Archive for October 2017

The building blocks of financial statement analysis include:

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The building blocks of financial statement analysis include: 



a. Liquidity, Efficiency, Solvency, Debt prospects.
b. Liquidity, Efficiency, Market prospects, Assets prospects.
c. Liquidity, Efficiency, Solvency, Market prospects.
d. Liquidity, Efficiency, Debt, Payment prospects.



Answer: C

Liquidity of a company is generally defined as a measure of:

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Liquidity of a company is generally defined as a measure of: 


a. the ability of a company to pay its employees in a timely manner.
b. the ability to pay interest and principal on all debt.
c. the ability to pay dividends.
d. the ability to pay current liabilities.




Answer: D

While determining the most profitable company, especially on the point of view of an owner, which of the following would be the best indicator of relative profitability?

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While determining the most profitable company, especially on the point of view of an owner, which of the following would be the best indicator of relative profitability? 



a. Highest net income
b. Highest retained earnings
c. Highest return on equity
d. All of these




Answer: C

Internal users of financial information:

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Internal users of financial information: 



a. Are not directly involved in operating a company.
b. Are those individuals involved in managing and operating the company.
c. Include shareholders and lenders.
d. Include directors and customers.



Answer: B

External users of financial information:

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External users of financial information: 



a. Are those individuals involved in managing and operating the company?
b. Include internal auditors and consultants.
c. Are not directly involved in operating the company.
d. Make operating decisions for a company.




Answer: C

Financial statement analysis:

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Financial statement analysis: 


a. Involves transforming accounting data into useful information for decision-making.
b. Helps users to make better decisions.
c. Helps to reduce uncertainty in decision-making.
d. All of these.




Answer: D

To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as:

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To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as: 



A. core earnings.
B. permanent earnings.
C. basic earnings.
D. operating earnings.



Answer: A

For a going concern, company value can be expressed by:

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For a going concern, company value can be expressed by: 




A. dividing permanent income by the cost of capital.
B. multiplying permanent income by the cost of capital.
C. dividing permanent income by the market value per share.
D. multiplying permanent income by the market value per share.





Answer: A

Economic income includes:

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Economic income includes: 


A. recurring components only.
B. nonrecurring components only.
C. both recurring and nonrecurring components.
D. neither recurring nor nonrecurring components.





Answer: C

Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure?

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Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure? 



A. Protection under Safe Harbor Rules.
B. To manage investors' expectations.
C. To signal information to investors.
D. To respond to increased demands by labor unions.




Answer: D

Which of the following is incorrect? When using the 10-Q, the analyst should be aware that the usefulness of the quarterly financial statements might be affected by:

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Which of the following is incorrect? When using the 10-Q, the analyst should be aware that the usefulness of the quarterly financial statements might be affected by: 



A. seasonality.
B. adjustments made in the final quarter of the year.
C. the use of cash accounting.
D. the increased use of estimates.




Answer: C

The matching principle requires that:

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The matching principle requires that: 



A. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.
B. non-operating gains and losses should be netted against each other.
C. a proportion of each dollar collected will be assumed to be a recovery of cost.
D. assets will be matched to the liabilities incurred to purchase them.




Answer: A

Accounting Standards are best described as:

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Accounting Standards are best described as: 



A. the result of a political process among groups with diverse interests.
B. presentation standards mandated by the Securities and Exchange Commission.
C. the state-of-the-art presentation of the science of accounting.
D. measuring the quality of safeguarding assets.



Answer: A

Which of the following are changes in accounting principle? I. A change from LIFO to FIFO. II. A change in estimated salvage value of depreciable asset. III. A change from an accelerated depreciation method to straight line depreciation. IV. Recording depreciation for the first time on machinery purchased five years ago.

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Which of the following are changes in accounting principle?
I. A change from LIFO to FIFO.
II. A change in estimated salvage value of depreciable asset.
III. A change from an accelerated depreciation method to straight line depreciation.
IV. Recording depreciation for the first time on machinery purchased five years ago. 



A. I, II, III and IV
B. I, II and III
C. I, III and IV
D. I and III




Answer: D

Which of the following is a change in an accounting estimate? I. A change from straight line depreciation to an accelerated depreciation method. II. A change in estimated salvage value of depreciable asset. III. A change in estimated useful life of an asset. IV. Recording depreciation for the first time on machinery purchased five years ago.

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Which of the following is a change in an accounting estimate?
I. A change from straight line depreciation to an accelerated depreciation method.
II. A change in estimated salvage value of depreciable asset.
III. A change in estimated useful life of an asset.
IV. Recording depreciation for the first time on machinery purchased five years ago. 



A. I, II, III and IV
B. II, III and IV
C. I, III and IV
D. II and III




Answer: D

When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions:

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When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions: 



A. can arise as management may deliberately manipulate financial statements.
B. arise often through application of (correct) accounting principles.
C. can affect the quality of earnings.
D. arise if the stock market is not efficient.




Answer: D

Which of the following statements is incorrect?

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Which of the following statements is incorrect? 



A. Under GAAP, statements are prepared using accrual accounting.
B. Under GAAP, all assets are marked to market each accounting period.
C. Under GAAP, it is necessary to make certain estimates.
D. Annual statements submitted to the SEC (10-K) must be prepared using GAAP.




Answer: B

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

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The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be: 



A. qualified.
B. unqualified.
C. adverse.
D. disclaimed.




Answer: A

10-K reports are:

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10-K reports are: 


A. the quarterly reports to stockholders.
B. quarterly filings made by a company with the SEC.
C. annual filings made by a company with SEC.
D. filings made by a company with SEC when a company changes auditors.




Answer: C

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?

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Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next? 

I. Change in accounting principles
II. Disposition of segment of business
III. Restructuring expenses
IV. Change in auditors


A. I and II
B. I and III
C. I, II and III
D. I, III and IV




Answer: C

Audit risk represents a danger to users of audited financial statements. The following are attributes pointing to potential areas of vulnerability except

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Audit risk represents a danger to users of audited financial statements. The following are attributes pointing to potential areas of vulnerability except 



A. company in financial distress requiring financing.
B. management dominated by one or more strong-willed individuals.
C. deterioration in liquidity or solvency.
D. company earning high profits consistently over a number of years




Answer: D

Financial accounting data has some inherent limitations. Which of the following are limitations?

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Financial accounting data has some inherent limitations. Which of the following are limitations? 

I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.


A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II, III and IV




Answer: D

Which of the following statements about accruals and cash flows is false?

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Which of the following statements about accruals and cash flows is false? 




A. Company value can be determined by using accrual accounting numbers.
B. Accrual accounting numbers are subject to accounting distortions.
C. Cash flows are more reliable than accruals.
D. Cash flows cannot be manipulated.



Answer: D

Which of the following statements about directors of a company is true?

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Which of the following statements about directors of a company is true? 




A. Directors are elected by management of a company.
B. Directors only get paid if the company increases its profitability that year.
C. Directors are shareholders' representatives.
D. All directors of a company are senior managers in that company.



Answer: C

Which of the following is not considered part of GAAP?

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Which of the following is not considered part of GAAP? 



A. Statements of Financial Accounting Standards (SFAS)
B. International Accounting Standards (IAS)
C. Accounting Research Bulletins (ARB).
D. Accounting Principles Board Opinions (APB).




Answer: B

Which of the following items would be classified as investing activities?

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Which of the following items would be classified as investing activities?



a. Proceeds from borrowing, payment of dividends, receipt of dividends.
b. Sale of goods, receipt of dividends, repurchase of firm's own stock.
c. Sale of property, purchase of securities, loans to others.
d. Proceeds from borrowing, payment of dividends.




Answer: C

Which of the following items would be classified as operating activities?

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Which of the following items would be classified as operating activities?



a. Payments for inventory, payments for salaries, cash received from sale of goods.
b. Payments on loans, payments for taxes, payments for rent.
c. Proceeds from borrowing, payments of dividends, purchases of supplies.
d. Acquisitions of equipment, payment of dividends, revenue.




Answer: A

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

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On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because: 



a. depreciation is a direct source of cash
b. depreciation is an outflow of cash to a reserve account for the replacement of assets
c. depreciation reduces net income and involves an outflow of cash
d. depreciation reduces net income but does not involve an outflow of cash



Answer: D

A cash flow adequacy ratio, when measured over the last several years, of less than one:

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A cash flow adequacy ratio, when measured over the last several years, of less than one: 



A. Indicates that a company's net income is too low relative to its sales level
B. Indicates that a company should decrease its dividend payout ratio
C. Indicates that a company needs to pay down its debt to decrease interest costs
D. Indicates that a company's internally generated cash flows have not been sufficient to cover dividend payments and support past growth levels





Answer: D

The cash flow adequacy ratio

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The cash flow adequacy ratio 




A. Measures a company's ability to generate sufficient cash flow from investing to cover debt repayments
B. Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures and debt repayment
C. Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures, inventory additions and dividends
D. Measures a company's ability to generate sufficient cash flows from operations to cover capital expenditures, debt repayment and dividends




Answer: C

The balance for supplies is $41,000 and $27,000 for 12/31/05 and 12/31/06, respectively. During the 2006, the company recorded $30,500 of supplies expense was recorded. How much new supplies were purchased?

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The balance for supplies is $41,000 and $27,000 for 12/31/05 and 12/31/06, respectively. During the 2006, the company recorded $30,500 of supplies expense was recorded. How much new supplies were purchased? 




A. $44,500
B. $16,500
C. $14,000
D. $30,500




Answer: B

Beginning and ending plant assets are, respectively, $325,000 and $370,000. Beginning and ending accumulated depreciation is, respectively, $82,800 and $95,000. Depreciation expense for the period was $30,000, and new assets of $76,000 were purchased. Plant assets were sold at a $10,500 loss. What were the cash proceeds from the sale?

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Beginning and ending plant assets are, respectively, $325,000 and $370,000. Beginning and ending accumulated depreciation is, respectively, $82,800 and $95,000. Depreciation expense for the period was $30,000, and new assets of $76,000 were purchased. Plant assets were sold at a $10,500 loss. What were the cash proceeds from the sale? 




A. $17,800
B. $3,100
C. $2,700
D. $31,000




Answer: C

Which of the following is true? The choice of LIFO versus FIFO will:

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Which of the following is true? The choice of LIFO versus FIFO will: 




A. not affect net income or cash flow from operations
B. not affect net income but will affect cash flow from operations
C. affect both net income and cash flow from operations
D. affect net income but will not affect cash flow from operations



Answer: C

Which of the following is true? Depreciation:

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Which of the following is true? Depreciation: 




A. is recorded so that net book value represents fair value of assets
B. does not affect the amount of cash realized from operations as it is a non-cash flow
C. is added back to net income to calculate cash from operations under the direct method
D. represents a fund from which to purchase future assets



Answer: B

Tracy used the indirect method of determining cash flow from operations (CFO), had they used the direct method:

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Tracy used the indirect method of determining cash flow from operations (CFO), had they used the direct method: 



A. CFO would have been higher as gains are not deducted in arriving at CFO
B. CFO would have been lower as losses and depreciation are not added back in arriving at CFO
C. CFO would have been the same
D. it is not possible to determine what CFO would have been without more information




Answer: C

The management of a company wishes to window-dress its cash flow from operations. Which of the following will improve cash flow from operations?

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The management of a company wishes to window-dress its cash flow from operations. Which of the following will improve cash flow from operations? 

I. factoring accounts receivable
II. paying suppliers more quickly
III. selling of some excess marketable securities
IV. deferring payment of taxes

A. IV only
B. III and IV
C. II, III and IV
D. I and IV





Answer: D

Which of the following statements are correct?

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Which of the following statements are correct? 

I. A company's choice of accounting principles for financial reporting purposes does not affect net cash flow for the accounting period
II. A company's choice of accounting principles for financial reporting purposes does not affect operating cash flow
III. If a company sells its receivables this will increase operating cash flow
IV. If a company sells its receivables this will increase financing cash flow


A. I and III
B. I, II and III
C. II and IV
D. I and IV





Answer: A

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

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On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because: 



A. depreciation is a direct source of cash
B. depreciation is an outflow of cash to a reserve account for the replacement of assets
C. depreciation reduces net income and involves an outflow of cash
D. depreciation reduces net income but does not involve an outflow of cash



Answer: D

Beginning accounts receivable are $76,000. Sales for the period total $384,000, of which $40,000 was directly for cash. $418,000 was collected from making sales and collecting accounts receivable. What is the ending balance for accounts receivable?

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Beginning accounts receivable are $76,000. Sales for the period total $384,000, of which $40,000 was directly for cash. $418,000 was collected from making sales and collecting accounts receivable. What is the ending balance for accounts receivable? 




A. $42,000
B. $2,000
C. $82,000
D. $68,000


Answer: A

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable?

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Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable? 




A. $344,000
B. $418,000
C. $378,000
D. $376,000



Answer: B

Which of the following would require an adjustment in the computation of cash flow from operations using the indirect method?

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Which of the following would require an adjustment in the computation of cash flow from operations using the indirect method? 



I. Sale of machinery for $50,000 with a net book value of $35,000
II. Purchase of supplies for cash
III. Remittance by customer in payment of goods purchased this accounting period
IV. Acquisition of land with simultaneous issuance of long-term note



A. I
B. I and II
C. I and III
D. IV




Answer: C

Under the accrual basis of accounting, which of the following statements is true?

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Under the accrual basis of accounting, which of the following statements is true? 

I. Reported net income provides a measure of operating performance
II. Revenue is recognized when cash is received, and expenses are recognized when payment is made
III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made



A. I only
B. III only
C. I and III
D. I, II and III



Answer: C

The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the:

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The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the: 



A. Objectivity principle.
B. Business entity assumption.
C. Going-concern assumption.
D. Revenue recognition principle.
E. Cost principle.



Answer: B

The rules adopted by the accounting profession as guides in preparing financial statements are:

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The rules adopted by the accounting profession as guides in preparing financial statements are: 




A. Comprised of both general and specific principles.
B. Known as generally accepted accounting principles.
C. Abbreviated as GAAP.
D. Intended to make information in financial statements relevant, reliable, and comparable.
E. All of these.




Answer: E

A corporation:

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A corporation: 



A. Is a business legally separate from its owners.
B. Is controlled by the FASB.
C. Has shareholders who have unlimited liability for the acts of the corporation.
D. Is the same as a limited liability partnership.
E. All of these.


Answer: A

The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is the:

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The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is the: 



A. Business entity principle.
B. Monetary unit principle.
C. Going-concern principle.
D. Cost principle.
E. Objectivity principle.




Answer: E

Social responsibility:

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Social responsibility: 



A. Is a concern for the impact of our actions on society.
B. Is a code that helps in dealing with confidential information.
C. Is required by the SEC.
D. Requires that all businesses conduct social audits.
E. All of these.



Answer: A

Ethical behavior requires:

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Ethical behavior requires: 



A. That auditors' pay not depend on the figures in the client's reports.
B. Auditors to invest in businesses they audit.
C. Analysts to report information favorable to their companies.
D. Managers to use accounting information to benefit themselves.
E. All of these.




Answer: A

A Certified Public Accountant

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A Certified Public Accountant 



A. Must meet education and experience requirements
B. Must pass an examination
C. Must exhibit ethical character
D. May also be a Certified Management Accountant.
E. All of these.



Answer: E

Accounting certifications include the:

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Accounting certifications include the: 




A. Certified Public Accountant.
B. Certified Management Accountant.
C. Certified Internal Auditor.
D. Personal Financial Specialist
E. All of these.



Answer: E

The primary objective of financial accounting is:

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The primary objective of financial accounting is: 



A. To serve the decision-making needs of internal users.
B. To provide financial statements to help external users analyze an organization's activities.
C. To monitor and control company activities.
D. To provide information on both the costs and benefits of looking after products and services.
E. To know what, when, and how much to produce.


Answer: B
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