Chapter 1, Financial Statements: An Overview Video Solutions, Understanding Financial Statements

Problem 1

________ Why should an individual learn to read and interpret financial statements?
(a) Understanding financial statements will guarantee at least a $20 \%$ return on investments.
(b) An individual need not learn to read and interpet financial statements since auditors offer a report indicating whether the company is financially sound or not.
(c) Learning to read and interpret financial statements will enable individuals to gain employment.
(d) Individuals cannot necessarily rely on auditors and management of firms to offer honest information about the financial well-being of firms.

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Problem 2

________ What are the basic financial statements provided in an annual report?
(a) Balance sheet and income statement.
(b) Statement of financial earnings and statement of stockholders' equity.
(c) Balance sheet, income statement, and statement of cash flows.
(d) Balance sheet, income statement, statement of cash flows, and statement of stockholders' equity.

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Problem 3

________ What items are included in the notes to the financial statements?
(a) Summary of accounting policies.
(b) Changes in accounting policies, if any.
(c) Detail about particular accounts.
(d) All of the above.

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Problem 4

________ What does an unqualified auditor's report indicate?
(a) The financial statements unfairly and inaccurately present the company's financial position for the accounting period.
(b) The financial statements present fairly the financial position, the results of operations, and the changes in cash flows for the company.
(c) There are certain factors that might impair the firm's ability to continue as a going concern.
(d) Certain managers within the firm are unqualified and, as such, are not fairly or adequately representing the interests of the shareholders.

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Problem 5

________ Which of the following statements is false?
(a) The Sarbanes-Oxley Act of 2002 was the cause of the demise of Arthur Andersen.
(b) The FASB and the IASB are working closely to develop a set of accounting rules that would ultimately be used by all publicly traded companies worldwide.
(c) The Public Company Accounting Oversight Board is responsible for monitoring auditors of all publicly owned companies.
(d) The Sarbanes-Oxley Act of 2002 requires the chief executive officer and the chief financial officer of a publicly traded company to certify the accuracy of the financial statements.

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Problem 6

________ What subject(s) should the management discussion and analysis section discuss?
(a) Liquidity.
(b) Commitments for capital expenditures.
(c) A breakdown of sales increases into price and volume components.
(d) All of the above.

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Problem 7

________ Which of the following statements is true?
(a) Annual reports only contain glossy pictures.
(b) Public relations material should be used cautiously.
(c) Market data refers to the advertising budget of a firm.
(d) The shareholders' letter should be ignored.

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Problem 8

________ What information can be found in a proxy statement?
(a) Information on voting procedures.
(b) Information on executive compensation.
(c) Information on the breakdown of audit and non-audit fees paid to the audit firm.
(d) All of the above.

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Problem 9

________ What is the allocation of the cost of fixed assets called?
(a) Fixed cost allocation.
(b) Salvage value.
(c) Depreciation.
(d) Matching revenues and expenses.

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Problem 10

________ Why could depreciation expense be considered a discretionary item?
(a) Management must estimate the useful life of the asset.
(b) A salvage value must be estimated.
(c) Management must select a method of depreciation.
(d) All of the above.

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Problem 11

________ What do the choices and estimates relating to depreciation affect?
(a) Gross fixed assets on the balance sheet and depreciation expense on the income statement.
(b) Accumulated depreciation on the income statement and depreciation expense on the balance sheet.
(c) Net fixed assets on the balance sheet and depreciation expense on the income statement.
(d) Only net fixed assets on the balance sheet.

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Problem 12

________ Which of the following statements is true?
(a) GAAP-based financial statements are prepared according to the cash basis of accounting.
(b) GAAP-based financial statements are prepared according to the accrual basis of accounting.
(c) GAAP-based financial statements may be prepared according to either the accrual or cash basis of accounting.
(d) GAAP-based financial statements must be prepared according to both the accrual and cash basis of accounting.

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Problem 13

________ Why was the implementation of FASB Statement No. 142, "Goodwill and Other Intangible Assets," confusing?
(a) The rule allowed companies to borrow money without recording the debt.
(b) The rule required that certain revenues and expenses bypass the income statement.
(c) The rule causes some firms to record large losses, while other firms report increased earnings.
(d) The rule requires companies to keep two sets of books.

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Problem 14

________ Which of the following is not generally considered to be a one-time, nonrecurring, or nonoperating item?
(a) A gain on the sale of a business.
(b) An accounting change.
(c) An extraordinary item.
(d) The costs of operating a business.

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Problem 15

________ Why might the use of accelerated depreciation rather than straight-line depreciation produce earnings of higher quality?
(a) Accelerated depreciation more accurately reflects financial reality because higher depreciation expense would be taken in the early years of its productive period.
(b) During inflationary periods, rising prices increase replacement costs of most assets, resulting in an understatement of depreciation based on historical cost.
(c) Both (a) and (b).
(d) None of the above.

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03:25

Problem 16

________ Which of the following are methods by which management can manipulate earnings and possibly lower the quality of reported earnings?
(a) Changing an accounting policy to increase earnings.
(b) Refusing to take a loss on inventory in an accounting period when the inventory is known to be obsolete.
(c) Decreasing discretionary expenses.
(d) All of the above.

Puneet Prajapati

Numerade Educator

Problem 17

________ Where would you find the following information?
________ (1) An attestation to the fairness of financial statements.
________ (2) Summary of significant accounting policies.
________ (3) Cash flow from operating, financing, and investing activities.
________ (4) A qualified opinion.
________ (5) Information about principal, interest, and maturity of longterm debt.
________ (6) Financial position on a particular date.
________ (7) Discussion of the company's results of operations.
________ (8) Description of pension plans.
________ (9) Anticipated commitments for capital expenditures.
________ (10) Reconciliation of beginning and ending balances of equity accounts.
(a) Financial statements.
(b) Notes to the financial statements.
(c) Auditor's report.
(d) Management discussion and analysis.

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