Question 1

Which of the following best describes why firms produce financial statements?
A)to use as a tool when planning future investments within the firm
B)to provide a means of enticing new investors to a firm
C)to provide interested parties,both inside and outside the company,with an overview of the short- and long-term financial condition of a business
D)to show what activities the company has undertaken in the previous financial year,and what activities are planned for the near future
E)to determine managerial performance

Accepted Answer

Financial statements are primarily produced to provide an overview of the financial health of a company to both internal and external stakeholders, including shareholders, potential investors, lenders, and regulators. It helps stakeholders make informed decisions about the company's operations, financial standing, and future prospects. While financial statements may be used for other purposes such as planning investments or evaluating management performance, their primary purpose is to keep stakeholders informed about the company's financial condition.

Question 2

Which of the following best describes why the left and right sides of a statement of financial position are equal?
A)In a properly run business,the value of liabilities will not exceed the assets held by the company.
B)By definition,the assets plus the liabilities will be the same as the stockholders' equity.
C)The assets must equal liabilities plus stockholders' equity,because stockholders' equity is the difference between the assets and the liabilities.
D)By accounting convention,the assets of a company must be equal to the liabilities of that company.
E)Assets must always exceed liabilities or the company will be bankrupt.

Accepted Answer

The left and right sides of a statement of financial position are equal because the assets must equal liabilities plus stockholders' equity, which is the difference between the assets and the liabilities. This is a fundamental accounting principle known as the accounting equation. It means that everything a company owns must be balanced against everything it owes to others and what the owners have invested in the company.

Question 3

Shareholders' equity is the difference between a firm's assets and liabilities,as shown on the statement of financial position.

Accepted Answer

Shareholders' equity is calculated by subtracting a company's total liabilities from its total assets on the statement of financial position. This represents the net worth of the company that belongs to its owners or shareholders.

Question 4

Use the table for the question(s)below.
Statement of Financial Position
 
-The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.If the company has 4 million shares outstanding,and these shares are trading at a price of $8.24 per share,what does this tell you about how investors view this firm's book value?
A)Investors consider that the firm's market value is worth very much less than its book value.
B)Investors consider that the firm's market value is worth less than its book value.
C)Investors consider that the firm's market value and its book value are roughly equivalent.
D)Investors consider that the firm's market value is worth more than its book value.
E)Investors consider that the firm's market value is worth much more than its book value.

Accepted Answer

The answer of Use the table for the question(s)below.
Statement of...

Question 5

Which of the following amounts would be included on the right side of a statement of financial position?
A)the value of government bonds held by the company
B)the cash held by the company
C)the amount of deferred tax liability held by the company
D)the amount of money owed to the company by customers who have not yet paid for goods and services they have received
E)the value of inventories held by the company

Accepted Answer

Deferred tax liability is a liability and would be included on the right side of a statement of financial position, which lists liabilities and equity.

Question 6

What is the main problem in using a statement of financial position to provide an accurate assessment of the value of a company's equity?
A)Valuable assets such as the company's reputation,the quality of its work force,and the strength of its management are not captured on the statement of financial position.
B)The statement of financial position does not accurately represent the book value of assets held by the company.
C)The equity shown on the statement of financial position does not reflect the market capitalization of the company.
D)Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
E)The statement of financial position does not provide enough detail about the company's equity.

Accepted Answer

Valuable assets such as the company's reputation, the quality of its workforce, and the strength of its management are not captured on the statement of financial position. These factors can greatly impact the value of a company's equity but are not reflected in the financial statements.

Question 7

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP)when creating financial statements?
A)It is easier to find specific information in such a report if it is laid out in a clear and consistent manner.
B)It ensures that information on the performance of private companies is readily available to the public.
C)It ensures that important information is not omitted and superfluous information is not included.
D)It makes it easier to compare the financial results of different firms.
E)To make sure they satisfy the auditor.

Accepted Answer

Following GAAP ensures that financial statements are created using consistent accounting methods, which makes it easier to compare the financial results of different firms. This facilitates investment decision-making and promotes transparency in financial reporting.

Question 8

Financial statements are accounting reports issued periodically by a firm that present information on the past performance of the firm,a summary of the firm's assets and the financing of those assets,and a prediction of the firm's future performance.

Accepted Answer

Financial statements provide information on the past performance of the firm, a summary of the firm's assets, and the financing of those assets, but they do not include predictions of the firm's future performance.

Question 9

What is the role of an auditor in financial statement analysis?

Accepted Answer

The answer of What is the role of an auditor...

Question 10

The major components of shareholders' equity are:
A)cash,common stock,and paid-in surplus.
B)common stock,paid-in surplus,and net income.
C)common stock,paid-in surplus,and retained earnings.
D)common stock,liabilities,and retained earnings.
E)cash,paid-in surplus,and retained earnings.

Accepted Answer

Shareholders' equity includes the common stock, which is the amount that shareholders have invested in the company, paid-in surplus, which is the excess amount received from shareholders above the par value of the stock, and retained earnings, which is the accumulated net income of the company not distributed as dividends. Therefore, choice C (common stock, paid-in surplus, and retained earnings) is the best option. Choices A, B, D, and E are incorrect because they do not include all the major components of shareholders' equity.

Question 11

The statement of financial position shows the assets,liabilities,and stockholders' equity of a firm over a given length of time.

Accepted Answer

The statement of financial position, also known as the balance sheet, shows the assets, liabilities, and equity of a firm at one specific point in time, not over a given length of time.

Question 12

What are the four financial statements that all public companies must produce?

Accepted Answer

The answer of What are the four financial statements that...

Question 13

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP)and verifies that the information reported is reliable is the:
A)TSX Enforcement Board.
B)Accounting Standards Board.
C)provincial securities commission.
D)auditor.
E)GAAP commission.

Accepted Answer

The third party who checks annual financial statements to ensure that they are prepared according to GAAP and verifies that the information is reliable is the auditor. The other options listed do not perform this specific role. The TSX Enforcement Board enforces the rules and regulations of the Toronto Stock Exchange, the Accounting Standards Board sets accounting standards, the provincial securities commission regulates securities markets within a specific province, and there is no such thing as a GAAP commission.

Question 14

International Financial Reporting Standards are taking root throughout the world.However,it is unlikely that the Canada will report according to IFRS before the second half of the twenty-first century.

Accepted Answer

This statement is not accurate. Canada has already adopted IFRS for reporting by publicly accountable enterprises since 2011.

Question 15

A delivery company is creating a statement of financial position.Which of the following would most likely be considered a short-term liability on this statement of financial position?
A)the depreciation over the last year in the value of the vehicles owned by the company
B)revenue received for the delivery of items that have not yet been delivered
C)a loan which must paid back in two years' time
D)prepaid rent on the offices occupied by the company
E)money owed to the firm by customers who have purchased goods on credit

Accepted Answer

Revenue received for the delivery of items that have not yet been delivered is considered a short-term liability because it represents unearned revenue. The company has an obligation to deliver those items, and until the delivery is made, the received funds are not earned and are recorded as a liability.

Question 16

Use the table for the question(s)below.
Statement of Financial Position
 
-The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.What is the company's net working capital?
A)$7 million
B)$32 million
C)$33 million
D)$40 million
E)$20 million

Accepted Answer

The answer of Use the table for the question(s)below.
Statement of...

Question 17

Use the table for the question(s)below.
Statement of Financial Position
 
-The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?
A)Net property,plant,and equipment would rise to $126 million,and Total Assets and Stockholders' Equity would be adjusted accordingly.
B)Net property,plant,and equipment would fall to $116 million,and Total Assets and Stockholders' Equity would be adjusted accordingly.
C)Long-Term Liabilities would rise to $182 million,and Total Liabilities and Stockholders' Equity would would be adjusted accordingly.
D)Long-Term Liabilities would fall to $172 million,and Total Liabilities and Stockholders' Equity would be adjusted accordingly.
E)Net property,plant,and equipment would be unchanged,and Total Assets and Stockholders' Equity would also remain the same.

Accepted Answer

If the company's long-term assets were judged to depreciate at an extra $5 million per year, the Net property, plant, and equipment would decrease by $5 million each year. Over the course of one year, the net value of these assets would be reduced by $5 million, resulting in a decrease in Total Assets and Stockholders' Equity by the same amount. Therefore, the new balance sheet would show Net property, plant, and equipment as $116 million, and Total Assets and Stockholders' Equity would be adjusted accordingly.

Question 18

A company that produces drugs is preparing a statement of financial position.Which of the following would be most likely to be considered a long-term asset on this statement of financial position?
A)commercial paper held by the company
B)the inventory of chemicals used to produce the drugs made by the company
C)a patent for a drug held by the company
D)the cash reserves of the company
E)money owed to the firm by customers who have purchased goods on credit

Accepted Answer

A patent is an intangible asset that represents a long-term investment for the company. Options A, D, and E are all current assets, while option B is a short-term asset.

Question 19

A small company has current assets of $112,000 and current liabilities of $117,000.Which of the following statements about that company is most likely to be TRUE?
A)Since net working capital is negative,the company will not have enough funds to meet its obligations.
B)Since net working capital is high,the company will likely have little difficulty meeting its obligations.
C)Since net working capital is very high,the company will have ample money to invest after it meets its obligations.
D)Since net working capital is nearly zero,the company is well run and will have little difficulty attracting investors.
E)Since net working capital is negative,the company will likely have little difficulty meeting its obligations.

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. In this case, it is $112,000 - $117,000 = -$5,000, which is negative. This indicates that the company might not have enough funds to meet its short-term obligations.

Question 20

In Canada,publicly traded companies can choose whether or not they wish to release periodic financial statements.

Accepted Answer

Publicly traded companies in Canada are required by law to release periodic financial statements to provide transparency to their shareholders and the public.

Quiz 2: Introduction to Financial Statement Analysis

Which of the following best describes why firms produce financial statements?

Which of the following best describes why the left and right sides of a statement of financial position are equal?

Shareholders' equity is the difference between a firm's assets and liabilities,as shown on the statement of financial position.

Which of the following amounts would be included on the right side of a statement of financial position?

What is the main problem in using a statement of financial position to provide an accurate assessment of the value of a company's equity?

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?

Financial statements are accounting reports issued periodically by a firm that present information on the past performance of the firm,a summary of the firm's assets and the financing of those assets,and a prediction of the firm's future performance.

What is the role of an auditor in financial statement analysis?

The major components of shareholders' equity are:

The statement of financial position shows the assets,liabilities,and stockholders' equity of a firm over a given length of time.

What are the four financial statements that all public companies must produce?

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the:

International Financial Reporting Standards are taking root throughout the world.However,it is unlikely that the Canada will report according to IFRS before the second half of the twenty-first century.

A delivery company is creating a statement of financial position.Which of the following would most likely be considered a short-term liability on this statement of financial position?

Use the table for the question(s) below. Statement of Financial Position -The above diagram shows a statement of financial position for a certain company.All quantities shown are in millions of dollars.What is the company's net working capital?

A company that produces drugs is preparing a statement of financial position.Which of the following would be most likely to be considered a long-term asset on this statement of financial position?

A small company has current assets of $112,000 and current liabilities of $117,000.Which of the following statements about that company is most likely to be TRUE?

In Canada,publicly traded companies can choose whether or not they wish to release periodic financial statements.