CHAPTER 2INTRODUCTION TO FINANCIAL STATEMENTS AND OTHER

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2—INTRODUCTION TO FINANCIAL STATEMENTS AND OTHER

FINANCIAL REPORTING TOPICS

MULTIPLE CHOICE

• At the end of the fiscal year, an adjusting entry is made that increases both interest expense and

interest payable. This entry is an application for which accounting principle?

• Full disclosure
• Materiality
• Matching
• Going concern
• Realization

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Adjusting Entries | IMA: Reporting TOP: The Accounting Cycle KEY: Bloom's: Application NOT: Time: 1 min.

• Who is responsible for the preparation and integrity of financial statements?
• A cost accountant
• Management
• An auditor
• A bookkeeper
• The FASB

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Reporting TOP: Management’s Responsibility for Financial Statements KEY: Bloom's: Knowledge NOT: Time: 1 min.

• Which of the following is not an objective of the SEC's integrated disclosure system?
• To coordinate the Form 10-K requirements with those of the annual report
• To lessen the impact of the FASB
• To expand the management discussion of liquidity, capital resources, and results of

operations

• To improve the quality of disclosure
• To standardize information requirements

ANS: B PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: GAAP | IMA: Reporting TOP: The SEC’s Integrated Disclosure System KEY: Bloom's: Knowledge NOT: Time: 3 min.

• Which of the following is not a type of audit opinion?
• Unqualified opinion
• Qualified opinion
• Adverse opinion
• Clean opinion

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© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

• Disclaimer of opinion

ANS: D PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Reporting TOP: Auditor’s Opinion KEY: Bloom's: Knowledge NOT: Time: 1 min.

• Which of the following statements is not true?
• A qualified opinion or an adverse opinion may bring into question the reliability of the

financial statements.

• A disclaimer of opinion indicates that one should not look to the auditor's report as an

indication of the reliability of the statements.

• In some cases, outside accountants are associated with financial statements when they

have performed less than an audit.

• A review is substantially less in scope than an examination in accordance with generally

accepted auditing statements.

• The accountant's report expresses an opinion on reviewed financial statements.

ANS: E PTS: 1 DIF: Difficulty: Moderate NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Reporting TOP: Auditor’s Opinion KEY: Bloom's: Comprehension NOT: Time: 3 min.

• In addition to the balance sheet, the income statement, and the statement of cash flows, a complete set

of financial statements must include:

• an auditor's opinion.
• a ten-year summary of operations.
• a note disclosure of such items as accounting policies.
• historical common-size (percentage) summaries.
• a list of corporate officers.

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Knowledge NOT: Time: 1 min.

• Which of the following statements is not correct concerning summary annual reports?
• A summary annual report omits much of the financial information included in an annual

report.

• When a company issues a summary annual report, the proxy materials it sends to

shareholders must include a set of fully audited statements and other required financial disclosures.

• A summary annual report generally has more nonfinancial pages than financial pages.
• A summary annual report is adequate for reasonable analysis.
• The concept of a summary annual report was approved by the Securities and Exchange

Commission.

ANS: D PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Financial Statement Analysis

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

TOP: Summary Annual Report KEY: Bloom's: Comprehension NOT: Time: 3 min.

• Which of the following is not a true statement relating to the Treadway Commission?
• The Treadway Commission is the popular name for the National Commission on

Fraudulent Reporting.

• The Treadway Commission has released reports detailing internal control systems.
• Management’s Report on Internal Control over Financial Reporting and the independent

public accounting from report to the shareholders and board of directors often refer to criteria established on internal control by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

• The Treadway Commission has issued a number of recommendations for the prevention of

fraud on financial reports, ethics, and effective internal controls.

• The Treadway Commission is a voluntary-sector organization formed to support the

Sarbones-Oxley Act.

ANS: E PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Reporting TOP: The Financial Statements KEY: Bloom's: Comprehension NOT: Time: 3 min.

• Which of these statements is not true?
• Transactions must be recorded in a journal.
• All transactions could be recorded in the general journal.
• Companies use a number of special journals to record most transactions.
• Special journals are designed to improve record- keeping efficiency.
• The form of the journals are the same from industry to industry.

ANS: E PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Recording Transactions | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Comprehension NOT: Time: 3 min.

• Which of these statements is not true?
• Asset, liability, and stockholders' equity accounts are referred to as permanent accounts.
• Revenue, expense, and dividend accounts are described as temporary accounts.
• Temporary accounts are closed at the end of the period to retained earnings.
• The balance sheet will not balance until the temporary accounts are closed to retained

earnings.

• With double-entry, each transaction is recorded twice.

ANS: E PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Closing Entries | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Comprehension NOT: Time: 3 min.

• Which of the following is a type of audit opinion that a firm would usually prefer?
• Uqualified opinion
• Qualified opinion
• Adverse opinion

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

• Clear opinion
• None of the answers are correct.

ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Reporting | ACBSP: Financial Statements | IMA: Reporting TOP: Auditor’s Opinion KEY: Bloom's: Knowledge NOT: Time: 1 min.

• Which of the following is a permanent account?
• Dividends
• Advertising expense
• Building
• Selling expense
• Insurance expense

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Application NOT: Time: 1 min.

• Which of the following is a temporary account?
• Advertising expense
• Land
• Building
• Accounts payable
• Bonds payable

ANS: A PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Financial Statements | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Application NOT: Time: 1 min.

• In terms of debits and credits, which of the following accounts have the same normal balances?
• Accounts payable, accounts receivable, notes payable
• Dividends, accounts receivable, notes payable
• Advertising expense, selling expense, accounts receivable
• Land, building, accounts payable
• Common stock, notes payable, land

ANS: C PTS: 1 DIF: Difficulty: Easy NAT: BUSPROG: Analytic STA: AICPA: FN: Measurement | ACBSP: Recording Transactions | IMA: Financial Statement Analysis TOP: The Financial Statements KEY: Bloom's: Application NOT: Time: 3 min.

• If liabilities total $70,000 and stockholders' equity totals $50,000, then total assets must be:
• $20,000.
• $80,000.
• $120,000.
• $30,000.