Deck 4: Financial Reporting and Analysis

Question 1

An advantage of accounting information is that it provides exact and completely reliable measures.

Answer 1

False

Question 2

For accounting information to be useful,it must be both relevant and reliable.

Answer 2

True

Question 3

Even when no errors have been made,accounting is never 100 percent accurate because of the extensive use of estimates.

Answer 3

True

Question 4

A different set of financial statements usually is prepared for each user.

Question 5

Accounting information contains numerous estimates,classifications,summarizations,judgments,and allocations.

Question 6

Although a stapler that costs $15 is a long-term asset,can be expensed because the amount is immaterial and will not affect anyone's decision making.

Question 7

Investors and creditors use financial statements to evaluate a company's ability to pay dividends and interest.

Question 8

Only the chief financial officer and the company's CPAs are responsible for the accuracy of financial statements.The chief executive officer is not expected to understand financial information.

Question 9

Financial statements are generally prepared for a limited number of users.

Question 10

The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

Question 11

Full disclosure of all important facts aids in overcoming the limitations of accounting information.

Question 12

The relevance of accounting information is also an indication of its reliability.

Question 13

Illegal acts of a small dollar amount can be ignored because they are immaterial.

Question 14

To understand accounting information,users must be familiar with the accounting conventions,or rules of thumb,used in preparing financial statements.

Question 15

A material item is one that is likely to affect a user's decision.

Question 16

Financial statements are important to the efficient allocation of resources in our economy.

Question 17

The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.

Question 18

In accounting,$1,000 is considered the dividing line between material and immaterial amounts.

Question 19

Both investors and creditors have an interest in a company's ability to generate favorable cash flows.

Question 20

Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.

Question 21

On the income statement of a merchandising company,net income is the amount by which net sales exceed operating expenses.

Question 22

Both wholesalers and retailers are types of merchandising companies.

Question 23

General and administrative expenses are a category of operating expense.

Question 24

Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and additional paid-in capital.

Question 25

The income statement of a company that provides a service only will contain gross margin.

Question 26

The two parts of a corporation's stockholders' equity section are contributed capital and retained earnings.

Question 27

Delivery expense is a selling expense on the income statement.

Question 28

The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.

Question 29

The convention of full disclosure requires that financial statements present all the information relevant to users' understanding of the statements.

Question 30

It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.

Question 31

Sales returns and allowances are deducted from gross sales on the balance sheet.

Question 32

The main difference between intangible assets and property,plant,and equipment is the length of the asset's life.

Question 33

General-purpose external financial statements that are divided into subcategories are called classified financial statements.

Question 34

Classified balance sheets list accounts in alphabetical order.

Question 35

Natural resources,such as coal mines and oil wells,are classified as intangible assets.

Question 36

For a merchandising company,the difference between net sales and operating expenses is called gross margin.

Question 37

The term net worth is a more accurate term than owner's equity because assets are recorded at original cost rather than at current value.

Question 38

The main difference among the balance sheets of the sole proprietorship,the partnership,and the corporation is found in the owners' equity section.

Question 39

Operating expenses include cost of goods sold.

Question 40

The investments category on the balance sheet normally includes investments that are intended to be held for a short period of time.

Question 41

The condensed form of the income statement refers only to the single-step type.

Question 42

A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.

Question 43

All the following are standards of accounting information except

A) flexibility.
B) reliability.
C) understandability.
D) relevance.

Question 44

According to the FASB,the usefulness of accounting is judged by which of the following two prime qualitative characteristics of accounting information?

A) Comparability and neutrality
B) Understandability and comparability
C) Verifiability and timeliness
D) Relevance and reliability

Question 45

Freight paid on goods shipped to customers is classified as a selling expense.

Question 46

Advertising expense appears as a selling expense on the income statement.

Question 47

Earnings per share,often called net income per share,is the net income earned on each share of common stock.

Question 48

Return on assets is a measure of liquidity.

Question 49

A company with a profit margin of 6 percent earns six cents profit for every dollar of net sales.

Question 50

Profit margin and gross margin are the same thing.

Question 51

The single-step and multistep income statements result in different net income figures.

Question 52

Interest paid on bank loans is classified as cost of goods sold.

Question 53

A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors.

Question 54

A company with a current ratio of 1.0 is considered more liquid than one with a current ratio of 2.0.

Question 55

Both return on assets and working capital are profitability measures.

Question 56

An advantage of the single-step income statement is that it is less complex than the multistep form.

Question 57

Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.

Question 58

Asset turnover measures how efficiently assets are used to produce sales.

Question 59

Profitability means having enough cash on hand to pay bills when they become due.

Question 60

Advertising expense should be included in the general and administrative expenses section of a multistep income statement.

Question 61

The accounting convention that is most responsible for the increase in the number of notes to financial statements is

A) materiality.
B) full disclosure.
C) consistency.
D) conservatism.

Question 62

Accounting information should make a difference to the outcome of a decision,according to the qualitative characteristic of

A) reliability.
B) relevance.
C) understandability.
D) verifiability.

Question 63

A company should classify land held for a planned manufacturing facility as

A) an intangible asset.
B) an investment.
C) a current asset.
D) property, plant, and equipment.

Question 64

A corporation's stockholders' equity section of the balance sheet may contain all except

A) T. McDonald, capital
B) Retained earnings
C) Additional paid-in capital
D) Common stock

Question 65

Who is responsible for preparing financial statements?

A) The CPA firm that audits the financial statements
B) Management
C) A company's accounting department
D) The SEC

Question 66

The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that,to their knowledge,the quarterly and annual statements that their companies file with the SEC are

A) 100 percent accurate and contain no misstatements, errors, or mistakes.
B) accurate and complete.
C) subject to interpretation due to the many accounting rules and regulations.
D) not to be used except by individuals working for the company.

Question 67

Which accounting convention describes a note to the financial statements explaining the company's method of revenue recognition?

A) Comparability and consistency
B) Materiality
C) Conservatism
D) Full disclosure

Question 68

Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?

A) Full disclosure
B) Conservatism
C) Materiality
D) Consistency

Question 69

The convention of consistency relates most closely to

A) cost-benefit.
B) comparability.
C) materiality.
D) full disclosure.

Question 70

The owner's capital for a sole proprietorship is similar in nature to which of the following for corporations?

A) Stockholders' equity
B) Retained earnings
C) Common stock
D) Dividends

Question 71

The qualitative characteristic of faithful representation contains all the following features except

A) complete.
B) verifiability.
C) neutral.
D) free from material error.

Question 72

A practical decision to expense small capital expenditures rather than record them as property,plant,and equipment and depreciate them probably is made on the basis of the convention of

A) conservatism.
B) consistency.
C) materiality.
D) full disclosure.

Question 73

Use this information to answer the following question. The total dollar amount of assets to be classified as current assets is

A) $140,000.
B) $220,000.
C) $120,000.
D) $170,000.

Question 74

The convention of consistency refers to consistent use of accounting principles

A) among firms.
B) throughout the accounting period.
C) within industries.
D) among accounting periods.

Question 75

The lower-of-cost-or-market method of accounting for inventories follows the convention of

A) full disclosure.
B) materiality.
C) conservatism.
D) cost-benefit.

Question 76

Which accounting convention could cause an overload of information for the financial statement user?

A) Consistency
B) Conservatism
C) Full disclosure
D) Materiality

Question 77

Which of the following should be classified as an intangible asset?

A) Land held for future use
B) Accounts receivable
C) Building
D) Franchises

Question 78

Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?

A) Full disclosure
B) Cost-benefit
C) Conservatism
D) Consistency

Question 79

To obtain a slightly more accurate measure of net income,Gabrielli,Inc.,has determined that it must hire two full-time accountants.If it decides against the hiring,it has followed the convention of

A) full disclosure.
B) materiality.
C) comparability.
D) cost-benefit.

Question 80

The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?

A) Relevance
B) Faithful representation
C) Understandability
D) Timeliness