Chapter 6—Additional Aspects of Financial Reporting and
Financial Analysis Key
1. Which one of the following statements regarding market efficiency is false?
2. An auditor issues an audit report that expresses three opinions. Which of the following is not one of those
opinions?
3. The “scope” paragraph of an unqualified audit opinion states that the auditor
4. An auditor’s report contains all of the following paragraphs except
5. If the information contained in the financial statements is not presented fairly in conformity with generally
accepted accounting principles, the auditor will issue a(n)
6. The group that has oversight over the financial reporting process of a company is called the
7. Which of the following auditor opinions would be appropriate when a company’s financial statements are
presented fairly in conformity with GAAP except for the effects of a certain item?
8. Which of the following auditor opinions would be appropriate when the auditor is unable to determine if a
company’s statements were prepared in conformity with GAAP?
9. Full disclosure is desirable for all of the following reasons except
10. In the Management Report contained in the audited annual report, management acknowledges its
responsibility for all of the following except
11. An operating segment is a reportable segment if it
12. Which one of the following need not be disclosed for reportable segments?
13. Under GAAP for segment reporting, a company must report
14. Given the following segment information:
Operating
Operating
Segment
Segment
Revenues
Expenses
Assets
V
$500
$400
$4,000
W
400
290
3,000
X
300
180
2,000
Y
100
70
1,000
Z
100
90
2,000
Which of the above operating segments are considered reportable segments?
15. An operating segment is a component of a company
16. The following information relates to the Anna Corporation:
Operating
Segment
Segment
Revenues
Assets
Profit (Loss)
A
$ 60
$ 350
$ 3
B
210
1,000
(10)
C
290
2,150
(50)
D
50
200
7
According to the segment reporting requirements under GAAP, which of these segments are considered reportable segments?
17. Information reported or disclosed about the profit or loss of reportable segments consists of
18. Tanner Company identified three operating segments by analyzing its types of products produced.
Information related to those segments for 2010 is presented below:
Revenues
Expenses
Common Expenses
Segment A
$ 400,000
$300,000
Segment B
250,000
100,000
Segment C
350,000
200,000
Total
$1,000,000
$600,000
$200,000
For measurement purposes, Tanner typically allocates common expenses to segments based on the ratio of a segment’s profit before common
expenses to total profit before common expenses. As this allocation method reasonably allocates common expenses to segments, Segment A’s
operating profit for segment reporting purposes would be
19. For operating segments, which one of the following is not included in the determination of whether a
segment is reportable?
20. Segment reporting results in disaggregated financial data. This can be important to the readers of financial
statements because it defines the
21. Disclosures required for reportable segments include all of the following except
22. The information reported about the reportable segments of an enterprise may be disclosed
23. The financial information to be reported separately for each reportable segment should include
24. Which of the following should be included in disclosures about the assets of a reportable segment?
25. Disclosures for reportable segments include all of the following except
26. Minimum disclosures are not required as part of interim reporting for
27. According to GAAP, the conceptual view of interim reporting is that interim reporting
28. Which of the following statements is true concerning interim financial reporting?
29. Interim summarized financial information for publicly traded companies must contain certain data. Which
of the following data does not have to be disclosed?
30. Which of the following statements is not true concerning interim financial reporting and inventories?
31. On January 3, 2010, Emanuel Co. paid $60,000 for insurance on its buildings for the calendar year 2010. In
the first week of April 2010, the company made unanticipated major repairs to its equipment at a cost of
$240,000. These repairs benefited operations for the remainder of 2010. How should these expenses be reflected
in Emanuel Co.’s quarterly income statements?
Three Months
Ended
3/31
6/30
9/30
12/31
I.
$15,000
$ 95,000
$95,000
$95,000
II.
60,000
240,000
—
—
III.
75,000
75,000
75,000
75,000
IV.
15,000
255,000
15,000
15,000
32. An inventory loss from market value declines of $200,000 occurred in August 2010. Marco Sales Company
recorded this loss in August after its March 31 and June 30 interim reports were issued. None of this loss was
recovered by the end of the year. How should this loss be reflected in Marco’s quarterly income statements?
Three Months
Ended
3/31
6/30
9/30
12/31
I.
—
—
$200,000
—
II.
—
—
100,000
$100,000
III.
$50,000
$50,000
50,000
50,000
IV.
—
—
—
200,000
D. IV
33. In its first interim period, Deuce had $500 of income before taxes and an estimated annual tax rate of 40%.
In its second interim, Deuce had $800 of income before taxes and its estimated annual tax rate changed to 30%.
Deuce’s tax expense for the second interim period was
34. A difficulty can arise in preparing an interim report because
35. Which of the following is an acceptable practice as it relates to interim financial reporting?
36. Which one of the following inventory procedures cannot be applied for interim reporting?
37. Cooper Company experienced a permanent loss due to an inventory market decline in June 2010 in the
amount of $800,000. The loss was not recovered by its fiscal year of December 31, 2010. How should this loss
have been reflected in Cooper’s interim quarterly financial reports?
Quarter Ended
March 31
June 30
September 30
December 31
I.
$200,000
$200,000
$200,000
$200,000
II.
0
266,667
266,667
266,667
III.
0
800,000
0
0
IV.
0
0
0
800,000
38. Pratt, Inc. paid its executives a $320,000 bonus based on profit results for the fiscal year ended December
31, 2010. Based on its master budgets for 2011, Pratt estimates its bonuses for the fiscal year ended December
31, 2011, will be $300,000. What amount, if any, should Pratt recognize as an expense for bonuses in its
quarterly income statement for the three months ended March 31, 2011?
39. Fritz Sales Company spent $180,000 to advertise in a national sales booklet on April 7, 2010. The booklet is
distributed exclusively at the national sales convention during the week beginning on May 14, 2010. Assuming
Fritz has a fiscal year ending on December 31, what amount of expense should be included in Fritz’s quarterly
income statement for the three months ended June 30, 2010, as a result of this advertising expenditure?
40. On January 17, 2010, THX Company received rent of $90,000 from a tenant. The rent is for the period
January through September 2010. What amount of revenue should THX recognize in the quarterly income
statement for the three months ended March 31, 2010, as a result of this cash receipt?
41. Bistro Company incurred a permanent inventory loss of $80,000 in April 2010 after the March 31, 2010
quarterly financial statements were issued. What amount of this loss should be reflected in the quarterly income
statement for the three months ended June 30, 2010?
42. An annual report filed with the SEC is called a
43. All of the following relate directly to the Securities and Exchange Commission except
44. Extensible Business Reporting Language (XBRL)
45. A comparison of a company’s performance with that of competitors is known as
46. A comparison of a company’s performance with that of its own past results is known as
47. In horizontal analysis
48. In vertical analysis
49. Which one of the following statements related to financial information is not true?
50. One test of a company’s liquidity is the
51. Which one of the following ratios helps to indicate a company’s effectiveness in meeting the stockholder
profitability objectives?
52. Which one of the following ratios is an indicator of the long-run safety of a firm?
53. Which one of the following ratios is a test of a company’s short-term debt-paying ability?
54. Which one of the following ratio formulas is incorrect?
55. Given the following information regarding accounts receivable:
Accounts receivable, December 31
$ 7,000
Total current assets, January 1
30,000
Sales (25% cash sales)
40,000
Total current assets, December 31
25,000
Accounts receivable, January 1
3,000
What is the accounts receivable turnover?
56. Given the following information:
Inventory
$500
Short-term marketable securities
100
Cash
200
Prepaid insurance
300
Accounts receivable
400
Current liabilities
400
What is the quick ratio?
57. Which one of the following is considered a liquidity ratio?
58. Given the following information:
Preferred dividends
$ 50
Income taxes
$200
Average number of shares outstanding
250 shares
Market price per common share
$ 10
Net income
$600
What is the price/earnings ratio?
59. A company’s current ratio of 2:1 will decrease if the company
60. Hodges Company has a current ratio of 1.6 to 1. Salaries payable accrued last quarter are paid this quarter.
What is the effect of this payment on the current ratio this quarter?
61. Based upon the following information, which company has the best collection policy?
Company A
30.4 days
Company B
29.8 days
Company C
12.2 times
62. The Philip Company had the following information available for the fiscal year ended December 31, 2010:
Net sales
$1,600,000
Cost of goods sold
1,200,000
Merchandise inventory:
January 1, 2010
200,000
December 31, 2010
400,000
Philip’s inventory turnover for 2010 was
63. The following information was obtained from the records of Trophy Company for 2010:
Net sales
$2,600,000
Interest expense
80,000
Income tax expense
40,000
Net income
100,000
How many times was interest earned in 2010?
64. Monroe Company reported the following information for the year ended December 31, 2010:
Net income
$ 600,000
Preferred dividends declared and paid
60,000
Common dividends declared and paid
80,000
Average common shares outstanding
90,000
Ending market price per share
40
Net sales
4,100,000
Monroe’s earnings per share for 2010 was
65. Exhibit 6-1
Morgan Company reported the following information for the year ended December 31, 2010:
Net income
$ 800,000
Preferred dividends declared and paid
100,000
Common dividends declared and paid
160,000
Average common shares outstanding
140,000
Ending market price per share
30
Net sales
7,400,000
Refer to Exhibit 6-1. Morgan’s 2010 price/earnings ratio was
66. Exhibit 6-1
Morgan Company reported the following information for the year ended December 31, 2010:
Net income
$ 800,000
Preferred dividends declared and paid
100,000
Common dividends declared and paid
160,000
Average common shares outstanding
140,000
Ending market price per share
30
Net sales
7,400,000
Refer to Exhibit 6-1. Morgan’s 2010 dividend yield was
67. The following information was obtained from the accounting records of the Guerra Corporation for 2010:
Cost of goods sold
$3,600,000
Merchandise inventory:
January 1
400,000
December 31
460,000
Assuming a business year consisting of 365 days, what was Guerra’s number of days’ sales in inventories for 2010?
68. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s 2010 profit margin was
69. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s return on total assets during 2010 was
70. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s return on stockholders’ equity for 2010 was
71. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s current ratio at December 31, 2010, was
72. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s acid-test ratio at December 31, 2010, was
73. Exhibit 6-2
Given the following information for the Green Company:
Net sales (all on account)
$5,200,000
Interest expense
240,000
Income tax expense
280,000
Net income
420,000
Income tax rate
40%
Total assets:
January 1, 2010
$1,800,000
December 31, 2010
2,400,000
Stockholders’ equity:
January 1, 2010
1,500,000
December 31, 2010
1,600,000
Current assets, December 31, 2010
700,000
Quick assets, December 31, 2010
400,000
Current liabilities, December 31, 2010
300,000
Net accounts receivable:
January 1, 2010
200,000
December 31, 2010
180,000
Refer to Exhibit 6-2. Green’s accounts receivable turnover for 2010 was
74. A difference between the segment disclosures required by IFRS and GAAP is that
75. The Latin Company is made up of five operating segments. Information concerning these segments for 2010
is shown below:
A
B
C
D
E
Sales
$127,000
$16,000
$24,000
$19,000
$15,000
Operating expenses
88,000
15,800
14,900
12,200
13,100
Segment assets
125,000
25,000
60,000
25,000
20,000