following statements is true concerning external users of financial information?

A)External users need detailed records of the business to make informed decisions.
B)External users are primarily responsible for the preparation of financial statements.
C)External users rely on the financial statements to help make informed decisions.
D)External users rely on management to tell them whether the company is a good investment.

Question 45

Which of the following is the best description of the purpose of financial reporting?

A)To allow users to access the daily detailed records of a business
B)To help the users reach their decisions in an informed manner
C)To provide users with an assessment of how long the company will continue as a going concern
D)To allow users access to a list of all the individuals who owe the company money

Question 46

An accountant is uncertain about the best estimate of an amount for a business transaction.If two amounts are about equally likely,the amount least likely to overstate assets and income is selected.Which of the following qualities is characterized by this action?

A)Comparability
B)Conservatism
C)Materiality
D)Neutrality

Question 47

The following information is given for Camino Company:
$\begin{array}{lrlr}\text { Cash } & \$ 50,000 & \text { Inventory } & \$ 45,000 \\\text { Land } & 75,000 & \text { Accumulated depreciation } & 40,000 \\\text { Plant and equipment } & 150,000 & \text { Accounts payable } & 60,000\end{array}$ What are the company's current assets?

A)$220,000
B)$155,000
C)$130,000
D)$ 95,000

Question 48

Jackson Transportation purchases many pieces of office furniture with an individual cost below $200 each.Jackson chooses to account for these expenditures as expenses when acquired rather than reporting them as property,plant,and equipment on its balance sheet.The company's accountant and independent CPA agree that no accounting principle has been violated.What accounting justification allows Jackson to expense the furniture?

A)Conservatism
B)Matching
C)Materiality
D)Verifiability

Question 49

Bevco Company has provided the following information from its accounting records for the current year:
$\begin{array}{lrlr}\text { Cash } & \$ 55,000 & \text { Accounts receivable } & \$ 45,000 \\\text { Inventory } & 65,000 & \text { Land } & 75,000 \\\text { Accounts payable } & 50,000 & \text { Notes payable (due 2021) } & 150,000 \\\text { Retained earnings } & ? & \text { Capital stock } & 20,000\end{array}$

-Read the information for Bevco Company.What are Bevco' current liabilities?

A)$50,000
B)$125,000
C)$200,000
D)$230,000

Question 50

Which one of the following items is reported as a current asset on a classified balance sheet?

A)Trucks
B)Accounts receivable
C)Land
D)Common stock

Question 51

Jones,Inc. ,a manufacturer of tires,has given you its most recent annual report in an effort to obtain a sizable loan.The company is very profitable and appears to have a sound financial position.Based on a report presented on prime-time television last night,you are aware that Jones is a defendant in several lawsuits related to its defective tires that cause vehicles to overturn.The information presented on television is an example of financial information that is

A)relevant.
B)consistent.
C)predictable.
D)comparable.

Question 52

Bevco Company has provided the following information from its accounting records for the current year:
$\begin{array}{lrlr}\text { Cash } & \$ 55,000 & \text { Accounts receivable } & \$ 45,000 \\\text { Inventory } & 65,000 & \text { Land } & 75,000 \\\text { Accounts payable } & 50,000 & \text { Notes payable (due 2021) } & 150,000 \\\text { Retained earnings } & ? & \text { Capital stock } & 20,000\end{array}$

-Read the information for Bevco Company.What are Bevco' current assets?

A)$100,000
B)$165,000
C)$210,000
D)$240,000

Question 53

You are comparing three companies that use different depreciation methods.Which of the following would help you the most in making a comparison of the companies?

A)The average earnings per share for the quarter
B)Prospective cash receipts
C)Claims to resources
D)Disclosure of accounting policies

Question 54

Tavella Co.applies the consistency convention.What does this mean?

A)Tavella Co.uses the same names for all its expenses as its competitors.
B)Tavella Co.has selected certain accounting principles that can never be changed.
C)Tavella Co.applies the same accounting principles each accounting period.
D)Tavella Co.applies the same accounting principles as its competitors.

Question 55

Which of the following is a noncurrent asset?

A)Land
B)Accounts receivable
C)Cash
D)None of these are correct

Question 56

To determine the source of a company's noncurrent assets,on which financial statement will you look?

A)Income statement only
B)Balance sheet only
C)Both the balance sheet and the income statement
D)Both the income statement and the statement of retained earnings

Question 57

If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses,the information is said to have the quality of

A)comparability.
B)consistency.
C)neutrality.
D)understandability.

Question 58

Information that is material means that an error or alternative method of handling a transaction

A)would possibly affect the judgment of someone relying on the financial statements.
B)would not affect the decisions of users.
C)might cause a company to understate its earnings for the accounting period.
D)could increase the profitability of a company.

Question 59

The preparation of financial statements requires that the information be understandable

A)only to CPAs.
B)to those willing to spend the time to understand it.
C)only to those who take an accounting course.
D)only to financial analysts and brokers.

Question 60

Which of the following accounts are normally reported as long-term liabilities on a classified balance sheet?

A)Notes payable due in five years and bonds payable
B)Interest payable and mortgage payable
C)Income taxes payable and salaries payable
D)Capital stock and accounts payable

Question 61

One significant difference between a classified and a non-classified balance sheet is the distinction between which of the following items?

A)Assets and liabilities
B)Current and noncurrent (or long-term)items
C)Liabilities and owners' equity
D)Resources invested by the owners and amounts borrowed from creditors

Question 62

Which of the following events will cause a company's current ratio to decrease?

A)The sale of inventory for cash
B)The sale of inventory for credit (accounts receivable)
C)Issuing stock for cash
D)Paying off long-term debt with cash

Question 63

If the current ratio is 2.5 to 1,net income is $6,000,and current liabilities are $18,000,how much is working capital?

A)$ 6,000
B)$ 14,000
C)$ 27,000
D)$ 45,000

Question 64

Oreo Company has current assets of $20,000,current liabilities of $8,000,and long-term liabilities of $3,000.Oreo wants to buy new equipment.How much of its existing cash can Oreo use to acquire equipment without allowing its current ratio to decline below 2.0 to 1?

A)$4,000
B)$8,000
C)$10,000
D)$12,000

Question 65

Excursion Corp.increased its dollar amount of working capital over the past several years.To further evaluate the company's short-run liquidity,which one of the following measures should be used?

A)The current ratio
B)An analysis of the company's long-term debt
C)An analysis of the return on stockholders' equity
D)An analysis of retained earnings

Question 66

Which of the following terms characterizes the time period between the investment of cash in merchandise and the collection of cash from the sale of that merchandise?

A)Operating cycle
B)Natural business year
C)Accounting period
D)Fiscal period

Question 67

Which of the following statements is true concerning intangible assets?

A)Intangible assets have no economic substance.
B)Intangible assets lack physical existence.
C)Intangible assets are listed in the Stockholders' Equity section of the balance sheet.
D)Intangible assets appear in the Current Assets section of the balance sheet.

Question 68

For which of the following is the current ratio most useful?

A)In evaluating a company's profitability
B)In evaluating a company's solvency
C)In evaluating a company's return on assets
D)In evaluating a company's liquidity

Question 69

What is the correct method for calculating working capital?

A)Total Assets - Total Liabilities
B)Current Assets - Total Liabilities
C)Current Assets - Current Liabilities
D)Current Assets + Current Liabilities

Question 70

Which set of items below includes current assets?

A)Accounts receivable,net income,inventory,and dividends
B)Cash,accounts receivable,capital stock,and sales
C)Net income,cash,office supplies,and inventory
D)Cash,accounts receivable,inventory,and office supplies

Question 71

Which financial statement reports information helpful in assessing working capital?

A)Income statement
B)Balance sheet
C)Statement of retained earnings
D)Statement of cash flows

Question 72

For several years,Bosco Corporation has had a current ratio that was consistent with other companies in its industry.For the most recent year,Bosco's current ratio was significantly higher than that for the industry.What is the best possible explanation for this situation?

A)The other companies in the industry were not as profitable.
B)Bosco's liquidity has improved or is not leveraging financial resources effectively.
C)Bosco has less property,plant,and equipment than other companies.
D)Bosco has too much debt.

Question 73

Use Rizwi Corporation's list of accounts at December 31,2017 to answer the following question:
Rizwi Corporation
List of Accounts at December 31,2017
$\begin{array}{lrr}\text { Cash } & \$ 30,000 &\text { Accumulated Depreciation } & \$ 12,000 \\\text { Merchandise } & 21,000 & \text { Notes Payable-Due } 12 / 31 / 2025 & 120,000 \\\text { Inventory } &&& \\\text { Land } & 40,000 &\text { Accounts Payable } & 14,000 \\\text { Buildings } & 80,000& \text { Equipment } & 33,000 \\\text { Accounts Receivable } & 25,000& \text { Notes Payable-Due } 07 / 01 / 2019 & 2,000\end{array}$ What is Rizwi Corporation's current ratio?

A)0.48 to 1
B)2.00 to 1
C)2.55 to 1
D)2.86 to 1

Question 74

Which of the following would not be considered to be an intangible asset?

A)Franchises
B)Copyrights
C)Investments
D)Goodwill

Question 75

Guinther & Sons,Inc. ,a retailer of men's clothing,earned a net profit of $77,000 for 2017.The balance sheet for Guinther & Sons includes the following items:

$$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 21,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$

-Read the information for Guinther & Sons,Inc.The average current ratio for stores such as Guinther & Sons is 2.4 to 1.What does this comparison tell you about its liquidity?

A)It is more liquid than its competitors.
B)It has more long-term assets than its competitors.
C)Since a rule of thumb for current ratios is 2 to 1,neither Guinther & Sons,Inc.nor its competitors is liquid.
D)Guinther & Sons,Inc.is more profitable than its competitors.

Question 76

How are assets that are expected to be realized in cash,sold,or consumed within the normal operating cycle of a business or within one year (if the operating cycle is shorter than one year)reported on a classified balance sheet?

A)Property,plant,and equipment
B)Current assets
C)Intangible assets
D)Current liabilities

Question 77

Guinther & Sons,Inc. ,a retailer of men's clothing,earned a net profit of $77,000 for 2017.The balance sheet for Guinther & Sons includes the following items:

$$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 21,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$

-Read the information for Guinther & Sons.Calculate the total amount of current assets for Guinther & Sons.

A)$100,000
B)$147,000
C)$150,000
D)$249,000

Question 78

Guinther & Sons,Inc. ,a retailer of men's clothing,earned a net profit of $77,000 for 2017.The balance sheet for Guinther & Sons includes the following items:

$$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 21,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$

-Read the information for Guinther & Sons,Inc.Calculate the current ratio for Guinther & Sons.

A)2.58 to 1
B)2.75 to 1
C)3.00 to 1
D)2.00 to 1

Question 79

Which one of the following is not a major category for long-term assets?

A)Receivables
B)Property,plant,and equipment
C)Intangibles
D)Investments

Question 80

Rosu Company has total current assets of $150,000 and total current liabilities of $50,000.What is the amount of working capital for Rosu Company?

A)$200,000
B)$100,000
C)$125,000
D)$ 179,000