Question 1

An audit is an examination of the financial statements to ensure that they represent what they claim and to make sure that they are in compliance with generally accepted accounting principles.

Accepted Answer

An audit is exactly what is described in the statement - it is an examination of financial statements to ensure accuracy and compliance with accounting principles.

Question 2

Which of the following correctly describes the various financial statements?

Accepted Answer

The income statement reports a company's financial performance over a specific accounting period, detailing revenues, expenses, and profits or losses, unlike the balance sheet and cash flow statement, which provide financial positions at a specific point in time.

Question 3

Which of the following accounts would be reported as assets on the balance sheet?

Accepted Answer

Cash, accounts receivable, and inventories are typically reported as assets on the balance sheet. Option A includes two liabilities (accounts payable and notes payable). Option B includes cash (an asset) and retained earnings (a component of stockholders' equity) but does not include any current assets like accounts receivable. Option D includes inventories (an asset) and property and equipment (also an asset) but does not include any current assets or cash.

Question 4

During the fiscal year ended 2016, a company had revenues of $400,000, cost of goods sold of $280,000, and an income tax rate of 30 percent on income before income taxes. What was the company's 2016 net income?

Accepted Answer

Net income can be calculated by subtracting the cost of goods sold from revenues and then multiplying the result by (1 - tax rate):

Net income = (revenues - cost of goods sold) x (1 - tax rate)
Net income = ($400,000 - $280,000) x (1 - 0.30)
Net income = $120,000 x 0.70
Net income = $84,000

Therefore, the company's 2016 net income was $84,000. Choice C is the correct answer.

Question 5

Which of the following is considered to be an expense on the income statement?

Accepted Answer

Cost of goods sold is a direct expense related to the production of goods that have been sold during the given period, and it is subtracted from sales to determine gross profit. Accounts payable, notes payable, and wages payable are all liability accounts that do not appear as expenses on the income statement.

Question 6

Which of the following would not be found on the statement of cash flows?

Accepted Answer

The cost flow from manufacturing activities would not be found on the statement of cash flows. The statement of cash flows reports the cash inflows and outflows from operating, investing, and financing activities only.

Question 7

What financial statement would you look at to determine the dividends declared by a business?

Accepted Answer

The dividends declared by a business are reported in the statement of stockholders' equity since they represent a distribution of profits to the owners of the business. The other financial statements do not typically provide information about dividends declared.

Question 8

Which of the following best describes assets?

Accepted Answer

Assets are the economic resources of a business that are expected to provide future benefits, such as cash, inventory, and property. They are resources that a company owns or controls, and they are reported on the balance sheet at their historical cost, not their current market value. Assets are not equal to liabilities minus stockholders' equity or financing provided by creditors.

Question 9

Which financial statement would you utilize to determine whether a company will be able to pay liabilities which are due in 30 days?

Accepted Answer

The balance sheet provides information about a company's current assets and current liabilities, which includes liabilities that are due within 30 days. By comparing the current assets and current liabilities, one can determine whether a company will be able to pay its short-term debts on time.

Question 10

One of the advantages of a corporation when compared to a partnership is the limited liability of the owners.

Accepted Answer

In a corporation, the owners (shareholders) have limited liability which means they are only liable for the debts of the corporation up to the amount of their investment in the business. In a partnership, the partners have unlimited liability which means they are personally responsible for all the debts and liabilities of the partnership.

Question 11

Which of the following statements is correct?

Accepted Answer

Net income is a measure of profitability while net cash flow from operations is a measure of the company's ability to generate cash. It is possible for a company to have positive net income but negative net cash flow from operations if it is not collecting cash from its customers or paying its bills in a timely manner.

Question 12

Which of the following best describes liabilities and stockholders' equity?

Accepted Answer

Liabilities and stockholders' equity are the sources of financing for an entity's assets. Liabilities represent amounts owed to creditors, while stockholders' equity represents the residual interest of the owners in the assets of the entity. Together, liabilities and stockholders' equity make up the funding that allows a business to acquire and operate its assets.

Question 13

Atlantic Corporation reported the following amounts at the end of the first year of operations:  What are the retained earnings of Atlantic at the end of the year, and what amount of expenses were incurred during the year?

Accepted Answer

The answer of Atlantic Corporation reported the following amounts at...

Question 14

Which of the following accounts would not be reported on the balance sheet?

Accepted Answer

Dividends are not reported on the balance sheet as they represent a distribution of earnings to shareholders and do not affect the company's assets or liabilities. Retained earnings, inventory, and accounts payable are all balance sheet accounts that reflect the company's assets, equity, and liabilities.

Question 15

Which of the following statements describes the balance sheet?

Accepted Answer

The balance sheet reports a company's assets, liabilities, and equity, and assets are generally reported at the cost incurred to acquire them. The other statements are incorrect: A describes the income statement, C is incorrect as stockholders' equity includes other components besides retained earnings, and D describes the statement of cash flows.

Question 16

Which of the following accounts is not a liability on the balance sheet?

Accepted Answer

Retained earnings is not a liability; it is an owner's equity account that reflects the accumulated earnings of a company that have not been distributed as dividends to shareholders. Notes payable, accounts payable, and interest payable are all liabilities that represent amounts owed to creditors.

Question 17

The auditor can be held liable for malpractice in situations where the investors suffered losses while relying on the financial statements.

Accepted Answer

The auditor can be held liable for malpractice if they were negligent in their auditing and the investors suffered losses while relying on the financial statements.

Question 18

Which of the following describes the primary objective of the balance sheet?

Accepted Answer

The primary objective of the balance sheet is to report the financial position of the reporting entity, including assets, liabilities, and equity, at a particular point in time. The balance sheet does not measure net income or cash inflows and outflows, nor does it report market value, which may differ from the book value of assets and liabilities.

Question 19

Which of the following equations is the balance sheet equation?

Accepted Answer

The balance sheet equation is Assets = Liabilities + Stockholders' Equity. This equation means that the total assets of a company must equal the sum of its liabilities and its owners' equity.

Question 20

Which of the following best describes the balance sheet?

Accepted Answer

The balance sheet provides a snapshot of a company's financial position at a specific point in time, listing its assets, liabilities, and stockholders' equity, but not at market values.

Quiz 1: Financial Statements and Business Decisions