Question 1

The generally accepted accounting principles (GAAP) are:
A) rules that outline how a firm can operate ethically.
B) rules on how the firm will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial statements.
D) rules for how a company can issue stock to raise money.

Accepted Answer

GAAP are a set of guidelines and procedures that dictate how companies must maintain their financial records and prepare financial statements. These guidelines ensure consistency and accuracy in financial reporting, as well as providing transparency and accountability to investors and other stakeholders. Options A, B, and D are not accurate descriptions of GAAP.

Question 2

Your uncle is planning to sell his second home in Bethany Beach, Delaware in the next few weeks., You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of:
A) the cost principle.
B) the assumption of arm's-length transactions.
C) the realization principle.
D) the going concern assumption.

Accepted Answer

The fact that the transaction is being negotiated through agents on both sides indicates that an arm's-length transaction is being assumed, where both parties are acting in their own best interest. The other options do not apply to this situation as the cost principle and going concern assumption are accounting principles and the realization principle is related to revenue recognition.

Question 3

Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash purchases of treasury stock.

Accepted Answer

Financing activities involve transactions that affect the company's equity and debt, including payments on long-term debt principal, dividends to shareholders, and purchases of treasury stock using cash.

Question 4

Rent and insurance are examples of depletion expenses.

Accepted Answer

Rent and insurance are not examples of depletion expenses. Depletion expenses are expenses incurred when natural resources (such as oil, gas, or minerals) are extracted or used up. Rent and insurance are typically classified as operating expenses.

Question 5

The average tax rate is the total tax payment divided by the taxable income.

Accepted Answer

The average tax rate is calculated by dividing the total tax payment by the taxable income. Therefore, the statement is true.

Question 6

Annual reports are prepared by a firm's management to:
A) communicate to its shareholders the firm's failures in the previous year.
B) provide a broad overview of the firm's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the economy in the coming years.

Accepted Answer

Annual reports are mainly prepared to provide a broad overview of the firm's financial and operating performance. It includes financial statements, management discussion and analysis, and other relevant information that helps shareholders and other interested parties evaluate the firm's financial health, strategy, and future prospects. While annual reports may also mention challenges or failures, the primary purpose is to communicate the company's strengths and achievements. The report does not typically include information about competitors or the economy's outlook.

Question 7

Which of the following sections do annual reports typically contain?
A) Financial summary related to the past year's performance
B) Information about the company, its products, and its activities
C) Audited financial statements, including limited historical financial data
D) All three of the above sections are included in the annual report.

Accepted Answer

Annual reports typically contain a financial summary related to the past year's performance, information about the company, its products, and its activities, as well as audited financial statements including limited historical financial data. Therefore, all three sections – A, B, and C – are included in the annual report.

Question 8

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because:
A) they make the financial statements of all firms standardized.
B) they allow one to examine a firm's performance with ease over a period of time.
C) they make it possible for management or analysts to compare a firm's performance with that of other competitors.
D) All of the above.

Accepted Answer

Accounting standards prescribed by GAAP make financial statements standardized, allow easy examination of a firm's performance over time, and make it possible for management or analysts to compare a firm's performance with that of other competitors. Therefore, all of the above options are correct.

Question 9

Amortization is the amount by which intangible assets like goodwill, patents, license, copyrights, and trademarks are written down in any period that they are utilized by the firm to generate benefits.

Accepted Answer

Amortization is the process of allocating the cost of intangible assets over their useful life. It is a non-cash expense that reflects the decline in value of the intangible assets over time as they are used in business operations. Therefore, the statement is true.

Question 10

The matching principle calls for the accountant of a firm to:
A) identify an asset with each liability of the firm.
B) associate the revenue generated from a sale to the costs or expenses incurred to generate the revenue.
C) match each item of inventory with the historical cost at which it was acquired.
D) None of the above.

Accepted Answer

The matching principle requires accountants to associate the revenue generated from a sale to the costs and expenses incurred to generate that revenue. This ensures that the financial statements provide an accurate representation of the firm's profitability in a given period. Options A and C are not correct because they do not relate to the matching principle. Option D is incorrect because the question asks for what the matching principle requires accountants to do, and "none of the above" does not provide a specific answer.

Question 11

Depreciation expense is the amount by which a firm's fixed assets are written down after the assets have been used to produce the firm's cash flows.

Accepted Answer

The answer of Depreciation expense is the amount by which...

Question 12

Cash flows from operating activities involve buying and selling of long-term assets.

Accepted Answer

Cash flows from operating activities involve transactions related to the day-to-day operations of a business such as sales, purchases, and expenses. Buying and selling of long-term assets would fall under investing activities.

Question 13

The key financial statement that ties the other three statements together is the statement of cash flows, which summarizes changes in the balance sheet from the beginning of the year to the end.

Accepted Answer

The statement of cash flows provides information about how the company generates and uses cash during a specific period, helping to explain changes in the balance sheet accounts over time. It is considered the key financial statement that ties the other three statements (income statement, balance sheet, and statement of stockholders' equity) together.

Question 14

The going concern assumption implies that:
A) a firm will continue to be in business for the foreseeable future.
B) a firm will be going out of business in the near future.
C) a firm will continue to operate in the near future, but only after being acquired by another firm.
D) None of the above.

Accepted Answer

The going concern assumption assumes that a firm will continue its operations for the foreseeable future, meaning it will not be going out of business in the near future. This assumption is important for financial reporting as it allows for assets and liabilities to be valued based on their ongoing usefulness and not just their current market value.

Question 15

Making and collecting loans, issuing and paying out on insurance contracts, and buying and selling debt or equity instruments of other firms are examples of financing activities.

Accepted Answer

These activities are examples of investing activities (buying and selling debt or equity instruments) and operating activities (making and collecting loans, issuing and paying out on insurance contracts), not financing activities. Financing activities involve transactions with the company's owners or creditors, such as issuing shares, paying dividends, or borrowing money.

Question 16

The assumption of arm's-length transaction states that:
A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.
D) None of the above.

Accepted Answer

The assumption of arm's-length transaction assumes that both parties to a transaction can act independently of each other and make economically rational decisions. It does not require that the parties have had previous transactions or that one of the parties is a bank with full knowledge of the firm's creditworthiness.

Question 17

Cash flows from operations are the net cash flows that support a firm's principal business activities.

Accepted Answer

Cash flows from operations refer to the cash inflows and outflows that are directly related to a company's core business operations. These cash flows are generated from the company's primary revenue-generating activities, such as selling products or providing services. Cash flows from operations are a critical metric for assessing a company's financial health and sustainability.

Question 18

Both depreciation and amortization are cash expenses that will serve to boost the firm's after-tax cash flows.

Accepted Answer

Depreciation and amortization are non-cash expenses, meaning they do not directly affect cash flow; instead, they spread the cost of an asset over its useful life for accounting purposes.

Question 19

Depreciation and amortization are examples of prepaid expenses.

Accepted Answer

Depreciation and amortization are both non-cash expenses that are used to allocate the cost of an asset over its useful life. Prepaid expenses, on the other hand, refer to expenses that have been paid in advance but have not yet been incurred, such as prepaid rent or insurance.

Question 20

The net cash provided by operating activities is another term used for net income.

Accepted Answer

Net income represents the profit or earnings of a company, while net cash provided by operating activities refers to the cash generated or used in a company's operations, which includes adjustments for non-cash items such as depreciation and changes in working capital. They are not the same thing, as net income can be different from net cash provided by operating activities due to differences in non-cash items affecting the two measures.

Quiz 3: The Financial System and the Level of Interest Rates

The generally accepted accounting principles (GAAP) are:

Your uncle is planning to sell his second home in Bethany Beach, Delaware in the next few weeks., You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of:

Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash purchases of treasury stock.

Rent and insurance are examples of depletion expenses.

The average tax rate is the total tax payment divided by the taxable income.

Annual reports are prepared by a firm's management to:

Which of the following sections do annual reports typically contain?

Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because: