Which of the following parties would perform an external financial analysis?

Which of the following parties would perform an external financial analysis?

A) A firm's compensation committee

B) A financial analyst forecasting the next period's borrowing needs

C) A firm's creditors

D) A CFO comparing the performance of the firm's various divisions

Which of the following parties would perform an internal financial analysis?

A) A financial analyst forecasting the next period's borrowing needs

B) A firm's competitors

C) A firm's creditors

D) Analysts for investment companies

Which of the following parties would be interested in an analysis of the firm's financial statements?

A) Investors

B) Creditors

C) The firm's managers

D) all of the above

The analysis of a firm's financial statements can be an important factor in the firm's ability to borrow money.

Answer:  TRUE

The analysis of a firm's financial statements is usually of interest only to people who do not work for the company.

Answer:  FALSE

Individuals who do not work for a company rarely have enough information to perform a detailed financial analysis of the company.

Answer:  FALSE

Which of the basic financial statements is best used to answer the questions "Where did the company's money

Which of the basic financial statements is best used to answer the questions "Where did the company's money come from and how was it spent over the preceding year?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement?

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

The income statement shows a company's earnings since it has been in business.

Answer:  FALSE

The balance includes information about the company's assets and liabilities.

Answer:  TRUE

The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.

Answer:  FALSE

The cash flow statement is an alternative term for the balance sheet.

Answer:  FALSE

Which of the basic financial statements is best used to answer the question, "How profitable is the business

Which of the basic financial statements is best used to answer the question, "How profitable is the business?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Accounts receivable aging schedule

Who owns the retained earnings of a public firm?

A) The IRS

B) Common stockholders

C) Bondholders

D) Preferred stockholders

Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?

A) Balance sheet

B) Cash flow statement

C) Income statement

D) None of the above

Stock that is repurchased by the issuing company is called

A) paid in capital.

B) treasury stock.

C) retained capital.

D) par value stock.

Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

In a growing business, negative cash flow from investing activities is normal.

Answer:  TRUE

Reducing a firm's debt will increase its cash flow.

Answer:  FALSE 

Beginning cash balance + cash flow from operations + cash flow from investing activities + cash flow from financing activities = ending cash balance.

Answer:  TRUE

Which of the basic financial statements is best used to answer the question, "How profitable is the business?"

Which of the basic financial statements is best used to answer the question, "How profitable is the business?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Accounts receivable aging schedule

Who owns the retained earnings of a public firm?

A) The IRS

B) Common stockholders

C) Bondholders

D) Preferred stockholders

Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?

A) Balance sheet

B) Cash flow statement

C) Income statement

D) None of the above

Stock that is repurchased by the issuing company is called

A) paid in capital.

B) treasury stock.

C) retained capital.

D) par value stock.

Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?"

A) Balance sheet

B) Statement of shareholder's equity

C) Income statement

D) Cash flow statement

Consider the adjustment process at the end of the accounting period.

1. Record the adjusting entries in the journal.

2. Prepare an adjusted trial balance to check the equality of the debits and credits.

3. Determine the accounts requiring adjustment, using the unadjusted trial balance.

4. Post the adjusting entries to the general ledger.

Place the actions above in the proper order.

A) 1, 4, 3, 2.

B) 1, 2, 4, 3.

C) 3, 4, 2, 1.

D) 3, 1, 4, 2.

Answer: D

An adjusted trial balance:

A) Is a list of all accounts and their balances after adjusting entries.

B) Is a list of all accounts and their balances before adjusting entries.

C) Is a list of all accounts and their balances after closing entries.

D) Is a trial balance adjusted for cash-basis accounting.

Answer: A

The adjusted trial balance should be prepared ________ the financial statements are prepared in order to prove the ________ of the debits and credits.

A) after; equality

B) before; accuracy

C) before; equality

D) after; accuracy

Answer: C

On November 1, $4,800 of rent on equipment for the next six months was paid and charged to Prepaid Rent. At the end of the year, the financial statements would report:

A) Rent Expense, $4,800; Prepaid Rent $0.

B) Rent Expense, $1,600; Prepaid Rent $3,200.

C) Rent Expense, $1,600; Prepaid Rent $4,800.

D) Rent Expense, $3,200; Prepaid Rent $1,600.

Answer: B

Prior to adjusting entries, Salaries Expense had a balance of $22,300. The following year-end adjusting entry was made by the company:

Salaries Expense 4,400

Salaries Payable 4,400

What balance would be shown for Salaries Expense in the adjusted trial balance?

A) $4,400.

B) $17,900.

C) $22,300.

D) $26,700.

Answer: D

Prior to adjusting entries, Prepaid Rent had a balance of $8,300. The following year-end adjusting entry was made by the company:

Rent Expense 6,800

Prepaid Rent 6,800

What balance would be shown for Prepaid Rent in the adjusted trial balance?

A) $1,500.

B) $6,800.

C) $8,300.

D) $15,100.

Answer: A

The cost of the goods that a company sold during a period is shown in its financial statements as ________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ________.

A) Cost of goods sold; inventory

B) Goods on hand; inventory expense

C) Inventory; cost of goods sold

D) Sales revenue; cost of goods sold

Answer: Cost of goods sold; inventory

The largest expense on a retailer's income statement is typically:

A) Salaries.

B) Cost of goods sold.

C) Income tax expense.

D) Depreciation expense.

Answer: Cost of goods sold.

The balance of the Cost of Goods Sold account at the end of the year represents:

A) The cost of inventory not sold in the current year.

B) The total sales revenue to customers.

C) The cost of inventory sold in the current year.

D) Total purchases of inventory for the year.

Answer: The cost of inventory sold in the current year.

Which of the following information would be included in the introductory paragraph of the auditor's report on internal control over financial reporting

Which of the following information would be included in the introductory paragraph of the auditor's report on internal control over financial reporting if the report is presented separately from the auditor's report on the entity's financial statements?

a. the fact that the auditors conducted an audit of the entity's financial statements
b. statements identifying the responsibility of the auditors and management for internal control over financial reporting
c. a reference to the auditors` report and opinion on the entity's financial statements
d. the definition of material weakness in internal control over financial reporting


Answer: b. statements identifying the responsibility of the auditors and management for internal control over financial reporting

When completing the audit of internal controls for an issuer, the PCAOB requires auditors of public companies to audit internal controls over

a. all of the answers are correct
b. compliance with regulations
c. financial reporting
d. operations

Answer: c. financial reporting

When completing the audit of internal controls for an issuer, AS5 requires auditors of public companies to report on

a. management's report on internal control- no; an audit of internal control- no
b. management's report on internal control- yes; an audit of internal control- yes
c. management's report on internal control- no; an audit of internal control- yes
d. management's report on internal control- yes; an audit of internal control- no


Answer: c. management's report on internal control- no; an audit of internal control- yes

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

a. audit risk
b. inherent risk
c. control risk
d. detection risk


Answer: d. detection risk

The risk of material misstatements is composed of which audit risk components?

a. inherent risk, control risk and detection risk
b. inherent risk and detection risk
c. inherent risk and control risk
d. control risk and detection risk


Answer: c. inherent risk and control risk

When evaluating whether accounting estimates made by mangement are reasonable, the audit team would be most interested in which of the following?

a. evidence of a conservative systematic bias
b. assumptions that are similar to industry guidelines
c. key factors that are consistent with prior periods
d. measurements that are objective and not susceptible to bias


Answer: a. evidence of a conservative systematic bias

Auditing standards do not require auditors of financial statements to

Auditing standards do not require auditors of financial statements to

a. assess the risk of occurrence of errors and frauds
b. understand the nature of errors and frauds
c. report all errors and frauds found to police authorities
d. design audits to provide reasonable assurance of detecting errors and frauds


Answer: c. report all errors and frauds found to police authorities

Enterprise risk management is the responsibility of:

a. company management
b. the external auditors
c. the company's insurance providers
d. all of the answers are correct


Answer: a. company management

Failure to meet company objectives is a result of

a. audit risk
b. inherent risk
c. information risk
d. business risk


Answer: d. business risk

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor

In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include 

A. Net Income.
B. Stockholders' Equity.
C. Net Income and Stockholders' Equity.
D. Assets.


Answer: Net Income and Stockholders' Equity.

In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion and expressing an adverse opinion? 

A. The auditor did not observe the entity's physical inventory and is unable to become satisfied as to its balance by other auditing procedures.
B. The financial statements fail to disclose information that is required by generally accepted accounting principles.
C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.


Answer: The financial statements fail to disclose information that is required by generally accepted accounting principles.

What is one reason hashing algorithms are helpful in encryption?

a. They allow the key to be longer so there are more possibilities for the key
b. They make it so the output of the algorithm can help uniquely identify the input
c. They can be used with any type of input
d. They make it so the input of the algorithm cannot be easily identified from the output


Answer: d. They make it so the input of the algorithm cannot be easily identified from the output

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item

When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity's 

A. Net income.
B. Retained earnings.
C. Assets.
D. Working capital.


Answer: Net income

A scope limitation sufficient to preclude an unqualified opinion always will result when management 

A. Prevents the auditor from reviewing the working papers of the predecessor auditor.
B. Engages the auditor after the year-end physical inventory is completed.
C. Requests that certain material accounts receivable not be confirmed.
D. Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.


Answer: Refuses to provide a representation letter acknowledging its responsibility for the fair presentation of the financial statements in conformity with GAAP.

A special report related to compliance with contractual provisions provides 

A. Positive assurance.
B. Negative assurance.
C. No assurance.
D. None of these.


Answer: Negative assurance.

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?

a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices


Answer: Liquidation preferences

The rate of return on common stock equity is calculated by dividing 

a. net income less preferred dividends by average common stockholders' equity.
b. net income by average common stockholders' equity.
c. net income less preferred dividends by ending common stockholders' equity.
d. net income by ending common stockholders' equity.


Answer: net income less preferred dividends by average common stockholders' equity

What effect does the issuance of a 2-for-1 stock split have on each of the following?

Par Value per Share Retained Earnings


a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease


Answer: Decrease No effect