Understanding Financial Statements, 12th Edition – Test Questions, Solutions, and Case Answers by Lyn M. Fraser & Aileen Ormiston (ISBN 9780137959228) – Complete Exam and Study Resource

TEST QUESTIONS SOLUTIONS / SOLUTIONS TO STUDY QUESTIONS,

PROBLEMS AND CASES

UNDERSTANDING FINANCIAL STATEMENTS

CHAPTER 1: FINANCIAL STATEMENTS: AN OVERVIEW

TRUE-FALSE QUESTIONS


1. A firm’s Form 10-K contains only two pieces of information: the financial
statements and the notes to the financial statements.


2. One objective of the financial statement user is to determine if an investment
would generate attractive returns.


3. The FASB has the authority to set accounting policies for governmental
organizations such as the IRS and the SEC has the authority to set accounting
policies for corporations.


4. There are three basic financial statements included in corporate annual reports.


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


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

,7. The Notes to the Financial Statements are an integral part of the statements and
must be read in order to understand the presentation on the face of each financial
statement.


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


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


10. GAAP-based financial statements are prepared according to the accrual basis
of accounting.
TRUE-FALSE ANSWERS


1. F 6. T
2. T 7. T
3. F 8. F
4. F 9. F
5. T 10. T




FILL IN THE BLANK


1. The requires all public companies to file a Form 10-K report
annually.


2. A corporate annual report contains the following four financial statements:

, , , , .


3. is responsible for the preparation of the financial statements,
including the notes, and the attests to the fairness of the
presentation.


4. A departure from GAAP in the financial statements will result in the auditor
giving a opinion.


5. The includes a discussion of the internal
and external sources of liquidity.


6. The Assumption assumes that business entities will operate
indefinitely unless there is strong evidence to the contrary.


7. The cash basis of accounting recognizes when cash is received and
recognizes when cash is paid.


8. The sharper and clearer the picture presented through the financial data and the
closer that picture is to financial reality, the higher is the of financial
statements and reported earnings.


9. One of the generally accepted accounting principles that provides the foundation
for preparing financial statements is the principle.


10. Management exercises control over the budget level and timing of
expenditures.

, FILL IN THE BLANK ANSWERS


1. SEC
2. Balance sheet, income statement or comprehensive income statement, statement
of stockholders’ equity, statement of cash flows
3. Management, auditor
4. Qualified
5. Management Discussion and Analysis
6. Going Concern
7. Revenues, expenses
8. Quality
9. Matching
10. Discretionary



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, statement of comprehensive income, statement of
shareholders' equity, and statement of cash flows.
c. Earnings statement, statement of retained earnings, balance sheet, and
statement of cash outflows.
d. Income statement, statement of financial position, cash flow statement,
and management discussion and analysis.

Ans: b