AU 60 Test Qs Chpts 5-8 UPDATED
ACTUAL Questions and CORRECT
Answers
Bob's Manufacturing has been in business for one year. Which one of the following is true
regarding Bob's year-end financial statements? - CORRECT ANSWER - The beginning
balance on the statement of changes in shareholders' equity will show as $0.
Random Insurance Company, specializing in property and casualty insurance, is considering
purchasing Infinity Insurance Company to increase its competitive position in the marketplace,
broaden its coverage area across the United States, and utilize technological efficiencies. After
Random Insurance Company's accountants review the notes to financial statements found in
Infinity Insurance Company's most recent annual statement, the accountants provide
management with a revised offer price reflecting a significant downward adjustment from their
original estimate. The accountants explain to management that the adjustment was made based
on a disclosure - CORRECT ANSWER - Regarding a potential liability due to pending
litigation.
Which one of the following accounting principles may cause a limitation in the use of financial
statements to evaluate an organization? - CORRECT ANSWER - The cost principle
The balance sheet provides a snapshot of an organization's financial condition - CORRECT
ANSWER - At a given point in time.
The report of management is a report to the users of financial statements, required as part of the
company annual report. Which one of the following is true regarding this report? - CORRECT
ANSWER - The chairman of the board signs it acknowledging the integrity of the report.
Why are qualitative assets of an organization, such as management and productivity, so hard to
quantify? - CORRECT ANSWER - It is extremely difficult to measure these qualitative
assets.
,How is the value of an insurer's reputation typically reflected on its balance sheet? - CORRECT
ANSWER - Not recorded
The four primary types of financial statements include the balance sheet, the income statement,
the statement of cash flows, and the - CORRECT ANSWER - Statement of changes in
owners' equity.
Gross profit is reported on the income statement. How is gross profit calculated? - CORRECT
ANSWER - Gross profit = sales - cost of goods sold
Which of the following best describes the result of the four major financial statements all taken
together? - CORRECT ANSWER - The financial condition of the organization.
Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance.
The underwriter requested a copy of Home Houseware's most recent financial statements. The
underwriter will use the balance sheet to determine - CORRECT ANSWER - Home
Houseware's financial position as of the balance sheet date.
Ace Woodworking Company makes household furniture. Which one of the following best
describes an expense that should be classified as an operating expense on Ace's income
statement? - CORRECT ANSWER - Utility charges for the manufacturing plant
The U.S. Securities and Exchange Commission (SEC) requires a publicly traded company to
keep its shareholders informed. Which one of the following is the most likely way that
companies meet this requirement? - CORRECT ANSWER - The company annual financial
report
Which one of the following groups of financial statements, when considered together, would best
present an organization's financial condition? - CORRECT ANSWER - The balance sheet,
the income statement, the statement of change in shareholders' equity, and the statement of cash
flow.
, An insurer's comprehensive income includes - CORRECT ANSWER - Unrealized gains
and losses on securities.
An organization's financial statements can help identify key property loss exposures. In which
financial statement would an organization identify property loss exposures in the cash from
investing section? - CORRECT ANSWER - Statement of cash flows
The four primary types of financial statements include the income statement, the statement of
changes in owners' equity, the statement of cash flows, and the - CORRECT ANSWER -
Balance sheet.
The income statement provides a detailed explanation of the results of the organization's
operations. Net income is found on the income statement as well as the - CORRECT
ANSWER - Statement of changes in shareholders' equity.
Which one of the following is a major purpose of the statement of cash flows? - CORRECT
ANSWER - It is used to assess an organization's need for additional financing.
Publicly traded companies must file a Form 10-K annually with the Securities and Exchange
Commission (SEC). Which one of the following best describes the information contained in
Form 10-K? - CORRECT ANSWER - It is similar to the annual report but contains more
detailed information about the company.
Which one of the following statements best describes the shareholders' equity section of the
balance sheet? - CORRECT ANSWER - Shareholders' equity is negative when liabilities
exceed assets.
When evaluating the price of equities, the stock market relies on which one of the following that
is not assigned a value on the financial statements? - CORRECT ANSWER - The entity's
reputation in the marketplace
ACTUAL Questions and CORRECT
Answers
Bob's Manufacturing has been in business for one year. Which one of the following is true
regarding Bob's year-end financial statements? - CORRECT ANSWER - The beginning
balance on the statement of changes in shareholders' equity will show as $0.
Random Insurance Company, specializing in property and casualty insurance, is considering
purchasing Infinity Insurance Company to increase its competitive position in the marketplace,
broaden its coverage area across the United States, and utilize technological efficiencies. After
Random Insurance Company's accountants review the notes to financial statements found in
Infinity Insurance Company's most recent annual statement, the accountants provide
management with a revised offer price reflecting a significant downward adjustment from their
original estimate. The accountants explain to management that the adjustment was made based
on a disclosure - CORRECT ANSWER - Regarding a potential liability due to pending
litigation.
Which one of the following accounting principles may cause a limitation in the use of financial
statements to evaluate an organization? - CORRECT ANSWER - The cost principle
The balance sheet provides a snapshot of an organization's financial condition - CORRECT
ANSWER - At a given point in time.
The report of management is a report to the users of financial statements, required as part of the
company annual report. Which one of the following is true regarding this report? - CORRECT
ANSWER - The chairman of the board signs it acknowledging the integrity of the report.
Why are qualitative assets of an organization, such as management and productivity, so hard to
quantify? - CORRECT ANSWER - It is extremely difficult to measure these qualitative
assets.
,How is the value of an insurer's reputation typically reflected on its balance sheet? - CORRECT
ANSWER - Not recorded
The four primary types of financial statements include the balance sheet, the income statement,
the statement of cash flows, and the - CORRECT ANSWER - Statement of changes in
owners' equity.
Gross profit is reported on the income statement. How is gross profit calculated? - CORRECT
ANSWER - Gross profit = sales - cost of goods sold
Which of the following best describes the result of the four major financial statements all taken
together? - CORRECT ANSWER - The financial condition of the organization.
Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance.
The underwriter requested a copy of Home Houseware's most recent financial statements. The
underwriter will use the balance sheet to determine - CORRECT ANSWER - Home
Houseware's financial position as of the balance sheet date.
Ace Woodworking Company makes household furniture. Which one of the following best
describes an expense that should be classified as an operating expense on Ace's income
statement? - CORRECT ANSWER - Utility charges for the manufacturing plant
The U.S. Securities and Exchange Commission (SEC) requires a publicly traded company to
keep its shareholders informed. Which one of the following is the most likely way that
companies meet this requirement? - CORRECT ANSWER - The company annual financial
report
Which one of the following groups of financial statements, when considered together, would best
present an organization's financial condition? - CORRECT ANSWER - The balance sheet,
the income statement, the statement of change in shareholders' equity, and the statement of cash
flow.
, An insurer's comprehensive income includes - CORRECT ANSWER - Unrealized gains
and losses on securities.
An organization's financial statements can help identify key property loss exposures. In which
financial statement would an organization identify property loss exposures in the cash from
investing section? - CORRECT ANSWER - Statement of cash flows
The four primary types of financial statements include the income statement, the statement of
changes in owners' equity, the statement of cash flows, and the - CORRECT ANSWER -
Balance sheet.
The income statement provides a detailed explanation of the results of the organization's
operations. Net income is found on the income statement as well as the - CORRECT
ANSWER - Statement of changes in shareholders' equity.
Which one of the following is a major purpose of the statement of cash flows? - CORRECT
ANSWER - It is used to assess an organization's need for additional financing.
Publicly traded companies must file a Form 10-K annually with the Securities and Exchange
Commission (SEC). Which one of the following best describes the information contained in
Form 10-K? - CORRECT ANSWER - It is similar to the annual report but contains more
detailed information about the company.
Which one of the following statements best describes the shareholders' equity section of the
balance sheet? - CORRECT ANSWER - Shareholders' equity is negative when liabilities
exceed assets.
When evaluating the price of equities, the stock market relies on which one of the following that
is not assigned a value on the financial statements? - CORRECT ANSWER - The entity's
reputation in the marketplace
