Test Questions and Solutions

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.

• 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.

• 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.

• 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 11th Edition Fraser Test Bank Visit TestBankDeal.com to get complete for all chapters

• 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.

• The was passed in 2002 and was one of the most sweeping

corporate reforms since the Securities Act of 1934.

• The is a document used to solicit shareholder votes.

• The Assumption is the assumed unit of measurement when

preparing financial statements.

• The cash basis of accounting recognizes when cash is received and

recognizes when cash is paid.

• 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.

• One of the generally accepted accounting principles that provide the foundation

for preparing financial statements is the principle.

• Management exercises control over the budget level and timing of

expenditures.

Multiple Choice

• What information would not be found in a firm’s annual report?
• Notes to the financial statements.
• Financial Reporting Rulings.
• Auditor’s report.
• High and low stock prices.

• Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks?
• FASB.
• IASB.
• SEC.
• GAAP.

• 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.

• 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.