Test Questions and Solutions

Copyright © 2016 Pearson Education, Inc.Test Questions and Solutions Chapter 1 True-False

• A firm’s annual report contains only two pieces of information: the financial

statements and the notes to the financial statements.

• The SEC regulates U.S. companies that issue securities to the public and

requires the issuance of a prospectus for any new security offering.

• The FASB has congressional authority to set accounting policies.

4.The European Union began requiring publicly traded companies to use U.S.GAAP in 2005.

• External auditors are required to audit the internal control assessment of the

company as well as the financial statements.

• Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future

accounting scandals and renewing investor confidence in the marketplace.

7.The Management Discussion and Analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data.

• Information that is significant enough to make a difference in a decision is

considered to be immaterial.

• The time period assumption assumes a two year time frame with interim

reporting occurring daily and weekly.

10.GAAP-based financial statements are prepared according to the accrual basis of accounting.Fill in the Blank

• The requires all public companies to file a Form 10-K report

annually.Understanding Financial Statements, 11e (Global Edition) Lyn Fraser, Aileen Ormiston (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter 1 / 4

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• A corporate annual report contains financial statements.
• is responsible for the preparation of the financial statements,

including the notes, and the attests to the fairness of the presentation.

4.The was passed in 2002 and was one of the most sweeping corporate reforms since the Securities Act of 1934.

5.The is a document used to solicit shareholder votes.

• TheAssumption is the assumed unit of measurement when

preparing financial statements.

7.The cash basis of accounting recognizeswhen cash is received and recognizes when cash is paid.

8.The sharper and clearer the picture presented through the financial data and the closer that picture is to financial reality, the higher the financial statements and reported earnings.

9.One of the generally accepted accounting principles that provide the foundation for preparing financial statements is the principle.

10.Management exercises control over the budget level and timing of expenditures.Multiple Choice 1.What information would not be found in a firm’s annual report?a.Notes to the financial statements.

• Financial Reporting Rulings.

c.Auditor’s report.d.High and low stock prices.

2.Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks?a.FASB.b.IASB.c.SEC.d.GAAP. 2 / 4

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• Which of the following statements is true?
• Foreign firms registered with the SEC may file reports based on IFRS.
• U.S. firms registered with the SEC may file reports based on IFRS.
• The European Union requires firms to report based on GAAP.
• Foreign firms registered with the SEC may file reports based on IFRS

only if they reconcile all amounts to GAAP.

• Which financial statement presents the results of operations?
• Balance sheet.
• Statement of financial position.
• Income statement.
• Statement of cash flows.

• Which financial statement shows the assets, liabilities and stockholders’ equity

of the firm on a particular date?

• Statement of stockholders’ equity.
• Statement of cash flows.
• Earnings statement.
• Balance sheet.

• Which financial statement provides information about operating, financing and

investing activities?

• Statement of financial position.
• Statement of cash flows.
• Statement of stockholders’ equity.
• Income statement.

• What information can be found on a statement of stockholders’ equity?
• A reconciliation of the cash account and the retained earnings account.
• A reconciliation of the beginning and ending balances of all accounts that

appears in the stockholders’ equity section of the balance sheet.

• A reconciliation of the operating, investing and financing activities of a

firm.

• A reconciliation of net profit or loss and the cash account.

• What basic financial statements can be found in a corporate annual report?
• Balance sheet, income statement, statement of shareholders' equity, and

statement of cash flows.

• Balance sheet, auditor's report and income statement.
• Earnings statement and statement of retained earnings. 3 / 4

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• Statement of cash flows and five-year summary of key financial data.

• What is an unqualified audit report?
• A report stating that the auditors are not qualified to report on a firm.
• A report that states the financial statements are in violation of GAAP.
• A report that states that departures from GAAP exist in the firm’s

financial statements.

• A report that states the financial statements are presented fairly, in all

material respects, and are in conformity with GAAP.

• What is a qualified report?
• A report stating that the auditors are not qualified to report on a firm.
• A report that states the financial statements are in violation of GAAP.
• A report that states that departures from GAAP exist in the firm’s

financial statements.

• A report that states the financial statements are presented fairly, in all

material respects, and are in conformity with GAAP.

• What organization has the authority to register, inspect, and discipline auditors

of all publicly owned companies?

• Public Company Accounting Oversight Board.
• SOX.
• Congress.
• FASB.

• According to Section 302 of the Sarbanes-Oxley Act, who must certify the

accuracy of the financial statements of a public company?

• Public Company Accounting Oversight Board.
• SEC.
• External auditor.
• CEO and CFO.

• All of the following items should be discussed in the management discussion

and analysis except for:

• Anticipated changes in the mix and cost of financing resources.
• The market value of all assets.
• The internal and external sources of liquidity.
• Unusual or infrequent transactions that affect income from continuing

operations.

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