95 test bank for financial accounting in an economic context 8th edition

95 Test Bank for Financial Accounting in an Economic
Context 8th Edition

Multiple Choice Questions-Page 1
Solvency may be described as
1.

a. an amount owed that must be paid in the future.

2.

b. amounts that can be distributed to owners only.

3.

c. the amount invested in the firm by its owners.

4.

d. the ability to generate enough cash to pay its debt as the amounts become due.

A debt investor is
1.

a. a person who provides money to a company with the expectation that it will be paid
back with interest.

2.

b. a person who provides money to a company and expects periodic cash payments in
return, though the original money never has to be repaid.

3.

c. a person who provides money to a company as a gift with a stipulation that it will be
used as agreed.

4.

d. often referred to as a stockholder.

The retained earnings section of the statement of shareholders’ equity
communicates
1.

a. beginning balance plus income less dividends.

2.

b. revenues less expenses during a period of time.


3.

c. how much cash that management has paid for bonuses.

4.

d. operating, investing, and financing activities.

A statement that “the financial statements were prepared in accordance with

generally accepted accounting principles” is found in the
1.

a. collateral.

2.

b. stock market.

3.

c. footnotes to the balance sheet.

4.

d. auditor’s report.

A statement that financial statement information “is the responsibility of the
company” issuing the statements is found in the
1.

a. footnotes to the financial statements.

2.

b. loan contract.

3.

c. management letter.

4.

d. board of directors’ report.

Dividends declared and paid to the owners are found in the
1.

a. management letter.

2.

b. income statement.

3.

c. dividends statement.

4.

d. statement of shareholders’ equity.


The cash paid during the year to satisfy a company’s debt is found in its
1.

a. statement of cash flows.

2.

b. income statement.

3.

c. statement of shareholders’ equity.

4.

d. auditor’s report.

A company’s profits during its most recent year are found in its
1.

a. balance sheet and income statement.

2.

b. statement of cash flows only.

3.

c. statement of shareholders’ equity only.

4.

d. income statement and statement of shareholders’ equity.

The statement of cash flows communicates
1.

a. assets, liabilities, and owners’ equity at a point of time.

2.

b. operating, investing, and financing activities.

3.

c. beginning balance plus income less dividends.

4.

d. how much cash the company owes its employees.

An internal control system
1.

a.is maintained to ensure that transactions of a company are properly recorded and
reported and the assets are safeguarded.

2.

b.is included in the set of footnotes to the financial statements.

3.

c.is an estimate of the profits a company expects to earn in the future.


4.

d.measures how much control management has over its staff.

Which one of the following statements is true?
1.

a.Financial accounting is the only accounting used in the United States.

2.

b.Companies that have a profit objective use not-for-profit accounting.

3.

c. Managerial accounting targets operating decisions.

4.

d. Financial and tax accounting are virtually the same.

Cash received by a company from its regular operations during the year is
found in its
1.

a. balance sheet.

2.

b. statement of cash flows.

3.

c. statement of shareholders’ equity.

4.

d. auditor’s report.

The balance sheet communicates
1.

a.proof to the investor that the company is profitable.

2.

b. assets, liabilities, and shareholders’ equity with all transactions reflected through the
year.

3.

c. assets, liabilities, and shareholders’ equity as of a certain date.

4.

d. operating, investing, and financing activities.


As a potential creditor, you are interested in a company’s ability to pay loan
interest and principal as they come due. Which of the following would be of
the greatest interest to you in your analysis?

1.

a. statement of shareholders’ equity.

2.

b. income statement.

3.

c. statement of cash flows.

4.

d. Statement of Financial Accounting Standards.

The income statement communicates
1.

a. assets, liabilities, and shareholders’ equity as of a certain date.

2.

b. how much cash the owner received during the period.

3.

c. information about dividends the company paid to its owners.

4.

d. revenues less expenses during a period of time.

Where would you find information on the amount of net income for the year?
1.

a.Factory production reports on units produced

2.

b.Auditor’s report

3.

c.Income statement

4.

d.Internal Revenue Service

To run a company effectively, which one of the following might be a source
from which management might acquire capital?
1.

a.Customers

2.

b.FASB

3.

c.Debt and equity investors

4.

d.Auditors

A Certified Public Accountant
1.

a.reviews every transaction that a company conducts during any given year.

2.

b.performs a company’s audit.

3.

c.is one of the investors of a company.

4.

d.is responsible for the preparation and integrity of a company’s financial statements.

An equity investor is
1.

a. a person who provides money to a company with the expectation that it will be paid

back with interest.

2.

b. a creditor that has a regular trade relationship.

3.

c. a person who provides money to a company as a gift with a stipulation that it will be
used as agreed.

4.

d. a person who provides money to a company, though the original money never has to
be repaid, and who may be entitled to receive periodic cash payments.

Public stock exchanges
1.

a. are operated by managers of a company.

2.

b. are markets that sell annual reports.

3.

c. provide a forum for buying and selling of equity interests in other companies.

4.

d. are used to evaluate debt and equity investments.


The board of directors
1.

a. provides money to a company with the expectation that it will be paid back with
interest.

2.

b.makes corporate decisions such as hiring and firing management and setting
company policy.

3.

c.is responsible for the future profits of a company.

4.

d. is in charge of accounting and human resources on a daily basis.

The amount which a company’s customers owe the company for products
delivered or services rendered is found in the
1.

a. footnotes only.

2.

b. income statement.

3.

c. balance sheet.

4.

d. statement of cash flows.

Considering and understanding how business decisions affect the financial
statements is
1.

a.the sole responsibility of the Securities and Exchange Commission.

2.

b.provided in the auditor’s report.

3.

c.referred to as an economic consequence perspective.

4.

d.interpreted strictly by the company’s suppliers.

Retained earnings may be described as

1.

a. the total past profits retained in the business.


2.

b. a company’s future growth.

3.

c. the amount invested in the firm by its owners.

4.

d. amounts retained for payments to vendors.

CPA is an abbreviation for
1.

a. Certified Public Accountant.

2.

b. Certified Production Accountant.

3.

c. Consumer Protection Agency.

4.

d. Certified Permissible Accounting.

An explanation about the assumptions, estimates, and choices of alternative
accounting methods used in the financial statements is found in the
1.

a. footnotes to the balance sheet.

2.

b. auditor’s report.

3.

c. statement of shareholders’ equity.

4.

d. president’s letter to the shareholders.

Footnotes to financial statements
1.

a.more fully explain certain items in the financial statements.

2.

b.reflect financial notes personalized by the company’s executive team.

3.

c.show the detail of salaries of every employee.

4.

d.justify fraudulent business practices.


Liabilities may be described as
1.

a. amounts that will be used for future growth.

2.

b. the amounts owed that must be paid in the future.

3.

c.the total measured past growth of a firm less the amount distributed to the owners.

4.

d.amounts the company paid during the past year.

An investor wants to find the amount of cash and land that a company has.
Where will the investor look?
1.

a. Statement of shareholders’ equity

2.

b. Income statement

3.

c. Balance sheet

4.

d. Statement of cash flows.

Who prepares financial reports for a particular company?
1.

a.The Securities and Exchange Commission

2.

b.The Board of Directors

3.

c.The company’s management

4.

d.The company’s auditors.

63 Free Test Bank for Financial Accounting in an
Economic Context 8th Edition by Pratt Multiple Choice
Questions-Page 2


Generally accepted accounting principles are determined by
1.

a. annual voting by all certified public accountants.

2.

b. a privately financed body known as the FASB.

3.

c. the SEC.

4.

d. a congressional committee that passes laws governing accounting practice.

All of the following might be found in the auditor's report except:
1.

a. A statement about conformity with GAAP.

2.

b. A statement about the fair presentation of the financial conditions and operations of

3.

the audited company.

4.

c. A statement about the effectiveness of the company's internal control system.

5.

d. A statement about the function of the company's board of directors.

Which of the following statements is true?
1.

a. Shopping for favorable audit opinions is permitted by the SEC.

2.

b. No formal reporting of auditor switches is required by the SEC.

3.

c.The SEC has enacted rules to help ensure financial literacy among audit committee
members.

4.

d.Since management constructs the financial statements, auditors have no legal
liability to those who rely upon these reports.

Annual reports of public companies
1.

a.are published once per year.


2.

b.include financial statements adjusted for inflation.

3.

c.are also known as Form 10-K.

4.

d.are published by companies 4 times per year.

Which of the following best describes the two perspectives of the financial
reporting process that managers need to understand in investing decisions?
1.

a. Economic consequences and user orientation.

2.

b. Corporate governance and user orientation.

3.

c. User orientation and debt covenants.

4.

d. Economic consequences and corporate governance.

The auditors are charged with responsibility
1.

a.to detect financial fraud committed by employees during the course of their audit

2.

b.to conduct a thorough and independent audit

3.

c.to correct all errors in the financial statements

4.

d.for the accuracy and completeness of the financial statements

What encourages management to refrain from pressuring auditors too
strongly?
1.

a. Possible legal liability

2.

b. Outside investors and creditors

3.

c. Prospects of higher net income

4.

d. Economic incentives from outsiders.


Which of the following groups enacted the Sarbanes Oxley Act?
1.

a. FASB

2.

b. AICPA

3.

c. U.S. Congress

4.

d. PCAOB.

The independence of the auditor is subject to question when the
1.

a. auditor is paid by the management of the company being audited.

2.

b.auditor is independent.

3.

c.audit firm is also responsible for preparing the tax return.

4.

d. auditor is paid 1% of the company’s profits for the audit services provided.

Which one of the following is true concerning the International Accounting
Standards Board?
1.

a.It is the international accounting standards setting body that is attempting to bring
greater uniformity to worldwide accounting practices.

2.

b.It approves all financial statements before they are distributed to users.

3.

c.It consistently disagrees with the FASB on its rulemaking.

4.

d.It requires both national and international companies around the world apply the
same accounting principles.

Equity investments are bought and sold
1.

a.only on the first day of each year.

2.

b.in stock exchanges such as the NASDAQ.


3.

c.by a company’s independent auditors.

4.

d.from and to the SEC.

GAAP is an acronym for
1.

a. General Asset Accounting Procedures.

2.

b. Government Agency Accounting Procedures.

3.

c. Generally Accepted Accounting Principles.

4.

d. Global Accounting Activity Principles.

Ownership of an equity security entitles the holder to which basic right?
1.

a. The right to management outstanding loans.

2.

b. The right to pay dividends.

3.

c. The right to vote for company directors at the annual shareholders' meeting.

4.

d. The right to certify financial report reviews.

International Financial Reporting Standards (IFRS) are promulgated by
1.

a.the United Nations.

2.

b.the World Bank.

3.

c.the Big Four accounting firms.

4.

d.the IASB.

Shareholders
1.

a.and employees are the owners of a company.


2.

b.receive repayment of the cash they have invested in a business.

3.

c.receive payment from a company regardless if the company is profitable or not.

4.

d.may benefit from increases in the value of their investment of a company.

Debt investments
1.

a.require payments to the shareholders for periodic dividends.

2.

b.are found on a company’s income statement.

3.

c.may be secured with collateral.

4.

d.return payments at the discretion of the board of directors.

Where would you most likely find a detailed explanation about estimates used
in the financial statements of a company?
1.

a. management letter

2.

b. financial footnotes

3.

c. debt restrictions

4.

d. debt contracts.

All of the following are false regarding international accounting standards
(IAS) except which of the following?
1.

a. The SEC requires all companies to use IAS.

2.

b. There are no substantive differences between U.S. GAAP and IFRS.

3.

c. The SEC prohibits U.S. stock exchanges from listing non-U.S. companies who follow
IFRS.


4.

d. All public companies in the European Union are required to report using IFRS and
IAS.

All of the following are functions of the board of directors except:
1.

a. Attending quarterly meetings.

2.

b. Conducting performance review for management.

3.

c. Declaring dividends.

4.

d. Firing staff personnel.

All of the following would likely be part of a loan contract except:
1.

a. maturity date

2.

b. earning power

3.

c. collateral

4.

d. annual interest.

Financial accounting practices and standards used in other countries
1.

a.are the same as practices used by United States companies.

2.

b.have different systems of financial accounting.

3.

c.are more progressive than those used by United States companies.

4.

d.will often have common practices similar to U.S. GAAP.

Which of the following statements is true?
1.

a. Dividend payments are determined by management.

2.

b. Dividend payments are specified by a contract.


3.

c. Dividend payments are based on company collateral.

4.

d. Dividend payments are paid at the board of director's discretion.

The advantage to the user of financial accounting statements that are audited
by independent certified public accountants is assurance that the
1.

a. statements are produced in accordance with generally accepted accounting
principles.

2.

b. company will be solvent for at least one more year.

3.

c. company cannot remain profitable for more than 2 to 3 years.

4.

d. company pays its fair share of income taxes.

Which of the following is least likely to be a by-product of ethical business
practices?
1.

a. fewer lawsuits.

2.

b. higher profits.

3.

c. higher audit fees.

4.

d. public trust.

When management goes beyond ethical boundaries in its attempt to make
financial statements appear attractive, management
1.

a.should be commended for its creativity.

2.

b.will not need an annual audit.

3.

c.should pay its employees larger bonuses.

4.

d.is perpetrating fraud or possible criminal activity.


Generally accepted accounting principles
1.

a.are laws created and enacted by Congress.

2.

b.define the standards for internal management reporting.

3.

c.increase the level of credibility in financial statements.

4.

d.are created by the Securities and Exchange Commission.

Which of the following groups make up a company’s audit committee?
1.

a. Auditors.

2.

b. Outside directors from the Board.

3.

c. Company officers.

4.

d. All of the individuals in (a), (b), and (c) are included in the audit committee.

International Financial Reporting Standards (IFRS) are recognized as
acceptable by major stock exchanges throughout the world except in
1.

a.England.

2.

b.Japan.

3.

c.The United States.

4.

d.France.

Which of the following factors is least likely to encourage managers and
auditors to act professionally?
1.

a. professional reputation.

2.

b. tax structure


3.

c. legal liability

4.

d. ethics.

Which of the following is a measure of past profits that have been retained in
a business?
1.

a liabilities

2.

b. common stock.

3.

c. retained earnings.

4.

d. assets.

Select the name that doesn’t fit with the others on the list.
1.

a. PricewaterhouseCoopers

2.

b. Sarbanes-Oxley

3.

c. Deloitte & Touche

4.

d. KPMG Peat Marwick.

Which of the following best describes assets paid to owners of a company as
a return for their initial investment?
1.

a. payables

2.

b. compensation contracts

3.

c. dividends

4.

d. interest.


Which of the following is a public exchange for equity and debt securities?
1.

a. The Federal Trade Commission.

2.

b. The New York Stock Exchange.

3.

c. The Securities and Exchange Commission.

4.

d. The Financial Accounting Standards Board.

Free Text Questions
Which source would you review to determine that the financial statements are
fairly stated in accordance with GAAP?
Answer Given

auditor’s report

What are the two fundamental economic reasons why investors and creditors
demand financial accounting information?
Answer Given

Creditors need financial information to monitor and enforce the debt and compensation
contracts written with management, and investors need financial information to help
decide where to invest their funds.

Which financial statement would you review to determine if a company’s
operating cash flow is sufficient to pay day-to-day obligations?
Answer Given

statement of cash flows

What financial statement lists and measures assets, liabilities, and
shareholders’ equity at a certain date?
Answer Given

balance sheet

Which financial statement would you review to determine the amount of cash
a company received from an issue of capital stock during the year?

Answer Given

statement of cash flows


What independent party attests that the balance sheet and income statement
present fairly the financial position of the company?
Answer Given

auditor

Identify the financial statement in which revenues less expenses are reported.
Answer Given

income statement

What is the role of the Securities and Exchange Commission?
Answer Given

The Securities and Exchange Commission is an agency of the federal government that
was commissioned to implement and enforce the Securities Act of 1933 and the
Securities Exchange Act of 1934.

Why might corporate management want to lobby the FASB?
Answer Given

Corporate management and other interested parties wish to influence generally
accepted accounting principles (GAAP). Because financial statements are prepared by
management using GAAP, management is very concerned that accounting principles
used provide benefits to investors, creditors, and the others associated with financial

reporting.

What powers does the Securities and Exchange Commission have?
Answer Given

The Securities and Exchange Commission has the power to prescribe the accounting
practices and standards to be employed by companies within its jurisdiction—public
companies. However, the SEC has chosen to delegate the responsibility for
establishing accounting practices and standards to the Financial Accounting


Standards Board (FASB). The SEC also is responsible for ensuring that listed
companies prepare and file registration statements before they issue new securities,
and file periodic quarterly and annual reports.

Which financial statement would best help you understand the increases and
decreases in cash over a period of time?
Answer Given

statement of cash flows

Identify which financial statement you would review to determine the amount
of cash a company paid to retire its debt.
Answer Given

statement of cash flows

What methods of controlling the ethical decisions by managers are common?
Why are these methods necessary?
Answer Given

The methods of controlling the quality of management decisions are financial
statements, debt and compensation contracts, the board of directors, auditors, and the
audit committee. These methods are necessary in order to protect the investments of
shareholders and creditors.

Why must managers understand financial reporting?
Answer Given

Managers often use financial statements to assess the financial condition and
performance of their own company, its competitors, and other companies of which
investments in stocks and bonds of other companies might be undertaken. Managers
must understand how business decisions affect the financial statements and how
capital providers and other outsiders use financial statements to evaluate and control
their actions.


What financial statement communicates profits retained and distributions to
shareholders?
Answer Given

statement of shareholders’ equity

On which financial statement(s) would you find the accumulation of total
profits and losses less distributions to owners since the company began
operations? What is the name of this amount?
Answer Given

balance sheet and statement of shareholders’ equity; retained earnings

What financial statement would you review to determine if a company’s
payroll exceeds $1,000,000?
Answer Given

income statement

What information is provided in a management letter? Who signs it?
Answer Given

The CEO and CFO provide a management letter that acknowledges responsibility for
the financial information provided in the financial statements and notes.

Identify the responsibilities of the board of directors.
Answer Given

Sets company policies; declares dividends; sets management compensation; hires
and fires management; appoints the audit committee

List the names of the financial statements that appear in an annual report.
Answer Given


balance sheet, income statement, statement of cash flows, statement of shareholders’
equity

Describe the two components of the income statement.
Answer Given

The two components of the income statement are revenues and expenses, the
difference of which represents net income or loss for a period of time. Revenues are a

measure of the assets generated from the products sold and services provided.
Expenses are a measure of the asset outflows or costs associated with selling the
products and providing the services.

What accounting name is given to one who provides money to a company
with the expectation that it will be paid back with interest?
Answer Given

debt investor or creditor and lender

On which financial statement would you find the amount invested by a
company’s owners? What is the name of this amount?
Answer Given

balance sheet; equity investment (stock), also statement of shareholders’ equity

What is the name of a person who provides money to a company who never
has to be paid back but expects periodic cash payments?
Answer Given

equity investor or owner

Who assesses whether the financial statements fairly represent the financial
position and results of operations?
Answer Given


independent auditor

What financial statement would you review to determine the profitability ratio?

Answer Given

income statement

Describe the three components of the statement of cash flows.
Answer Given

The three components of the statement of cash flows are operating, investing, and
financing activities. Operating activities are associated with the actual products and
services provided by a company. Investing activities include the purchase and sale of
assets, such as equipment and land. Financing activities refer to the collections and
payments related to a company’s capital resources, such as cash borrowings, loan
payments, cash from owners, and payment of dividends to owners.

What financial statement communicates cash flows from operating activities?
Answer Given

statement of cash flows

Which financial statement would you review to determine a company’s
interest expense?
Answer Given

income statement

Where would you most likely find statements revealing the assumptions,
estimates, and choices of alternative accounting methods used in the balance
sheet?
Answer Given

footnotes to the financial statements