Question 1

There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies.

Accepted Answer

There is no standard threshold for materiality set by the Financial Accounting Standards Board. Materiality is a matter of professional judgment for each company and its auditors. The FASB provides guidance and principles to assist companies in making materiality judgments, but does not set a specific threshold.

Question 2

The amount of a transaction may be immaterial by company standards but still be considered significant by financial statement users.

Accepted Answer

Materiality is subjective and can vary depending on the context and perspective of the user. Even if a transaction is considered immaterial by a company, it may still be important to investors, creditors, or other financial statement users.

Question 3

Income from operations does not include interest revenue and interest expense because these items are considered to be non-operating in nature.

Accepted Answer

Income from operations refers to the revenue generated from the core business activities of a company. Interest revenue and interest expense are not directly related to these activities and are therefore classified as non-operating items.

Question 4

The lack of a common depreciation method makes it impossible to compare the performance companies using different methods.

Accepted Answer

Different depreciation methods (straight-line, declining balance, etc.) impact the timing of expense recognition, but adjustments and standardized financial ratios allow analysts to compare the performance of companies using different methods.

Question 5

The quality of accounting information that allows a user to compare two or more accounting periods for a single company is known as consistency.

Accepted Answer

Consistency is the quality of accounting information that allows a user to compare two or more accounting periods for a single company. This means that the accounting policies and methods used by the company should be consistent over time so that changes in financial position can be accurately measured and evaluated.

Question 6

Funds raised from operating activities should be invested in assets that can be used to carry on business operations.

Accepted Answer

The answer of Funds raised from operating activities should be...

Question 7

The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is consistency.

Accepted Answer

The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is understandability, not consistency. Consistency refers to the uniformity and comparability of accounting information over time.

Question 8

In the independent auditors' report included with the annual report, management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements.

Accepted Answer

The independent auditors' report is prepared by the external auditors, not management. Management may include explanations in the financial statements or management discussion and analysis section, but not in the auditors' report.

Question 9

Dividends declared and paid reduce a company's retained earnings balance.

Accepted Answer

Dividends are paid to shareholders using a company's profits, which are normally kept in its retained earnings account. When dividends are paid, the retained earnings balance decreases since the profits are being transferred to the shareholders instead of being kept by the company.

Question 10

The statement of cash flows, like the income statement, reports only operating activities of a company.

Accepted Answer

The statement of cash flows reports all three types of activities: operating, investing, and financing.

Question 11

A 12% change in sales will result in a 12% change in net income.

Accepted Answer

The relationship between sales and net income is not direct due to the presence of fixed and variable costs, taxes, and interest expenses, which can cause the percentage change in net income to differ from the percentage change in sales.

Question 12

Financing activities are needed to provide the funds to start a business.

Accepted Answer

Financing activities involve obtaining funding for a business, which is crucial for starting it up. These activities include seeking investments from investors, applying for loans from financial institutions, and issuing bonds or stocks.

Question 13

Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company's financial position, operating results, and cash flows.

Accepted Answer

This is a true statement. Independent auditors, who are Certified Public Accountants (CPAs), are responsible for examining a company's financial statements and providing an opinion on whether they fairly present the company's financial position, operating results, and cash flows.

Question 14

The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company's independent accountants (CPAs).

Accepted Answer

The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company's management. The role of independent accountants (CPAs) is to audit and express an opinion on the fairness and accuracy of those statements.

Question 15

An independent auditor's (CPA's) report is a guarantee that the financial statements are free from fraud or material error

Accepted Answer

An independent auditor's report does not provide a guarantee that the financial statements are free from fraud or material error. Rather, the report provides reasonable assurance that the financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles. The auditor also performs procedures to detect and report any material misstatements or fraud that are identified during the audit, but the report does not guarantee the absence of such issues.

Question 16

Some analysts properly refer to a company's profit margin as its return on assets.

Accepted Answer

Profit margin measures the efficiency of a company's ability to generate profit from its revenues, while return on assets (ROA) measures how efficiently a company uses its assets to generate profit. ROA takes into account both the company's profitability and asset utilization, whereas profit margin only considers profitability.

Question 17

Dividends paid appears on both the income statement and the statement of retained earnings.

Accepted Answer

Dividends paid do not appear on the income statement; they are deducted from retained earnings and appear on the statement of retained earnings. The income statement records revenues and expenses, not distributions to shareholders.

Question 18

If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause the ratio to decrease.

Accepted Answer

Since a note receivable is an asset that will increase the firm's liquidity, the current ratio will actually increase, not decrease.

Question 19

The quality of accounting information that allows a user to analyze two or more companies and look for similarities and differences is known as understandability.

Accepted Answer

The quality described is comparability, not understandability. Comparability allows users to identify and understand similarities and differences among items, whereas understandability means that information is presented clearly and concisely.

Question 20

The purchase of inventory for cash will cause the current ratio to decrease.

Accepted Answer

The answer of The purchase of inventory for cash will...

Quiz 2: Financial Statements and the Annual Report