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Chapter 2
Introduction to Financial Statements and Other
Financial Reporting Topics
QUESTIONS
2- 1. a. Unqualified opinion with explanatory paragraph
b. Unqualified opinion with explanatory paragraph
2- 2. The responsibility for the preparation and integrity of financial statements
conformity with GAAP, and consistency.
2- 3. The basic purpose of the integrated disclosure system is to achieve
companies reporting.
2- 4. The explanatory paragraphs explain important considerations that the
concern.
2- 5. A review consists principally of inquiries of company personnel and
standards.
2- 6. No. The accountant’s report will indicate that they are not aware of any
accounting principles. The accountant does not express an opinion on
reviewed financial statements.
with a compilation.
2- 8. No. Some statements have not been audited, reviewed, or compiled.
accountant’s report.
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2- 9. Balance Sheet
Income Statement
accounting period.
Statement of Cash Flows
a specified period of time.
2-10. Notes to the financial statements increase the full disclosure of the
2-11. Contingent liabilities depend on the outcome of a future event that
outcome of the case.
2-12. a, c
2-13. A proxy is the solicitation sent to stockholders for the election of directors
2-14. A summary annual report is a condensed annual report that omits much of
2-15. The firm must include a set of fully audited statements and other required
is also available to the public.
2-16. There is typically a substantial reduction in non-financial pages and
pages.
2-17. Cash flows from operating activities, cash flows from investing activities,
and cash flows from financing activities.
2-18. The income statement and the statement of cash flows. The income
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dates.
2-19. Assets, liabilities, and owners’ equity.
and the retained earnings account.
2-21. Notes are an integral part of financial statements. A detailed review of
statements.
2-22. APB Opinion No. 22 requires disclosure of accounting policies as the first
2-23. They are interchangeable terms referring to ideals of character and
distinguishing between right and wrong.
2-26. The scheme of the double-entry system revolves around the accounting
equation:
(including the temporary accounts).
2-27. a. Assets, liabilities, and stockholders’ equity accounts are referred to as
forward to the next accounting period.
They are referred to as temporary accounts.
2-28. Because the employee worked in the period just ended, the salary must be
employee.
2-29. Adjusting entries are necessary to match revenues with the expenses that
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2-30. Companies use a number of special journals to improve record keeping
2-31. Filing deadline for Form 10-K follow:
2-32. Sole Proprietorship
Partnership
Corporation
is evidenced by shares of stock.
2-33. Even an efficient market does not have access to “inside” information;
2-34. In an efficient market, the method of disclosure is not as important as
whether or not the item is disclosed.
2-35. Abnormal returns could be achieved if the market does not have access to
2-36. With the purchase method the firm doing the acquiring records the
2-37. Consolidated statements reflect an economic, rather than a legal, concept
of the entity.
2-38. The financial statements of the parent and the subsidiary are consolidated
rest with the majority owner.
2-39. The SEC requires that a copy of the companies code of ethics be made
company’s Internet Web Site.
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2-40. Treadway Commission is the popular name for the National Commission on
and effective internal controls.
2-41. The Sarbanes-Oxley Act requires the auditor to present a report on the
2-42. Audit Report
Report on the firm’s internal controls
2-44. Reasons why some private companies elect to follow the law follow:
2-45. 1. The subsidiary’s accounts are shown separately from the parent’s.
2-46. Control can be gained by means other than obtaining majority stock
and the primary beneficiary.
2-47. Some countries do not consolidate. Other countries use consolidation with
different rules.
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PROBLEMS
PROBLEM 2-1
Cash
Sales
Dec 6 2,500
Dec 14 3,000
Dec 24 1,200
Dec 10 500
Dec 17 6,000
Dec 28 700
Dec 2 4,000
Dec 6 2,500
Accounts Receivable
Office Salaries
Dec 2 4,000
Dec 21 900
Dec 24 1,200
Dec 10 500
Land
Gain on Sale of Land
2,200 original cost
Dec 14 2,200
Dec 14 800
Equipment
Services
Dec 17 6,000
Dec 21 900
Accounts Payable
Dec 28 700
PROBLEM 2-2
Cash
Revenue
July 15 500
July 1 10,000
July 20 300
July 24 400
July 8 3,000
Accounts Receivable
July 8 3,000
July 15 500
Land
Repair Expense
July 12 600
Accounts Payable
Wages Expense
July 12 600
July 24 400
PROBLEM 2-3
Insurance Expense
Prepaid Insurance
(1)December 31 600
July 1 1,200
(1) December 31
600
Supplies Expense
Supplies
(2) 300
September 10 500
(2) 300
Revenue
Unearned Revenue
(3) 1,000
December 1 1,000
(3) 1,000
(4) 200
(4) 200
(5) 500
(5) 500
Revenue
(1) 640
May 1 960
(1) 640
(2) 100
December 1 400
(2) 100
(4) 800
(4) 800
Revenue
(5) 600
(6) 400
(6) 400
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PROBLEM 2-5
liabilities plus stockholder’s equity.
permanent account.
e. 3 Insurance expense is an income statement account and therefore a
temporary account.
debit.
PROBLEM 2-6
b. 1 An unqualified opinion usually has the highest degree of reliability.
f. 2 Form 10-K is the annual financial report submitted to the Securities
and Exchange Commission.
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PROBLEM 2-7
statements
fairly, in all material respects, the financial position, results of
complete set of financial statements
e. 1 Financial statements of legally separate entities may be issued to
PROBLEM 2-8
Permanent (P)
or Temporary (T)
Normal Balance
Dr. (Cr.)
Cash
P
Dr.
Accounts receivable
P
Dr.
Equipment
P
Dr.
Accounts payable
P
Cr.
Common stock
P
Cr.
Sales
T
Cr.
Purchases
T
Dr.
Rent expense
T
Dr.
Utility expense
T
Dr.
Selling expenses
T
Dr.
PROBLEM 2-9 PROBLEM 2-10
c 1 c 1
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PROBLEM 2-11
Prepaid Insurance
Insurance Expense
December 31, 2011 180,000
320,000
X 320,00
Amount paid 310,000
December 31, 2011 170,000