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Question 1

  1. “What type of audit report indicates that the financial statements present fairly the financial position, results of operations and the cash flows for the accounting period?”

A disclaimer of opinion.


An unqualified report.


A qualified report.


An adverse opinion.

5 points  

Question 2

  1. Which of the following items would not be discussed in the management discussion and analysis?

Commitments for capital expenditures.


The internal and external sources of liquidity.


The market value of all assets.


A breakdown of sales increases into price and volume components.

5 points  

Question 3

  1. What is a Form 10-K?

The annual report of a publicly held company which must be filed with the SEC.


The quarterly report of a publicly held company which must be filed with the SEC.


The bankruptcy report of a publicly held company which must be filed with the SEC.


The form required to report a change of auditor.

5 points  

Question 4

  1. What was one of the major impacts of the Sarbanes-Oxley Act of 2002 on external auditors?

External auditors are now required to establish and maintain an adequate internal control structure for their clients.


External auditors are now required to audit the internal control assessment of a client firm.


External auditors are now required to state their responsibility for the internal control structure of their clients.


None of the above.

5 points  

Question 5

  1. Which of the following statements is true?

GAAP-based financial statements are prepared according to the cash rather than the accrual basis of accounting.


Accounting choices and estimates can have a significant impact on the outcome of financial statement numbers.


The accrual method means that the expense is recognized after the cash is paid out.


The purpose of the accrual method is to attempt to match assets with liabilities in appropriate accounting periods.

5 points  

Question 6

  1. What types of information cannot be found in the financial statements?

“Reputation of the firm, morale of employees and prestige in the community.”


Nature and terms of off-balance sheet financing arrangements.


Disclosures about segments of an enterprise.


Disclosures about the fair value of financial instruments.

5 points  

Question 7

  1. What item is probably the least useful when analyzing financial statements?

Management discussion and analysis.


Public relations materials.


The statement of cash flows.


The notes to the financial statements.

5 points  

Question 8

  1. Which item below does not describe a balance sheet?

Assets = Liabilities + Stockholders’ Equity.


Financial position at a point in time.


Assets Liabilities = Stockholders’ Equity.


Assets + Liabilities = Stockholders’ Equity.

5 points  

Question 9

  1. Which of the following statements is false?

Annual reports must include three-year audited balance sheets and two-year audited income statements.


The balance sheet is prepared on a particular date.


Interim statements are generally prepared quarterly.


“When a parent company owns more than 50% of the voting stock of a subsidiary, the financial statements are consolidated for both entities.”

5 points  

Question 10

  1. What are current assets?

Assets purchased within the last year.


Assets which will be used within the next month.


Assets expected to be converted into cash within one year or operating cycle.


Assets are the net working capital of the firm.

5 points  

Question 11

  1. “Which of the following items could be included in the account “”cash and cash equivalents””?”

US Treasury bills.


Certificates of deposit.


Commercial paper.


All of the above.

5 points  

Question 12

  1. How are marketable securities valued on the balance sheet?

Historical cost.


At cost or fair value depending on how the securities are classified.


Market value.


At fair value with the difference between cost and fair value reported as revenue.

5 points  

Question 13

  1. How is accounts receivable reported on the balance sheet?

At their net realizable value.


At the actual amount less an allowance for doubtful accounts.


At the actual amount plus an allowance for doubtful accounts.


Both (a) and (b).

5 points  

Question 14

  1. The inventory of a retail company is comparable to which type of inventory of a manufacturing company?

Finished goods.


Work in process.




Raw materials.

5 points  

Question 15

  1. Which type of firm would carry little or no inventory?

A manufacturing firm.


A retail firm.


A service firm.


A wholesale firm.

5 points  

Question 16

  1. Which of the following statements is false?

Reserve accounts should only be set up when the amounts can be determined with 100% certainty.


Reserve accounts can be used to record declines in asset values.


Reserve accounts are set up for the purposes of estimating obligations.


Some firms have used reserve accounts to manipulate earnings.

5 points  

Question 17

  1. Which of the following accounts would be classified as current assets?

“Cash, accounts receivable, accounts payable.”


“Accounts receivable, inventory, marketable securities.”


“Accounts receivable, inventory, equipment.”


“Marketable securities, inventory, goodwill.”

5 points  

Question 18

  1. Which of the following statements is true?

“Land, buildings and equipment should be depreciated over the period of time they benefit the firm.”


Most companies use accelerated depreciation for financial reporting purposes.


Book value is equal to the original cost of a fixed asset plus any accumulated depreciation to date.


The process of depreciation is a method of allocating the cost of long-lived assets.

5 points  

Question 19

  1. Which items would be classified as intangible assets?

“Unearned revenue, patents, copyrights.”


“Goodwill, trademarks, franchises.”


“Land, goodwill, copyrights.”


“Deferred taxes, prepaid expenses, patents.”

5 points  

Question 20

  1. Which items would be classified as liabilities?

“Accounts payable, additional paid-in capital, pension liabilities.”


“Common stock, retained earnings, bonds payable.”


“Commitments and contingencies, obligations under leases, notes payable.”


“Deferred taxes, accrued expenses, treasury stock.”