Part 1

Management is responsible for the preparation of the financial statements, including the notes, and the auditor's report attests to the fairness of the presentation

TRUE

Publicity in the media can impact a firm's financial performance

TRUE

The accrual basis of accounting means that revenues are recognized when the sale is made rather than when cash is received

TRUE

The goal of the International Accounting Standards Board is the adoption of uniform international accounting standards

TRUE

The management discussion and analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data

TRUE

The management discussion and analysis should contain a discussion of the commitments for capital expenditures, the purpose of such commitments, and expected sources of funding

TRUE

The matching principle requires that expenses be matched with the generation of revenues in order to determine net income for an accounting period

TRUE

The proxy statement offers information about such items as corporate governance, audit-related matters, directors and executive compensation, and related party transactions

TRUE

What types of information cannot be found in the financial statements? a. Details about officer and employee retirement, pension, and stock option plans. b. Pending legal proceedings. c. Reputation of the firm, morale of employees and prestige in the community. d. Disclosures about segments of an enterprise.

c. Reputation of the firm, morale of employees and prestige in the community.

The globalization of business activity has resulted in which of the following? a. Increased corruption and unethical behavior. b. A uniform set of accounting rules in all countries. c. The FASB and IASB working jointly on a project to converge accounting standards. d. The requirement that U.S. firms use international accounting rules as of 2006.

c. The FASB and IASB working jointly on a project to converge accounting standards.

What does Section 404 of the Sarbanes-Oxley Act of 2002 require? a. The external auditors must create an adequate internal control structure for the firm being audited. b. The external auditors must approve of all internal auditors hired by a firm. c. The inclusion of an internal control report in the annual report. d. The external auditors need to perform internal audit services.

c. The inclusion of an internal control report in the annual report.

What type of audit report indicates that the financial statements have not been presented fairly? a. A disclaimer of opinion. b. An unqualified report. c. A qualified report. d. An adverse opinion.

d. An adverse opinion.

In what industries would it be expected that companies would spend a significant amount on research and development activities? a. Health. b. Clothes retailer. c. Auto. d. Both (a) and (c).

d. Both (a) and (c).

What item is probably the least useful when analyzing financial statements? a. Management discussion and analysis. b. The notes to the financial statements. c. The statement of cash flows. d. Public relations materials.

d. Public relations materials.

How are revenues and expenses recognized under the accrual basis of accounting? a. Revenues are recognized when cash is received and expenses are recognized when cash is paid. b. Revenues and expenses are recognized equally over a twelve month period. c. Revenues and expenses are recognized based on the choices of management. d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

A corporate annual report contains three basic financial statements

FALSE

Accounting choices and estimates rarely have a significant impact on financial statement numbers

FALSE

Annual reports of public companies can only be found on the SEC's EDGAR database

FALSE

Conglomerates operating in diversified lines of business are required to create separate annual reports for each line of business

FALSE

The SEC requires all companies, both public and private, to file annually a Form 10-K report

FALSE

The Sarbanes-Oxley Act eliminated the need for internal auditors

FALSE

The Sarbanes-Oxley Act of 2002 requires all members of management as well as directors to certify the accuracy of the financial statements

FALSE

The notes to financial statements, while helpful, are not an integral part of the statements

FALSE

The shareholders' letter from the CEO of a firm offers factual information needed to analyze the financial statements

FALSE

United States accounting rules have been perceived as being less complex than international standards

FALSE

The FASB was given Congressional authority to write accounting rules

FALSE -Congress gave congressional authority to the SEC

A basic understanding of financial statements is needed due to ongoing financial turmoil and major corporate failures

TRUE

An unqualified auditor's report states that the financial statements present fairly the financial position, results of operation, and the cash flows of the entity

TRUE

Despite the enactment of the Sarbanes-Oxley Act of 2002, corruption and unethical behavior continued in the 2000s

TRUE

Examples of discretionary items include repairs and maintenance, research and development and advertising

TRUE

Financial statements are currently prepared according to Generally Accepted Accounting Principles in the US

TRUE

In 2006, the IASB and the FASB agreed to work on all major projects jointly

TRUE

9. What type of audit report indicates that the financial statements have been presented fairly? a. An unqualified report. b. A disclaimer of opinion. c. A qualified report. d. An adverse opinion.

a. An unqualified report.

What basic financial statements can be found in a corporate annual report? a. Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows. b. Balance sheet, auditor's report and income statement. c. Earnings statement and statement of retained earnings. d. Statement of cash flows and five-year summary of key financial data.

a. Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows.

Why does the management discussion and analysis help the analyst? a. It contains information that cannot be found in the financial data. b. It provides predictions of all future financial statement numbers. c. It outlines the accounting choices made by the firm. d. It explains the market valuation of the firm's stock.

a. It contains information that cannot be found in the financial data.

14. What document is required by the SEC to solicit shareholder votes? a. Proxy statement. b. Five-year summary. c. Shareholders' letter. d. Prospectus.

a. Proxy statement.

Which of the following items is NOT discretionary in nature? a. Union wages. b. Repairs and maintenance. c. Research and development. d. Advertising.

a. Union wages.

What information can be found on a statement of stockholders' equity? a. A reconciliation of the cash account and the retained earnings account. b. A reconciliation of the beginning and ending balances of all accounts that appear in the stockholders' equity section of the balance sheet. c. A reconciliation of the operating, investing and financing activities of a firm. d. A reconciliation of net profit or loss and the cash account.

b. A reconciliation of the beginning and ending balances of all accounts that appear in the stockholders' equity section of the balance sheet.

Which of the following statements is true? a. a. GAAP-based financial statements are prepared according to the "cash" rather than the "accrual" basis of accounting. b. Accounting choices and estimates can have a significant impact on the outcome of financial statement numbers. c. The accrual method means that the expense is recognized after the cash is paid out. d. The purpose of the accrual method is to attempt to "match" assets with liabilities in appropriate accounting periods.

b. Accounting choices and estimates can have a significant impact on the outcome of financial statement numbers.

Which of the following could be detrimental to a firm's sales and earnings? a. Using the matching principle when recording revenues and expenses. b. Deferring repairs and maintenance on equipment. c. Investing in research and development. d. Increasing discretionary expenses.

b. Deferring repairs and maintenance on equipment.

Which report is not required to be filed by public companies to the SEC? a. Annual reports (Form 10-K). b. Financial Reporting Rulings. c. A prospectus for any new security offering. d. Quarterly reports (From 10-Q).

b. Financial Reporting Rulings.

Which of the following items would not be discussed in the management discussion and analysis? a. Commitments for capital expenditures. b. The market value of all assets. c. The internal and external sources of liquidity. d. A breakdown of sales increases into price and volume components.

b. The market value of all assets.

What item is not included in the notes to the financial statements? a. Details about inventory and property, plant and equipment. b. Information about major acquisitions or divestitutures. c. The management discussion and analysis. d. A summary of the firm's accounting policies.

c. The management discussion and analysis.

What information can be found on an income statement? a. The financing and investing activities during an accounting period. b. Cash inflows and cash outflows. c. A reconciliation of the beginning and ending balances of all revenue accounts. d. Revenues, expenditures, net profit or loss and net profit or loss per share.

d. Revenues, expenditures, net profit or loss and net profit or loss per share.

What information can be found on a balance sheet? a. Information to support that assets equal liabilities. b. The profit or loss for the accounting period. c. The reasons for changes in the cash account. d. The financial position on a particular date; i.e. assets, liabilities and shareholders' equity.

d. The financial position on a particular date; i.e. assets, liabilities and shareholders' equity.