Financial Statement Analysis Ch.2

b. If assets are $40,000 and stockholders'equity is $10,000, how much are liabilities?

1. $30,000

d. This item need not be provided with a complete set of financial statements: 1. A 20-year summary of operations 2. Note disclosure of such items as accounting policies 3. Balance sheet 4. Income statement 5. Statement of cash flows

1. A 20-year summary of operations

a. Audit opinions cannot be classified as which of the following?

1. All-purpose

e. Which of the following statements is true? 1. Financial statements of legally separate entities may be issued to show financial position, income, and cash flow as they would appear if the companies were a single entity (consolidated). 2. Consolidated statements reflect a legal, rather than an economic, concept of the entity. 3. The financial statements of the parent and the subsidiary are consolidated for majority-owned subsidiaries. 4. Consolidated statements are rare in the United States. 5. The acceptance of consolidation has been decreasing.

1. Financial statements of legally separate entities may be issued to show financial position, income, and cash flow as they would appear if the companies were a single entity (consolidated).

From the point of view of analysis, which classification of an audit opinion indicates that the financial statements carry the highest degree of reliability?

1. Unqualified opinion

b. Which of the following is a type of audit opinion that a firm would usually prefer? 1. Unqualified opinion 2. Qualified opinion 3. Adverse opinion 4. Clear opinion 5. None of the above.

1. Unqualified opinion

f. The Form 10-K is submitted to the 1. American Institute of Certified Public Accountant 2. Securities and Exchange Commission 3. Internal Revenue Service 4. American Accounting Association 5 Emerging Issues Task Force

2. Securities and Exchange Commission

If assets are $100,000 and liabilities are $40,000, how much is stockholders'equity?

3. $60,000

c. Which of the following statements is true? 1. You are likely to regard an adverse opinion as an immaterial issue as to the reliability of the financial statements. 2. A disclaimer of opinion indicates that you should look to the auditor's report as an indication of the reliability of the statements. 3. A review consists principally of inquiries made to company personal and analytical procedures applied to financial data. 4. When the outside accountant presents only financial information as provided by management, he or she is said to have reviewed the financial statements. 5. None of the above.

3. A review consists principally of inquiries made to company personal and analytical procedures applied to financial data.

d. Which is a permanent account? 1. Revenue 2. Advertising Expense 3. Accounts Receivable 4. Dividends 5. Insurance Expense

3. Accounts Receivable

e. Which is a temporary account? 1. Cash 2. Accounts Receivable 3. Insurance Expense 4. Accounts Payable 5. Notes Payable

3. Insurance Expense

a. Which party has the primary responsibility for the financial statements? 1. Bookkeeper 2. Auditor 3. Management 4. Cost accountant 5. None of the above.

3. Management

Auditors Opinion

4 types of audit opinions and how they differ; the majority of audit opinions are "unqualified" since management will normally adjust or disclose necessary information in accordance with the auditor's request in order to secure a "clean" opinion.

d. If an accountant performs a compilation and becomes aware of deficiencies in the statements, the accountant's report characterizes the deficiencies by all but one of the following: 1. The omission of substantially all disclosures 2. The omission of the statement of cash flows 3. Accounting principles not generally accepted 4. All of the above. 5. None of the above.

4. All of the above.

e. In addition to the company's principal financial statements, the Form 10-K and shareholder annual reports must include all but one of the following: 1. Information on the market for holders of common stock and related securities, including high and low sales price, frequency and amount of dividends, and number of shares. 2. Five-year summary of selected financial data. 3. Management's discussion and analysis of financial condition and results of operations. 4. Two years of audited balance sheets, three years of audited statements of income, and two years of statements of cash flows. 5. Disclosure of the domestic and foreign components of pretax income.

4. All of the above.

f. In terms of debits and credits, which accounts have the same normal balances? 1. Dividends, retained earnings, liabilities 2. Capital stock, liabilities, expenses 3. Revenues, capital stock, expenses 4. Expenses, assets, dividends 5. Dividends, assets, liabilities

4. Expenses, assets, dividends

Which one of the following statements is false? 1. The reliance that can be placed on financial statements that have been reviewed is substantially less than for those that have been audited. 2. An accountant's report described as a compilation presents the only financial information as provided by management. 3. A disclaimer of opinion indicates that you should not look to the auditor's report as an indication of the reliability of the statements. 4. A review has substantially less scope than an examination in accordance with generally accepted auditing standards. 5. The typical unqualified opinion has one paragraph.

5. The typical unqualified opinion has one paragraph.

1. This opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity, in conformity with generally accepted accounting principles.

Adverse Opinion

Permanent Accounts

Asset, Liability, and Equity (balance sheet) accounts; the ending balance is the beginning balance for the following year; these accounts continue to roll over

a. The balance sheet equation can be defined as which of the following?

Assets = Liabilities + Stockholder equity

This type of report is rendered when the auditor has not performed an audit sufficient in scope to form an opinion.

Disclaimer of Opinion

2. Summary of revenues and expenses and gains and losses for a specific period of time.

Income Statement

What are notes (Disclosure notes)

Note 1: Used for the disclosure of significant accounting and methods such as depreciation methods and inventory methods.

Accounts Payable

Permanent. Credit.

Common Stock

Permanent. Credit.

Accounts receivable

Permanent. Debit.

Equipment

Permanent. Debit.

Permanent or temporary and normal balance: Cash

Permanent. Debit.

This opinion states that, except for the effects of the matters to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity, in conformity with generally accepted accounting principles.

Qualified Opinion

What are reviews and compilations (Opposed to an audit)?

Review- is substantially less in scope than an audit; primarily consists of analytical procedures and inquiries. The CPA's review report should state that there are no material modifications of the financial statements in order for them to be in accordance with GAAP. The quarterly reports or 10-Q's submitted to the SEC by public companies are reviewed, not audited. Compilation- the external CPA is only presenting the financial information as provided by management. If the CPA becomes aware of any deficiencies in the statements, then these should be explained in the report (e.g. omission of significant disclosures, GAAP not followed, no CF statement provided, etc.)

1. Details the sources and uses of cash during a specified period of time.

Statement of Cash Flows

3. Shows the financial condition of an accounting entity as of a specific date.

Statement of Cash Flows

4. Presents reconciliation of the beginning and ending balances of the stockholders equity accounts.

Statement of Stockholders equity

Sales

Temporary. Credit.

Purchases

Temporary. Debit.

Rent Expenses.

Temporary. Debit.

Selling Expense

Temporary. Debit.

Utility Expenses

Temporary. Debit.

SEC Requirements for 10-k

The 10-K is due 60-90 days after year end, depending on the market value of the company The 10-K must include a 5-year summary of significant financial data, 3 years of audited income statements and CF statements, 2 years of audited balance sheets, Management Discussion & Analysis; stock price, dividend and share data. Management is to focus on the financial statements as a whole rather than just the income statement; emphasis should be placed on favorable and unfavorable trends and identifying significant trends and uncertainties.

What is managements responsibility for financial statements?

The management of a company is responsible for preparing and for the integrity of the financial statements, not the auditor.

This opinion states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity, in conformity with generally accepted accounting principles

Unqualified Opinion

what are contingent liabilities:

a potential loss depending on the resolution of future events; e.g. settlement of a lawsuit. Record an estimated liability and a loss; increases total liabilities and reduces net income by the estimated loss.

Temporary Accounts

all these accounts are closed to Retained Earnings at year end: Revenue and income accounts (Sales Revenue, Service Revenue, Gains, Interest income, Investment income); Expense and loss accounts (Cost of Goods Sold, various expense accounts, loss accounts); Dividends account (closed to Retained Earnings at year end).

Adverse Opinion

do not fairly present

What is a proxy?

document sent to shareholders for the election of directors of the company and for voting on various corporate actions. Information required in the proxy is prescribed by the SEC. Information of particular interest to shareholders: oExecutive compensation information o 5-year stock performance graph oRetirement plan information for company executives

Subsequent Events:

events that occur after the balance sheet date but before the statements are issued; subject to materiality.

Consolidated financial statements

financial statements that present the assets and liabilities controlled by the parent company and the total revenues and expenses of the subsidiary companies Financial statements of a parent company and its majority owned subsidiary company(s) are combined; accounts are added together and intercompany transactions and accounts are eliminated. If the parent company does not own 100% of a subsidiary company then the noncontrolling interest (portion not owned) is shown below the stockholders' equity section of the balance sheet. Also, the portion of the income attributable to the non-controlling interest is shown separately on the last part of the income statement. A subsidiary company that is not consolidated is shown as an Investment on the parent company's balance sheet as a long-term asset.

SEC Requirement for code of ethics

he SEC requires that a company disclose whether it has a code of ethics to its management; if so, the Code of Ethics must be made available by the company. These requirements resulted from the Sarbanes-Oxley Act of 2002 (SOX).

Disclaimer

no opinion given since auditor's scope is limited

Qualified Opinion

present fairly except for a particular disclosed issue

Unqualified Opinion

the financial statements present fairly; good or clean opinion

Efficient Market Hypothesis

the hypothesis that prices of securities fully reflect available information about securities