Test Questions and Solutions
Chapter 1
True-False
1. The SEC requires regular filing of annual and quarterly reports, as well as 8-K
reports.
2. The FASB was given Congressional authority to write accounting rules.
3. A Form 10-K must include information about legal proceedings, the
management discussion and analysis, executive compensation, and financial
statements, amongst other items.
4. The four financial statements required by the SEC are the balance sheet, income
statement, statement of stockholders' equity, and cash flow statement.
5. Notes to the financial statements are not a required component of the Form
10-K.
6. The Sarbanes-Oxley Act of 2002 requires all executive officers and directors to
certify the accuracy of the financial statements.
7. A qualified auditor's report states that the financial statements present fairly the
financial position, results of operation, and the cash flows of the entity.
8. The Sarbanes-Oxley Act of 2002 was passed in hopes of ending future
accounting scandals and renewing investor confidence in the marketplace.
9. The shareholders' letter should be ignored due to misleading information
contained in this document.
10. The management discussion and analysis includes coverage of favorable and
unfavorable trends and significant events or uncertainties in the areas of liquidity,
capital resources, and results of operations.
11. A breakdown of sales increases into price and volume components can be
found in the management discussion and analysis.
1
,12. The FASB has so far refused to cooperate with the International Accounting
Standards Board to create a set of international generally accepted accounting
principles.
13. The proxy statement offers information about such items as corporate
governance, audit-related matters, directors and executive compensation, and
related party transactions.
14. How companies handle social issues can impact sales, profits and public
perception.
15. Generally accepted accounting principles provide a measure of uniformity and
do not allow discretion in the preparation of financial statements.
16. When preparing financial statements management can make choices with
respect to accounting policies and make estimates in the application of those
policies.
17. The matching principle requires that expenses be matched with the generation
of revenues in order to determine net income for an accounting period.
18. Examples of discretionary items include repairs and maintenance, research and
development and advertising.
19. During economic downturns it is beneficial for firms to cut research and
development.
20. Nonrecurring and nonoperating items are important in assessing the enterprise's
ability to generate future operating profits.
Multiple Choice
1. What basic financial statements can be found in a corporate annual report?
a. Balance sheet, auditor's report and income statement.
b. Balance sheet, income statement, statement of shareholders' equity, and
statement of cash flows.
c. Earnings statement and statement of retained earnings.
d. Statement of cash flows and five-year summary of key financial data.
2
,2. 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 financial position on a particular date; i.e. assets, liabilities and
shareholders' equity.
d. The reasons for changes in the cash account.
3. What information can be found on an income statement?
a. Revenues, expenditures, net profit or loss and net profit or loss per share.
b. Cash inflows and cash outflows.
c. A reconciliation of the beginning and ending balances of all revenue
accounts.
d. The financing and investing activities during an accounting period.
4. Where are the possible places that the four financial statements can be found?
a. In the Form 10-K filed annually with the SEC.
b. In the annual report mailed to shareholders.
c. In the company's proxy statement or on the company's Web site.
d. All of the above.
5. What item is included in the notes to the financial statements?
a. The auditor's report.
b. The management discussion and analysis.
c. The Form 10-K report.
d. A summary of the firm's accounting policies.
6. What type of audit report indicates that the financial statements present fairly
the financial position, results of operations and the cash flows for the accounting
period?
a. A disclaimer of opinion.
b. An unqualified report.
c. A qualified report.
d. An adverse opinion.
7. Which of the following items would not be discussed in the management
discussion and analysis?
a. Commitments for capital expenditures.
b. The internal and external sources of liquidity.
c. The market value of all assets.
d. A breakdown of sales increases into price and volume components.
3
, 8. What organization currently has the legal authority to set accounting policies?
a. FASB.
b. IRS.
c. GAO.
d. SEC.
9. What is a Form 10-K?
a. The annual report of a publicly held company which must be filed with
the SEC.
b. The quarterly report of a publicly held company which must be filed with
the SEC.
c. The bankruptcy report of a publicly held company which must be filed
with the SEC.
d. The form required to report a change of auditor.
10. Which of the following statements is false?
a. The SEC has delegated accounting rule-making to the FASB.
b. The FASB is comprised of seven full-time, paid members.
c. The FASB has legal authority to write international accounting standards.
d. In recent years the SEC and FASB have worked closely together in the
development of accounting policy.
11. What is the goal of the International Accounting Standards Board?
a. To have worldwide acceptance of a set of international generally accepted
accounting principles.
b. To develop accounting principles to meet the legal and tax needs of
countries.
c. To develop rules for listing securities in any market.
d. All of the above.
12. Which of the following statements is true?
a. Corporations must use straight-line depreciation.
b. The globalization of business activity has resulted in the need for a set of
accounting rules that would be uniform in all countries.
c. A significant change in 1998 eliminates the need for companies to report
comprehensive income.
d. Using two sets of accounting rules—one for reporting purposes and one
for tax purposes—is illegal.
4
Chapter 1
True-False
1. The SEC requires regular filing of annual and quarterly reports, as well as 8-K
reports.
2. The FASB was given Congressional authority to write accounting rules.
3. A Form 10-K must include information about legal proceedings, the
management discussion and analysis, executive compensation, and financial
statements, amongst other items.
4. The four financial statements required by the SEC are the balance sheet, income
statement, statement of stockholders' equity, and cash flow statement.
5. Notes to the financial statements are not a required component of the Form
10-K.
6. The Sarbanes-Oxley Act of 2002 requires all executive officers and directors to
certify the accuracy of the financial statements.
7. A qualified auditor's report states that the financial statements present fairly the
financial position, results of operation, and the cash flows of the entity.
8. The Sarbanes-Oxley Act of 2002 was passed in hopes of ending future
accounting scandals and renewing investor confidence in the marketplace.
9. The shareholders' letter should be ignored due to misleading information
contained in this document.
10. The management discussion and analysis includes coverage of favorable and
unfavorable trends and significant events or uncertainties in the areas of liquidity,
capital resources, and results of operations.
11. A breakdown of sales increases into price and volume components can be
found in the management discussion and analysis.
1
,12. The FASB has so far refused to cooperate with the International Accounting
Standards Board to create a set of international generally accepted accounting
principles.
13. The proxy statement offers information about such items as corporate
governance, audit-related matters, directors and executive compensation, and
related party transactions.
14. How companies handle social issues can impact sales, profits and public
perception.
15. Generally accepted accounting principles provide a measure of uniformity and
do not allow discretion in the preparation of financial statements.
16. When preparing financial statements management can make choices with
respect to accounting policies and make estimates in the application of those
policies.
17. The matching principle requires that expenses be matched with the generation
of revenues in order to determine net income for an accounting period.
18. Examples of discretionary items include repairs and maintenance, research and
development and advertising.
19. During economic downturns it is beneficial for firms to cut research and
development.
20. Nonrecurring and nonoperating items are important in assessing the enterprise's
ability to generate future operating profits.
Multiple Choice
1. What basic financial statements can be found in a corporate annual report?
a. Balance sheet, auditor's report and income statement.
b. Balance sheet, income statement, statement of shareholders' equity, and
statement of cash flows.
c. Earnings statement and statement of retained earnings.
d. Statement of cash flows and five-year summary of key financial data.
2
,2. 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 financial position on a particular date; i.e. assets, liabilities and
shareholders' equity.
d. The reasons for changes in the cash account.
3. What information can be found on an income statement?
a. Revenues, expenditures, net profit or loss and net profit or loss per share.
b. Cash inflows and cash outflows.
c. A reconciliation of the beginning and ending balances of all revenue
accounts.
d. The financing and investing activities during an accounting period.
4. Where are the possible places that the four financial statements can be found?
a. In the Form 10-K filed annually with the SEC.
b. In the annual report mailed to shareholders.
c. In the company's proxy statement or on the company's Web site.
d. All of the above.
5. What item is included in the notes to the financial statements?
a. The auditor's report.
b. The management discussion and analysis.
c. The Form 10-K report.
d. A summary of the firm's accounting policies.
6. What type of audit report indicates that the financial statements present fairly
the financial position, results of operations and the cash flows for the accounting
period?
a. A disclaimer of opinion.
b. An unqualified report.
c. A qualified report.
d. An adverse opinion.
7. Which of the following items would not be discussed in the management
discussion and analysis?
a. Commitments for capital expenditures.
b. The internal and external sources of liquidity.
c. The market value of all assets.
d. A breakdown of sales increases into price and volume components.
3
, 8. What organization currently has the legal authority to set accounting policies?
a. FASB.
b. IRS.
c. GAO.
d. SEC.
9. What is a Form 10-K?
a. The annual report of a publicly held company which must be filed with
the SEC.
b. The quarterly report of a publicly held company which must be filed with
the SEC.
c. The bankruptcy report of a publicly held company which must be filed
with the SEC.
d. The form required to report a change of auditor.
10. Which of the following statements is false?
a. The SEC has delegated accounting rule-making to the FASB.
b. The FASB is comprised of seven full-time, paid members.
c. The FASB has legal authority to write international accounting standards.
d. In recent years the SEC and FASB have worked closely together in the
development of accounting policy.
11. What is the goal of the International Accounting Standards Board?
a. To have worldwide acceptance of a set of international generally accepted
accounting principles.
b. To develop accounting principles to meet the legal and tax needs of
countries.
c. To develop rules for listing securities in any market.
d. All of the above.
12. Which of the following statements is true?
a. Corporations must use straight-line depreciation.
b. The globalization of business activity has resulted in the need for a set of
accounting rules that would be uniform in all countries.
c. A significant change in 1998 eliminates the need for companies to report
comprehensive income.
d. Using two sets of accounting rules—one for reporting purposes and one
for tax purposes—is illegal.
4
