Question 1

Methods of financial statements analysis are most effectively applied together in a reiterative (rather than sequential)process.

Accepted Answer

The methods of financial statement analysis are most effectively applied together in a reiterative process. This means that analysts should use multiple methods and apply them in an overlapping and iterative manner rather than following a sequential process. This will help to provide a more comprehensive analysis and improve the accuracy of the results.

Question 2

Financial ratios represent effects,not causes.

Accepted Answer

Financial ratios are mathematical relationships between various financial statement items, providing insight into a company's financial performance. However, they do not necessarily explain the reasons behind the financial performance. Financial ratios simply represent the effects of the company's financial operations and decisions, rather than the causes behind them.

Question 3

Which of the following is a difference between conservatism principle and materiality principle?
A) Conservatism requires that financial reporting should neither disproportionately overstate nor understate a situation, whereas materiality holds that strict adherence to accounting principles is not required for items of little significance.
B) Conservatism is listed as a constraint in the conceptual framework determined by the American financial community, whereas materiality is no longer listed as a constraint in the conceptual framework.
C) Conservatism holds that strict adherence to accounting principles is not required for items of little significance, whereas materiality requires that financial reporting should neither disproportionately overstate nor understate a situation.
D) Conservatism requires that revenues be measured within the specific reporting period, whereas materiality requires that costs be deducted from the reported revenues to determine the period's net income.

Accepted Answer

The conservatism principle focuses on avoiding the overstatement of assets and revenues while not understating liabilities and expenses. On the other hand, materiality principle suggests that only significant items should be reported in financial statements, and small differences or errors can be ignored. Therefore, option A correctly identifies the difference between the two principles.

Question 4

Internal and external comparisons,made during financial statement analysis,can reveal unexpected relationships or the absence of expected relationships.

Accepted Answer

Internal and external comparisons can reveal unexpected relationships or the absence of expected relationships, leading to important insights and new perspectives in financial statement analysis. Internal comparisons involve comparing financial data within an organization over different time periods, while external comparisons involve comparing financial data across different companies or industries. Both types of comparisons can provide valuable information about a company's financial health, performance, and prospects, and help investors and managers make better decisions. However, it is important to use appropriate analytical tools, techniques, and benchmarks in order to ensure the accuracy and relevance of the comparisons.

Question 5

Amounts shown on financial statements reflect current values.

Accepted Answer

Amounts on financial statements typically reflect historical cost rather than current values, although there are exceptions depending on the accounting standards being applied (e.g., fair value accounting for certain assets).

Question 6

Which of the following is true of the cost principle?
A) It highlights the proposition that value is not the focus of accounting and is not represented in financial statements.
B) Using this principle results in the subjectivity of value assessments.
C) Under this, costs are measured subjectively on actual basis.
D) It results in reflecting the current values of assets, liabilities, equity, revenues, and expenses shown on the financial statements.

Accepted Answer

The cost principle is a fundamental accounting principle that states that assets should be recorded at their historical cost, that is, the cost at which they were acquired or produced. The focus of accounting is on objective and verifiable data, rather than subjective assessments of value. Therefore, the cost principle highlights the proposition that value is not the focus of accounting and is not represented in financial statements.

Question 7

Which of the following accountants use a conservative reporting strategy?
A) Imogene reported a higher inventory than actual.
B) Malik understated the expense incurred during the year.
C) Lia capitalized the general maintenance expenses.
D) Yuriko used a higher depreciation rate for the assets.

Accepted Answer

Yuriko's use of a higher depreciation rate for assets is a conservative reporting strategy because it results in lower net income and asset values, reflecting a more cautious approach to financial reporting.

Question 8

Financial statements rarely,if ever,represent economic reality.

Accepted Answer

Financial statements are subject to various accounting principles, estimates, and assumptions that may not always reflect the underlying economic reality accurately. For instance, the historical cost accounting method may understate the current value of assets or exaggerate the value of liabilities. Similarly, the accrual accounting method may recognize revenue or expense before or after the related cash flow has occurred, leading to discrepancies between reported earnings and actual cash flows. Moreover, financial statements may not capture financial risks, intangible assets, contingent liabilities, or other qualitative factors that can affect the value of a company. Therefore, financial statements should be interpreted with caution and supplemented with additional information, analysis, and judgment.

Question 9

Which of the following is true of reviewed financial statements?
A) These represent the most basic level of financial statements.
B) These have a broader scope as compared to audited financial statements.
C) These provide assurance to the user of the financial statements.
D) These have a limited implication of assurance.

Accepted Answer

Reviewed financial statements have a limited implication of assurance, as compared to audited financial statements. While review procedures are performed by the accountant to provide limited assurance that the financial statements are free of material misstatement, they do not provide the same level of assurance as an audit. Therefore, option D is the correct answer. Options A, B, and C are incorrect as they are not applicable to reviewed financial statements.

Question 10

Since 2002,the FASB and the International Accounting Standards Board (IASB)have been working to merge U.S.GAAP with international financial reporting standards (IFRS).Which of the following terms is used to describe this process?
A) merger
B) integration
C) convergence
D) unification

Accepted Answer

The process being described is convergence, which involves the gradual alignment of accounting rules and standards across different countries or regions. It does not necessarily involve a complete merger or unification of accounting practices, but aims to achieve greater consistency and comparability between different financial reporting systems.

Question 11

Which of the following best defines the term earnings management?
A) It is the intervention by the management in the internal financial reporting process, with the intent of boosting the earnings of an organization.
B) It is the purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.
C) It is the legitimate alteration of internal reports by the management to influence contractual outcomes that depend on reported accounting numbers.
D) It is a systematic management of earnings of an organization by its external shareholders, with the intent of increasing future profits.

Accepted Answer

Earnings management refers to the manipulation of financial reporting by management to either make the company appear more profitable or to achieve personal gain. Option B best represents this definition. Options A, C, and D represent legitimate practices within financial reporting and do not necessarily involve manipulation or unethical behavior.

Question 12

Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Accepted Answer

A personal balance sheet is a financial document that lists an individual's assets, liabilities, and net worth at a given point in time. It provides a comprehensive view of the individual's financial health and can help in making financial decisions, such as managing debt or creating a budget.

Question 13

Which of the following is a fundamental accounting principle?
A) price principle
B) objectivity principle
C) subjectivity principle
D) conformity principle

Accepted Answer

The objectivity principle is a fundamental accounting principle that requires financial information to be based on objective evidence, such as receipts, invoices, and bank statements. This principle ensures that financial statements are reliable and free from bias or subjectivity. The price principle (also known as the cost principle) is another fundamental accounting principle that requires assets to be recorded at their historical cost, rather than their market value. The subjectivity principle and conformity principle are not fundamental accounting principles.

Question 14

The income statement explains all changes in the assets,liabilities,and equity of a company between two consecutive balance sheet dates.

Accepted Answer

The income statement explains the revenues, expenses, gains, and losses of a company over a specific period of time, usually one year or one quarter. It does not directly relate to changes in assets, liabilities, and equity between balance sheet dates, although it can indirectly affect these accounts.

Question 15

Which of the following is an accounting choice that violates GAAP?
A) recording sales after they are realized, not before it
B) recording intangible assets
C) recording fictitious inventory
D) using estimates to determine provisions for bad debts

Accepted Answer

Recording fictitious inventory violates the basic principle of accuracy and honesty in financial reporting, thereby violating GAAP. Recording sales after they are realized instead of before, recording intangible assets, and using estimates to determine provisions for bad debts are all acceptable accounting choices that are in line with GAAP.

Question 16

Operational freedom and reporting freedom are held in check by the principle of materiality.

Accepted Answer

Operational freedom and reporting freedom are held in check by the principle of accountability, not materiality. Materiality relates to the significance of financial information in decision-making.

Question 17

Which of the following is a difference between audits and compilations?
A) The auditor's objective is to obtain reasonable assurance that the financial statements are free of material misstatements, whereas the objective of a compilation is to assist management in presenting financial information without obtaining any level of assurance.
B) Audits do not require an understanding of the entity's internal controls and an assessment of fraud risk, whereas compilations require an understanding of the entity's internal controls and an assessment of fraud risk.
C) Audits have a narrower scope as compared to reviews, whereas compilations have a broader scope as compared to reviews.
D) Audits provide a reasonable level of assurance to the users of the financial statements, whereas compilations provide a limited level of assurance to the users of the financial statements.

Accepted Answer

The main difference between audits and compilations is the level of assurance provided. In an audit, the objective is to obtain reasonable assurance that the financial statements are free from material misstatements, whereas in a compilation, the objective is to assist management in presenting financial information without obtaining any level of assurance. Audits involve a more extensive examination of the financial statements and the underlying accounting records, whereas compilations do not involve any substantive testing of transactions or balances. Additionally, audits require an understanding of the entity's internal controls and an assessment of fraud risk, whereas compilations do not require this level of detail.

Question 18

In which of the following aspects does audit differ from compilation or review?
A) An audit gives reasonable level of assurance to the users, whereas a compilation or review does not give any level of assurance to the users.
B) An audit requires an understanding of the entity's internal controls and assessment of fraud risk, whereas a compilation or review does not require such understanding or assessment.
C) An audit requires an auditor or accountant to perform inquiry and analytical procedures, whereas a compilation or review does not require such procedures.
D) An audit is performed to obtain limited assurance that there are no material modifications that should be made to the financial statements, whereas a compilation or review is performed without obtaining any level of assurance.

Accepted Answer

An audit requires an understanding of the entity's internal controls and assessment of fraud risk, whereas a compilation or review does not require such understanding or assessment. While option A, C, and D are partially correct, they do not capture the key difference between an audit and compilation or review.

Question 19

Content analysis is a quantitative method of determining characteristics of interest.

Accepted Answer

Content analysis can be both quantitative and qualitative, depending on whether it focuses on counting and measuring elements or interpreting meanings and themes within the content.

Question 20

As per the research conducted by Churyk and Clinton,significantly fewer colons in the management discussion and analysis section of annual reports are an indication of financial statement deception.

Accepted Answer

According to the research conducted by Churyk and Clinton, significantly fewer colons in the management discussion and analysis section of annual reports are an indication of financial statement deception.

Quiz 5: Financial Statements Analysis Reading Between the Lines

Methods of financial statements analysis are most effectively applied together in a reiterative (rather than sequential)process.

Financial ratios represent effects,not causes.

Which of the following is a difference between conservatism principle and materiality principle?

Internal and external comparisons,made during financial statement analysis,can reveal unexpected relationships or the absence of expected relationships.

Amounts shown on financial statements reflect current values.

Which of the following is true of the cost principle?

Which of the following accountants use a conservative reporting strategy?

Financial statements rarely,if ever,represent economic reality.

Which of the following is true of reviewed financial statements?

Since 2002,the FASB and the International Accounting Standards Board (IASB) have been working to merge U.S.GAAP with international financial reporting standards (IFRS) .Which of the following terms is used to describe this process?

Which of the following best defines the term earnings management?

Personal balance sheet provides a snapshot of an individual's financial condition at a specific point in time.

Which of the following is a fundamental accounting principle?

The income statement explains all changes in the assets,liabilities,and equity of a company between two consecutive balance sheet dates.

Which of the following is an accounting choice that violates GAAP?

Operational freedom and reporting freedom are held in check by the principle of materiality.

Which of the following is a difference between audits and compilations?

In which of the following aspects does audit differ from compilation or review?

Content analysis is a quantitative method of determining characteristics of interest.

As per the research conducted by Churyk and Clinton,significantly fewer colons in the management discussion and analysis section of annual reports are an indication of financial statement deception.