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Financial Reporting Test Answers

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1. What does the indirect method of preparing the cash flow statement effectively accomplish?
 Answers: • It takes the accrual basis of accounting and converts it to cash basis
 2. Which cash collection technique is the most cost-effective for companies with many locations?
 Answers: • Self-addressed stamped envelopes
 3. How does Treasury Stock differ from Trading Stock?
 Answers: • Treasury stock has no voting or dividend rights
 4. How often do companies typically generate standard financial reports?
 Answers: • Monthly
 5. What is one procedure a Company Manager would take to make the information on financial reports more useful for examination?
 Answers: • Use the information on the financial reports to do a financial analysis, creating comparable ratios
 6. How does the income statement of a charity differ from that of a public company?
 Answers: • Charities produce a similar report which shows funding sources, and program expenses and other commitments
 7. In what general way do investors use the information in the financial statements?
 Answers: • To determine if a company is worth investing in
 8. Which of the following is not a part of cost of goods sold?
 Answers: • Capital
 9. Which of the following does Financing Activities not include?
 Answers: • Payments to vendors
 10. A company declares a dividend. What is its effect on the cash?
 Answers: • It decreases Cash
 11. How are the Cash Flow Statement and Balance Sheet related?
 Answers: • Changes in Accounts Receivable and Accounts Payable are reflected on the Cash Flow Statement
 12. Which is/are the primary financial statements used to measure liquidity?
 Answers: • Cash Flow Statement and Balance Sheet
 13. What is the primary reason a government entity would want to look at a company's financial statements?
 Answers: • To determine tax liability
 14. A company pays out a previous declared common stock dividend. What is its effect on the cash?
 Answers: • It will decrease
 15. What is the purpose of a trial balance?
 Answers: • To act as a worksheet, making sure all debits equal all credits, as well as aid in the discovery of issues
 16. The best financial report to see a company's cash balance is ______.
 Answers: • Balance Sheet
 17. Which of the following errors/s can a trial balance be used to detect?
 Answers: • An entry where both sides of the transaction are entered as a debit
 18. What purpose would a company's financial statements have for the lending institutions?
 Answers: • To determine if the company is meeting current covenants in their existing debt agreement
 19. Financial managers use the _____________ to plan for monthly financing needs.
 Answers: • cash budget
 20. What is another name for the Balance Sheet?
 Answers: • Statement of Financial Position
 21. How are the Cash Flow Statement and Balance Sheet related?
 Answers: • Ending cash balance from the Cash Flow Statement is transferred to the Balance Sheet
 22. What are the four traits of a useful financial statement?
 Answers: • Understandable, Relevant, Reliable, Comparable
 23. Which of the following errors/s can a trial balance be used to detect?
 Answers: • A transposition error when entering the credit side of an entry
 24. What is the purpose of an income statement?
 Answers: • To show the reader how the company made and spent money in the period presented
 25. What is Treasury Stock?
 Answers: • Stock repurchased by the issuing company, reducing the amount of stock outstanding in the open market
 26. How do investors turn the information on the financial statements into more useful data which is comparable to other companies?
 Answers: • Perform financial analysis
 27. What is another name for the Income Statement?
 Answers: • Profit & Loss Statement
 28. Which is/are the primary financial statements used to measure solvency?
 Answers: • Balance Sheet and Income Statement
 29. The formula to calculate Ending Retained Earnings is ______.
 Answers: • Ending Retained Earnings = Beginning RE - Investments - Dividends Paid + Net Income
 30. The three sections of a Statement of Cash Flows are _____.
 Answers: • Operating, investing, financing
 31. What does GAAP stand for?
 Answers: • Generally Accepted Accounting Principles
 32. Which financial statement best allows a firm to assess its ability to pay dividends?
 Answers: • Statement of Cash Flows
 33. What is one possible use employees would have of the company financial statements?
 Answers: • It helps the employees to demonstrate their own personal contribution to the company
 34. Which of the following are the 3 main sections of Statement of Cash Flows?
 Answers: • Operating, Investing, Financing
 35. Which of the following does the cash flow cycle measure?
 Answers: • The time between purchase of raw materials and collection of cash
 36. Which of the following transactions would have no impact on the stockholder's equity?
 Answers: • Purchase of land from the proceeds of a bank loan
 37. Which of the following transactions is a non cash event but would be disclosed in the notes of the Statement of Cash Flows?
 Answers: • Exchange of shares for an asset
 38. What does the Balance Sheet reflect?
 Answers: • Net changes over a period of time
 39. How does Gross Income differ from Net Income?
 Answers: • Gross Income measures profitability before operating expenses, whereas Net Income is calculated after all operating expenses
 40. What is historical value?
 Answers: • The original cost or price paid for an asset
 41. When a company files a statement of their financial plans for the next two years with the SEC, it is called a ______.
 Answers: • Prospectus
 42. What does Treasury Stock appear on the balance sheet as?
 Answers: • As a reduction of opening Retained Earnings
 43. What are the main categories of a balance sheet?
 Answers: • Assets, Liabilities, Equity
 44. What way is government accounting different from public company accounting?
 Answers: • The chart of accounts and financial statements are classified and organized differently
 45. What is the one problem while comparing financial statements with companies based in different countries?
 Answers: • Countries use different accounting standards, comparisons can only be made directly with countries using GAAP
 46. Which is the primary financial statement used to measure profitability?
 Answers: • Income Statement
 47. How are the income statement and balance sheet linked?
 Answers: • Net income from the income statement transfers to the balance sheet equity section
 48. Which method of preparing the statement of cash flows begins with Net Income?
 Answers: • Indirect
 49. By doing/issuing which of the following could a company raise short-term funds by selling receivables and inventory?
 Answers: • By line of credit
 50. How would the financial statements be useful for a Company Manager?
 Answers: • To make operational decisions based on comparing past and current results
 51. What is one possible use employees would have for the company financial statements?
 Answers: • Employees have a vested interest in the company for job security and any equity incentive they have
 52. What is the purpose of the statement of cash flows?
 Answers: • To demonstrate how the company used their cash in the period reported
 53. Which of the following is not a fundamental of accounting?
 Answers: • Magnitude
 54. Pro forma statements are _______ statements.
 Answers: • next years'
 55. Retained earnings will change over time because of several factors. Which of the following factors would lead to an increase in the Retained Earnings?
 Answers: • Net income
 56. Which is/are the primary financial statements used to measure stability?
 Answers: • Balance Sheet
 57. Which of the following is a difference between a public company and a private one?
 Answers: • Public companies must have audited financial statements and prepared SEC reports
 58. What is the purpose of an audit?
 Answers: • To verify that statements made by the company are true based on an independent party's evaluation