Exam 1

Use the following information for Jett Co. to answer the question below: 2015 2014 Sales 1,200 1,000 COGS 850 700 Operating expenses 200 200 Income taxes 30 35 Jett Co.'s gross profit, operating profit and net profit margins for 2015 are:

29.2%, 12.5%, 10.0%, respectively.

What information can be found on a statement of stockholders' equity?

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

What is a qualified audit report?:

A report that states that departures from GAAP exist in the firm's financial statements.

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

Accounts receivable, inventory, cash equivalents.

A firm's annual report contains only two pieces of information: the financial statements and the notes to the financial statements.

False

Accounts receivable are recorded on the balance sheet at gross realizable value.

False

Information that is significant enough to make a difference in a decision is considered to be immaterial.

False

Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

False

Operating profit margin is impacted by sales and all operating expenses except, cost of goods sold.

False

Retained earnings is the unused stash of cash that a firm has accumulated since inception.

False

The FASB has congressional authority to set accounting policies.

False

The balance sheet is prepared for a period of time, generally a year.

False

The common size income statement expresses each income statement item as a percentage of total assets.

False

The income statement comes in two basic formats, the multiple-step and the single-step versions; however, for analysis purposes the single-step version should be used.

False

The income statement presents cash revenues, cash expenses, net income, and earnings per share for an accounting period.

False

The time period assumption assumes a two year time frame with interim reporting occurring daily and weekly.

False

Which of the following statements is true?

Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity.

Which item is not a special item that must be disclosed separately on the income statement?

Foreign currency translation adjustments.

How does the equity method distort earnings?

Income is recognized even though cash may never be received.

Which format of the income statement should be used for analysis purposes?

Multiple-step.

How is earnings per common share calculated?

Operating profit divided by the average number of common stock shares outstanding.

In what industry would it be expected that companies would spend a significant amount on research and development activities?

Pharmaceutical.

Which of the following items could be found on a statement of shareholders' equity?

Reasons for retained earnings increases or decreases.

Which equation represents an income statement?

Revenues - expenses = net income.

Selling and administrative expenses include which of the following income statement items?

Salaries, rent, advertising.

How are sales reported on the income statement?

Sales are shown for three years net of returns and allowances.

How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate?

Tax rates in foreign countries where the firm operates are lower.

Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement.

True

Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions.

True

Which method of inventory assumes the last units purchased will remain in ending inventory on the balance sheet?

FIFO

ABC Company purchases five products for sale in the order and at the costs shown: Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC uses the average cost method of inventory valuation. What unit cost would be used to determine the amount in ending inventory or cost of goods sold?

Answer: (10+12+15+18+13)/5 = $13.60

The balancing equation is expressed as:

Assets = Liabilities + Stockholders' Equity

According to Section 302 of the Sarbanes-Oxley Act, who must certify the accuracy of the financial statements of a public company?

CEO and CFO.

Which item below would not be a quality of financial reporting issue related to the balance sheet?:

Discretionary expenses

How is a common-size income statement prepared?

Each income statement item is expressed as a percentage of net sales.

Which of the following statements is false?

Each item on a common-size balance sheet is expressed as a percentage of sales.

How should companies with more than one revenue source report revenue and cost of goods sold?

Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

What is amortization?

The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.

Which of the following is NOT a condition that must be met for an item to be recorded as revenue?

The revenue must be received in cash.

Which of the following items would not be classified as cash equivalents?

Trading securities

A classified balance sheet means that the asset and liability sections are categorized into key areas.

True

A common-size balance sheet is useful to the analyst because it facilitates the structural analysis of the firm.

True

Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

True

Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting scandals and renewing investor confidence in the marketplace.

True

External auditors are required to audit the internal control assessment of the company as well as the financial statements.

True

GAAP-based financial statements are prepared according to the accrual basis of accounting.

True

If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased.

True

In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year.

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 balance sheet is also called the statement of condition or statement of financial position.

True

The valuation of marketable securities on the balance sheet requires the separation of investment securities into three categories: held to maturity, trading securities, and securities available for sale.

True

All of the following items should be discussed in the management discussion and analysis except for: a. The internal and external sources of liquidity b. The market value of all assets. c. Anticipated changes were the mix and cost of financing resources d. Unusual or infrequent transactions that affect income from continuing operations

b. The market value of all assets.

Which of the following statements is false?: a. The common-size balance sheet reveals the composition of assets within major categories b. Each item on a common-size balance sheet is expressed as a percentage of sales c. The common-size balance sheet reveals the capital and the debt structure of the firm d. Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator.

d. Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator.