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Test answers for Financial Reporting Test 2016

(58 / 20) Last updated: March 25
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58 Answered Test Questions:

1. What does the indirect method of preparing the cash flow statement effectively accomplish?

Answers:

• It keeps the use of cash vague so the reader cannot tell the exact use

• It is a less detailed summary version of use of cash

• It takes the accrual basis of accounting and converts it to cash basis

• It shows the reader how well the management is performing

2. Which cash collection technique is the most cost-effective for companies with many locations?

Answers:

• Self-addressed stamped envelopes

• Centralized collection system

• Lockbox system

• Using a post office box

• Regional collection offices

3. How does Treasury Stock differ from Trading Stock?

Answers:

• Treasury stock is an indication that a company is failing

• Treasury stock has no voting or dividend rights

• Treasury stock is looked negatively upon by the investment community

• Treasury stock can be resold to employees at a discount

4. How often do companies typically generate standard financial reports?

Answers:

• Yearly

• Quarterly

• Monthly

• Daily

5. What is one procedure a Company Manager would take to make the information on financial reports more useful for examination?

Answers:

• Hire an auditor to validate the company reports

• Use the information on the financial reports to do a financial analysis, creating comparable ratios

• Compare it to other companies

• Change the statement of cash flows to be the direct method

6. How does the income statement of a charity differ from that of a public company?

Answers:

• Charities typically have higher overhead expenses such as management wages

• Charities produce a similar report which shows funding sources, and program expenses and other commitments

• Charities do not generate cash via a revenue model, and do not produce any statements

• Charities report each donation as taxable income

7. In what general way do investors use the information in the financial statements?

Answers:

• To determine if a company is worth investing in

• To determine if a company is too top heavy with management

• To look for irregularities and report them to the authorities

• To look for insider trading

8. Which of the following is not a part of cost of goods sold?

Answers:

• Raw material

• Labor

• Capital

• All of the above are part of cost of goods sold

9. Which of the following does Financing Activities not include?

Answers:

• Payments to vendors

• Payments of dividends to company shareholders

• Payments to repurchase company shares

• Repayment of debt

10. A company declares a dividend. What is its effect on the cash?

Answers:

• It increases Cash

• It decreases Cash

• There is no change

• It depends on the dividend date

11. How are the Cash Flow Statement and Balance Sheet related?

Answers:

• Changes in Accounts Receivable and Accounts Payable are reflected on the Cash Flow Statement

• Accounts Receivable is determined by analyzing the Cash Flow statement

• Ending Inventory is calculated using the Cash Flow statement

• They are not linked directly

12. Which is/are the primary financial statements used to measure liquidity?

Answers:

• Balance Sheet

• Income Statement

• Balance Sheet and Income Statement

• Cash Flow Statement and Balance Sheet

13. What is the primary reason a government entity would want to look at a company's financial statements?

Answers:

• To look whether ethical standards meeting expectations

• To determine if the company is committing tax fraud or evasion

• To determine if a company has an offshore bank account

• To determine tax liability

14. A company pays out a previous declared common stock dividend. What is its effect on the cash?

Answers:

• It will decrease

• It will increase

• There would be no change

• It depends on the dividend date

15. What is the purpose of a trial balance?

Answers:

• To act as a worksheet, making sure all debits equal all credits, as well as aid in the discovery of issues

• To be shown to the public along with all other financial statements

• To determine if cash reserves are adequate

• To demonstrate to management the profitability of the company

16. The best financial report to see a company's cash balance is ______.

Answers:

• Balance Sheet

• Income Statement

• Margin Analysis

17. Which of the following errors/s can a trial balance be used to detect?

Answers:

• An incorrect reversing entry

• The omission of payroll raises

• An entry where both sides of the transaction are entered as a debit

• The lack of a prepaid expense entry

18. What purpose would a company's financial statements have for the lending institutions?

Answers:

• To determine if management is too top heavy

• To change a company's agreed upon interest rate without telling them

• To look for a reason to break a loan agreement

• To determine if the company is meeting current covenants in their existing debt agreement

19. Financial managers use the _____________ to plan for monthly financing needs.

Answers:

• capital budget

• cash budget

• pro forma

• income statement

20. What is another name for the Balance Sheet?

Answers:

• Income Statement

• Statement of Income

• Cash Inflows & Outflows

• Statement of Financial Position

21. How are the Cash Flow Statement and Balance Sheet related?

Answers:

• The ending cash balance on the Balance Sheet is transferred to the current period Cash Flow Statement

• There is no relation

• If the cash flow statement is prepared, the balance sheet does not have to show cash

• Ending cash balance from the Cash Flow Statement is transferred to the Balance Sheet

22. What are the four traits of a useful financial statement?

Answers:

• Material, Timely, Accurate, Cash Basis

• Bi Weekly, Audited, Outsourced, Comparable

• Relevant, Accurate, Cash Basis, Bi Weekly

• Understandable, Relevant, Reliable, Comparable

23. Which of the following errors/s can a trial balance be used to detect?

Answers:

• A calculation error resulting in sales tax being entered twice

• The omission of depreciation on a new asset purchase

• A transposition error when entering the credit side of an entry

• A missing payroll entry

24. What is the purpose of an income statement?

Answers:

• To show the reader how the company made and spent money in the period presented

• To examine income tax liability

• To show how much cash was generated in the period presented

• To determine management bonuses at year end

25. What is Treasury Stock?

Answers:

• Stock purchased by the U.S. Treasury Department

• Stock repurchased by the issuing company, reducing the amount of stock outstanding in the open market

• Stock purchased by the treasurer of the company for their personal portfolio

• Stock not allowed to be purchased in the first 30 days after IPO

26. How do investors turn the information on the financial statements into more useful data which is comparable to other companies?

Answers:

• Read all of the notes

• Skip to the net income number, the only important number

• Track cash balance

• Perform financial analysis

27. What is another name for the Income Statement?

Answers:

• Income Statement

• Profit & Loss Statement

• Statement of Cash Flows

• Statement of Financial Position

28. Which is/are the primary financial statements used to measure solvency?

Answers:

• Balance Sheet

• Income Statement

• Balance Sheet and Income Statement

• Cash Flow Statement and Income Statement

29. The formula to calculate Ending Retained Earnings is ______.

Answers:

• Ending Retained Earnings = Cash + Current Assets - Fixed Assets

• Ending Retained Earnings = Beginning RE - Investments - Dividends Paid + Net Income

• Ending Retained Earnings = Investments + Dividends - Net Income

• Ending Retained Earnings = Change in Accounts Receivable - Change in Accounts Payable

30. The three sections of a Statement of Cash Flows are _____.

Answers:

• Leverage, liquidity, financing

• Operating, investing, profit

• Operating, investing, financing

• Sales, investing, financing

• Operating, investing, borrowing

31. What does GAAP stand for?

Answers:

• General Accounting Accrual Procedures

• Generally Accepted Accounting Principles

• Gap Accounts receivable Accounting Practices

• General Accounting Accounts Payable

32. Which financial statement best allows a firm to assess its ability to pay dividends?

Answers:

• Statement of Cash Flows

• Income Statement

• Balance Sheet

• Statement of Operations

33. What is one possible use employees would have of the company financial statements?

Answers:

• It helps the unionized workers to determine their collective bargaining agreements

• It helps the employees to buy shares of the company before a big news release hits

• It helps the employees to demonstrate their own personal contribution to the company

• It helps in creating human resource policies

34. Which of the following are the 3 main sections of Statement of Cash Flows?

Answers:

• Current, Long term, Near Term

• Net Income, Gross Margin, Revenues

• Assets, Liabilities, Equity

• Operating, Investing, Financing

35. Which of the following does the cash flow cycle measure?

Answers:

• The time between purchase of raw materials and collection of cash

• The time it takes to invest liquid funds

• The time it takes for a check to get cleared in the bank

• The maturity date of corporate bonds

• The time between offering a marketable security and receiving funds from sale of one

36. Which of the following transactions would have no impact on the stockholder's equity?

Answers:

• Purchase of land from the proceeds of a bank loan

• Dividends to stockholders

• Net loss

• Investments in cash by stockholders

37. Which of the following transactions is a non cash event but would be disclosed in the notes of the Statement of Cash Flows?

Answers:

• Exchange of shares for cash

• Investment of cash in exchange for a note receivable

• Exchange of shares for an asset

• Payment of accounts payable

38. What does the Balance Sheet reflect?

Answers:

• Net changes over a period of time

• Only annual balances

• Net Income over a period of 1 month

• A specific point in time

39. How does Gross Income differ from Net Income?

Answers:

• Gross Income determines the company's cash flow, Net Income does not

• Gross Income includes several fixed costs, Net Income does not

• Gross Income includes all fixed costs, Net Income does not include any

• Gross Income measures profitability before operating expenses, whereas Net Income is calculated after all operating expenses

40. What is historical value?

Answers:

• Prices adjusted for inflation

• The current sale value of an asset

• The original cost or price paid for an asset

• The average value of an asset

41. When a company files a statement of their financial plans for the next two years with the SEC,  it is called a ______.

Answers:

• Market plan

• Shelf registration

• Stock plan

• Statement of intent

• Prospectus

42. What does Treasury Stock appear on the balance sheet as?

Answers:

• As a reduction of opening Retained Earnings

• As a positive entry in the equity section

• As Dividends Paid

• As a negative entry in the equity section

43. What are the main categories of a balance sheet?

Answers:

• Sales, COGS, Operating Expenses, Net Income

• Assets, Liabilities, Equity

• Retained Earnings, Current Assets, Current Liabilities

• Cash, Accounts Receivable, Fixed Assets, Long Term Assets

44. What way is government accounting different from public company accounting?

Answers:

• Government accounting has far more rules than public company accounting

• Government accounting occurs only once per decade

• The chart of accounts and financial statements are classified and organized differently

• Governments trade their shares in a different market than Public companies and thus report differently

45. What is the one problem while comparing financial statements with companies based in different countries?

Answers:

• Countries use different accounting standards, comparisons can only be made directly with countries using GAAP

• The exchange rate needs to be applied

• Other countries do not audit their financial statements as thoroughly

• Product lines are completely different making a comparison unusable

46. Which is the primary financial statement used to measure profitability?

Answers:

• Balance Sheet

• Income Statement

• Cash Flow Statement

• None of the above

47. How are the income statement and balance sheet linked?

Answers:

• Cash from the balance sheet transfers to the income statement

• They are not linked directly

• All debt payments show on both the income statement and balance sheet

• Net income from the income statement transfers to the balance sheet equity section

48. Which method of preparing the statement of cash flows begins with Net Income?

Answers:

• Direct

• Indirect

• Current Period

• Accrual

49. By doing/issuing which of the following could a company raise short-term funds by selling receivables and inventory?

Answers:

• By factoring

• By pledging inventory

• By line of credit

• By Notes

• By term loan

50. How would the financial statements be useful for a Company Manager?

Answers:

• To decide whether to buy more stock or sell off the stock they own before financial reports become public

• To compete against other departments for best sales

• To make operational decisions based on comparing past and current results

• To decide whether to double fixed assets in the next period

51. What is one possible use employees would have for the company financial statements?

Answers:

• Employees can justify larger personal expense reports if the company is doing well

• The better the company is performing, the more leeway the employees have for making small mistakes

• Employees have a vested interest in the company for job security and any equity incentive they have

• The employees can proof read the reports once they are public, looking for possible errors to report to the SEC

52. What is the purpose of the statement of cash flows?

Answers:

• To demonstrate how the company used their cash in the period reported

• To show net income

• To show how much cash the company collected in the period reported

• To show outstanding loans and loan payments made

53. Which of the following is not a fundamental of accounting?

Answers:

• Materiality

• Timeliness

• Matching

• Magnitude

54. Pro forma statements are _______ statements.

Answers:

• actual

• projected

• previous years'

• next years'

55. Retained earnings will change over time because of several factors. Which of the following factors would lead to an increase in the Retained Earnings?

Answers:

• Net loss

• Net income

• Dividends

• Investments by stockholders

56. Which is/are the primary financial statements used to measure stability?

Answers:

• Balance Sheet

• Income Statement

• Balance Sheet and Income Statement

• Statement of Cash Flows and Income Statement

57. Which of the following is a difference between a public company and a private one?

Answers:

• Public companies use different accounting software than private ones

• Public companies will always have more employees than a private one

• Only public companies can form corporations

• Public companies must have audited financial statements and prepared SEC reports

58. What is the purpose of an audit?

Answers:

• To look for fraud

• To make-work project for CPA's

• To verify that statements made by the company are true based on an independent party's evaluation

• To look for additional tax liability


20 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
59. Why do companies include notes along with the financial statements?

Answers:

• Without them no one would be able to use the numbers reported

• So that the reader knows what type of inventory valuation method is being used

• It is required by the IRS

• To give the reader further insight into particular line items on a financial statement

60. With which of the following regulatory bodies would a publicly traded company be much more involved than a private company would be?

Answers:

• SEC

• GAAP

• IRS

• FCC

61. Which is an example of a variable cost?

Answers:

• Management salaries

• Utilities

• Property taxes

• Raw material

• Depreciation

62. Why is the Statement of RE created?

Answers:

• To show the changes in Retained Earnings over a period of time

• To show how the Retained Earnings balance at a specific time

• To give the reader an idea of how much cash is reinvested in the company

• It is a placeholder for tax liability

63. Why is depreciation added back in the cash flow statement?

Answers:

• It is a substantial number which could skew the report if ignored

• Companies handle depreciation differently so it is added back to neutralize any effects

• It is non taxable

• It is a transaction which will never impact cash and needs to be reversed out from its effect on net income

64. Why would someone be interested in how the company used its cash?

Answers:

• Cash flow indicates profitability

• Cash flow indicates how the company is managing its cash resources

• The current cash flow statement indicates future profitability

• It is a good detection method for fraud

65. Why would the general public be interested in a company's financial statements?

Answers:

• They might want early indications of management decisions

• They work for or are considering working for the company

• They are acting as a watch dog for the SEC

• The IRS hires individuals to secretly audit company financial statements for fraud

66. Why would a company repurchase their own stock?

Answers:

• To reduce the market float at a time when the stock is undervalued in the market

• To reduce the market float when prices are high

• To increase the market float at a discount

• To increase the market float at a premium, sending stocks higher

67. Which of these items would be accounted for as an expense?

Answers:

• Repayment of a bank loan

• Dividends to stockholders

• Purchase of land

• Payment of the current period's rent

68. Why would a company repurchase their own stock?

Answers:

• It is required to by the law after 1 year

• To dilute the outstanding shares

• To put cash in the stockholder's hands without issuing a dividend

• To boost the share price

69. What number is transferred from the Income Statement to the Cash Flow statement?

Answers:

• Gross Sales

• Net Income

• Payroll Expense

• Taxes

70. Which of the following would not appear on an income statement?

Answers:

• Cash

• Payroll Expense

• Income Tax

• COGS

71. Why would R&D be possibly included on both or either the Income Statement and Balance Sheet?

Answers:

• It depends what state the company is in and what the governing rules are

• R&D can stand for different things, so it depends on how a company defines what is R&D

• Companies can move it from statement to statement depending on what the most favorable result is

• Some companies elect to capitalize their R&D over a certain amount, and expense smaller amounts

72. Which of these are the four general groups of outside users of a company's financial reports?

Answers:

• Government, Charities, SEC, IRS

• Investors, Lenders, Government, General Public

• Accounting Standards Board, Charities, GAAP, Employees

• Unions, Non Unions, Government Officials, SEC

73. Which of the following would not be included in a balance sheet?

Answers:

• Accounts receivable

• Accounts payable

• Sales

• Cash

74. Which of these is a part of "Other Revenues"?

Answers:

• Sale of the company's products beyond the forecasted amount

• Sale of all new products introduced that year

• Any revenue items not generated as part of the primary operations of the company

• Revenues generated from the sale of old inventory

75. Which of these are the two methods of preparing the cash flow statement?

Answers:

• Cash & Accrual

• Direct & Indirect

• Current Period & Prior Period

• GAAP & International

76. Which of these does the operating section of a cash flow statement not contain?

Answers:

• Interest received on loans

• Payments to suppliers

• Dividends received from investments

• Purchase of fixed assets

77. A company prepays for 6 months of insurance. What effect does this have on their current assets?

Answers:

• No Change

• Increase

• Decrease

• Varies depending on how they paid

78. How are the Statement of Retained Earnings & the Balance Sheet related?

Answers:

• Debts paid off in the current period are detailed in the Statement of RE

• Statement of RE is a detailed analysis of the equity section and the change in it from the prior reported period

• Cash from the balance sheet is transferred to the Statement of RE

• They are not linked directly


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Ira August 1, 2015
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