Financial Accounting, 10e (Libby)
Chapter 5 Communicating and Interpreting Accounting Information
1) External users of accounting information include decision makers such as investors, creditors,
and financial analysts.
2) The mission of the Securities & Exchange Commission (SEC) is to develop generally
accepted accounting principles.
3) Independent auditors are advisors who analyze financial statements and other economic
information to formulate forecasts and stock recommendations.
4) The Securities & Exchange Commission (SEC) oversees the work of the Financial
Accounting Standards Board (FASB).
5) The Financial Accounting Standards Board (FASB) oversees the work of the Public Company
Accounting Oversight Board (PCAOB).
6) The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for
independent auditors.
7) The primary responsibility for the information in a corporation’s financial statements lies with
the chief executive officer (CEO) and the chief financial officer (CFO).
8) The audit committee of the board of directors is responsible for maintaining the integrity of a
company’s financial statements and financial reporting.
9) The Securities & Exchange Commission requires publicly traded companies to have their
financial statements audited by their internal auditors.
10) Financial analysts utilize a company’s financial reports to assist them in making earnings
forecasts and earnings per share projections.
11) Corporate governance refers to the procedures designed to ensure that the company is
managed in the interest of the board of directors who oversee management.
12) The fraud triangle conditions necessary for financial statement fraud to occur are the
existence of a system of internal control, the ability to invade the system, and rationalization to
commit the fraud.
13) The form 10-Q contains an unaudited set of quarterly financial statements.
14) The form 10-K is the annual report that publicly traded companies must file with the
Securities & Exchange Commission (SEC).
15) Sales by major product category is a required financial statement disclosure.
16) Information on all contractual agreements is included in notes as a financial statement
disclosure.
17) Inventories are reported on the balance sheet as a current asset.
18) Intangible assets are reported on the balance sheet as a current asset.
19) Intangible assets are reported on the balance sheet as noncurrent assets and include goodwill.
20) Comparative financial statements are those of a company in one industry presented with
another company in the same industry.
21) An intangible asset has no physical existence and no life.
22) The essence of reporting the gains on sales of investments separately on an income statement
is that they are not part of the primary operations of the reporting company.
23) Net sales plus cost of goods sold is reported on the income statement as income from
continuing operations.
24) Gains and losses on sales of investments are reported on the income statement as a
component of income from operations.
25) The summary of significant accounting policies is typically included as one of the first notes
to the financial statements.
26) Preparers of the statement of cash flow must choose the direct or indirect method for each
classification category on the statement.
27) The indirect method of reporting cash flow from operating activities on the statement of cash
flow begins with net income and adjusts for cash items.
28) The gross profit percentage is calculated by dividing net sales by gross profit.
29) The gross profit percentage decreases when operating expenses increase.
30) The return on assets ratio is calculated by dividing operating income by average total assets.
31) The return on assets ratio may increase when sales increase.
32) The return on assets ratio is affected by both the net profit margin ratio and the total asset
turnover ratio.
33) Which of the following tasks is not performed by the Securities & Exchange Commission
(SEC)?
A) Overseeing the work of the Financial Accounting Standards Board (FASB).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) Taking responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.
34) Which of the following tasks does the Financial Accounting Standards Board (FASB)
perform?
A) Overseeing the work of the Securities & Exchange Commission (SEC).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) The responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.
35) Which of the following are primarily responsible for the information provided in a
company’s financial statements?
A) The internal and external auditors.
B) The Securities & Exchange Commission (SEC) and the external auditors.
C) The chief executive officer (CEO) and the chief financial officer (CFO).
D) The external auditors and the board of directors.
36) Which of the following is not a responsibility of the chief executive officer (CEO) and the
chief financial officer (CFO)?
A) Overseeing the financial statement external audit.
B) Ensuring the accuracy and completeness of all reports provided to the Securities & Exchange
Commission (SEC).
C) The certification of the strength of the internal control system.
D) The disclosure to the audit committee of any frauds they are aware of.
37) Which of the following is not true about the audit committee of the board of directors?
A) They meet with the auditors to discuss management’s compliance with their financial
reporting responsibilities.
B) They ensure the accuracy and completeness of all reports provided to the Securities &
Exchange Commission (SEC).
C) They are responsible for ensuring that processes are in place for maintaining the integrity of
the financial statement preparation and reporting.
D) They are responsible for hiring the company’s external auditors.
38) Which of the following statements is false?
A) The board of directors meets with the external auditors to discuss management’s compliance
with their financial reporting obligations.
B) The external auditors are selected by the Securities & Exchange Commission (SEC).
C) The Securities & Exchange Commission (SEC) requires publicly traded companies to have
their financial statements audited by an independent auditor.
D) The external auditors assume some responsibility with respect to the fairness of the financial
statements.
39) Which of the following is an objective of the external audit of a company’s financial
statements?
A) To provide a forecast of the company’s future earnings.
B) To assure no fraud has been committed by the company’s management.
C) To provide credibility that the financial statements are fairly presented.
D) To detect all accounting errors made by the accounting system and employees.
40) Which of the following is not included as a primary part of the financial disclosure in Form
10-K?
A) Summarized financial data for a 5-year period.
B) Management’s opinion of the financial statements.
C) Business operations and strategy.
D) Four basic financial statements.
41) The Statement of Comprehensive Income includes items in which order?
A) Net income, Other items of net income, Comprehensive income.
B) Comprehensive income, Net income, Other items of Comprehensive income.
C) Net income, Other Fair value items, Comprehensive income.
D) Net income, Other comprehensive income items, Comprehensive income.
42) Which of the following would not be classified as a current asset?
A) Accounts receivable.
B) Goodwill.
C) Inventories.
D) Non-trade receivables.
43) Information disclosed in a balance sheet about shares of common stock includes the number
of shares that are:
A) Authorized and Issued.
B) Issued and Outstanding.
C) Authorized, Issued, and Outstanding.
D) Authorized, Issued, Outstanding, and Not Outstanding.
44) Stockholders’ equity, also called shareholders’ equity, includes which of the following two
accounts?
A) Common stock and Deferred revenue.
B) Common stock and Retained earnings.
C) Liabilities and Retained earnings.
D) Retained earnings and Cash.
45) Components of other comprehensive income can be reported in combination with the:
A) Balance sheet.
B) Statement of cash flows.
C) Statement of stockholders’ equity.
D) Income statement.
46) Panmar Inc. is preparing a statement of stockholders’ equity for 2019. On January 1, 2019,
Panmar started the year with a $200,000 credit balance in its retained earnings account. During
2019, the company earned net income of $140,000. Panmar declared dividends of $80,000 and
paid $50,000 of those dividends. Also, the company received cash of $100,000 for additional
shares of common stock issued and then paid $30,000 to repurchase shares of common stock.
What is the balance in retained earnings on December 31, 2019?
A) $260,000.
B) $290,000.
C) $330,000.
D) $390,000.
47) Denmark Inc. is preparing a statement of stockholders’ equity for 2019. On January 1, 2019,
Denmark started the year with a $100,000 credit balance in its retained earnings account. During
2019, the company earned net income of $70,000 and declared dividends of $10,000. Also, the
company received cash of $15,000 as an additional investment by its owners. What is the
balance in retained earnings on December 31, 2019?
A) $100,000.
B) $170,000.
C) $175,000.
D) $160,000.
48) Which of the following is true about gross profit (gross margin)?
A) It is net sales minus operating expenses.
B) It is net sales minus cost of goods sold.
C) It is the same as income from continuing operations.
D) It is net sales minus cost of goods sold and operating expenses.
49) Which of the following best describes operating income?
A) It includes the results of discontinued operations.
B) It is before operating expenses.
C) It is sales minus cost of goods sold and income tax expense.
D) It is net sales minus cost of goods sold and operating expenses.
50) The Callie Company has provided the following information:
Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie’s gross profit?
A) $564,000.
B) $188,000.
C) $333,000.
D) $232,000.