Question 1

Peaches Corp.has current assets worth $90,000 and current liabilities worth $75,000.Current assets include inventory of $10,000.Calculate the net working capital of the company.

Accepted Answer

A)   $80,000
B)   $65,000
C)   $15,000
D)   $5,000 C

Question 2

Which of the following is a difference between personal financial statements and business financial statements?

Accepted Answer

A)   Personal financial statements follow the cost principle, whereas business financial statements do not follow the cost principle.
B)   Personal financial statements should present assets at estimated current values, whereas business financial statements should present assets at historical cost.
C)   Personal financial statements are not governed by GAAP, whereas business financial statements are governed by GAAP.
D)   Personal financial statements are prepared for a specific period of time, whereas business financial statements are prepared for a general period. B

Question 3

Since 2002,the FASB and the International Accounting Standards Board (IASB)have been working to merge U.S.GAAP with international financial reporting standards (IFRS).Which of the following terms is used to describe this process?

Accepted Answer

A)   merger
B)   integration
C)   convergence
D)   unification C

Question 4

Which of the following is true of the cost principle?

Accepted Answer

A)   It highlights the proposition that value is not the focus of accounting and is not represented in financial statements.
B)   Using this principle results in the subjectivity of value assessments.
C)   Under this, costs are measured subjectively on actual basis.
D)   It results in reflecting the current values of assets, liabilities, equity, revenues, and expenses shown on the financial statements.

Question 5

Which of the following is an accounting choice that violates GAAP?

Accepted Answer

A)   recording sales after they are realized, not before it
B)   recording intangible assets
C)   recording fictitious inventory
D)   using estimates to determine provisions for bad debts

Question 6

Which of the following is Altman's conventional Z-score model for publicly traded manufacturing firms?

Accepted Answer

A)   Z = 0.717(X1)  + 0.847(X2)  + 3.107(X3)  + 0.420(X4)  + 0.998(X5) 
B)   Z = 1.4(X1)  + 0.847(X2)  + 3.3(X3)  + 1.05(X4)  + 0.998(X5) 
C)   Z = 6.65(X1)  + 3.26(X2)  + 6.72(X3)  + 1.05(X4) 
D)   Z = 1.2(X1)  + 1.4(X2)  + 3.3(X3)  + 0.6(X4)  + 0.999(X5)

Question 7

Operational freedom and reporting freedom are held in check by the principle of materiality.

Accepted Answer

A) True 
 B)False

Question 8

Amounts shown on financial statements reflect current values.

Accepted Answer

A) True 
 B)False

Question 9

Give examples and explain techniques of cash flow manipulations which may not constitute GAAP violations.

Accepted Answer

The answer of Give examples and explain techniques of cash...

Question 10

Which of the following is a difference between internal comparison and external comparison with regard to financial statement analysis?

Accepted Answer

A)   An internal comparison reveals unexpected relationships within a company, whereas an external comparison reveals the absence of expected relationships outside a company.
B)   An internal comparison involves comparing a company with the industry as a whole, whereas an external comparison involves comparing a company's current performance with its past experience.
C)   An internal comparison is done by an accountant or auditor, whereas an external comparison is done by a forensic accountant.
D)   An internal comparison allows the examination of changes within a company over time, whereas an external comparison reveals the company's relative performance and financial standing.

Question 11

Which of the following is the correct formula for calculating sustainable growth rate?

Accepted Answer

A)   Sustainable growth rate = Return on sales × Return on equity
B)   Sustainable growth rate = Retention ratio × Return on equity
C)   Sustainable growth rate = Retention ratio × Return on assets
D)   Sustainable growth rate = Return on sales × Return on assets

Question 12

Which of the following is a profitability ratio?

Accepted Answer

A)   return on assets
B)   earnings per share
C)   price to earnings
D)   dividend yield

Question 13

Which of the following is a limitation of computer-assisted audit tools?

Accepted Answer

A)   These tools cannot replace skilled forensic accountants, but rather allow them to focus their efforts on the highest-risk journal entries.
B)   These tools cannot analyze 100% of the data, but rather can choose and analyze samples from the journal entry database.
C)   The conclusions arrived at using these tools cannot be supported with substantial quantitative data.
D)   The forensic accountant will have to manually review the general ledger even after using these tools.

Question 14

Which of the following does a discrepancy in cash flow reconciliation indicate?

Accepted Answer

A)   The cash outflow is greater than the cash inflow.
B)   The cash flow statement reflects entries for intercompany cash flows and transactions.
C)   Certain cash transactions are not accurately reflected in the income statement and balance sheet.
D)   There was an unexpected surge of cash flow during the period.

Question 15

Which of the following is true of reviewed financial statements?

Accepted Answer

A)   These represent the most basic level of financial statements.
B)   These have a broader scope as compared to audited financial statements.
C)   These provide assurance to the user of the financial statements.
D)   These have a limited implication of assurance.

Question 16

Which of the following best defines the term earnings management?

Accepted Answer

A)   It is the intervention by the management in the internal financial reporting process, with the intent of boosting the earnings of an organization.
B)   It is the purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.
C)   It is the legitimate alteration of internal reports by the management to influence contractual outcomes that depend on reported accounting numbers.
D)   It is a systematic management of earnings of an organization by its external shareholders, with the intent of increasing future profits.

Question 17

Which of the following is a difference between audits and compilations?

Accepted Answer

A)   The auditor's objective is to obtain reasonable assurance that the financial statements are free of material misstatements, whereas the objective of a compilation is to assist management in presenting financial information without obtaining any level of assurance.
B)   Audits do not require an understanding of the entity's internal controls and an assessment of fraud risk, whereas compilations require an understanding of the entity's internal controls and an assessment of fraud risk.
C)   Audits have a narrower scope as compared to reviews, whereas compilations have a broader scope as compared to reviews.
D)   Audits provide a reasonable level of assurance to the users of the financial statements, whereas compilations provide a limited level of assurance to the users of the financial statements.

Question 18

Which of the following the correct formula for calculating acid test ratio?

Accepted Answer

A)   Acid test ratio = (Current assets - Inventory)  / Current liabilities
B)   Acid test ratio = (Current assets - Interest expense)  / Current liabilities
C)   Acid test ratio = (Current assets - Current liabilities)  / Current liabilities
D)   Acid test ratio = Current assets / Current liabilities

Question 19

List the common disclosures that are to accompany a personal financial statement.

Accepted Answer

The answer of List the common disclosures that are to...

Question 20

List and explain the three basic financial statements.

Accepted Answer

The answer of List and explain the three basic financial...

Exam 5: Financial Statements Analysis Reading Between the Lines