Deck 5: Communicating and Interpreting Accounting Information

Question 1

The form 10-Q contains an unaudited set of quarterly financial statements.

Answer 1

True

Question 2

Corporate governance refers to the procedures designed to ensure that the company is managed in the interest of the board of directors who oversee management.

Answer 2

False

Question 3

Independent auditors are advisors who analyze financial statements and other economic information to formulate forecasts and stock recommendations.

Answer 3

False

Question 4

The audit committee of the board of directors is responsible for maintaining the integrity of a company's financial statements and financial reporting.

Question 5

The form 10-K is the annual report that publically traded companies must file with the Securities & Exchange Commission (SEC).

Question 6

Intangible assets are reported on the balance sheet as a current asset.

Question 7

The fraud triangle conditions necessary for financial statement fraud to occur are the existence of a system of internal control, the ability to invade the system, and rationalization to commit the fraud.

Question 8

Intangible assets are reported on the balance sheet as noncurrent assets and include goodwill.

Question 9

Sales by major product category is a required financial statement disclosure.

Question 10

The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by their internal auditors.

Question 11

The mission of the Securities & Exchange Commission (SEC) is to develop generally accepted accounting principles.

Question 12

External users of accounting information include decision makers such as investors, creditors, and financial analysts.

Question 13

The Securities & Exchange Commission (SEC) oversees the work of the Financial Accounting Standards Board (FASB).

Question 14

The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independent auditors.

Question 15

Information on all contractual agreements is included in notes as a financial statement disclosure.

Question 16

The Financial Accounting Standards Board (FASB) oversees the work of the Public Company Accounting Oversight Board (PCAOB).

Question 17

The primary responsibility for the information in a corporation's financial statements lies with the chief executive officer (CEO) and the chief financial officer (CFO).

Question 18

Financial analysts utilize a company's financial reports to assist them in making earnings forecasts and earnings per share projections.

Question 19

Comparative financial statements are those of a company in one industry presented with another company in the same industry.

Question 20

Inventories are reported on the balance sheet as a current asset.

Question 21

Which of the following statements is false?

A)The board of directors meets with the external auditors to discuss management's compliance with their financial reporting obligations.
B)The external auditors are selected by the Securities & Exchange Commission (SEC).
C)The Securities & Exchange Commission (SEC) requires publically traded companies to have their financial statements audited by an independent accountant.
D)The external auditors assume some responsibility with respect to the fairness of the financial statements.

Question 22

The gross profit percentage is calculated by dividing net sales by gross profit.

Question 23

Which of the following is an objective of the external audit of a company's financial statements?

A)To provide a forecast of the company's future earnings.
B)To assure no fraud has been committed by the company's management.
C)To provide credibility that the financial statements are fairly presented.
D)To detect all accounting errors made by the accounting system and employees.

Question 24

Preparers of the statement of cash flow must choose the direct or indirect method for each activity section of the statement.

Question 25

The return on assets ratio may increase when sales increase.

Question 26

The indirect method of reporting cash flow from operating activities on the statement of cash flows begins with net income and adjusts for cash items.

Question 27

Gains and losses on sales of investments are reported on the income statement as a component of income from operations.

Question 28

Which of the following is not true about the audit committee of the board of directors?

A)They meet with the auditors to discuss management's compliance with their financial reporting responsibilities.
B)They ensure the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).
C)They are responsible for ensuring that processes are in place for maintaining the integrity of the financial statement preparation and reporting.
D)They are responsible for hiring the company's external auditors.

Question 29

Which of the following are primarily responsible for the information provided in a company's financial statements?

A)The internal and external auditors.
B)The Securities & Exchange Commission (SEC) and the external auditors.
C)The chief executive officer (CEO) and the chief financial officer (CFO).
D)The external auditors and the board of directors.

Question 30

Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?

A)Overseeing the work of the Securities & Exchange Commission (SEC).
B)Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C)The responsibility for protecting investors and maintaining the integrity of the securities markets.
D)The development of generally accepted accounting principles.

Question 31

The gross profit percentage decreases when operating expenses increase.

Question 32

Net sales plus cost of goods sold is reported on the income statement as income from continuing operations.

Question 33

Which of the following is not included as a primary part of the financial disclosure in Form 10-K?

A)Financial data for a 5-year period.
B)Management's opinion of the financial statements.
C)Business operations and strategy.
D)Four basic financial statements.

Question 34

The essence of reporting the gains on sales of investments separately on an income statement is that they are do not to primary operations of the reporting company.

Question 35

The return on assets ratio is calculated by dividing income from continuing operations by average total assets.

Question 36

The summary of significant accounting policies is a required financial statement disclosure.

Question 37

Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financial officer (CFO)?

A)Overseeing the financial statement external audit.
B)Ensuring the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).
C)The certification of the strength of the internal control system.
D)The disclosure to the auditor committee of any frauds they are aware of.

Question 38

An intangible asset has no physical existence and no life.

Question 39

The return on assets ratio is affected by both the net profit margin ratio and the total asset turnover ratio.

Question 40

Which of the following tasks is not performed by the Securities & Exchange Commission (SEC)?

A)Overseeing the work of the Financial Accounting Standards Board (FASB).
B)Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C)Taking responsibility for protecting investors and maintaining the integrity of the securities markets.
D)The development of generally accepted accounting principles.

Question 41

Stockholders' equity, also called shareholders' equity, includes which of the following two accounts?

A)Common stock and Deferred revenue.
B)Common stock and Retained earnings.
C)Liabilities and Retained earnings.
D)Retained earnings and Cash.

Question 42

Brimmel Corp. has provided the following information: Sales were $780,000;
Cost of goods sold was $429,000;
Net income was $195,000.
What was Brimmel's gross profit percentage?

A)55%
B)45%
C)62%
D)222%

Question 43

Kryton Corp. has provided the following information: Gross profit was $620,000;
Cost of goods sold was $380,000;
Net income was $400,000.
What was Kryton's gross profit percentage?

A)40%
B)61.3%
C)62%
D)155%

Question 44

Panmar Inc. is preparing a statement of stockholders' equity for 2016. On January 1, 2016, Panmar started the year with a $200,000 credit balance in its retained earnings account. During 2016, the company earned net income of $140,000. Panmar declared dividends of $80,000 and paid $50,000 of those dividends. Also, the company received cash of $100,000 for additional shares of common stock issued and then paid $30,000 to repurchase shares of common stock. What is the balance in retained earnings on December 31, 2016?

A)$260,000.
B)$290,000.
C)$330,000.
D)$390,000.

Question 45

The Statement of Comprehensive Income includes items in which order?

A)Net income, Other items of net income, Comprehensive income.
B)Comprehensive income, Net income, Other items of Comprehensive income.
C)Net income, Other Fair value items, Comprehensive income.
D)Net income, Other comprehensive income items, Comprehensive income.

Question 46

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.
What was Willie's income before taxes?

A)$344,000.
B)$199,000.
C)$257,000.
D)$286,000.

Question 47

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's income from operations (operating income)?

A)$333,000.
B)$188,000.
C)$156,000.
D)$232,000.

Question 48

Information disclosed in a balance sheet about shares of common stock includes the number of shares that are:

A)Authorized and Issued.
B)Issued and Outstanding.
C)Authorized, Issued, and Outstanding.
D)Authorized, Issued, Outstanding, and Not Outstanding.

Question 49

Which of the following would not be classified as a current asset?

A)Accounts receivable.
B)Goodwill.
C)Inventories.
D)Non-trade receivables.

Question 50

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's gross profit?

A)$564,000.
B)$188,000.
C)$333,000.
D)$232,000.

Question 51

Denmark Inc. is preparing a statement of stockholders' equity for 2016. On January 1, 2016, Denmark started the year with a $100,000 credit balance in its retained earnings account. During 2016, the company earned net income of $70,000 and declared dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. What is the balance in retained earnings on December 31, 2016?

A)$100,000.
B)$170,000.
C)$175,000.
D)$160,000.

Question 52

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.
What was Willie's nonoperating income (expense)?

A)($71,000).
B)($158,000).
C)$216,000.
D)$257,000.

Question 53

The Callie Company has provided the following information: Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's income before taxes?

A)$564,000.
B)$188,000.
C)$377,000.
D)$232,000.

Question 54

Which of the following best describes operating income?

A)It includes the results of discontinued operations.
B)It is before operating expenses.
C)It is sales minus cost of goods sold and income tax expense.
D)It is net sales minus cost of goods sold and operating expenses.

Question 55

The Nellie Company has provided the following information: Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Income tax expense was $199,000.
What was Nellie's operating income?

A)$514,000.
B)$612,000.
C)$497,000.
D)$298,000.

Question 56

Which of the following is not reported as an operating expense on the income statement?

A)Administrative expenses.
B)Research and development expense.
C)Interest expense.
D)Selling expenses.

Question 57

Components of other comprehensive income can be reported in combination with the:

A)Balance sheet.
B)Statement of cash flows.
C)Statement of stockholders' equity.
D)Income statement.

Question 58

Which of the following is true about gross profit (gross margin)?

A)It is net sales minus operating expenses.
B)It is net sales minus cost of goods sold.
C)It is the same as income from continuing operations.
D)It is net sales minus cost of goods sold and operating expenses.

Question 59

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.
What was Willie's gross profit?

A)$340,000.
B)$689,000.
C)$818,000.
D)$760,000.

Question 60

The Nellie Company has provided the following information: Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Income tax expense was $199,000.
What was Nellie's income before taxes?

A)$514,000.
B)$612,000.
C)$497,000.
D)$298,000.

Question 61

Huron has provided the following year-end balances: Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000
How much is Huron's stockholders' equity?

A)$33,800.
B)$187,100.
C)$195,100.
D)$202,600.

Question 62

Which of the following statements regarding earnings per share is false?

A)It is reported on the income statement.
B)It increases when net income increases.
C)It is calculated using the average number of common shares outstanding during the period.
D)It would not be affected by additional shares of common stock issued during the year.

Question 63

Which one of the following statements is true when a company sells inventory costing $800 for $1,400 cash, and operating expenses are $500?

A)There is no change in current assets.
B)Gross profit increases $100.
C)Stockholders' equity increases $100.
D)Net sales increases $2,200.

Question 64

Where are shares of the reporting company's common stock issued in exchange for cash reported on a statement of cash flows?

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 65

Which of the following would not be used to calculate income from operations?

A)Gross profit.
B)Selling and administrative expenses.
C)Interest income.
D)Research and development expense.

Question 66

Which of the following would not typically be disclosed in the notes to the financial statements?

A)Additional detail regarding numbers reported in the financial statements.
B)A summary of significant accounting policies.
C)Commitments under long-term supply agreements.
D)The net income earned for the reporting perioD.The net income earned for the reporting period is included directly in the financial statements.

Question 67

A company has paid cash to repurchase its common stock that was previously issued. Where will this cash flow be reported on the statement of cash flows?

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 68

Huron has provided the following year-end balances: Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000
How much are Huron's current assets?

A)$85,900.
B)$71,300.
C)$74,900.
D)$102,100.

Question 69

Examples of nonoperating items that would appear on an income statement are:

A)Interest income, depreciation expense, gain on sale of land.
B)Income taxes, interest expense, loss on sale of investments.
C)Interest expense, interest income, loss on sale of investments.
D)Depreciation expense, interest income, interest expense.

Question 70

Which of the following statements is false when a company sells inventory costing $900 for $1,500 cash?

A)Current assets increase $600.
B)Gross profit increases $1,500.
C)Stockholders' equity increases $600.
D)Net sales increases $1,500.

Question 71

In which of the following classifications would cash dividend payments to stockholders be reported in the statement of cash flows?

A)Operating activities.
B)Financing activities.
C)Investing activities.
D)Stockholder activities.

Question 72

What additional information is required to be presented on the same page as the income statement?

A)Cash paid for interest.
B)Deferred revenues.
C)Earnings per share.
D)Profit margin.

Question 73

Which of the following would not be included on an income statement?

A)Accumulated depreciation.
B)Insurance expense.
C)Cost of goods sold.
D)Discontinued operations.

Question 74

Which of the following is true?

A)Income from operations would increase other income.
B)Income before income taxes would be shown as a component of operating income on the income statement.
C)Gains and losses on the sales of investments are included in nonoperating income (loss).
D)Income tax expense is shown as part of operating expenses.

Question 75

In what order are cash flow activities presented on the statement of cash flows?

A)Investing activities, Operating activities, Financing activities.
B)Financing activities, Operating activities, Investing activities.
C)Operating activities, Investing activities, Financing activities.
D)Operating activities, Financing activities, Investing activities.

Question 76

The Willie Company has provided the following information: Operating expenses were $345,000;
Income from operations was $415,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Loss from sale of investments was $87,000;
Income tax expense was $58,000.
What was Willie's net income?

A)$373,000.
B)$328,000.
C)$199,000.
D)($156,000).

Question 77

Which of the following statements is false when a company sells inventory costing $700 for $1,200 cash and operating expenses are $200?

A)Cost of goods sold is $700.
B)Gross profit is $500.
C)Stockholders' equity increases by net income of $300.
D)Net sales increase $500.

Question 78

Anjou Company had 10,000 shares of common stock outstanding at December 31, 2015 and 14,000 shares of common stock outstanding at December 31, 2016. Anjou had sales of $3,600,000 in 2016 and net income of $280,000 in 2016. What is Anjou's earnings per share reported for 2016?

A)$7.78
B)$9.36
C)$20.00
D)$23.33

Question 79

Which of the following items is not part of disclosure notes to the financial statements?

A)Descriptions of the significant accounting methods applied in the company's financial statements.
B)Additional detail of income taxes payable reported in the balance sheet.
C)Names of executive officers and the salaries for each officer listed.
D)Commitments under long-term supply agreements to buy inventory and equipment.

Question 80

Huron has provided the following year-end balances: Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000
How much are Huron's net noncurrent assets?

A)$122,300.
B)$120,200.
C)$123,800.
D)$112,300.