Deck 5: Financial Reporting and Analysis

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

The same set of financial statements usually is prepared for each user.

Answer 3

True

Question 4

Financial statements are not important to the efficient allocation of resources in our economy.

Question 5

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

Question 6

Accounting information does not contain estimates,classifications,summarizations,judgments,and allocations.

Question 7

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

Question 8

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

Question 9

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

Question 10

The Sarbanes-Oxley Act requires the management of a company to guarantee,to its knowledge,that the financial statements that are filed with the SEC are accurate and complete.

Question 11

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

Question 12

When no errors have been made,accounting is always 100 percent accurate.

Question 13

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

Question 14

Providing financial information that is useful to present and potential equity investors,lenders,and other creditors in decision making is the objective of financial reporting.

Question 15

The relevance of accounting information is also an indication of its faithful representation.

Question 16

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

Question 17

In accounting,$500 is considered the dividing line between material and immaterial amounts.

Question 18

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

Question 19

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

Question 20

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

Question 21

Natural resources,such as coal mines and oil wells,are classified as property,plant,and equipment.

Question 22

Operating expenses include cost of goods sold.

Question 23

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

Question 24

The Retained Earnings portion of a corporation's balance sheet represents the earnings of the corporation less any losses,dividends,or transfers to contributed capital.

Question 25

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 26

Accounting expense is a selling expense on the income statement.

Question 27

Freight paid on goods shipped to customers is classified as a general and administrative expense.

Question 28

Classified balance sheets list accounts in alphabetical order.

Question 29

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

Question 30

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

Question 31

General and administrative expenses are a category of operating expense.

Question 32

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

Question 33

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 34

For a merchandising company,the difference between net sales and cost of goods sold is called gross margin.

Question 35

Advertising expense appears as a general and administrative expense on the income statement.

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

All the following are qualitative characteristics of accounting information except

A) flexibility.
B) comparability.
C) verifiability.
D) relevance.

Question 42

Sales returns and allowances are not deducted from gross sales on the balance sheet.

Question 43

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

Question 44

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

A) faithful representation.
B) relevance.
C) comparability.
D) understandability.

Question 45

A cash flow yield of 2.5 times is considered better than one of 2.0 times.

Question 46

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

Question 47

Return on assets is a measure of profitability.

Question 48

Return on assets measures how efficiently assets are used to produce sales.

Question 49

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

Question 50

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

Question 51

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

Question 52

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

A) Timeliness and understandability
B) Understandability and relevance
C) Verifiability and faithful representation
D) Relevance and faithful representation

Question 53

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

Question 54

Both return on assets and debt to equity ratio are profitability measures.

Question 55

Earnings per share,often called net income per share,is the final figure or "bottom line" of an income statement.

Question 56

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

Question 57

Cash return on assets is measured in percent.

Question 58

Profit margin and gross margin are not the same thing.

Question 59

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

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

Question 60

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

Question 61

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 62

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 63

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 64

Which of the following appears on the balance sheet?

A) Rent income
B) Depreciation expense
C) Net sales
D) Merchandise inventory

Question 65

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

Question 66

Which accounting term does not mean the same as the others?

A) Retained earnings
B) Net worth
C) Capital
D) Owner's equity

Question 67

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 68

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 69

Who is responsible for preparing financial statements?

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

Question 70

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) verifiability.
C) consistency.
D) cost-benefit.

Question 71

The convention of consistency relates most closely to

A) verifiability.
B) comparability.
C) timeliness.
D) faithful representation.

Question 72

Patents would appear in which section of the balance sheet?

A) Contributed capital
B) Property,plant,and equipment
C) Current liabilities
D) Intangible assets

Question 73

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

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

Question 74

An investment is classified as short term or long term based on

A) whether the investment can be sold immediately.
B) the length of time the investor expects to hold it.
C) the purpose for which it is held.
D) the dollar amount of the investment.

Question 75

The convention of consistency refers to the consistent use of accounting principles

A) among all firms in a particular industry.
B) throughout one accounting period.
C) among all firms.
D) among accounting periods.

Question 76

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 77

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 78

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

A) Relevance
B) Cost-benefit
C) Conservatism
D) Timeliness

Question 79

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

A) comparability.
B) consistency.
C) materiality.
D) faithful representation.

Question 80

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

A) Land held for future use
B) Natural resources
C) Equipment
D) Goodwill