Deck 5: Financial Reporting and Analysis

Question 1

As of 2012,the U.S.had not switched to IFRS.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

An audit report expressing an unqualified opinion is generally desired by the company presenting its financial statements.

Answer 3

True

Question 4

The fraud triangle identifies incentive,opportunity,and benchmarks as the requirements for a fraud to occur.

Question 5

Form 10-Q is a quarterly report electronically filed with the SEC.

Question 6

The Sarbanes-Oxley Act requires external auditors to test the company's internal control system.

Question 7

The opportunity to commit fraud exists if there are weak internal controls.

Question 8

The incentive element of the fraud triangle includes reasons why top management may commit fraud such as enhancing job security and obtaining bigger paychecks.

Question 9

The International Accounting Standards Board (IASB)is the international counterpart to the FASB in the United States.

Question 10

The Sarbanes-Oxley Act (SOX)requires the company's board of directors to establish an audit committee of independent directors to oversee the financial matters of the company.

Question 11

Financial statements in the quarterly reports are usually audited to ensure that GAAP were followed.

Question 12

Under IFRS,the balance sheet is called the statement of financial position and the income statement is called the statement of comprehensive income.

Question 13

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

Question 14

The order in which assets are reported on the balance sheet under IFRS is the same as the order under the U.S.GAAP rules.

Question 15

External audits are conducted by Certified Public Accountants (CPAs)who are not independent of the company.

Question 16

Multiple-step income statements separate core results from peripheral results.

Question 17

The asset turnover ratio and the net profit margin ratio can both be used to evaluate the solvency of a company.

Question 18

Today's stock price is included in the annual report.

Question 19

The asset turnover ratio is directly affected by operating and financing decisions.

Question 20

The Sarbanes-Oxley Act (SOX)grants legal protection to 'whistle-blowers.'

Question 21

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)labor unions to negotiate contracts with the business.
D)investors to vote on company policies.

Question 22

Which of the following statements regarding distribution of financial information is not true?

A)A company does not issue a press release containing financial data until the data have been checked by management.
B)Company filings with the SEC,such as Forms 10-K and 10-Q,are available to the public.
C)SEC filings are available to the public after they are received by the SEC's EDGAR service.
D)An audit involves an examination of every transaction that occurred during the year by an independent auditor.

Question 23

Which of the following statements regarding the asset turnover ratio is true?

A)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.
B)An asset turnover ratio must be less than 1.
C)The higher the ratio,the less efficiently the company is using its assets.
D)This ratio is not expressed as a percentage.

Question 24

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 25

Which of the following statements regarding ratios is true?

A)All other things being equal,a lower debt-to-assets ratio indicates a riskier financing strategy.
B)A lower asset turnover ratio is a favorable indicator of how efficiently a company is utilizing its resources.
C)The net profit margin ratio cannot be used to indicate how well a company is controlling its expenses.
D)Ratios can be used to compare companies of different sizes.

Question 26

A purpose of comparative income statements is to

A)reveal trends in sales.
B)see how the company compares to its competitors.
C)show whether retained earnings has increased or decreased over the years.
D)help prevent fraud.

Question 27

Earnings forecasts:

A)are issued by the S.E.C.
B)are calculated by taking net income and dividing by expenses.
C)estimate future net income.
D)are included in audited financial statements.

Question 28

If we were to compare the financial statements of Microsoft Corporation for 2011,2012 and 2013,this would be:

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

Question 29

The Grass is Greener Company borrows money from a bank.Part of the loan agreement requires Grass is Greener to maintain stockholders' equity of at least 40% of assets or otherwise to 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 30

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

A)managers to run the business.
B)directors to protect stockholders' interests.
C)government officials to protect the public's interests.
D)investors to estimate how much the business is worth.

Question 31

Which of the following statements regarding financial information comparisons is true?

A)A time-series analysis compares a company's financial results for one period to its own results in other periods.
B)If we compare a company's performance in the current period to its competitors' performance,we are conducting a time-series analysis.
C)Benchmarks are used to compare companies in different industries.
D)Cross-sectional analysis refers to a ratio comparison across companies that are in different industries.

Question 32

Which of the following would generally be considered an operating revenue or expense?

A)Income from renting out extra warehouse space.
B)Interest on a note payable.
C)Dividends earned on an investment is another company's stock.
D)Depreciation expense.

Question 33

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.

Question 34

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)analysts to vote on company policies.

Question 35

Which of the following is correct?

A)Management is under constant pressure from directors to produce pleasing financial results,whatever it takes.
B)Directors oversee the managers of the company and have the primary goal of ensuring that financial decisions benefit management.
C)Managers oversee the members of the Board of Directors.
D)The stockholders elect the board of directors.

Question 36

Which of the following statements is true of a multiple-step income statement?

A)It groups all revenues together.
B)It reports a different amount of net income than a single-step income statement.
C)It includes expenses that would not appear on a single-step income statement.
D)Net income is probably not the number that investors and creditors care most about.

Question 37

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 38

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 39

Which of the following statements regarding the roles of accounting information is not true?

A)When creditors use accounting information to administer contracts,it serves a contracting role.
B)When accounting data are used to assess the worth of a company or its stock,the data are said to be used in a valuation role.
C)When accounting information is used in managing the business,it is being used in a management function.
D)When directors use financial information,the information is being used in an audit function.

Question 40

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-assets ratio and the asset turnover ratio are used to evaluate profitability of the company.

Question 41

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 42

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 was greater in 2014 than it was in 2013.
B)In comparison to 2013,the company became less efficient in 2014 in generating revenues from its investment in assets.
C)Despite the increase in sales in 2014,the company controlled its expenses just as well as it had in 2012.
D)The company's level of financing risk was less in 2013 than it was in 2012.

Question 43

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 44

When calculating a ratio that uses period data and point-in-time data,analysts typically use the:

A)average value for the period data.
B)starting point for the point-in-time data.
C)ending point for the period data.
D)average value for the point-in-time data.

Question 45

The company's debt-to-assets ratio on January 1,2015 is:

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

Question 46

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

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

Question 47

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

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

Question 48

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)revenue is 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 49

If the company doesn't have other sources of revenue,its net profit margin during 2014 is closest to:

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

Question 50

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 2013,which the company used to acquire additional assets.
B)Assets acquired in 2014 did not improve Momentum's ability to generate sales from each dollar invested in assets.
C)The total dollar amount of stockholders' equity increased from 2012 to 2013 and from 2013 to 2014.
D)Momentum's financing strategy has shifted toward greater relative reliance on investors for funding the company's growth.

Question 51

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

A)stockholders' equity is 55% of total assets.
B)stockholders' equity is 45% of total assets.
C)investors provide 55% of the company's financing.
D)liabilities are 55% of equity.

Question 52

The company's asset turnover ratio for 2014 is:

A)2.5
B)0.5
C)0.45
D)0.1

Question 53

Scandals involving Enron and WorldCom drew heightened attention to the possibility that financial statements might be misreported to portray a favorable 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 54

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 55

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 stockholders.

Question 56

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 57

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 stockholders for $1,000,000.As a direct result of this transaction,the:

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

Question 58

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

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

Question 59

If a company negotiates a deal with creditors to exchange debt for stock,its:

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

Question 60

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 61

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 62

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)they do not have to match the financial statements.

Question 63

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

A)Recording the entire costs of supplies purchased,but not used,as an expense.
B)Failing to adjust for insurance expired.
C)Failing to accrue wages incurred but not yet paid for the current period.
D)Recording rent received but not yet earned

Question 64

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

A)press releases.
B)annual reports.
C)SEC filings.
D)management reports.

Question 65

Performance-based bonuses DO NOT 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)overstate liabilities of the company.

Question 66

Which of the following describes the order in which the financial reports or disclosures would normally be issued by public companies?

A)(1)annual report, (2)Form 10-K, (3)Press release announcing annual earnings.
B)(1)Form 10-K, (2)annual report, (3)Press release announcing annual earnings.
C)(1)Press release announcing annual earnings, (2)Form 10-K, (3)annual report.
D)(1)Press release announcing annual earnings, (2)annual report, (3)Form 10-K.

Question 67

If a publicly traded company is trying to appear attractive to external users,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 68

A company files a Form 10-K with the SEC to submit its:

A)quarterly report.
B)annual report.
C)press releases.
D)report of current events of financial importance.

Question 69

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

A)An investor's web site.
B)A company's annual report.
C)A company's press release.
D)A report filed with the SEC.

Question 70

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 71

Which of the following was enacted by the government to prevent more corporate accounting scandals?

A)Federal Accounting Standards Board Act.
B)Securities and Exchange Act.
C)Sarbanes-Oxley Act.
D)Clayton Act.

Question 72

Which of the following statements about a multiple-step income statement is not true?

A)Net income plus income tax expense is equal to income before income taxes.
B)Depreciation would be considered an operating expense.
C)Income before income taxes less non-operating expenses,plus non-operating revenues is equal to income from operations.
D)Net income plus income tax expense plus non-operating expenses less non-operating revenues equals income from operations.

Question 73

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

A)Recording costs as assets that should have been expensed.
B)Failing to adjust for depreciation in the current period.
C)Failing to accrue income taxes of the current period.
D)Failing to accrue interest earned of the current period.

Question 74

Numerous accounting scandals and material financial misrepresentations resulted in the SEC:

A)taking over responsibility for setting accounting rules in the United States.
B)requiring companies to issue monthly reports on financial data.
C)requiring companies to have two different accounting firms audit the financial statements included in the annual report on Form 10-K.
D)introducing severe legal consequences for managers found guilty of such actions.

Question 75

Form 8-K,which is filed with the SEC,is also known as a(n):

A)quarterly report.
B)annual report.
C)current events report.
D)audit report.

Question 76

Which of the following is not a SOX requirement?

A)SOX establishes a requirement for a tip line for employees to report questionable acts.
B)SOX requires the external auditors to issue a report on the effectiveness of internal controls.
C)SOX increases the maximum fines for individuals who commit fraudulent acts.
D)SOX requires management to report on the effectiveness of internal controls and to make it clear that they are not responsible for the internal control system.

Question 77

Under current laws dealing with misstatements of financial results,which of the following statements is true?

A)Managers found guilty can escape paying fines if they declare bankruptcy.
B)Managers can be sentenced to long prison terms of up to 20 years per violation.
C)Managers found guilty may keep any bonuses or profits from the misrepresentation if their fines are less than such bonuses or profits.
D)If you blow the whistle on your boss for misstating financial results,you can be fired.

Question 78

Which of the following would overstate 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)Making an accrual adjusting entry for interest earned on a bond investment.

Question 79

Fraud investigators identify three things that must exist for accounting fraud to occur.Which of the following is not one of the three elements of the fraud triangle?

A)The incentive to commit fraud.
B)The opportunity to commit fraud.
C)The ability to rationalize and conceal fraud.
D)The lack of a business Code of Ethics.

Question 80

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 long-term debt rather than total liabilities to calculate the company's debt-to-assets ratio,the web site will report a ratio of:

A)0.4,which would correctly state financing risk.
B)0.4,which would suggest more financing risk than it actually has.
C)0.3,which would suggest less financing risk than it actually has.
D)0.3,which would suggest more financing risk than it actually has.