CHAPTER 2INTRODUCTION TO FINANCIAL STATEMENTS AND OTHER

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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

• Who is responsible for the preparation and integrity of financial statements?
• a cost accountant
• management
• an auditor
• a bookkeeper
• the FASB

ANS: B

• 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

• Which of the following is not a type of audit opinion?
• unqualified opinion
• qualified opinion
• adverse opinion
• clean opinion
• disclaimer of opinion

ANS: D

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• 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

• 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

• 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

• Which of the following would not be considered a subsequent event?
• A major customer declares bankruptcy subsequent to the balance sheet date but prior to

issuing the statements. This event was not considered on the balance sheet date.

• A major purchase of a subsidiary subsequent to the balance sheet date but prior to issuing

the statements.

• Substantial debt incurred subsequent to the balance sheet date but prior to issuing the

statements.

• Substantial stock issued subsequent to the balance sheet date but prior to issuing the

statements.

• Hiring of employees for a new store, subsequent to the balance sheet date but prior to

issuing the statements.

ANS: E

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• 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

• 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

• Which of the following is a type of audit opinion that a firm would usually prefer?
• unqualified opinion
• qualified opinion
• adverse opinion
• clear opinion
• none of the answers are correct

ANS: A

• Which of the following is a permanent account?
• dividends
• advertising expense
• building
• selling expense
• insurance expense

ANS: C

• Which of the following is a temporary account?
• advertising expense
• land
• building
• accounts payable
• bonds payable

ANS: A

• 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

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

ANS: C

• Tiffin Company had retained earnings of $50,000 at the end of last year. For the current year, income

was $20,000 and dividends $15,000. What is the balance in retained earnings at the end of the current year?

• $85,000
• $45,000
• $55,000
• $60,000
• none of the answers are correct

ANS: C

• Smith Company had retained earnings of $60,000 at the end of the current year. For the current year,

income was $30,000 and dividends $10,000. What was the balance in retained earnings at the end of the prior year?

• $30,000
• $40,000
• $60,000
• $30,000
• $70,000

ANS: B

• 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 firm 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 private-sector organization formed to support

the Sarbanes-Oxley Act.

ANS: E

TRUE/FALSE

• Subsequent events are those that occur after the balance sheet date but before the statements are issued.

ANS: T