Chapter 5

Question 1

Who is responsible for information in the financial statements and disclosures?

Answer 1

Managers - CEO and CFO
They must both certify that the reports are true, there is no material weakness and they have disclosed to the auditors any weaknesses

Question 1

Who are the BoD

Answer 1

Oversees the CEO and assures that the long-term interests of the shareholders are being served.
They are elected by the stockholders

Question 2

Who are the BoD and the audit committee?

Answer 2

They are responsible for ensuing that processes are in place for maintaining the integrity of the accounts

Question 3

Who are the big 4?

Answer 3

EY, KPMG, PwC, Deloitte

Question 4

How do data analytics affect what auditors do?

Answer 4

Ease identification of trends, patterns
This helps auditors better anticipate potential areas of high audit risk

Question 5

Who are the users of the statements?

Answer 5

Institutional investors, private investors, lenders/creditors

Question 6

What is the disclosure process?

Answer 6

SEC requires that companies provide all investors equal access to important company news.
Managers are prohibited from trading their company’s shares based on insider information.
Public companies announce quarterly and annual earnings through a press release

Question 7

What are the ESG reports?

Answer 7

Help investors assess the long-term consequences of the company’s strategies.

Question 8

What are the 3 additional characteristics of financial statements?

Answer 8

Comparative financial statements
Additional subtotals and classifications
Additional disclosures

Question 9

How do you calculate earnings per share?

Answer 9

Net income/weighted average number of shares of common stock outstandings

Question 10

How do you calculate the gross profit percentage?

Answer 10

Gross profits/net sales

Gross profit is calculated by net sales - cost of sales

Question 11

What are the 3 sections of the statement of cash flows?

Answer 11

Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activites

Question 12

What is cash flows from operating acitivites?

Answer 12

Reports cash flows associated with earning income

Question 13

What is cash flows from investing activities?

Answer 13

Associated with the purchase and sale of 1. productive assets and 2. investments in other companies

Question 14

What is cash flows from financing activites?

Answer 14

Related to financing the business through borrowing and repaying loans from financial institutions, stock issuances and repurchases, and dividend payments

Question 15

How can cash flows be reported?

Answer 15

Direct method or indirect method

Question 16

How do you calculate cash provided by operating activities?

Answer 16

Net income +/- adjustments for noncash items

Question 17

What do all financial reports include?

Answer 17

1. Descriptions of the key accounting rules applied in the company’s statements
2. Additional detail supporting reported numbers
3. Relevant financial information not disclosed on the statements

Question 18

How to calculate return on assets?

Answer 18

Net income/average total assets

Question 19

What does the gross profit percentage mean?

Answer 19

Measures a company’s ability to charge premium prices and produce goods and services at low cost
A higher gross profit results in higher net income

Question 20

What is the indirect method for reporting a cash flow?

Answer 20

1. first section reconciles accrual basis net income to cash flows from operation
2. operating activities section helps the analyst understand the causes of differences between a company’s net income and its cash flows
3. accrual basis net income +- adjustments for noncash items = cash provided by operating activities