Test Questions and Solutions
Chapter 1
True-False
1. A basic understanding of financial statements is needed due to ongoing
financial turmoil and major corporate failures.
2. The SEC requires all companies, both public and private, to file annually a
Form 10-K report.
3. Financial statements are currently prepared according to generally accepted
accounting principles in the U.S.
4. The FASB was given Congressional authority to write accounting rules.
5. The goal of the International Accounting Standards Board is the adoption of
uniform international accounting standards.
6. In 2006, the IASB and the FASB agreed to work on all major projects jointly.
7. Annual reports of public companies can only be found on the SEC's EDGAR
database.
8. A corporate annual report contains three basic financial statements.
9. The notes to financial statements, while helpful, are not an integral part of the
statements.
10. Management is responsible for the preparation of the financial statements,
including the notes, and the auditor’s report attests to the fairness of the
presentation.
11. The Sarbanes-Oxley Act eliminated the need for internal auditors.
12. An unqualified auditor's report states that the financial statements present
fairly the financial position, results of operation, and the cash flows of the entity.
1
,13. The Sarbanes-Oxley Act of 2002 requires all members of management as well
as directors to certify the accuracy of the financial statements.
14. Despite the enactment of the Sarbanes-Oxley Act of 2002, corruption and
unethical behavior continued in the 2000s.
15. The management discussion and analysis is of potential interest to the analyst
because it contains information that cannot be found in the financial data.
16. The management discussion and analysis should contain a discussion of the
commitments for capital expenditures, the purpose of such commitments, and
expected sources of funding.
17. The shareholders' letter from the CEO of a firm offers factual information
needed to analyze the financial statements.
18. The proxy statement offers information about such items as corporate
governance, audit-related matters, directors and executive compensation, and
related party transactions.
19. Publicity in the media can impact a firm’s financial performance.
20. Conglomerates operating in diversified lines of business are required to create
separate annual reports for each line of business.
21. Accounting choices and estimates rarely have a significant impact on financial
statement numbers.
22. The accrual basis of accounting means that revenues are recognized when the
sale is made rather than when cash is received.
23. United States accounting rules have been perceived as being less complex than
international standards.
24. The matching principle requires that expenses be matched with the generation
of revenues in order to determine net income for an accounting period.
25. Examples of discretionary items include repairs and maintenance, research and
development and advertising.
2
,Multiple Choice
1. Which report is not required to be filed by public companies to the SEC?
a. Annual reports (Form 10-K).
b. Financial Reporting Rulings.
c. A prospectus for any new security offering.
d. Quarterly reports (From 10-Q).
2. The globalization of business activity has resulted in which of the following?
a. Increased corruption and unethical behavior.
b. A uniform set of accounting rules in all countries.
c. The FASB and IASB working jointly on a project to converge accounting
standards.
d. The requirement that U.S. firms use international accounting rules as of
2006.
3. What basic financial statements can be found in a corporate annual report?
a. Balance sheet, income statement, statement of shareholders' equity, and
statement of cash flows.
b. Balance sheet, auditor's report and income statement.
c. Earnings statement and statement of retained earnings.
d. Statement of cash flows and five-year summary of key financial data.
4. 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 reasons for changes in the cash account.
d. The financial position on a particular date; i.e. assets, liabilities and
shareholders' equity.
5. What information can be found on an income statement?
a. The financing and investing activities during an accounting period.
b. Cash inflows and cash outflows.
c. A reconciliation of the beginning and ending balances of all revenue
accounts.
d. Revenues, expenditures, net profit or loss and net profit or loss per share.
3
, 6. What information can be found on a statement of stockholders’ equity?
a. A reconciliation of the cash account and the retained earnings account.
b. A reconciliation of the beginning and ending balances of all accounts that
appear in the stockholders’ equity section of the balance sheet.
c. A reconciliation of the operating, investing and financing activities of a
firm.
d. A reconciliation of net profit or loss and the cash account.
7. What item is not included in the notes to the financial statements?
a. Details about inventory and property, plant and equipment.
b. Information about major acquisitions or divestitutures.
c. The management discussion and analysis.
d. A summary of the firm's accounting policies.
8. What type of audit report indicates that the financial statements have not been
presented fairly?
a. A disclaimer of opinion.
b. An unqualified report.
c. A qualified report.
d. An adverse opinion.
9. What type of audit report indicates that the financial statements have been
presented fairly?
a. An unqualified report.
b. A disclaimer of opinion.
c. A qualified report.
d. An adverse opinion.
10. What does Section 404 of the Sarbanes-Oxley Act of 2002 require?
a. The external auditors must create an adequate internal control structure for
the firm being audited.
b. The external auditors must approve of all internal auditors hired by a firm.
c. The inclusion of an internal control report in the annual report.
d. The external auditors need to perform internal audit services.
11. Why does the management discussion and analysis help the analyst?
a. It contains information that cannot be found in the financial data.
b. It provides predictions of all future financial statement numbers.
c. It outlines the accounting choices made by the firm.
d. It explains the market valuation of the firm’s stock.
4
Chapter 1
True-False
1. A basic understanding of financial statements is needed due to ongoing
financial turmoil and major corporate failures.
2. The SEC requires all companies, both public and private, to file annually a
Form 10-K report.
3. Financial statements are currently prepared according to generally accepted
accounting principles in the U.S.
4. The FASB was given Congressional authority to write accounting rules.
5. The goal of the International Accounting Standards Board is the adoption of
uniform international accounting standards.
6. In 2006, the IASB and the FASB agreed to work on all major projects jointly.
7. Annual reports of public companies can only be found on the SEC's EDGAR
database.
8. A corporate annual report contains three basic financial statements.
9. The notes to financial statements, while helpful, are not an integral part of the
statements.
10. Management is responsible for the preparation of the financial statements,
including the notes, and the auditor’s report attests to the fairness of the
presentation.
11. The Sarbanes-Oxley Act eliminated the need for internal auditors.
12. An unqualified auditor's report states that the financial statements present
fairly the financial position, results of operation, and the cash flows of the entity.
1
,13. The Sarbanes-Oxley Act of 2002 requires all members of management as well
as directors to certify the accuracy of the financial statements.
14. Despite the enactment of the Sarbanes-Oxley Act of 2002, corruption and
unethical behavior continued in the 2000s.
15. The management discussion and analysis is of potential interest to the analyst
because it contains information that cannot be found in the financial data.
16. The management discussion and analysis should contain a discussion of the
commitments for capital expenditures, the purpose of such commitments, and
expected sources of funding.
17. The shareholders' letter from the CEO of a firm offers factual information
needed to analyze the financial statements.
18. The proxy statement offers information about such items as corporate
governance, audit-related matters, directors and executive compensation, and
related party transactions.
19. Publicity in the media can impact a firm’s financial performance.
20. Conglomerates operating in diversified lines of business are required to create
separate annual reports for each line of business.
21. Accounting choices and estimates rarely have a significant impact on financial
statement numbers.
22. The accrual basis of accounting means that revenues are recognized when the
sale is made rather than when cash is received.
23. United States accounting rules have been perceived as being less complex than
international standards.
24. The matching principle requires that expenses be matched with the generation
of revenues in order to determine net income for an accounting period.
25. Examples of discretionary items include repairs and maintenance, research and
development and advertising.
2
,Multiple Choice
1. Which report is not required to be filed by public companies to the SEC?
a. Annual reports (Form 10-K).
b. Financial Reporting Rulings.
c. A prospectus for any new security offering.
d. Quarterly reports (From 10-Q).
2. The globalization of business activity has resulted in which of the following?
a. Increased corruption and unethical behavior.
b. A uniform set of accounting rules in all countries.
c. The FASB and IASB working jointly on a project to converge accounting
standards.
d. The requirement that U.S. firms use international accounting rules as of
2006.
3. What basic financial statements can be found in a corporate annual report?
a. Balance sheet, income statement, statement of shareholders' equity, and
statement of cash flows.
b. Balance sheet, auditor's report and income statement.
c. Earnings statement and statement of retained earnings.
d. Statement of cash flows and five-year summary of key financial data.
4. 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 reasons for changes in the cash account.
d. The financial position on a particular date; i.e. assets, liabilities and
shareholders' equity.
5. What information can be found on an income statement?
a. The financing and investing activities during an accounting period.
b. Cash inflows and cash outflows.
c. A reconciliation of the beginning and ending balances of all revenue
accounts.
d. Revenues, expenditures, net profit or loss and net profit or loss per share.
3
, 6. What information can be found on a statement of stockholders’ equity?
a. A reconciliation of the cash account and the retained earnings account.
b. A reconciliation of the beginning and ending balances of all accounts that
appear in the stockholders’ equity section of the balance sheet.
c. A reconciliation of the operating, investing and financing activities of a
firm.
d. A reconciliation of net profit or loss and the cash account.
7. What item is not included in the notes to the financial statements?
a. Details about inventory and property, plant and equipment.
b. Information about major acquisitions or divestitutures.
c. The management discussion and analysis.
d. A summary of the firm's accounting policies.
8. What type of audit report indicates that the financial statements have not been
presented fairly?
a. A disclaimer of opinion.
b. An unqualified report.
c. A qualified report.
d. An adverse opinion.
9. What type of audit report indicates that the financial statements have been
presented fairly?
a. An unqualified report.
b. A disclaimer of opinion.
c. A qualified report.
d. An adverse opinion.
10. What does Section 404 of the Sarbanes-Oxley Act of 2002 require?
a. The external auditors must create an adequate internal control structure for
the firm being audited.
b. The external auditors must approve of all internal auditors hired by a firm.
c. The inclusion of an internal control report in the annual report.
d. The external auditors need to perform internal audit services.
11. Why does the management discussion and analysis help the analyst?
a. It contains information that cannot be found in the financial data.
b. It provides predictions of all future financial statement numbers.
c. It outlines the accounting choices made by the firm.
d. It explains the market valuation of the firm’s stock.
4
