Chap 014

Chapter 14 - Accounting and Financial Statements
Chapter 14 Accounting and Financial Statements
True / False Questions 1. (p. 425) Only large businesses use the financial information compiled by accountants. FALSE
AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1
2. (p. 425) Accounting is the recording, measurement, and interpretation of financial information. TRUE
3. (p. 425) Only business organizations use accounting information to demonstrate how their funds are being used. FALSE
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4. (p. 427) The terms accounting and bookkeeping are interchangeable because they mean almost the same thing. FALSE
AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1
5. (p. 427) Bookkeeping is only one aspect of accounting and involves the recording of routine, day-to-day business transactions. TRUE
6. (p. 429) Governments are immune from accounting scandals FALSE
Multiple Choice Questions 7. (p. 425) Accountants compile financial information to A. give to competitors. B. make sure the organization's financial resources are used efficiently. C. mislead stockholders. D. keep the organization's managers confused about their bonuses. E. give to customers.
AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Easy Learning Objective: 1
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8. (p. 425) Accounting A. records, measures, and interprets financial data. B. produces goods and services. C. reports only to those within the organization. D. reports only to those outside the organization. E. develops promotional plans.
9. (p. 425) If Sara Sidle is a self-employed, state-certified accountant who provides various types of accounting services for different companies and organizations, she is probably a A. private accountant. B. certified management accountant. C. certified public accountant. D. noncertified accountant. E. forensic accountant.
10. (p. 425) CPA stands for A. Certified Private Accountant. B. Credentialed Private Accountant. C. Credentialed Public Accountant. D. Certified Public Accountant. E. Certified Professional Accountant.
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11. (p. 425) A CPA may A. officially express an unbiased opinion about the accuracy of a firm's financial statements. B. may express a biased opinion about the accuracy of a firm's financial statements. C. make no errors. D. handle every firm's reports by different rules. E. all of the above.
12. (p. 426) A forensic accountant A. investigates crime scenes. B. works for a public corporation. C. analyzes financial documents in search of fraudulent entries or financial misconduct. D. investigates workplace accidents to determine fault. E. analyzes annual reports to ensure that corporations have adequate corporate governance mechanisms.
13. (p. 428) John James is an accountant who is employed by a large department store chain in the tax department. He is probably a(n) A. public accountant. B. private accountant. C. legal accountant. D. junior accountant. E. senior accountant.
AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 1
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14. (p. 428) Private accountants do all of the following except A. work for a corporation, government, or other organization to prepare and analyze its financial information. B. have titles such as controller or internal auditor. C. prepare and interpret a firm's financial statements. D. express an official unbiased opinion regarding the accuracy of a client's financial statements. E. take part in internal planning and decision making.
AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 1
15. (p. 428) CMA stands for A. Certified Money Accountant. B. Credentialed Management Accountant. C. Certified Management Accountant. D. Credentialed Marketing Accountant. E. Certified Marketing Analyst.
16. (p. 428-429) All of the following are outsiders who rely on information from an organization's financial statements except A. lenders. B. the Internal Revenue Service. C. stockholders. D. creditors. E. managers.
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17. (p. 429) Bob Banker has to decide whether to lend the Yubble Bubble Gum Company $10,000 to pay suppliers. He will A. review the company's financial statements. B. give it the loan because he likes its looks. C. see if its gum blows good bubbles. D. ask its competition what to do. E. turn down the loan application.
18. (p. 427) Although the terms accounting and bookkeeping are often used interchangeably, a point of distinction is that the scope of bookkeeping tends to be more A. narrow. B. important. C. interpretive. D. highly paid. E. broad.
19. (p. 428) Managers use accounting information to A. evaluate the success of the firm's activities. B. pinpoint problems. C. plan for the future. D. report financial performance to outsiders. E. all of the above.
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20. (p. 428) According to the text, a financial managers' greatest concern is probably A. ensuring they have the right credentials. B. employees. C. federal regulators. D. budgets. E. cash flow.
Essay Questions 21. (p. 428) How do managers and owners use financial statements?
Managers and owners use financial statements to aid in internal planning and control and for external purposes such as reporting to the Internal Revenue Service, stockholders, creditors, employees, and other interested parties.
True / False Questions 22. (p. 430) Assets are a firm's economic resources. TRUE
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23. (p. 431) The accounting cycle is a system of analyzing and interpreting business transactions in separate accounts in order to maintain the balance of the accounting equation. FALSE
24. (p. 431) All business transactions can be classified as assets, liabilities, or owner's equity. TRUE
25. (p. 431-432) The accounting cycle collects, records, and analyzes raw data constantly through the business's life cycle. TRUE
26. (p. 434) When the financial statements are completed, a firm's books are said to be "closed," and the accounting cycle begins anew for the next accounting period. TRUE
Multiple Choice Questions
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27. (p. 430) All of the following represent assets except A. cash. B. inventory. C. land. D. equipment. E. a bank loan.
28. (p. 431) The debts Anna's Flowers owes to the Small Business Administration and her company's suppliers represent which of the following? A. Owners' equity B. Assets C. Liabilities D. Stock E. Bonds
29. (p. 431) Which of the following equations is equivalent to the accounting equation? A. Equity = liabilities - assets B. Owners' equity = assets - liabilities C. Revenues - expenses = net income D. Net income = expenses - revenues + taxes E. Profit = sales - revenues
AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 2
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30. (p. 431) Double-entry bookkeeping is a system of recording and classifying business transactions A. in separate accounts in order to maintain the accounting equation. B. by the amount of the transaction. C. in all accounts including those that do not maintain the accounting equation. D. in general ledgers. E. none of the above.
31. (p. 431-434) The accounting cycle includes which of the following? A. Collecting data B. Recording data C. Analyzing data D. Posting transactions E. All of the above are part of the accounting cycle.
32. (p. 434) After gathering together and analyzing source documents and recording each financial transaction in a journal, a financial manager, bookkeeper, or accountant next A. closes out the books. B. posts transactions in a journal. C. posts transactions in a ledger. D. prepares a trial balance. E. balances the accounting equation.
Essay Questions
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33. (p. 431) Define double-entry bookkeeping and explain how to use it, keeping the accounting equation in balance.
Double-entry bookkeeping is a system of recording and classifying business transactions in accounts that maintain the accounting equation. To keep the accounting equation in balance, each business transaction must be classified and recorded in two separate accounts.
True / False Questions 34. (p. 435) Income statements show revenue, expenses, and income over a period of time. TRUE
35. (p. 436) Only business organizations have revenue to report. FALSE
36. (p. 437) Cost of goods sold is calculated by subtracting the ending inventory from the beginning inventory. FALSE
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37. (p. 437) Expenses can be incurred daily. TRUE
38. (p. 437-438) Net income is the profit (loss) after all expenses excluding taxes have been deducted from revenue. FALSE
Multiple Choice Questions 39. (p. 436) An accounting term that is synonymous with revenue is A. profit. B. expenses. C. sales. D. net income. E. price.
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40. (p. 437) An accounting term that is synonymous with net income is A. earnings after taxes. B. assets after taxes. C. liabilities after taxes. D. expenses after taxes. E. cash disbursements after taxes.
41. (p. 435) An income statement shows A. revenues, expenses, and net income over a period of time. B. assets, liabilities, and equity. C. the company's status at a particular point in time. D. how much income each employee earned. E. how much income the CEO earned.
42. (p. 435) The financial document that shows a company's revenue, expenses, and profits over a period of time is called a(n) A. income statement. B. balance sheet. C. budget. D. statement of cash flow. E. discount statement.
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43. (p. 437) Acme Model Trains started the accounting period with $10,000 worth of model trains in inventory. During the accounting period, it purchased $5,000 worth of model trains and sold $7,500 worth. What is its cost of goods sold? A. $15,000 B. $2,500 C. $5,000 D. $7,500 E. $10,000
AACSB: Reflective Thinking Bloom's Taxonomy: Application Difficulty: Hard Learning Objective: 3
44. (p. 437) All of the following could be expense accounts except A. interest expense. B. retained expense. C. general and administrative expense. D. research and development expense. E. depreciation expense.
45. (p. 437) When an accountant allocates the cost of a piece of equipment over a period of time, this is called A. discounting. B. encumberment. C. cost plus. D. expense designation. E. depreciation.
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46. (p. 437) When a company wants to place a value on a physical asset, it must A. reduce the value by the amount the asset has depreciated. B. auction the asset off. C. ask its competitors what the asset is worth. D. price a new one. E. increase the value by the amount the asset has appreciated.
47. (p. 437) The profits of a company are equal to the revenue minus A. assets. B. equity. C. expenses. D. sales. E. income.
48. (p. 435-438) The information presented in an income statement could be described using which of the following equations? A. Equity = liabilities - assets B. Equity = assets - liabilities C. Revenues - expenses = net income D. Net income = expenses - revenues + taxes E. All of the above
Essay Questions
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49. (p. 436) Define the "cost of goods sold" line on an income statement and explain how to calculate it.
Cost of goods sold is the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. It may be calculated with this formula: Cost of goods sold = Beginning inventory + Interim purchases - Ending inventory.
True / False Questions 50. (p. 439) Balance sheets show revenues, expenses, and profits. FALSE
51. (p. 439) Balance sheets show assets, liabilities, and expenses over a period of time. FALSE
52. (p. 439) A balance sheet shows the financial position of an organization at any given moment in time. TRUE
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53. (p. 440) Liquidity is judged by how easily an asset can be turned into cash. TRUE
54. (p. 442) Owners' equity includes owners' contributions to their business along with income retained to finance growth and development. TRUE
55. (p. 443) Negative cash flow always indicates that a company is in financial trouble FALSE
AACSB: Reflective Thinking Bloom's Taxonomy: Analysis Difficulty: Medium Learning Objective: 4
Multiple Choice Questions 56. (p. 439) The financial document that has been likened to a snapshot of how the company's finances are doing at that moment is called a(n) A. income statement. B. balance sheet. C. annual report. D. budget. E. statement of cash flow.
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57. (p. 439) The financial statement that represents an accumulation of all of a company's transactions since it began is the A. income statement. B. balance sheet. C. profit and loss statement. D. statement of cash flow. E. income tax form.
58. (p. 439) The balance sheet uses all of the following account titles to describe assets except A. accounts receivable. B. cash. C. inventory. D. current assets. E. deferred income taxes.
59. (p. 440) A company's assets that can be easily converted into cash are called A. fixed assets. B. long-term assets. C. current assets. D. equity. E. revenue assets.
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60. (p. 442) A company's financial obligations are called its A. assets. B. equity. C. net profit. D. liabilities. E. revenue.
61. (p. 442) The balance sheet uses all of the following account titles to describe liabilities except A. sales revenue. B. accounts payable. C. current liabilities. D. taxes payable. E. wages payable.
62. (p. 442) The owners' contributions to a company and all earnings retained to finance continued growth and product development are A. owners' equity. B. assets. C. liabilities. D. revenue. E. profits.
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63. (p. 442) All of the following would be considered owners' equity accounts except A. common stock. B. preferred stock. C. stockholders' equity. D. accounts payable. E. retained earnings.
64. (p. 442) The financial statement that explains how a firm's cash changed from the beginning of the accounting period to the end is called the A. statement of cash flows. B. balance sheet. C. income statement. D. master budget. E. profit-loss statement.
Essay Questions
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65. (p. 439) Discuss why the financial statement called the "balance sheet" was given the name and explain the two different formats that this statement can have.
This statement is called a balance sheet because it must reflect a balanced accounting equation: Assets must equal liabilities plus owners' equity. Balance sheets can be presented in two different formats. In the first format, assets, liabilities, and ownership are presented in a vertical format, with assets at the top followed by liabilities and the owner's investment. In the second format, assets can be presented on the left side and liabilities and owners' investment on the right side.
True / False Questions 66. (p. 444) Ratio analysis brings the information on financial statements into sharper focus so that a firm's managers and others can measure its productivity, profitability, and sources of financing relative to other firms. TRUE
67. (p. 445) After ratios are computed, it is not much help to compare them with those of similar organizations. FALSE
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68. (p. 445) Profitability ratios measure how efficiently a firm uses its assets to generate $1 of sales. FALSE
69. (p. 448) Liquidity ratios show how fast a company can turn current assets into cash to pay off short-term debt. TRUE
70. (p. 448) Debt utilization ratios measure how much debt a company is using relative to other sources of capital. TRUE
Multiple Choice Questions
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71. (p. 444) Information found on the company's income statement and balance sheet is extracted from these documents and examined more closely through the use of A. general analysis. B. specific analysis. C. psychoanalysis. D. summative analysis. E. ratio analysis.
72. (p. 444) Ratio analysis is used to determine A. what a firm is worth. B. how much a firm made or lost. C. how a firm compares to others in the industry. D. all of the above. E. none of the above.
73. (p. 445) Profitability ratios are used to measure A. how efficiently a firm uses its assets to generate sales. B. the speed with which a company can turn its short-term assets into cash to pay off its shortterm debts. C. how much income (net or operating) a firm generates relative to its assets, equity, and sales. D. how much debt the firm is using relative to other sources of financing. E. the performance of the firm relative to others on a per-share basis.
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74. (p. 445) One of the best ways to analyze a company's financial performance is to compare its ratios with those of A. suppliers who work in the field. B. manufacturers producing their products. C. companies in the same industry. D. the U.S. government. E. foreign governments.
75. (p. 445-447) Return on assets and return on equity are examples of which type of ratio? A. Asset utilization B. Liquidity C. Debt D. Profitability E. Current
76. (p. 447) Asset utilization ratios are used to measure A. the speed with which a company can turn its short-term assets into cash to pay off its shortterm debts. B. how much income a firm generates relative to its assets, equity, and sales. C. how much debt the firm is using relative to other sources of financing. D. the performance of the firm relative to others on a per-share basis. E. how efficiently the firm uses its assets to generate $1 in sales.
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77. (p. 448) Barbara was asked to extend trade credit to a restaurant she hadn't serviced before. She asked to see its balance sheet to determine if it could pay its bills. She divided its current assets by current liabilities to get its A. current ratio. B. receivable turnover. C. inventory turnover. D. earnings per share. E. book value per share.
78. (p. 448) The ratio that reflects a company's liquidity after the inventory has been deleted is which type of ratio? A. Past B. Current C. Future D. Slow E. Quick
79. (p. 448-449) If a company is relying on borrowing and credit too extensively, this will probably be reflected in which ratio? A. Current usage B. Past utilization C. Debt utilization D. Liquid utilization E. Fixed asset usage
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Essay Questions 80. (p. 444) Discuss how analysts can use ratio analysis to evaluate a company's financial performance.
In evaluating a company's financial performance, analysts use ratio analysis to bring the information on the balance sheet and the income statement into sharper focus to help measure its productivity, profitability, and sources of finances relative to those of other firms. They can then take these ratios and compare them to other firms in the industry to evaluate financial performance.
81. (p. 454) Describe the three basic accounting statements. What types of information does each provide that can help you evaluate the situation?
The three basic accounting statements are the income statement, the balance sheet, and the statement of cash flow. The income statement shows the profitability of a firm over a period of timeits overall revenues and the costs incurred in generating those revenues. The balance sheet is a snapshot of a company's financial position at a given moment and indicates what the organization owns or controls and the various sources of funds used to pay for these assets (debt or equity). In other words, it shows what is owned (and who owns it) and owed. The statement of cash flow provides information about the movement of cash through the firm from the beginning of an accounting period to the end.
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82. (p. 454) Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company's financial ratios might you expect to be especially poor?
Students' answers may vary but should include logical justification. For example, profitability ratios (profit margin, return on assets, and return on equity) are likely to be of great value (at least initially) because they measure how much operating or net income an organization is able to generate relative to its assets, owners' equity, and sales. Simply, is the firm making or losing money? Because the firm is in trouble, debt and asset utilization, and liquidity ratios may be poor.
AACSB: Reflective Thinking Bloom's Taxonomy: Application Difficulty: Hard Learning Objective: 6
83. (p. 454) Discuss the limitations of ratio analysis.
The main limitation of ratio analysis is that accounting practices of different organizations are never quite the same. Hence, making comparisons with ratios is never quite comparing apples to apples. Another limitation is that a single or even a set of ratios provides only part of the financial story. Other information is needed to evaluate clearly a firm's performance. For example, strategic objectives and environmental (business environment, social/political environment, etc.) factors may impede or facilitate the firm's ability to perform, thus biasing conclusions drawn merely from ratio analysis.
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Chapter 14 - Accounting and Financial Statements

Chapter 14 Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

6. (p. 429) Governments are immune from accounting scandals FALSE

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Multiple Choice Questions

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

37. (p. 437) Expenses can be incurred daily. TRUE

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Multiple Choice Questions

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

Chapter 14 - Accounting and Financial Statements

83. (p. 454) Discuss the limitations of ratio analysis.

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