Deck 2: Financial Statements and the Annual Report

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Companies prepare classified financial statements because they are required by international accounting principles.

Question 5

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

Question 6

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

Question 7

Accountants are the main reason financial statements are prepared.

Question 8

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

Question 9

The operating cycle for all businesses is one year.

Question 10

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.

Question 11

The SEC created the objectives of financial reporting.

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

Funds raised from operating activities should be invested in assets that can be used to carry on business operations.

Question 27

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

Question 28

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 29

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

Question 30

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

Question 31

A 12% change in sales will result in a 12% change in net income.

Question 32

Financing activities are needed to provide the funds to start a business.

Question 33

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 34

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 35

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

Question 36

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

Question 37

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

Question 38

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 39

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 40

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

Question 41

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 42

Which of the following is a noncurrent asset?

A) Land
B) Accounts receivable
C) Cash
D) None of these choices.

Question 43

Which of the following is a current asset?

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

Question 44

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 45

Bevco Company has provided the following information from its accounting records for the current year: $$\begin{array} { l r l r } \text { Cash } & \$ 55,000 & \text { Accounts receivable } & \$ 45,000 \\\text { Inventory } & 65,000 & \text { Land } & 75,000 \\\text { Accounts payable } & 50,000 & \text { Notes payable (due 2020) } & 150,000 \\\text { Retained earnings } & ? & \text { Capital stock } & 20,000\end{array}$$

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

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

Question 46

The qualitative characteristics of accounting data include

A) Assets reported on the balance sheet
B) All accounting information
C) Cash flows
D) Reliability

Question 47

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 48

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 49

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 50

DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.02-02 - LO: 02-02
KEYWORDS:
Bloom's: Applying
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 51

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 52

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 53

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 54

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 55

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 claim to resources.
D) To reflect current stock prices and information concerning stock markets.

Question 56

"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 57

Bevco Company has provided the following information from its accounting records for the current year: $$\begin{array} { l r l r } \text { Cash } & \$ 55,000 & \text { Accounts receivable } & \$ 45,000 \\\text { Inventory } & 65,000 & \text { Land } & 75,000 \\\text { Accounts payable } & 50,000 & \text { Notes payable (due 2020) } & 150,000 \\\text { Retained earnings } & ? & \text { Capital stock } & 20,000\end{array}$$

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

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

Question 58

Tavella Company 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 it competitors.

Question 59

Which of the following include 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 60

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 61

Use Rizwi Corporation's list of accounts at December 31, 2016 to answer the following question. Rizwi Corporation
List of Accounts at December 31, 2016
$\begin{array}{lrlr}\text { Cash } & \$ 30,000 & \text { Accumulated depreciation } & \$ 12,000 \\\text { Merchandise inventory } & 14,000 &\text { Notes payable- } & 120,000 \\\text { Land } & 40,000&\text { Due12/31/2024 } & \\\text { Buildings } & 80,000&\text { Accounts payable } & 14,000 \\\text { Accounts receivable } &25,000& \text { Equipment } & 33,000 \\& & \text { Notes Payable- } & 14,000\\&&\text { Due07/01/2018 }\\\end{array}$ ? What is Rizwi Corp.'s current ratio?

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

Question 62

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 63

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

A) Notes payable due in 5 years and bonds payable
B) Interest payable and mortgage payable
C) Income taxes payable and salaries payable
D) Capital stock and accounts payable

Question 64

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 65

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

Question 66

Guinther & Sons, Inc.a retailer of men's clothing, earned a net profit of $77,000 for 2016.The balance sheet for Guinther & Sons includes the following items: $$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 14,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$ ?

-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 67

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 68

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 items
C) Liabilities and owners' equity
D) Resources invested by the owners and amounts borrowed from creditors

Question 69

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 70

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 71

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

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

Question 72

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

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

Question 73

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 74

How are assets which 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 75

What is the correct method for calculating working capital?

A) Total Assets minus Total Liabilities
B) Current Assets minus Total Liabilities
C) Current Assets minus Current Liabilities
D) Current Assets plus Current Liabilities

Question 76

Guinther & Sons, Inc.a retailer of men's clothing, earned a net profit of $77,000 for 2016.The balance sheet for Guinther & Sons includes the following items: $$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 14,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$ ?

-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 77

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 78

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

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

Question 79

Guinther & Sons, Inc.a retailer of men's clothing, earned a net profit of $77,000 for 2016.The balance sheet for Guinther & Sons includes the following items: $$\begin{array} { l r l r } \text { Cash } & \$ 29,000 & \text { Accounts receivable } & \$ 39,000 \\\text { Inventory } & 79,000 & \text { Prepaid insurance } & 3,000 \\\text { Land } & 90,000 & \text { Accounts payable } & 14,000 \\\text { Taxes payable } & 29,000 & \text { Capital stock } & 50,000 \\\text { Retained earnings } & 97,000 & \text { Long-term notes payable } & 43,000\end{array}$$ ?

-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 80

Which set of items below are 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