Question 1

Generally accepted accounting principles are authorized by the Financial Accounting Standards Board (FASB).

Accepted Answer

Generally accepted accounting principles (GAAP) are authorized by the Financial Accounting Standards Board (FASB).

Question 2

The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict-of-interest problems of corporations.

Accepted Answer

The Sarbanes-Oxley Act of 2002, commonly known as SOX, was passed in response to several high-profile corporate accounting scandals, including those involving Enron and WorldCom. The act aims to improve corporate transparency and accountability by establishing strict disclosure and conflict-of-interest requirements, among other measures.

Question 3

Net fixed assets represent the difference between gross fixed assets and the amount of depreciation expense from the most recent year.

Accepted Answer

Net fixed assets are calculated by subtracting accumulated depreciation (the total depreciation over the years) from gross fixed assets, not just the depreciation expense from the most recent year.

Question 4

Retained earnings represent the cumulative total of all earnings,net of dividends,that have been retained and reinvested in the firm since its inception.

Accepted Answer

Retained earnings are the portion of net income that a company retains rather than distributing as dividends to its shareholders. It represents the accumulation of all past earnings, minus any dividends paid out to shareholders.

Question 5

The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board (PCAOB)which is a for-profit corporation that oversees CEOs of public corporations.

Accepted Answer

The Private Company Accounting Oversight Board (PCAOB) oversees the auditing of public companies, but it is not a for-profit corporation and it does not oversee CEOs. Its purpose is to protect investors and enhance the accuracy and reliability of financial statements.

Question 6

GAAP is the accounting profession's rule-setting body.

Accepted Answer

GAAP (Generally Accepted Accounting Principles) is a collection of commonly-followed accounting rules and standards for financial reporting. The rule-setting bodies are the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) for International Financial Reporting Standards (IFRS).

Question 7

Paid-in capital in excess of par represents the proceeds in excess of par value received from the original sale of common stock.

Accepted Answer

Paid-in capital in excess of par is the amount of money that investors pay for shares that exceed the par or stated value of the stock. It represents the surplus funds that a company receives when shares are issued above their par value. Therefore, it is true that paid-in capital in excess of par represents the proceeds in excess of par value received from the original sale of common stock.

Question 8

The common stock entry in balance sheet is the par value of common stock.

Accepted Answer

The common stock entry on a balance sheet represents the par value of all issued shares of common stock, which is a nominal value assigned to the shares.

Question 9

The balance sheet is a statement which balances a firm's assets (what it owns)against its debt (what it owes)and its equity (what is provided by owners).

Accepted Answer

The statement accurately describes the purpose and contents of a balance sheet.

Question 10

Earnings per share represents amount earned during the period on each outstanding share of common stock.

Accepted Answer

Earnings per share is calculated by dividing the net earnings available to common shareholders by the weighted average number of outstanding shares during the period. The result represents the amount earned per share of common stock.

Question 11

The amount paid in by the original purchasers of common stock is shown by two entries in the firm's balance sheet-common stock and paid-in capital in excess of par on common stock.

Accepted Answer

This statement is true. The common stock account represents the par value of the stock, while the paid-in capital in excess of par account represents the amount paid by investors that exceeds the par value. Together, these accounts show the total amount paid in by the original purchasers of common stock.

Question 12

The letter to stockholders is the primary communication from management in an annual report.

Accepted Answer

The letter to stockholders typically includes management's discussion of the company's performance over the past year, goals for the future, and other important updates for investors. It is usually the first section of an annual report and serves as a key communication from management to shareholders.

Question 13

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 statement is true. The original price per share received by the firm will depend on a combination of the par value of the stock, any paid-in capital (money received from investors above the par value), and the total number of shares outstanding.

Question 14

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 flow from operating activities (not net income) and any cash dividends paid with the change in cash and cash equivalents between the start and end of that year. The change in retained earnings is reconciled through the statement of retained earnings.

Question 15

The income statement is a financial summary of a firm's operating results during a specified period while the balance sheet is a summary statement of a firm's financial position at a given point in time.

Accepted Answer

The income statement summarizes a firm's revenue and expenses over a period of time, usually a quarter or a year, while the balance sheet presents a snapshot of the firm's assets, liabilities, and equity at a specific moment in time.

Question 16

Earnings per share results from dividing earnings available for common stockholders by the number of shares of common stock authorized.

Accepted Answer

Earnings per share (EPS) is calculated by dividing the earnings available for common stockholders by the number of shares of common stock outstanding, not the number authorized.

Question 17

Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC)to provide their stockholders with an annual stockholders' report.

Accepted Answer

This statement is true. Publicly owned corporations with more than $5 million assets are required by the Securities and Exchange Commission (SEC) to provide their stockholders with an annual stockholders' report. This report includes financial statements, information on the company's operations and management, and other relevant information for investors.

Question 18

The Financial Accounting Standards Board (FASB)is the federal regulatory body that governs the sale and listing of securities.

Accepted Answer

The Financial Accounting Standards Board (FASB) is a private organization that establishes and improves accounting standards in the United States. It is not a federal regulatory body that governs the sale and listing of securities. That role is filled by the Securities and Exchange Commission (SEC).

Question 19

Common stock dividends paid to stockholders is equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding.

Accepted Answer

Common stock dividends paid to stockholders is not necessarily equal to the earnings available for common stockholders divided by the number of shares of common stock outstanding. The amount of dividends paid may be determined by the company's board of directors and can vary based on various factors such as the company's financial performance, growth plans, and cash flow needs.

Question 20

The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB)which is a not-for-profit corporation that oversees auditors of public corporations.

Accepted Answer

This statement is true. The PCAOB was established by the Sarbanes-Oxley Act of 2002 to oversee auditors of public corporations and is a not-for-profit corporation.

Quiz 3: Financial Statements and Ratio Analysis