Financial Statements and the Annual Report



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CHAPTER 2: Financial Statements and the Annual Report

  1. What is the primary objective of financial reporting?

    1. To help investors make credit decisions.

    2. To help management assess cash flows.

    3. To protect users from fraudulent financial information.

    4. To provide useful information for decision making


ANSWER: d


  1. “Claims to economic resources” are known as

    1. Assets and liabilities

    2. Liabilities and stockholders’ equity

    3. Owners’ equity and stockholders’ equity

    4. Retained earnings and revenues


ANSWER: b


  1. Which of the following is not an objective of financial reporting?

    1. To reflect prospective cash receipts to investors and creditors.

    2. To reflect prospective cash flows to an enterprise.

    3. To reflect resources and claim to resources.

    4. To reflect current stock prices and information concerning stock markets.


ANSWER: d


  1. Which of the following statements is true concerning external users of financial information?

    1. External users need detailed records of the business to make informed decisions.

    2. External users are primarily responsible for the preparation of financial statements.

    3. External users rely on the financial statements to help make informed decisions.

    4. External users rely on management to tell them whether the company is a good investment


ANSWER: c


  1. Relevant information can be quantitative or qualitative. In deciding whether to go to college part-time or full-time, which of the following is a qualitative factor for a student?

    1. The cost of tuition

    2. The opportunity to make friends

    3. The price of football tickets

    4. “Good Student” discounts on auto insurance rates.


ANSWER: b



  1. The preparation of financial statements requires that the information be understandable

    1. Only to CPAs.

    2. To those willing to spend the time to understand it.

    3. Only to those who take an accounting course.

    4. Only to financial analysts and brokers.


ANSWER: b


  1. Cook, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan. The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time television last night, you are aware that Cook is a defendant in several lawsuits related to its defective tires that cause vehicles to overturn. The information presented on television is an example of financial information that is

    1. Relevant

    2. Consistent

    3. Predictable

    4. Comparable


ANSWER: a


  1. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of

    1. Comparability

    2. Consistency

    3. Neutrality

    4. Understandability


ANSWER: a


  1. Button Transportation purchases many pieces of office furniture with an individual cost below $200 each. Button chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant and independent CPA agree that no accounting principle has been violated. What accounting justification allows Button to expense the furniture?

    1. Conservatism

    2. Matching

    3. Materiality

    4. Verifiability


ANSWER: c


  1. Madden Company applies the consistency convention. What does this mean?

    1. Madden Co. uses the same names for all its expenses as its competitors.

    2. Madden Co. has selected certain accounting principles that can never be changed.

    3. Madden Co. applies the same accounting principles each accounting period.

    4. Madden Co. applies the same accounting principles as it competitors.


ANSWER: c


  1. Information that is material means that an error or alternative method of handling a transaction

    1. Would possibly affect the judgment of someone relying on the financial statements

    2. Would not affect the decisions of users

    3. Might cause a company to understate its earnings for the accounting period

    4. Could increase the profitability of a company


ANSWER: a


  1. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action?

    1. Comparability

    2. Conservatism

    3. Materiality

    4. Neutrality


ANSWER: b


  1. The qualitative characteristics of accounting data include

    1. Assets reported on the balance sheet

    2. All accounting information

    3. Cash flows

    4. Reliability


ANSWER: d


  1. Which of the following is a noncurrent asset?

    1. Inventories

    2. Office supplies

    3. Land

    4. Accounts receivable


ANSWER: c


  1. Which of the following is a current asset?

    1. Land

    2. Buildings

    3. Store fixtures

    4. Prepaid insurance


ANSWER: d



  1. Which of the following include only current assets?

    1. Accounts receivable, cash, inventory, office supplies

    2. Cash, accounts payable, inventory, office supplies

    3. Cash, land, accounts receivable, inventory

    4. Accounts receivable, cash, furniture, office supplies


ANSWER: a


  1. To determine the source of a company's assets, on which financial statement will you look?

    1. Balance sheet only

    2. Income statement only

    3. Both the balance sheet and the income statement

    4. Both the income statement and the statement of retained earnings


ANSWER: a



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