Chapter 05 Communicating and Interpreting Accounting Information
Answer Key
True / False Questions
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 publically 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 publically 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 do not to 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 a required financial statement disclosure.
26.
Preparers of the statement of cash flow must choose the direct or indirect method for each
activity section of the statement.
27.
The indirect method of reporting cash flow from operating activities on the statement of cash
flows 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 income from continuing operations 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.
Multiple Choice Questions
33.
Which of the following tasks is not performed by the Securities & Exchange Commission
(SEC)?
34.
Which of the following tasks does the Financial Accounting Standards Board (FASB)
perform?
35.
Which of the following are primarily responsible for the information provided in a company’s
financial statements?
36.
Which of the following is not a responsibility of the chief executive officer (CEO) and the chief
financial officer (CFO)?
37.
Which of the following is not true about the audit committee of the board of directors?
38.
Which of the following statements is false?