Which of the following is least likely to be considered a role of financial statement analysis?
Determining whether to invest in the company's securities.
Assessing the management skill of the company's executives.
To make economic decisions.
A company collects cash from a customer to settle an account receivable. What effect does this transaction have on the company's total assets and total shareholders' equity?
Assets Equity
Increase Increase
No effect Increase
No effect No effect
The Management Discussion and Analysis (MD&A) portion of the financial statements:
is not required by the SEC.
includes such items as discontinued operations, extraordinary items, and other unusual or infrequent events.
includes audited disclosures that help explain the information summarized in the financial statements.
In the expanded form of the accounting equation, assets equal liabilities plus contributed capital plus:
ending retained earnings minus beginning retained earnings.
beginning retained earnings plus revenue minus expenses.
ending retained earnings.
According to the IASB, which of the following least accurately describes financial reporting? Financial reporting:
provides information about changes in financial position of an entity.
uses the information in a company's financial statements to make economic decisions.
is useful to a wide range of users.
Alpha Company reported the following financial statement information: December 31, 2006: Assets $70,000 Liabilities 45,000 December 31, 2007: Assets 82,000 Liabilities 55,000 During 2007: Stockholder investments 3,000 Net income ? Dividends 6,000 Calculate Alpha's net income for the year ended December 31, 2007 and the change in stockholders' equity for the year ended December 31, 2007.
Net income Change in stockholders' equity
$5,000 $2,000 decrease
($3,000) $2,000 increase
$5,000 $2,000 increase
What is the fundamental balance sheet equation?
Assets = Liabilities + Stockholders' Equity (A = L + E).
Liabilities = Assets + Stockholders' Equity (L = A + E).
Assets = Stockholders' Equity Liabilities (A = E L).
Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the:
initial trial balance.
general ledger.
general journal.
Beta Company reported the following financial statement information: December 31, 2006: Assets $58,000 Liabilities 28,000 December 31, 2007: Assets ? Liabilities 38,000 During 2007: Stockholder investments 15,500 Net income 18,000 Dividends 7,750 Calculate Beta's total assets and stockholders' equity as of December 31, 2007.
Total assets Stockholders' equity
$93,750 $30,000
$93,750 $55,750
$79,250 $55,750
An accounting entry that updates the historical cost of an asset to current market levels is best described as:
a contra account.
a valuation adjustment.
accumulated depreciation.
Which of the following financial reporting choices is permitted under IFRS but not under U.S. GAAP?
Netting deferred tax assets with deferred tax liabilities.
Excluding actuarial gains and losses from balance sheet pension items.
Revaluing plant and equipment upward.
Accruals are best described as requiring an accounting entry:
when the earliest event in a transaction occurs.
only when a good or service has been provided.
when an expense has been incurred.
Which of the following statements represents information at a specific point in time?
The income statement and the balance sheet.
The balance sheet.
The income statement.
Which of the following statements about proxy statements is least accurate? Proxy statements are:
a good source of information about the qualifications of board members and management.
available on the EDGAR web site.
not filed with the SEC.
When a publicly traded U.S. company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, it also files the statement with the SEC as Form:
144.
DEF14A.
8K.
Which of the following is an analyst least likely to rely on as objective information to include in a company analysis?
Government agency statistical data on the economy and the company's industry.
Proxy statements.
Corporate press releases.
Wichita Corporation reported the following balances as of December 31, 2007: Cash $? Accounts payable 16,000 Accounts receivable 58,000 Additional paidin capital 42,000 Common stock 19,600 Inventory 12,000 Plant and equipment 26,800 Notes payable 20,000 Retained earnings 32,000 Calculate Wichita's cash and total assets as of December 31, 2007 based only on these entries. Cash Total assets
$32,800 $129,600
$32,800 $113,600
$16,000 $129,600
A firm engages in a new type of financial transaction that has a material effect on its earnings. An analyst should most likely be suspicious of the new transaction if:
the transaction is not governed by existing regulations.
no accounting standard exists that applies to the transaction.
management has not explained its business purpose.
Reading the footnotes to a company's financial statements and the Management Discussion & Analysis is least likely to help an analyst determine:
how well the financial statements reflect the company's true performance.
the various accruals, adjustments and assumptions that went into the financial statements.
the detailed information that underlies the company's accounting system.
Information about a company's financial position at a point in time is most likely found in the:
income statement.
balance sheet.
cash flow statement.
Allowance for bad debts and investment in affiliates are most likely to be shown as what types of accounts?
Allowance for bad debts Investment in affiliates
Liabilities Asset
Contraasset Asset
Contraasset Liabilities
Characteristics of a coherent financial reporting framework are best described as:
materiality, comprehensiveness, and aggregation.
consistency, materiality, and transparency.
transparency, consistency, and comprehensiveness.
Which of the following would NOT require an explanatory paragraph added to the auditors' report?
Statements that the financial information was prepared according to GAAP.
Doubt regarding the "going concern" assumption.
Uncertainty due to litigation.
Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts? Accumulated Treasury stock depreciation
Liability Equity
Contraasset Contraequity
Professional organizations of accountants and auditors that establish financial reporting standards are called:
Regulatory authorities.
International organizations of securities commissions.
Standard setting bodies.
Management disclosure of the likely impact of implementing recently issued accounting standards is least likely to:
conclude that the standard will not affect the financial statements materially.
conclude that the standard does not apply.
state that the impact of the standard is impossible to determine.
The Management Discussion and Analysis (MD&A) portion of the financial disclosure is least likely required to discuss:
capital resources and liquidity.
unusual or infrequent items.
results of operations.
Which of the following statements about financial statement analysis and reporting is least accurate?
Providing information about changes in a company's financial position is a role of financial reporting.
Deciding whether to recommend a company's securities to investors is a role of financial statement analysis.
Financial statement analysis focuses on the way companies show their financial performance to investors by preparing and presenting financial statements.
According to the IASB conceptual framework, characteristics that enhance relevance and faithful representation include:
comparability and thoroughness.
timeliness and verifiability.
assurance and understandability.
In the financial statement analysis framework, using the data to address the objectives of the analysis and deciding what conclusions or recommendations the information supports is best described as:
analyzing and interpreting the data.
reporting the conclusions.
processing the data.
Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers explains to Blackmon, "Even though we don't have access to the detailed transactions that underlie the financial statements, we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters." Rivers is:
correct.
incorrect because even within appropriate accounting parameters, management can manipulate earnings through the assumptions that rely on their discretion.
Financial statements could potentially take any form if reporting standards didn't exist.
Which of the following statements about financial statements and reporting standards is least accurate?
Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions.
The objective of financial statements is to provide economic decision makers with useful information.
Which of the following is the least likely to be considered an accrual for accounting purposes?
Unearned revenue.
Accumulated depreciation.
Wages payable.
Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn's assets and liabilities?
Assets Liabilities
Increase Unchanged
Unchanged Unchanged
Making a profitable sale on credit is most likely to have which of the following effects?
Increase assets and decrease liabilities.
Increase assets and increase equity.
Decrease assets and increase equity.
Which of the following is an independent auditor least likely to do with respect to a company's financial statements?
Prepare and accept responsibility for them.
Provide an opinion concerning their fairness and reliability.
Confirm assets and liabilities contained in them.
A listing of all the firm's journal entries by date is called the:
adjusted trial balance.
In addition to the audited financial statements included in a firm's annual report, which of the following sources of information is most likely to contain audited data?
Footnotes to the annual financial statements.
Management's commentary.
Interim financial statements filed with the SEC.
Which of the following is a company least likely required to present according to International Accounting Standard (IAS) No. 1?
Statement of changes in owners' equity.
A summary of accounting policies.
Disclosures of material events.
An analyst is least likely to use disclosures of accounting policies and estimates to evaluate:
whether the disclosures have changed since the prior period.
what policies are likely to be modified in future periods.
what policies are discussed.
According to the IASB Conceptual Framework for Financial Reporting, one of the qualitative characteristics of financial statements is:
going concern.
faithful representation.
timeliness.
The best description of the general ledger is that it:
groups accounts into the categories that are presented in the financial statements.
is where journal entries are first recorded.
sorts the entries in the general journal by account.
A company's chart of accounts is:
the set of journal entries that makes up the components of owners' equity.
a detailed list of the accounts that make up the five financial statement elements
used for entries that offset other accounts.
The term "convergence" is most accurately used to describe:
the reduction of the premium on a bond as it nears maturity.
the process of developing one universally accepted set of accounting standards.
when expected return and required return are equal.
Which of the following is least likely a qualitative characteristic accounting information must possess in order to provide useful information to an analyst, according to the IASB Conceptual Framework?
Faithful representation.
Relevance.
Conservatism.
Which of the following is the best description of the flow of information in an accounting system?
Journal entries, general ledger, trial balance, financial statements.
Trial balance, general ledger, general journal, financial statements.
General ledger, trial balance, general journal, financial statements.
A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to affect which accounts? Purchase Sale
Assets only Assets, revenue, expenses, owners' equity
Assets and expenses Assets, revenue, expenses, owners' equity
Assets only Assets and revenues only
Disagreements that inhibit development of a coherent financial reporting framework are least likely to involve which of the following?
Standard setting.
Transparency.
Valuation.
Which of the following statements regarding footnotes to the financial statements is least accurate?
Footnotes may contain information regarding contingent losses.
Footnotes provide information about assumptions and estimates used by management.
Some supplementary schedules are audited whereas footnotes are not audited.
Which of the following is least likely to be considered a characteristic of a coherent financial reporting framework?
Stability.
Comprehensiveness.
The step in the financial statement analysis framework that includes making any appropriate adjustments to the financial statements and calculating ratios is best described as:
gathering the data.
A company's operating revenues for a reporting period are most likely to be shown on its:
Two underlying assumptions of financial statements, according to the IASB conceptual framework, are:
going concern and accrual accounting.
accrual accounting and historical cost.
historical cost and going concern.
Which of the following best describes financial reporting and financial statement analysis?
Financial reporting refers to how companies show their financial performance and financial analysis refers to using the information to make economic decisions.
The objective of financial analysis is to provide information about the financial position of an entity that is useful to a wide range of users.
Financial reports assess a company's past performance in order to draw conclusions about the company's ability to generate cash and profits in the future.
The purchase of equipment for $25,000 cash is most likely to be recorded as:
an increase in an asset account and an increase in a liability account.
an increase in one asset account and a decrease in another asset account.
an increase in two asset accounts.
An analyst can find a company's accounting policies that require significant judgement or estimates in:
both the footnotes to the financial statements and Management's Discussion and Analysis.
only the footnotes.
both the footnotes and in the auditor's opinion.
Which of the following least accurately describes a correct use of doubleentry accounting?
A decrease in a liability account may be balanced by a decrease in another liability account.
A transaction may be recorded in more than two accounts.
An increase in an asset account may be balanced by an increase in an owner's equity account.
Under which framework for financial reporting systems are the financial statement elements related to performance defined as revenues, expenses, gains, losses, and comprehensive income?
FASB framework.
Both IASB and FASB frameworks.
IASB framework.
The step in the financial statement analysis framework of "processing the data" is least likely to include which activity?
Making appropriate adjustments to the financial statements.
Acquiring the company's financial statements.
Preparing exhibits such as graphs.
Which description of the objective of financial statements is most accurate? The objective of financial statements is:
to provide a wide range of users with information about a firm's financial prospects.
to provide economic decision makers with useful information about a firm's financial performance and changes in financial position. to provide securities analysts with objective data about
to provide securities analysts with objective data about a firm's financial prospects.
Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to his new assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes to a firm's financial statement and the Management Discussion and Analysis (MD&A) before making an investment decision. Which rationale is Martinenko least likely to provide to Stevenson regarding the importance of analyzing the footnotes and MD&A?
The footnotes disclose whether or not the company is adhering to GAAP.
Evaluating the footnotes helps the analyst assess whether management is manipulating earnings.
Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.
According to the IFRS framework, timeliness is a characteristic that enhances:
relevance.
both relevance and faithful representation
Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)?
Develop global accounting standards requiring transparency, comparability, and high quality in financial statements.
Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest.
Account for the needs of emerging markets and small firms when implementing global accounting standards.
Regarding the use of financial statements in security analysis and selection, it would be most accurate to say that:
analysts can verify the accuracy of financial statements by using a firm's detailed accounting system information.
further analysis of a firm's financial statements is typically not necessary if the firm has conformed to applicable accounting principles.
analysts can use footnotes and Management's Discussion and Analysis to better understand assumptions used in the financial statements.
Which of the following is most likely to be considered a barrier to developing one universally recognized set of reporting standards?
Reluctance of firms to adhere to a single set of reporting standards.
Different standardsetting bodies of different countries disagree on the best treatment of a particular issue.
GATT already requires sufficient agreement.
Which of the following is the best description of the financial statement analysis framework?
State the objective and context, gather data, process the data, analyze and interpret the data, report the conclusions or recommendations, update the analysis.
Gather data, analyze and interpret the data, determine the context, report the conclusions, update the analysis.
Gather data, analyze and interpret the data, process the conclusions, assess the context, report the recommendations, update the analysis.
Required financial statements, according to International Accounting Standard (IAS) No. 1, include a(n):
balance sheet and explanatory notes.
cash flow statement and auditor's report.
income statement and working capital summary.
The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to:
−$150.
$150.
$450.
The standard auditor's report is most likely required to:
provide reasonable assurance that management is reliable.
provide an "unqualified" opinion if material uncertainties exist.
provide reasonable assurance that the financial statements contain no material errors.
Which of the following statements about financial reporting standards is least accurate? Reporting standards:
narrow the range within which management estimates can be seen as reasonable.
are disclosed on Form 8K by publicly traded firms in the United States.
ensure that the information is "useful to a wide range of users."
Which of the following statements concerning the notes to the audited financial statements of a company is least accurate? Financial statement notes:
contain information about contingent losses that may occur.
include management's assessment of the company's operating performance and financial results.
are audited.
Desirable attributes of accounting standardsetting bodies least likely include:
making decisions that are in the public interest.
operating independently of interested stakeholders.
having clear and consistent standardsetting processes.
Which of the following is least likely to be available on EDGAR (Electronic Data Gathering, Analysis, and Retrieval System)?
SEC filings.
Form 10Q.
The process of developing one universally accepted set of accounting standards is best described as:
unification.
convergence.
IASB.
Which of the following statements about the elements of financial statements under the FASB and IASB frameworks is least accurate?
The IASB framework lists income and expenses as the elements related to performance.
The IASB framework does not allow the values of assets to be adjusted upward.
The word "probable" is used by the FASB to define assets and liabilities.
