Question 1

The original price per share received by the firm on a single issue of common stock is equal to the sum of the common stock and paid-in capital in excess of par accounts divided by the number of shares outstanding.

Accepted Answer

This is true. The original price per share formula is:

Original Price per Share = (Common Stock + Paid-in Capital in Excess of Par) / Number of Shares Outstanding

Question 2

The 2002 Sarbanes-Oxley Act was designed to ________.

Accepted Answer

The 2002 Sarbanes-Oxley Act was designed to address the disclosure and conflict-of-interest problems that were uncovered in corporate scandals such as Enron and WorldCom. It established new requirements for corporate accountability, including increased financial disclosures, greater independence of auditors, and tougher penalties for fraudulent actions. It did not address CEO compensation, international accounting standards, or tax minimization.

Question 3

The stockholder's report includes ________.

Accepted Answer

The stockholder's report typically includes a statement of retained earnings, which shows how much of the company's profits were retained rather than paid out as dividends. This statement provides useful information to shareholders as it indicates the company's future growth potential and investment value. Option A is incorrect because the estimated interest cost report would not be relevant to stockholders; it would be more important for creditors or lenders. Option B is incorrect because the estimated dividend report is not necessary as the actual dividend payment will be noted in the report. Option C is incorrect because the break-even sales report is not typically included in the stockholder's report as it is more important for management to use as a tool in making strategic decisions.

Question 4

A U.S. parent company's foreign equity accounts are translated into dollars using the historical rate or average rate based on the company's discretion.

Accepted Answer

A U.S. parent company's foreign equity accounts are translated using the historical exchange rate, not at the company's discretion between historical or average rates.

Question 5

A(n) ________ provides a financial summary of a firm's operating results during a specified period.

Accepted Answer

The income statement provides a financial summary of a firm's operating results during a specified period, showing the revenues, expenses, and net income or loss. The balance sheet reports the financial position of a firm at a specific point in time, showing its assets, liabilities, and equity. The statement of cash flows reports the sources and uses of cash during a specified period, while the statement of retained earnings shows the changes in a firm's retained earnings over a specified period.

Question 6

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called ________.

Accepted Answer

The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) is called the Sarbanes-Oxley Act. The other options listed are different laws or combinations of names that do not refer to the PCAOB.

Question 7

The statement of cash flows provides insight into a firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period of concern.

Accepted Answer

The statement of cash flows is designed to show the sources and uses of cash and cash equivalents in a company. It breaks down a company's cash inflows and outflows into three categories: operating activities, investing activities, and financing activities. The statement of cash flows reconciles these cash flows with changes in the company's cash balance over a given period of time.

Question 8

The Public Company Accounting Oversight Board (PCAOB) ________.

Accepted Answer

The PCAOB is a not-for-profit corporation that oversees auditors of public corporations. Its main responsibility is to protect investors by ensuring that audit reports are accurate, complete, and independent.

Question 9

The federal regulatory body governing the sale and listing of securities is called the ________.

Accepted Answer

The Securities and Exchange Commission (SEC) is the federal regulatory body that oversees the sale and listing of securities. The IRS (Internal Revenue Service) is responsible for collecting taxes, FASB (Financial Accounting Standards Board) establishes accounting standards, and GAAP (Generally Accepted Accounting Principles) is a set of guidelines for financial reporting.

Question 10

The stockholders' annual report must include ________.

Accepted Answer

The stockholders' annual report must include an income statement, which reports the company's revenue, expenses, and net income (or loss) over a specific period of time. Common-size financial statements, an advance tax statement, and a margin of safety report may be included in the annual report, but they are not required by law.

Question 11

The statement of cash flows reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.

Accepted Answer

The statement of cash flows reconciles the net cash provided by operating activities, investing activities, and financing activities with the change in cash and cash equivalents between the start and end of the year. It does not directly reconcile net income and dividends with the change in retained earnings. However, changes in retained earnings can be indirectly affected by the cash flows from these activities.

Question 12

Net profit after taxes is ________.

Accepted Answer

Net profit after taxes is calculated by subtracting all operating expenses, interest expenses, and taxes from earnings before interest and taxes (EBIT). Therefore, the correct option is D: EBIT minus interest and taxes.

Question 13

A U.S. parent company's foreign retained earnings are not adjusted for currency movements to reflect each year's operating profits or losses.

Accepted Answer

U.S. parent companies must adjust their foreign subsidiaries' retained earnings for currency movements to accurately reflect each year's operating profits or losses in their consolidated financial statements, according to U.S. GAAP and IFRS. This ensures that the financial statements present a true and fair view of the company's financial position.

Question 14

Total assets less net fixed assets equals ________.

Accepted Answer

Total assets less net fixed assets equals current assets. This is because current assets are those that can be easily converted to cash within a year, while net fixed assets are assets that are not intended for sale and have a useful life of more than a year. Therefore, subtracting net fixed assets from total assets leaves only the assets that can be quickly converted to cash, which are the current assets.

Question 15

Accounting practices and procedures used to prepare financial statements are called ________.

Accepted Answer

GAAP stands for generally accepted accounting principles and refers to the set of accounting standards, rules, and procedures used by companies to prepare their financial statements. The SEC (Securities and Exchange Commission) is a regulatory agency, IFRS (International Financial Reporting Standards) is a set of accounting standards used in some countries outside of the US, and IRB (Internal Review Board) is not related to accounting practices and procedures.

Question 16

The rule-setting body, which authorizes generally accepted accounting principles is the ________.

Accepted Answer

The FASB (Financial Accounting Standards Board) is the rule-setting body that authorizes generally accepted accounting principles in the US. The IFRS (International Financial Reporting Standards) is a set of global accounting standards, not specific to the US. The SEC (Securities and Exchange Commission) is a government agency that oversees and regulates the securities industry in the US, but does not set accounting standards. The Federal Reserve System is responsible for conducting monetary policy and regulating banks, but is not involved in accounting standards.

Question 17

Gross profit is ________.

Accepted Answer

Gross profit is the revenue generated from sales minus the cost of goods sold. It does not include operating expenses or depreciation. Therefore, option D - sales revenue minus cost of goods sold - is the correct choice.

Question 18

A firm's annual stockholders' report ________.

Accepted Answer

The annual stockholders' report summarizes and documents the firm's financial activities during the past year, including financial statements, management's analysis of the firm's performance, and any other relevant information. It is made available to all shareholders and other interested parties. It does not document the list of investors or financial plan and budgets.

Question 19

The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based companies translate their foreign-currency-denominated assets and liabilities into dollars using the current rate (translation) method.

Accepted Answer

FASB Standard No. 52 does indeed mandate that U.S.-based companies use the current rate method to translate their foreign-currency-denominated assets and liabilities into dollars. This method entails using the exchange rates in effect at the time of the financial statement preparation to determine the value of those items.

Question 20

Operating profit is ________.

Accepted Answer

Operating profit is the profit generated by a company's regular business operations, calculated as gross profit minus operating expenses.

Quiz 3: Financial Statements and Ratio Analysis