Chapter 3. Balance Sheet

Question 1

Which of the following are subsequent events that must be disclosed in the notes to the financial statements? 
A) Issuance of debt securities
B) Collections on account
C) Sale of a business
D) Event that affects a loss contingency

Answer 1

A) Issuance of debt securities
C) Sale of a business
D) Event that affects a loss contingency

Question 2

______ Risk is the risk that a company may not effectively manage its business and might impair it ability to earn profits

Answer 2

Operational

Question 3

The financial statement that displays a firm’s financial position on a particular date is the ________

Answer 3

Balance Sheet

Question 4

Which of the following items are included in the professional opinions given in the auditor’s report
A) The accuracy of the financial statements
B) The Fairness of the financial statements
C) The effectiveness of management strategy
D) The effectiveness of internal control

Answer 4

B) The Fairness of the financial statements

D) The effectiveness of internal control

Question 5

Times interest earned =

Answer 5

EBIT / interest expense

Question 6

Acid-Test =

Answer 6

Quick Ratio / Current liabilities

Question 7

Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements
A) Method of recognizing contract revenue
B) Items included in cash and cash equivalents
C) Choice between LIFO and FIFO
D) Supporting calculations for income taxes

Answer 7

A) Method of recognizing contract revenue
B) Items included in cash and cash equivalents
C) Choice between LIFO and FIFO

Question 8

A __________ ___________ is a significant development that occurs after a company’s fiscal year-end but before the financial statements are issued or available to be issued

Answer 8

Subsequent event

Question 9

Which of the following is a subsequent event that must be disclosed in the notes to the financial statements
A) The issuance of debt or equity securities
B) Accounts receivable collected after the balance sheet date but before the issuance of financial statements
C) Inventory purchased after the balance sheet date
D) Investments sold after the balance sheet date

Answer 9

A) The issuance of debt or equity securities

Question 10

What are related-party transactions

Answer 10

Transaction between you and company parties

Question 11

Which of the following are required disclosures for related-party transactions.
A) Name of the related party
B) Amounts Due to or from related parties
C) Nature of the relationship
D) Intentions to continue the relationship with related parties

Answer 11

B) Amounts Due to or from related parties

C) Nature of the relationship

Question 12

The readiness of a company to pay its short-term debts as they come due is referred to as _________ analysis

Answer 12

Liquidity

Question 13

The debt to equity ratio is calculated by

Answer 13

Total liabilities / total owners

Question 14

_________ analysis examines the relationship of items on the financial statements of one year

Answer 14

Vertical

Question 15

Another term for net assets is _________

Answer 15

Equity

Question 16

What is the role of the auditors attest function
A) To provide an opinion on the company’s success
B) To provide an opinion on the company’s future
C) To provide an opinion on managements strategies
D) To provide an opinion on the financial statements

Answer 16

D) To provide an opinion on the financial statements

Question 17

The type of analysis that uses ratio analysis or trend analysis of financial statements across multiple years is called ________ analysis

Answer 17

horizontal

Question 18

_______ analysis compares financial statements of 2 or more years, whereas ________ analysis examines the relationships between financial statement items of the same year

Answer 18

Horizontal, Vertical

Question 19

Which of the following valuation methods are used to display items on the balance sheet
A) Liquidation value
B) Historical cost
C) fair value

Answer 19

B) Historical cost

C) fair value

Question 20

Classifying items on the balance sheet as current and non-current assists financial statement users in assessing what aspects about a company
A) Profitability and future earnings
B) Earnings and marketability of the stock
C) Potential cash flows
D) Solvency and Liquidity

Answer 20

D) Solvency and Liquidity

Question 21

A common method of analysis is to express a relationship between the two financial statement items, such as net income divided by sales, and compare this relationship with previous years. This comparison is referred to as ______ analysis

Answer 21

Vertical

Question 22

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio
A) Account Receivable
B) Prepaid Assets
C) Inventory
D) Short-term trading securities

Answer 22

B) Prepaid Assets

C) Inventory

Question 23

A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial ________

Answer 23

Leverage

Question 24

Favorable financial leverage occurs when a company
A) pays more in dividends than in interest
B) pays more in interest expense than it pays in dividends.
C) earns more interest income than it pays in interest expense
D) earns a return on borrowed funds that exceeds the cost of borrowing

Answer 24

D) earns a return on borrowed funds that exceeds the cost of borrowing

Question 25

A _______ is an unintentional mistake in the financial statements, whereas an ________ is an intentional distortion of the financial statements

Answer 25

error, irregularity

Question 26

An unqualified audit opinion represents which of the following. A) The financial statements are qualified by the auditor to have certain errors B) The financial statements are free from errors and irregularities C) The financial statements are fairly presented in conformity with generally accepted accounting principles D) The financial statements are certified to be accurate

Answer 26

C) The financial statements are fairly presented in conformity with generally accepted accounting principles

Question 27

When a receivable is supported by a formal agreement or note that specifies payment terms, it is called _________

Answer 27

Note receivable

Question 28

What is the criterion to determine if an investment qualifies as a cash equivalent A) it is an investment in stock of another company that is held for active trading B) it is a marketable security being held for sale C) it is a highly liquid investment with a maturity date of 2 months or less from date of purchase D) it is a short-term investment with a maturity date of 12 months or less

Answer 28

C) it is a highly liquid investment with a maturity date of 2 months or less from date of purchase

Question 29

Investments in debt and equity securities are classified into which the three categories A) operating, investing, and financing securities B) Short-term, long-term and sinking fund securities C) financial assets, financial liabilities, and equity securities D) held-to-maturity, trading, and available-for-sale securities

Answer 29

D) held-to-maturity, trading, and available-for-sale securities

Question 30

``` Which of the following will be given if an auditory believes that insufficient evidence has bee gathered to successfully express an opinion on the financial statements A) Qualified report B) adverse report C) disclaimer D) unqualified report ```

Answer 30

C) disclaimer

Question 31

``` Which of the following opinions is used when an auditor has an exception to the standard opinion but there is not sufficient seriousness to invalidate the financial statements as a whole A) unqualified B) disclaimer C) qualified D) adverse ```

Answer 31

C) qualified

Question 32

What situation would require an auditor to use an explanatory paragraph in the auditors report A) lack of consistency due to a change in accounting principle B) material mistakes in the financial statements C) A loss that is not material in amount but is remote D) a finding that the financial statements are not fairly presented

Answer 32

A) lack of consistency due to a change in accounting principle

Question 33

``` Which of the following opinions is necessary when the auditor finds exceptions that are so material that the financial statements may be misleading A) disclaimer B) adverse C) qualified D) unqualified ```

Answer 33

B) adverse

Question 34

``` Which of the following items requires supplemental disclosures in the notes to the financial statements A) items that are immaterial B) pension plans C) leases D) long-term debt ```

Answer 34

B) pension plans C) leases D) long-term debt

Question 35

The higher the debt to equity ratio is for a company then the ________ the risk of insolvency is for the company

Answer 35

Higher

Question 36

``` Which document is required to provide information on executive and director compensation A) income statement B) Balance sheet C) proxy statement D) notes to the financial statements ```

Answer 36

C) proxy statement

Question 37

The purpose of comparative financial statements is to allow users to A) analyze curent year date B) analyze relationships between financial statements B) Detect and predict trends

Answer 37

B) Detect and predict trends

Question 38

What is the purpose of an auditor report A) To provide users with assurance as to the accuracy of the financial statements B) To provide users with a certification that the financial statements are free from error C) To provide users witha professional opinion regarding the fairness of the financial statements

Answer 38

C) To provide users witha professional opinion regarding the fairness of the financial statements