Acct 5312 McGraw Ch10
The explanatory notes to the financial statements contained in the "financial review" section of the annual report include descriptions of all of the following, except:
Employee Productivity Statistics
The impact of changing price levels on amounts reported in financial statements is:
Encouraged, but not required to be described in the explanatory notes to the financial statements.
The impact of changing price levels on amounts reported in financial statements is: Reported as a separate item on the balance sheet Accomplished by reporting assets at their replacement cost Required to be described in the notes to the financial statements Encouraged, but not required to be described in the notes to the financial statements
Encouraged, but not required to be described in the notes to the financial statements
Which of the following is not a topic that is likely to be discussed as a significant accounting policy? Depreciation method Earnings per share of common stock calculations and details Inventory valuation method Method of estimating uncollectible accounts receivable
Method of estimating uncollectible accounts receivable
Which of the following is not a topic that is likely to be discussed as a significant accounting policy?
Method of estimating uncollectible accounts receivable.
The comparison of activity measures of different companies is complicated by the fact that: A. different inventory cost flow assumptions may be used. B. dollar amounts of assets may be significantly different. C. only one of the companies may have preferred stock outstanding. D. the number of shares of common stock issued may be significantly different.
different inventory cost flow assumptions may be used.
Management's use of resources can best be evaluated by focusing on measures of: A. liquidity. B. activity. C. leverage. D. book value.
activity
Management's use of resources can best be evaluated by focusing on measures of: A. liquidity. B. activity. C. leverage. D. book value.
activity.
Management's statement of responsibility
affirms that management is responsible for assuring adherence to internal control policies and procedures
Financial leverage: - usually has no bearing on the risk associated with a company. - arises because most borrowed funds have a variable interest rate. - arises because most borrowed funds have a fixed interest rate. - is a concept that does not apply to individuals.
arises because most borrowed funds have a fixed interest rate.
Which of the following is not a category of financial statement ratios? A. Financial leverage. B. Liquidity. C. Profitability. D. Prospectus.
Prospectus.
Financial leverage: A. arises because most borrowed funds have a fixed interest rate. B. arises because most borrowed funds have a variable interest rate. C. usually has no bearing on the risk associated with a company. D. is a concept that does not apply to individuals.
arises because most borrowed funds have a fixed interest rate.
A firm's independent auditors have the responsibility to:
assess the firm's accounting policies.
If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be: A. less than 10. B. between 10 and 25. C. between 25 and 40. D. over 40.
between 10 and 25.
If a firm's payment terms for sales made on account to its customers were 2/10, n30, the number of days' sales in accounts receivable would be expected to be: A. less than 10. B. between 10 and 25. C. between 25 and 40. D. over 40.
between 10 and 25.
Business segment information is included in the notes to financial statements because:
current and potential investors can make more informed judgments about the company.
Another term for return on investment is: - Return on assets. - Return on equity. - Return on retained earnings. - Return to sender.
Return on assets.
Another term for return on investment is: - Return to sender. - Return on equity. - Return on retained earnings. - Return on assets.
Return on assets.
Which of the following is a universally accepted measure of profitability? - Return on liabilities. - Return on retained earnings. - All of these. - Return on investment.
Return on investment.
Required segment information disclosures do not include data concerning:
Sales made to subsidiaries by each segment
"Significant Accounting Policy" disclosures normally provide detailed information in relation to all of the following, except:
Sales returns and allowances.
The price/earnings ratio: - is a measure of the relative expensiveness of a firm's common stock. - is calculated by dividing the earnings multiple by net income. - does not usually change by more than 1.0 (e.g. 8.2 to 9.2) during the year. - can be used to determine the cash dividend to be received during the year.
is a measure of the relative expensiveness of a firm's common stock.
The price/earnings ratio: A. is a measure of the relative expensiveness of a firm's common stock. B. does not usually change by more than 1.0 (e.g. 8.2 to 9.2) during the year. C. can be used to determine the cash dividend to be received during the year. D. is calculated by dividing the earnings multiple by net income.
is a measure of the relative expensiveness of a firm's common stock.
The inventory turnover calculation: - is wrong unless sales is used in the numerator. - requires knowledge of the inventory cost flow assumption being used. - is wrong unless cost of goods sold is used in the numerator. - is an alternative way of expressing the number of days' sales in inventory.
is an alternative way of expressing the number of days' sales in inventory
The inventory turnover calculation: A. is wrong unless cost of goods sold is used in the numerator. B. is wrong unless sales is used in the numerator. C. is an alternative way of expressing the number of days' sales in inventory. D. requires knowledge of the inventory cost flow assumption being used.
is an alternative way of expressing the number of days' sales in inventory.
When a corporation has both common stock and preferred stock outstanding: A. dividends on preferred stock are paid only if the company has current earnings. B. dividends on preferred stock must be paid before dividends on common stock can be paid. C. preferred stockholders receive the same dividend per share as common stockholders. D. dividends on preferred stock are paid only if dividends are to be paid on the common stock.
dividends on preferred stock must be paid before dividends on common stock can be paid.
When a corporation has both common stock and preferred stock outstanding: A. dividends on preferred stock are paid only if the company has current earnings. B. dividends on preferred stock must be paid before dividends on common stock can be paid. C. preferred stockholders receive the same dividend per share as common stockholders. D. dividends on preferred stock are paid only if dividends are to be paid on the common stock.
dividends on preferred stock must be paid before dividends on common stock can be paid.
The inventory turnover calculation: A. is wrong unless cost of goods sold is used in the numerator. B. is wrong unless sales is used in the numerator. C. is an alternative way of expressing the number of days' sales in inventory. D. requires knowledge of the inventory cost flow assumption being used.
is an alternative way of expressing the number of days' sales in inventory.
Book value per share of common stock of a manufacturing company: - is the same as the total balance sheet asset value per share of common stock. - reflects the fair value of the company's stock. - is not a very useful measure most of the time. - is calculated by dividing market value per share by earnings per share.
is not a very useful measure most of the time.
Book value per share of common stock of a manufacturing company: A. is not a very useful measure most of the time. B. is calculated by dividing market value per share by earnings per share. C. reflects the fair value of the company's stock. D. is the same as the total balance sheet asset value per share of common stock.
is not a very useful measure most of the time.
An advantage of the DuPont model for calculating ROI is that:
it focuses on asset utilization as well as net income.
A potential creditor's judgment about granting credit would be most influenced by the potential customer's: A. current ratio at the end of the prior fiscal year. B. most recent acid-test ratio. C. trend of acid-test ratio over the past three years. D. practice with respect to taking cash discounts offered by current suppliers.
practice with respect to taking cash discounts offered by current suppliers.
A potential creditor's judgment about granting credit would be most influenced by the potential customer's: A. current ratio at the end of the prior fiscal year. B. most recent acid-test ratio. C. trend of acid-test ratio over the past three years. D. practice with respect to taking cash discounts offered by current suppliers.
practice with respect to taking cash discounts offered by current suppliers.
A management that wanted to increase the financial leverage of its firm would: A. raise additional capital by selling common stock. B. use excess cash to purchase preferred stock for the treasury. C. raise additional capital by selling fixed interest rate long-term bonds. D. try to increase its ROI by increasing asset turnover.
raise additional capital by selling fixed interest rate long-term bonds.
Another term for the price/earnings ratio is: - earnings multiple. - sales multiple. - cost ratio. - profit ratio.
earnings multiple.
Another term for the price/earnings ratio is: A. cost ratio. B. sales multiple. C. earnings multiple. D. profit ratio.
earnings multiple.
A common size income statement: - makes comparisons between years more difficult. - uses the same dollar amount of revenues for each year. - is useful in estimating the impact of inflation. - expresses items as a percentage of revenues.
expresses items as a percentage of revenues.
A common size income statement: A. uses the same dollar amount of revenues for each year. B. expresses items as a percentage of revenues. C. makes comparisons between years more difficult. D. is useful in estimating the impact of inflation.
expresses items as a percentage of revenues.
A common size income statement: A. uses the same dollar amount of revenues for each year. B. expresses items as a percentage of revenues. C. makes comparisons between years more difficult. D. is useful in estimating the impact of inflation.
expresses items as a percentage of revenues.
Which is the following descriptions is not one of the "Thirteen Financial Shenanigans" identified by Schilit and Perler, and listed in Exhibit 10-1:
failing to record intangible assets which the company has ownership rights to.
The independent auditors' report usually
includes an opinion that the financial statements present fairly, in all material respects, financial information about the company.
Asset turnover calculations: A. are made by dividing the average asset balance during the year by the sales for the year. B. are made by dividing sales for the year by the asset balance at the end of the year. C. communicate information about how promptly the entity pays its bills. D. should be evaluated by observing the turnover trend over a period of time.
should be evaluated by observing the turnover trend over a period of time.
The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:
tax services.
The most powerful corporate governance legislation to date has been
the Sarbanes-Oxley Act (SOX) of 2002.
An entity's current ratio will be influenced by: - the depreciation method used. - writing off an overdue account receivable against the allowance for uncollectible accounts. - issuance of a stock dividend. - the inventory cost flow assumption used.
the inventory cost flow assumption used.
An entity's current ratio will be influenced by: A. the inventory cost flow assumption used. B. writing off an overdue account receivable against the allowance for uncollectible accounts. C. the depreciation method used. D. issuance of a stock dividend.
the inventory cost flow assumption used.
The dividend payout ratio describes: - the percentage change in dividends this year compared to last year. - the relationship of dividends per share to market price per share. - the proportion of earnings paid as dividends. - dividends as a percentage of the price/earnings ratio.
the proportion of earnings paid as dividends.
The dividend payout ratio describes: A. the proportion of earnings paid as dividends. B. the relationship of dividends per share to market price per share. C. the percentage change in dividends this year compared to last year. D. dividends as a percentage of the price/earnings ratio.
the proportion of earnings paid as dividends.
The dividend payout ratio describes: A. the proportion of earnings paid as dividends. B. the relationship of dividends per share to market price per share. C. the percentage change in dividends this year compared to last year. D. dividends as a percentage of the price/earnings ratio.
the proportion of earnings paid as dividends.
A higher P/E ratio means that: - investors are wary of the stock. - the stock is relatively expensive. - the stock is more reasonably priced. - earnings are expected to decrease.
the stock is relatively expensive.
A higher P/E ratio means that: A. the stock is more reasonably priced. B. the stock is relatively expensive. C. investors are wary of the stock. D. earnings are expected to decrease.
the stock is relatively expensive.
A management that wanted to increase the financial leverage of its firm would: A. raise additional capital by selling common stock. B. use excess cash to purchase preferred stock for the treasury. C. raise additional capital by selling fixed interest rate long-term bonds. D. try to increase its ROI by increasing asset turnover.
raise additional capital by selling fixed interest rate long-term bonds.
Return on equity:
relates net income and stockholders' equity.
An individual interested in making a judgment about the profitability of a company should: - calculate the company's ROI for the most recent year. - review the trend of the company's ROI for several years. - compare the company's ROI for the most recent year with the industry average ROI for the most recent year. - review the trend of working capital for several years.
review the trend of the company's ROI for several years.
An individual interested in making a judgment about the profitability of a company should: A. review the trend of working capital for several years. B. calculate the company's ROI for the most recent year. C. review the trend of the company's ROI for several years. D. compare the company's ROI for the most recent year with the industry average ROI for the most recent year.
review the trend of the company's ROI for several years.
When a firm has financial leverage: - ROI will usually be less than it would be without leverage. - ROI will be greater than ROE. -risk is greater than if there wasn't any leverage. - the firm will always have a higher ROE than it would without leverage.
risk is greater than if there wasn't any leverage.
When a firm has financial leverage: A. ROI will be greater than ROE. B. ROI will usually be less than it would be without leverage. C. risk is greater than if there wasn't any leverage. D. the firm will always have a higher ROE than it would without leverage.
risk is greater than if there wasn't any leverage.
Financial statement ratios support informed judgments and decision making most effectively: - when compared to an industry average for the most recent year. - when the trend of entity data is compared to the trend of industry data. - when viewed as a trend of entity data. - when viewed for a single year.
when the trend of entity data is compared to the trend of industry data.
Management's statement of responsibility: Explains that the entity's financial statements are the responsibility of the entity's auditors States that the financial statements are free of significant error Affirms that management is responsible for assuring adherence to internal control policies and procedures Guarantees that the firm has operated in a highly ethical manner
Affirms that management is responsible for assuring adherence to internal control policies and procedures
Management's statement of responsibility:
Affirms that management is responsible for assuring adherence to internal control policies and procedures.
Corporate governance includes concerns about: Business ethics and social responsibility The responsibility of the board of directors Equitable treatment of all stakeholders Disclosures and transparency All of these
All of these
Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following? An annual report A form 10-K A set of financial statements All of these
All of these
Which of the following requires an explanatory paragraph in the independent auditors' report? Basing the opinion on the work of another auditor Uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements Substantial doubt about the entity's viability to continue as a going concern None of these All of these
All of these
A firm's independent auditors have the responsibility to: Assess the firm's accounting policies Ascertain the firm's profit potential Uncover all fradulent activities Assess management's discussion and analysis
Assess the firm's accounting policies
Which of the following requires an explanatory paragraph in the independent auditors' report?
Basing the opinion on the work of another auditor, uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements and substantial doubt about the entity's viability to continue as a going concern are correct.
Which of the following is a proper paragraph for an independent auditor's report? Scope, introduction, opinion Introduction, scope, opinion Opinion, scope, summary Introduction, opinion, scope
Introduction, Scope, Opinion
Which of the following is the proper paragraph sequence for an independent Auditor's Report?
Introduction, scope, opinion.
The nature and content of disclosures relate to all except: Accounting changes Segment information Management's plans for the future Contingencies and commitments Events subsequent to the balance sheet date
Management's plans for the future
Which of the following accounts is part of working capital? - Common Stock - Retained Earnings - Sales - Merchandise Inventory
Merchandise Inventory
A leveraged buyout refers to: A. one firm issues stock to take over another firm. B. one firm trades its stock for the stock of another firm. C. a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private. D. one firm pays cash for the shares of a takeover firm's shares.
a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
A leveraged buyout refers to: A. one firm issues stock to take over another firm. B. one firm trades its stock for the stock of another firm. C. a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private. D. one firm pays cash for the shares of a takeover firm's shares.
a firm goes heavily into debt in order to obtain the funds to purchase the shares of the public stockholders and thus take the firm private.
A firm's cash dividends were $3.96 per share of common stock for calendar 2013. In 2014, the stock was split 3-for-1 and in 2015 a 10% stock dividend was issued. Dividends per share for 2013, to be reported in the firm's annual report for 2015, are: $3.96 $1.45 $1.32 $1.20
$1.20
For 2013, Skress Co. reported 3.64 of earnings per share of common stock. During 2014, the firm had a 4% common stock dividend. The 2013 earnings per share to be reported in the annual report for 2014 are: $3.79 $3.64 $3.50 $3.49
$3.50
If a firm's debt ratio was 25%, its debt/equity ratio would be: A. 25%. B. 50%. C. 33.33%. D. 75%.
33.33%
If a firm's debt ratio was 25%, its debt/equity ratio would be: A. 25%. B. 50%. C. 33.33%. D. 75%.
33.33%.
Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following?
A form 10-K. An annual report. A set of financial statements.
Business segment information is included in the notes to the financial statements because: The amounts shown on the financial statements of most companies are just too large to comprehed Current and potential investors can make more informed judgments about the company Net income from various geographic areas can be clearly determined By combining these amounts for each segment, ROI and cash flows for the company as a while can be determined
Current and potential investors can make more informed judgements about the company
Which of the following is(are) an example of a measure of leverage? - Debt/equity ratio. - Debt payout ratio. - Preferred dividend coverage ratio. - Debt yield.
Debt/equity ratio.
Which of the following is(are) an example of a measure of leverage? A. Debt yield. B. Debt payout ratio. C. Preferred dividend coverage ratio. D. Debt/equity ratio.
Debt/equity ratio.
An audit conducted in accordance with generally accepted auditing standards includes each of the following except: Examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements Evaluation of the efficiency and effectiveness of management Assessment of the accounting principles used and significant estimates made by management Planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements
Evaluation of the efficiency and effectiveness of management
The notes to the financial statements: Are not an integral part of the financial statements Explain the significant accounting policies of the company Usually disclose the amount of the company's bad debts expense Describe the management's product development plans for the coming year
Explain the significant accounting policies of the company
Which of the following descriptions is not one of the "Thirteen Financial Shenanigans" identified by Schilit and Perler, and listed in Exhibit 10-1: Recording revenue too soon or that is of a questionable quality Boost income with one-time gains Failing to record intangible assets which the company has ownership rights to Shifting future expenses to the current period as a special charge Failing to record or improperly reducing liabilities
Failing to record intangible assets which the company has ownership rights to
The nature and content of disclosures relate to all of the following except:
Fair market value.
Which of these disclosures is unaudited and appears after the audit opinion in the annual report?
Five-year summary of financial data.
The independent auditors' report usually: Presents a "clean bill of health" for the company Refers to the quality of the company's product or services Includes an opinion that the financial statements are correct Includes an opinion that the financial statements present fairly, in all material respects, financial information about the company
Includes an opinion that the financial statements present fairly, in all material respects, financial information about the company
The notes to financial statements: Should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved Are not an integral part of the financial statements Include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of an entity Are used by many entities to hide information from the reader of the financial statement including the notes information that should be shown in detail on the financial statements themselves
Should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved
The SOX Act of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client: Financial information systems design and implementation Internal audit outsourcing services Tax services "Expert" services All non-audit services are prohibited
Tax services
The most powerful corporate governance legislation to date has been: The Sabranes-Oxley Act of 2002 The creation of the American Institute of Certified Public Accountants Corporate Ethics Code of 2007 The regulation of inventory management practices by the SEC
The Sabranes-Oxley Act of 2002
When an entity changes its accounting from one generally accepted method to another generally accepted method: Financial statements of all prior years are changed to maintain compatibility An explanatory note stating that the change was approved by the Financial Accounting Standards Board is required The dollar effect of the change on both balance sheet and income statement must be disclosed Changes like this are not permitted
The dollar effect of the change on both balance sheet and income statement must be disclosed
When an entity changes its accounting from one generally accepted method to another generally accepted method:
The dollar effect of the change on both the balance sheet and income statement must be disclosed.
Significant accounting policies are described in the notes to the financial statements because: There isn't enough space for them to be included in the captions of the financial statements If the accrual basis of accounting is used, "matching" of revenues and expenses may not take place The reader must be aware of which of the alternative generally acceptable practices have been used None of these
The reader must be aware of which of the alternative generally acceptable practices have been used
If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be: - Lower. - The same. - Higher. - Would depend on the amount borrowed.
The same.
Management's statement of responsibility: Usually refers to the company's system of internal controls Emphasizes that the auditors are responsible for financial statements Includes a disclaimer of responsibility for the level of P/E ratio of the company's common stock Gives the president of the company an opportunity to explain why profits changed
Usually refers to the company's system of internal controls