Question 1

Byfort Company reports the following in its financial statements:
 $$\begin{array} { | l | c | c | } 
\hline & \underline { 2005 } & \underline { 2006 } \
\hline \text { Accounts Receivable, net } & \$ 34,289 \mathrm {~K} & \$ 29,678 \mathrm {~K} \
\hline \text { Net sales } & \$ 360,007 \mathrm {~K} & \$ 450,000 \mathrm {~K} \
\hline
\end{array}$$ *All sales are on credit.
-How much sales would have been reported by the company in 2006 if Byfort would have been using cash accounting and not accrual accounting?
A) $445,389K
B) $454,611K
C) $484,289K
D) $488,900K

Accepted Answer

Under cash accounting, sales are only recorded when cash is received, regardless of whether they were made on credit or not. Therefore, the reported sales in 2006 would be equal to the cash received from customers during 2006. We do not have information about the cash received from customers in 2006, so we cannot calculate the exact number. However, we can make an estimate based on the change in accounts receivable from 2005 to 2006.

Accounts receivable decreased by $34,289K - $29,678K = $4,611K from 2005 to 2006. This means that the company collected $4,611K more in cash from customers in 2006 than it did in 2005. Assuming that the company collected all of the accounts receivable during 2006, we can add this amount to the reported net sales in 2006 to estimate the cash received from customers:

Cash received from customers = Net sales in 2006 + decrease in accounts receivable
= $450,000K + $4,611K
= $454,611K

Therefore, the best choice is B.

Question 2

Which of the following would require the filing of Form 8-K?
I. Major acquisition
II. Audited financial statements
III. Bankruptcy
IV. Change in management control
A) I and III
B) II and IV
C) I, III and IV
D) I, II, III and IV

Accepted Answer

Form 8-K is required for major events that could impact the investing public. A major acquisition, bankruptcy, and a change in management control are all significant events that could affect the value of a company's stock and therefore require the filing of Form 8-K. Audited financial statements, however, are not considered a significant event that require the filing of Form 8-K.

Question 3

Financial accounting data has some inherent limitations. Which of the following are limitations?
I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.
A) I, II and III
B) I, III and IV
C) II, III and IV
D) I, II, III and IV

Accepted Answer

Financial accounting data has limitations such as not all economic events being easily quantifiable, reliance on estimates, distortion from historical cost, and inflation affecting the accuracy of accounting data.

Question 4

Which of the following statements about accruals and cash flows is true?
A) All cash flows are value relevant.
B) Cash flows cannot be manipulated.
C) Cash flows are more reliable than accruals.
D) All accrual accounting adjustments are value irrelevant.

Accepted Answer

Cash flows are considered more reliable than accruals because they represent the actual inflows and outflows of cash, while accruals are based on estimates and assumptions. However, it is also important to consider accruals when analyzing financial statements because they provide insight into future cash flows and the company's earnings quality. Option A is incorrect because not all cash flows are value relevant; some may be insignificant or non-recurring. Option B is incorrect because cash flows can be manipulated through irregular or fraudulent activities. Option D is incorrect because some accrual accounting adjustments, such as allowance for bad debts or inventory write-downs, can have a significant impact on a company's financial performance and future cash flows.

Question 5

10-K reports are:
A) the quarterly reports to stockholders.
B) quarterly filings made by a company with the SEC.
C) annual filings made by a company with SEC.
D) filings made by a company with SEC when a company changes auditors.

Accepted Answer

10-K reports are annual filings made by a company with the SEC.

Question 6

Which of the following is not considered part of GAAP?
A) Statements of Financial Accounting Standards (SFAS)
B) International Accounting Standards (IAS)
C) Accounting Research Bulletins (ARB).
D) Accounting Principles Board Opinions (APB).

Accepted Answer

International Accounting Standards (IAS) are not considered part of GAAP as they are used in different countries and may differ from GAAP. The other three options, Statements of Financial Accounting Standards (SFAS), Accounting Research Bulletins (ARB), and Accounting Principles Board Opinions (APB), are all considered part of GAAP.

Question 7

Which of the following statements is incorrect?
A) Under GAAP, statements are prepared using accrual accounting.
B) Under GAAP, all assets are marked to market each accounting period.
C) Under GAAP, it is necessary to make certain estimates.
D) Annual statements submitted to the SEC (10-K) must be prepared using GAAP.

Accepted Answer

Under GAAP, not all assets are marked to market each accounting period. Marking to market is typically used for financial instruments that are traded in active markets, such as stocks and bonds. Other types of assets, such as property and equipment, are usually carried at historical cost or a lower value if impaired.

Question 8

The two primary qualities of accounting information to make it useful for decision making are:
A) reliability and comparability.
B) relevance and reliability.
C) materiality and comparability.
D) full disclosure and relevance.

Accepted Answer

The two primary qualities of accounting information that make it useful for decision making are relevance and reliability. Relevant information is pertinent to the decision at hand and helps users assess past, present, and future events. Reliable information is accurate, dependable, and free from bias or errors. Materiality, comparability, and full disclosure are also important qualities of accounting information, but they are not the primary ones for decision making.

Question 9

Which of the following is not considered a monitoring mechanism?
A) The Securities and Exchange Commission (SEC)
B) Top level management
C) The board of director's audit committee
D) The external auditors

Accepted Answer

Top level management is not considered a monitoring mechanism as it is part of the entity being monitored. The other three options listed are all external to the entity being monitored and are responsible for overseeing and ensuring accountability and transparency. The SEC is a government agency that regulates financial markets, while the board of director's audit committee and external auditors work to ensure compliance with laws and regulations, as well as the accuracy and reliability of financial reporting.

Question 10

Which of the following statements about directors of a company is true?
A) Directors are elected by management of a company.
B) Directors only get paid if the company increases its profitability that year.
C) Directors are shareholders' representatives.
D) All directors of a company are senior managers in that company.

Accepted Answer

Directors are elected by shareholders and serve as their representatives on the board of the company. While some directors may also be senior managers within the company, this is not always the case. Directors typically receive a fixed compensation for their service, regardless of the company's profitability.

Question 11

If a company fails to record a material amount of depreciation in a previous year, this is considered:
A) a change in accounting principle.
B) an unusual item.
C) an accounting error.
D) a change in estimate.

Accepted Answer

Failing to record a material amount of depreciation in a previous year is considered an accounting error.

Question 12

Which of the following would affect the comparison of financial statements across two different firms?
I. Different accounting principles
II. Different sizes of the companies
III. Different reporting periods
IV. Different industries
A) I, III and IV
B) I and IV
C) I and II
D) I, II, III and IV

Accepted Answer

All listed factors can affect the comparison of financial statements across different firms. Different accounting principles can lead to different recognition and measurement of transactions. Different sizes may impact the scale and scope of operations and financial metrics. Different reporting periods can make time-sensitive comparisons difficult. Different industries can lead to variations in financial performance due to sector-specific factors.

Question 13

Audit risk represents a danger to users of audited financial statements. The following are attributes pointing to potential areas of vulnerability except
A) company in financial distress requiring financing.
B) management dominated by one or more strong-willed individuals.
C) deterioration in liquidity or solvency.
D) company earning high profits consistently over a number of years.

Accepted Answer

A company consistently earning high profits over a number of years is not a potential area of vulnerability in terms of audit risk. This attribute may actually decrease audit risk because it suggests a financially sound and stable company. The other three options are potential areas of vulnerability because a company in financial distress, management dominated by strong-willed individuals, and deterioration in liquidity or solvency can increase the likelihood of material misstatements in the financial statements.

Question 14

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?
I. Change in accounting principles
II. Disposition of segment of business
III. Restructuring expenses
IV. Change in auditors
A) I and II
B) I and III
C) I, II and III
D) I, III and IV

Accepted Answer

Changes in accounting principles, disposition of a segment of business, and restructuring expenses can all affect the comparability of accounting information across different periods by altering the basis of accounting or the structure of the company's operations. Changing auditors does not inherently affect the comparability of the financial statements themselves, as it does not change how transactions are recorded or reported.

Question 15

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:
A) qualified.
B) unqualified.
C) adverse.
D) disclaimed.

Accepted Answer

The statement of cash flows is a required financial statement under generally accepted accounting principles (GAAP). Not including it would result in a qualified opinion due to the omission of a required financial statement.

Question 16

When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions:
A) can arise as management may deliberately manipulate financial statements.
B) arise often through application of (correct) accounting principles.
C) can affect the quality of earnings.
D) arise if the stock market is not efficient.

Accepted Answer

Accounting distortions are caused by factors such as management's manipulation of financial statements or the application of accounting principles that do not accurately reflect the underlying economic reality. However, they are not caused by the efficiency or inefficiency of the stock market.

Question 17

Which would be issued by auditors where there is a history of significant losses coupled with uncertain prospects?
A) An "except for" qualification
B) An adverse opinion
C) A disclaimer of opinion
D) An audit warning

Accepted Answer

The answer of Which would be issued by auditors where...

Question 18

Byfort Company reports the following in its financial statements:
 $$\begin{array} { | l | c | c | } 
\hline & \underline { 2005 } & \underline { 2006 } \
\hline \text { Accounts Receivable, net } & \$ 34,289 \mathrm {~K} & \$ 29,678 \mathrm {~K} \
\hline \text { Net sales } & \$ 360,007 \mathrm {~K} & \$ 450,000 \mathrm {~K} \
\hline
\end{array}$$ *All sales are on credit.
-How much did the company collect in cash from debtors during 2006?
A) $445,389K
B) $454,611K
C) $484,289K
D) $488,900K

Accepted Answer

The company collected cash from debtors during 2006 can be calculated using the following formula:
Cash collected = Net Sales - Change in Accounts Receivable
Change in Accounts Receivable = Accounts Receivable in 2005 - Accounts Receivable in 2006

Change in Accounts Receivable = $34,289K - $29,678K = $4,611K

Cash collected = $450,000K - $4,611K = $445,389K

Therefore, the best choice is B.

Question 19

Which of the following are examples of judgments made in the accounting reporting process?
I. Useful life of machinery
II. Allowance for doubtful accounts
III. Obsolescence of assets
IV. Interest payment on bonds
A) I, II, III and IV
B) I, II and III
C) II and III
D) I and III

Accepted Answer

Judgments made in the accounting reporting process include estimates of useful life of machinery, allowance for doubtful accounts, and obsolescence of assets. Interest payment on bonds, on the other hand, is a factual transaction that does not involve judgment. Therefore, the best choice is option B as it includes the three items that involve judgments.

Question 20

Which of the following statements about accruals and cash flows is false?
A) Company value can be determined by using accrual accounting numbers.
B) Accrual accounting numbers are subject to accounting distortions.
C) Cash flows are more reliable than accruals.
D) Cash flows cannot be manipulated.

Accepted Answer

Cash flows can be manipulated through various methods such as delaying payments or accelerating revenue recognition. Therefore, the statement that cash flows cannot be manipulated is false.

Quiz 2: Financial Reporting and Analysis

Which of the following would require the filing of Form 8-K? I. Major acquisition II. Audited financial statements III. Bankruptcy IV. Change in management control

Financial accounting data has some inherent limitations. Which of the following are limitations? I. Not all economic events are easily quantifiable. II. Many accounting entries rely heavily on estimates. III. Historical cost can distort statements. IV. Inflation can distort accounting data.

Which of the following statements about accruals and cash flows is true?

10-K reports are:

Which of the following is not considered part of GAAP?

Which of the following statements is incorrect?

The two primary qualities of accounting information to make it useful for decision making are:

Which of the following is not considered a monitoring mechanism?

Which of the following statements about directors of a company is true?

If a company fails to record a material amount of depreciation in a previous year, this is considered:

Which of the following would affect the comparison of financial statements across two different firms? I. Different accounting principles II. Different sizes of the companies III. Different reporting periods IV. Different industries

Audit risk represents a danger to users of audited financial statements. The following are attributes pointing to potential areas of vulnerability except

Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next? I. Change in accounting principles II. Disposition of segment of business III. Restructuring expenses IV. Change in auditors

The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions:

Which would be issued by auditors where there is a history of significant losses coupled with uncertain prospects?

Which of the following are examples of judgments made in the accounting reporting process? I. Useful life of machinery II. Allowance for doubtful accounts III. Obsolescence of assets IV. Interest payment on bonds

Which of the following statements about accruals and cash flows is false?