Deck 5: Fraud,internal Control,and Cash

Question 1

When auditors conclude that a company's financial statements conform to GAAP,the audit report is said to be:

A)validated.
B)qualified.
C)relevant.
D)unqualified.

Answer 1

unqualified.

Question 2

Which of the following statements is true?

A)The debt-to-assets ratio requires only information found on the balance sheet.
B)The net profit margin ratio requires only information found on the balance sheet.
C)The asset turnover ratio requires only information found on the income statement.
D)The debt-to-equity ratio requires only information found on the income statement.

Answer 2

The debt-to-assets ratio requires only information found on the balance sheet.

Question 3

Accounting information serves a management function when it is used by:

A)executives to make a business decision.
B)government officials to regulate the business and its financial records.
C)directors to oversee the business.
D)investors to vote on company policies.

Answer 3

executives to make a business decision.

Question 4

Which of the following is correct?

A)Shareholders elect the managers of companies who are then overseen by directors.
B)Managers are elected by shareholders.
C)Shareholders elect the directors who then oversee the performance of management.
D)Managers appoint the directors who then pass information to shareholders.

Question 5

If we were to compare the financial statements of Royal Bank of Canada for 2011 with that of Bank of Montreal,this would be:

A)an external audit.
B)a cross-sectional analysis.
C)an internal audit.
D)a time series analysis.

Question 6

Which of the following measures is most useful in analyzing a company's ability to control expenses?

A)Debt-to-assets ratio.
B)Asset turnover ratio.
C)Net profit margin ratio.
D)Pro forma ratio.

Question 7

On March 15,MVX Corporation announced that it had changed its fiscal year-end from June 30 to May 31.As a result of this change,the corporation's current fiscal year is comprised of an eleven-month period.The corporation issued a press release that stated "management believes the May 31 year-end is consistent with more of its peers in the industry,allowing for more meaningful analysis and comparisons within the sector." To which of the four characteristics of useful information is management referring?

A)Relevance.
B)Reliability.
C)Consistency.
D)Comparability.

Question 8

Accounting information serves a governance function when it is used by:

A)managers to make a business decision.
B)government officials to regulate the business and its financial records.
C)directors to oversee the business.
D)investors to vote on company policies.

Question 9

An investor notes that the net income of a major corporation grew 10% last year and that it is currently growing at 11%.The analyst concludes that the net income will rise 12% next year.This is an example of a(n):

A)audit.
B)earnings forecast.
C)credit analysis.
D)business model.

Question 10

Earnings forecasts:

A)estimate future revenue.
B)are calculated by taking net income and dividing by expenses.
C)estimate future net income.
D)are calculated by taking net income estimates and dividing by expense estimates.

Question 11

Accounting information serves a valuation function when it is used by:

A)managers to evaluate net income and taxes.
B)directors to evaluate net income and taxes.
C)government officials to evaluate net income and taxes.
D)Investors in making their decision to buy,hold or sell the company's stock.

Question 12

The purpose to external audit is to:

A)Provide reasonable assurance to financial statement users that the companies statements are presented in accordance with GAAP.
B)Provide reasonable assurance to financial statement users that the company will make profit in the future.
C)Provide guarantee to financial statements users that the companies statements are presented in accordance with GAAP.
D)Provide guarantee to financial statements users that the companies will make a profit in the future.

Question 13

Why do analysts rely on financial statement ratio analysis?

A)It enables them to determine the size of the company.
B)It enables them to determine how well a company performed given the resources available to it.
C)It enables them to determine the future performance of the company stock.
D)It enables them to determine the role of the company's management.

Question 14

What has been the main thrust of recent changes in the financial reporting rules following the financial scandals of Enron,Worldcom,etc.?

A)To improve internal control over companies' financial reporting.
B)To add to the work of the companies' external accountants.
C)To force the companies' to disclose more of their internal information.
D)To provide incentives to increase their net income.

Question 15

The Grass is Greener Company borrows money from a bank.Part of the loan agreement requires Grass is Greener to maintain shareholders' equity of at least 40% of assets or pay a higher interest rate.This requirement is referred to as a:

A)loan covenant.
B)credit rating.
C)bond rating.
D)call feature.

Question 16

The group that uses accounting information to evaluate companies' past performance,predict future results,and make recommendations about the companies to current and potential investors is known as:

A)analysts.
B)managers.
C)creditors.
D)auditors.

Question 17

What are the four elements of a business model in proper order?

A)Produce net income,invest in assets,generate revenues,obtain financing
B)Generate revenues,invest in assets,obtain financing,produce net income
C)Obtain financing,invest in assets,generate revenues,produce net income.
D)Obtain financing,generate revenues,invest in assets,produce net income

Question 18

Accounting information serves a contracting function when it is used by:

A)creditors to manage financial agreements.
B)government officials to regulate the business and its financial records.
C)analysts to assess business risks.
D)investors to vote on company policies.

Question 19

When analysts compare the results of one company with those of others companies' in the same area of the industry it's called:

A)Time series analysis
B)Cross sectional analysis
C)Regression analysis
D)Valuation analysis

Question 20

If we were to compare the financial statements of Hudson's Bay Company for 1995,2000,and 2005,this would be:

A)an external audit.
B)a cross-sectional analysis.
C)an internal audit.
D)a time series analysis.

Question 21

At the end of last year,Cessa Company had total assets in the amount of $4,000,000 and total liabilities in the amount of $3,000,000.The company sold stock to new shareholders at the beginning of the current year for $1,000,000.As a direct result of this transaction,the:

A)debt-to-assets ratio will decrease.
B)asset turnover ratio will increase.
C)net profit margin ratio will increase.
D)net profit margin ratio will decrease.

Question 22

Which of the following accurately describes how declaring but not yet paying dividends would affect the ratios indicated?

A)Option A
B)Option B
C)Option C
D)Option D

Question 23

On January 1,2011,a company has assets of $16 billion and shareholders' equity of $8 billion.On January 1,2012,the same company has assets of $20 billion and shareholders' equity of $9 billion.During 2011,the company had total sales revenue of $900 million and total expenses of $700 million.If the company doesn't have other sources of revenue,its net profit margin during 2011 is:

A)0.01
B)0.013
C)0.22
D)0.022

Question 24

Refer to the summary financial information for Momentum Clothing Distributors.Which of the following statements is true?

A)The company's level of financing risk did not change between 2010 and 2011.
B)In comparison to 2010,the company became more efficient in 2011 in generating revenues from its investment in assets.
C)Despite the increase in sales in 2011,the company controlled its expenses just as well as it had in 2010.
D)None of the above.

Question 25

Scandals involving Enron and WorldCom drew heightened attention to the possibility that financial statements might be misreported to portray a favourable impression of a company's financial results.Which of the following false impressions could be suggested by the ratio indicated?

A)Greater control of expenses might be suggested by the net profit margin ratio.
B)Greater efficiency in asset use might be suggested by the debt-to-assets ratio.
C)Greater control of expenses might be suggested by the debt-to-assets ratio.
D)Less financing risk might be suggested by the asset turnover ratio.

Question 26

Which of the following accurately describes how recording amortization for an existing building would affect the ratios indicated?

A)Option A
B)Option B
C)Option C
D)Option D

Question 27

The basic business model shows:

A)financing is used to generate revenue that is invested in assets that produce net income.
B)financing is used to invest in assets that generate revenues that produce net income.
C)revenues produced from net income that is invested in assets to repay financing.
D)assets are used to generate financing that produces revenue and net income.

Question 28

Which of the following is not true regarding differences between IFRS and ASPE?

A)On the balance sheet similar accounts are shown but differ in order.
B)Similar expenses are reported but grouped differently.
C)While the financial statements report similar items but have different titles.
D)The financial statements report different items with different titles.

Question 29

All other things equal,in which of the following cases would an analyst rank the company most favourably?

A)The company has the highest debt-to-assets ratio in the industry as well as the highest profit margin and asset turnover ratio.
B)The company has the highest debt-to-assets ratio in the industry as well as the highest profit margin while its asset turnover ratio is the lowest.
C)The company has the lowest debt-to-assets ratio in the industry as well as the lowest asset turnover ratio while its profit margin is the highest.
D)The company has the lowest debt-to-assets ratio in the industry as well as the highest profit margin and asset turnover ratio.

Question 30

On January 1,2011,a company has assets of $16 billion and shareholders' equity of $8 billion.On January 1,2012,the same company has assets of $20 billion and shareholders' equity of $9 billion.During 2011,the company had total sales revenue of $900 million and total expenses of $700 million.The company's debt-to-assets ratio on January 1,2012 is:

A)0.55
B)0.45
C)0.035
D)0.01

Question 31

Purrfect Pets has a debt-to-assets ratio of 0.55.This means that:

A)shareholders' equity is 55% of total assets.
B)shareholders' equity is 45% of total assets.
C)the asset turnover ratio also is 0.55.
D)the asset turnover ratio also is 0.45.

Question 32

On January 1,2011,a company has assets of $16 billion and shareholders' equity of $8 billion.On January 1,2012,the same company has assets of $20 billion and shareholders' equity of $9 billion.During 2011,the company had total sales revenue of $900 million and total expenses of $700 million.The company's asset turnover ratio for 2011 is:

A)0.25
B)0.05
C)0.045
D)0.01

Question 33

A company increases sales revenue.Total assets and net income are unchanged.The company's net profit margin ratio:

A)and asset turnover ratio both rise.
B)rises and its asset turnover ratio falls.
C)and asset turnover ratio both fall.
D)falls and its asset turnover ratio rises.

Question 34

Which of the following accurately describes how the issuance of additional shares of stock for cash would affect the ratios indicated?

A)Option A
B)Option B
C)Option C
D)Option D

Question 35

Which of the following accurately describes how accruing advertising expense incurred but not yet paid would affect the ratios indicated?

A)Option A
B)Option B
C)Option C
D)Option D

Question 36

Which of the following accurately describes how the collection of cash on account from a customer would affect the ratios indicated?

A)Option A
B)Option B
C)Option C
D)Option D

Question 37

A company has an asset turnover ratio of 1.15.Which of the following statements is true?

A)The company generates $1.15 of net income for every $1 in reported assets.
B)The company buys assets more frequently than it sells them.
C)The company generates $1.15 of sales revenue for every $1 in reported assets.
D)This is an improvement over the previous period when the asset turnover rate was 1.7.

Question 38

If a company declares and pays a dividend during the year,this will:

A)decrease the company's net profit margin.
B)increase the company's debt-to-assets ratio.
C)decrease the company's debt-to-assets ratio.
D)increase the company's net profit margin.

Question 39

Which of the following is not consistent with the changes in financial results reported by Momentum Clothing Distributors?

A)Momentum obtained additional debt and equity financing in 2005,which the company used to acquire additional assets.
B)Assets acquired in 2006 did not improve Momentum's ability to generate sales from each dollar invested in assets.
C)The total dollar amount of shareholders' equity has increased in each of the three years.
D)Momentum's financing strategy has shifted toward greater relative reliance on investors for funding the company's growth.

Question 40

If a company's total liabilities decrease,with assets unchanged,its:

A)net profit margin will increase.
B)asset turnover ratio will increase.
C)debt-to-assets ratio will decrease.
D)debt-to-assets ratio will remain unchanged.

Question 41

Further information about financial data,accounting methods,and financial statements is included in what part of the annual report?

A)The balance sheet.
B)The unaudited condensed quarterly data.
C)The notes to the financial statements.
D)The summarized financial data.

Question 42

Which of the following misstatements would cause the asset turnover ratio to be overstated?

A)Capitalizing costs that should have been expensed.
B)Failing to adjust for amortization in the current period.
C)Failing to accrue income taxes of the current period.
D)None of the above.

Question 43

Which of the following would portray an overly optimistic view of a company's net income?

A)Counting shipments of customers' orders as revenue before payment has been received.
B)Shipping goods to customers without receiving orders from those customers and recording the transactions as revenue.
C)Accruing liabilities for marketing expenses before they are incurred.
D)All of the above.

Question 44

Performance-based bonuses can give managers a personal incentive to:

A)increase sales and enhance company growth.
B)decrease expenses and boost efficiency.
C)misrepresent financial data on company performance.
D)all of the above.

Question 45

One of the main reasons that companies release early summaries of financial statements in press releases is:

A)they do not have to conform to GAAP.
B)this allows them to delay the release of financial statements.
C)it makes information available to external users in a more timely manner.
D)all of the above.

Question 46

In which of the following cases a ratio will decrease:

A)Its top number increases and the bottom number does not change,
B)Its bottom number decreases and its top number does not change.
C)If its top number increases while the bottom number decreases.
D)If its top number decreases while the bottom number increases.

Question 47

Creditors use accounting information to serve a contracting role.
BT: Knowledge

Question 48

Which of the following misstatements would cause the debt-to-assets ratio to be understated?

A)Capitalizing costs that should have been expensed.
B)Failing to adjust for amortization in the current period.
C)Failing to accrue income taxes of the current period.
D)All of the above.

Question 49

A company has assets of $10 million and liabilities of $7 million.Liabilities include $4 million in accounts payable,$2 million in long-term notes payable and $1 million in other non-current liabilities.If a financial web site uses non-current liabilities rather than total liabilities to calculate the company's debt-to-assets ratio,the web site will report a ratio of:

A)0.5.
B)0.4.
C)0.3.
D)0.1.

Question 50

Which of the following sources of information is most likely to contain unreliable information?

A)Investors' discussion on internet chat rooms.
B)A company's annual report.
C)A company's press release.
D)A report filed with the Securities Commission.

Question 51

Important public sources of financial information about a company other than its financial statements do not include:

A)press releases.
B)company annual report.
C)Canadian Securities Administrators (CSA)filings.
D)Internal management reports.

Question 52

The primary purpose of external financial reporting is to release information that is useful to directors.
BT: Knowledge

Question 53

Which of the following ensures that management and financial decisions are to benefit the shareholders:

A)Corporate Management
B)Board of Directors
C)Creditors
D)Bankers

Question 54

The asset turnover ratio measures:

A)the profit generated by efficient management of assets.
B)the level of financing risk assumed by the company.
C)the sales revenue generated by efficient management of assets.
D)the ability to earn profit for the shareholders.

Question 55

The financial results for a public company are generally first reported in a:

A)press release issued one day after the accounting period ends.
B)press release issued on the same day as the quarterly or annual report.
C)quarterly or annual report issued a week or two after the accounting period ends.
D)press release issued a few weeks after the accounting period ends.

Question 56

According to the changes in financial reporting which of the following is required to communicate with the external auditors and ensure that they are able to effectively perform their work?

A)Board of directors
B)Audit committee of the board of directors
C)Audit committee of the management
D)CEO and corporate officers

Question 57

Which of the following misstatements would cause the net profit margin ratio to be overstated?

A)Capitalizing costs that should have been expensed.
B)Failing to adjust for amortization in the current period.
C)Failing to accrue income taxes of the current period.
D)All of the above.

Question 58

If a publicly traded company is trying to maximize its perceived performance,as reported to decision makers external to the corporation,the company is most likely to understate which of the following on its balance sheet?

A)Assets.
B)Liabilities.
C)Retained earnings.
D)Contributed capital.

Question 59

In which of the following cases a ratio will increase:

A)If its top number decreases and the bottom number does not change.
B)If its top number increases and the bottom number does not change.
C)If its bottom number increases and its top number does not change.
D)If its top number decreases while the bottom number increases.

Question 60

In addition to examining the company's financial statements and report whether they were presented fairly without any misstatement what else is required of the external auditors by the recent changes in financial reporting?

A)To report any financial misstatements or irregularities to the press
B)To review and test the effectiveness of the company's internal controls
C)To review and test the effectiveness of the company's board of directors
D)To review and test the effectiveness of the company's marketing department

Question 61

All four financial statements must be included in quarterly reports.
BT: Knowledge

Question 62

Condensed financial statements in the quarterly reports are usually audited to ensure that GAAP were followed.
BT: Knowledge

Question 63

Changes made to financial reporting rules in Canada do not provide protection to whistleblowers.
BT: Knowledge

Question 64

A "hold" rating on a stock is an analyst's position that you should buy and accumulate shares of this company.
BT: Knowledge

Question 65

Under IFRS,the balance sheet accounts are listed in case of assets in order of liquidity,while liabilities are listed in order of maturity.
BT: Comprehension

Question 66

An qualified audit report does not have the same credibility as one expressing an unqualified audit opinion.
BT: Knowledge

Question 67

A net profit margin of 0.2 means that $1 of profit is generated for every $5 of sales revenue.
BT: Comprehension

Question 68

An asset turnover ratio of 0.4 means that $4 in net income is generated for every $10 in assets.
BT: Comprehension

Question 69

A company does not issue a press release containing financial data until the data have been checked by management.
BT: Knowledge

Question 70

A higher asset turnover ratio is a positive indicator of the efficiency of a company.
BT: Comprehension

Question 71

When ratios are calculated from information obtained from separate financial statements,they are usually expressed as percentages.
BT: Knowledge

Question 72

All other things equal,a higher debt-to-assets ratio indicates a riskier financing strategy.
BT: Comprehension

Question 73

An asset turnover ratio must be less than 1.
BT: Comprehension

Question 74

A time-series analysis compares a company's financial results for one period to its own results in other periods.
BT: Knowledge

Question 75

Company filings with the Securities Commission,such as the Annual Reports or Quarterly Reports,are available to the public.
BT: Knowledge

Question 76

Under IFRS,the balance sheet is called statement of financial position
BT: Comprehension

Question 77

The asset turnover ratio compares the amount of sales revenue for the period to the book value of assets at the end of the period.
BT: Knowledge

Question 78

If we compare a company's performance in the current period to its competitors' performance,we are conducting a time-series analysis.
BT: Knowledge

Question 79

The income statement provides all the data needed to calculate the basic financial statement ratios.
BT: Knowledge

Question 80

When accounting data are used to assess the worth of a company or its stock,they are said to be used in a valuation role.
BT: Knowledge