Financial Statements MCQs

Notes to financial statements are beneficial in meeting the disclosure requirements of financial reporting. The notes should not be used to

Describe significant accounting policies.
Describe depreciation methods employed by the company.
"Describe principles and methods peculiar to the industry in which the company operates, when these principles and methods are predominantly followed in that industry."
Correct an improper presentation in the financial statements.

The management of ABC Corporation is analyzing the financial statements of XYZ Corporation because ABC is strongly considering purchasing a block of...

Income statement.
Statement of changes in equity.
Statement of cash flows.
Statement of financial position.

An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months service at ...

Deferred income.
Earned income.
Accrued income.
Prepaid expense.

Which of the following is true regarding the comparison of managerial and financial accounting?

Managerial accounting is generally more precise.
Managerial accounting has a past focus, and financial accounting has a future focus.
The emphasis on managerial accounting is relevance, and the emphasis on financial accounting is timeliness.
Managerial accounting need not follow generally accepted accounting principles (GAAP), while financial accounting must follow them.

The financial statements included in the annual report to the shareholders are least useful to which one of the following?

Stockbrokers.
Bankers preparing to lend money.
Competing businesses.
Managers in charge of operating activities.

Prepaid expenses are valued on the statement of financial position at the

Cost to acquire the asset.
Face amount collectible at maturity.
Cost to acquire minus accumulated amortization.
Cost less expired or used portion.

Dixon Company has the following items recorded on its financial records: Available-for-sale securities .............$200,000 Prepaid expenses..........

$400,000
$500,000
$600,000
$700,000

Long-term obligations that are or will become callable by the creditor because of the debtor’s violation of a provision of the debt agreement at t...

Long-term liabilities.
Current liabilities unless the debtor goes bankrupt
Current liabilities unless the creditor has waived the right to demand repayment for more than 1 year from the balance sheet date.
Contingent liabilities until the violation is corrected

Abernathy Corporation uses a calendar year for financial and tax reporting purposes and has $100 million of mortgage bonds due on January 15, Year 2...

Classified as a current liability on the statement of financial position at December 31, Year 1.
Classified as a long-term liability on the statement of financial position at December 31, Year 1
Retired as of December 31, Year 1
Considered off-balance-sheet debt.

A cable television entity receives deposits from customers that are refunded when service is terminated. The average customer stays with the entity ...

Operating revenue.
Other revenue.
Paid-in capital.
Liability.

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinan...

Noncurrent liabilities of $130,000
Current liabilities of $130,000
Current liabilities of $30,000, noncurrent liabilities of $100,000
Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan

Rice Co. was incorporated on January 1, Year 6, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of ope...

$598,000
$600,000
$617,000
$692,000

Careful reading of an annual report will reveal that off-balance-sheet debt includes

Amounts due in future years under operating leases
Transfers of accounts receivable without recourse.
Current portion of long-term debt.
Amounts due in future years under capital leases.

Which one of the following is not a form of off-balance-sheet financing?

Sale of receivables
Foreign currency translations
Operating leases
Special purpose entities

A primary objective of external financial reporting is

Direct measurement of the value of a business enterprise.
"Provision of information that is useful to present and potential investors, creditors, and others in making rational financial decisions regarding the enterprise."
Establishment of rules for accruing liabilities.
Direct measurement of the enterpriseâ€™s stock price.

The primary purpose of the statement of financial position is to reflect

The fair value of the firm assets at some moment in time.
The status of the firm assets in case of forced liquidation of the firm.
The success of a company operations for a given amount of time.
Items of value, debt, and net worth.

A receivable classified as current on the statement of financial position is expected to be collected within

The current operating cycle.
1 year
The current operating cycle or 1 year, whichever is longer.
The current operating cycle or 1 year, whichever is shorter

The major segments of the statement of retained earnings for a period are

Dividends declared, prior period adjustments, and changes due to treasury stock transactions.
Before-tax income or loss and dividends paid or declared.
Prior-period adjustments, before-tax income or loss, income tax, and dividends paid.
Net income or loss, prior-period adjustments, and dividends paid or declared.

In recording transactions, which of the following best describes the relation between expenses and losses?

Losses are extraordinary charges to income, whereas expenses are ordinary charges to income.
Losses are material items, whereas expenses are immaterial items.
Losses are expenses that may or may not arise in the course of ordinary activities.
Expenses can always be prevented, whereas losses can never be prevented.

An entity had the following opening and closing inventory balances during the current year: ................................1/1............ ...

$1,480,000
$1,500,000
$1,610,000
$1,650,000

The profit and loss statement of Madengrad Mining includes the following information for the current fiscal year: Sales.................................

$46,110
$49,890
$49,890
$113,890

If the beginning balance for May of the materials inventory account was $27,500, the ending balance for May is $28,750, and $128,900 of materials were...

$101,400
$127,650
$130,150
$157,650

Given the following data for Scurry Company, what is the cost of goods sold? Beginning inventory of finished goods.. $100,000 Cost of goods manufa...

$500,000
$600,000
$800,000
$950,000

The following information was taken from last yearâ€™s accounting records of a manufacturing company. Inventory.......................January 1....

$460,500 and $489,500, respectively.
$468,500 and $439,500, respectively.
$468,500 and $470,900, respectively.
$646,500 and $617,500, respectively.

The financial statement that provides a summary of the firmâ€™s operations for a period of time is the

Income statement.
Statement of financial position.
Statement of shareholdersâ€™ equity.
Statement of retained earnings.

The following information pertains to Maynard Corporation’s income statement for the 12 months just ended. The company has an effective income tax r...

$36,000
$12,000
$8,000
$(24,000)

Items reported as prior-period adjustments

Do not include the effect of a mistake in the application of accounting principles, as this is accounted for as a change in accounting principle rather than as a prior-period adjustment.
Do not affect the presentation of prior-period comparative financial statements.
Do not require further disclosure in the body of the financial statements.
Are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.

An appropriation of retained earnings by the board of directors of a corporation for bonded indebtedness will result in

The establishment of a sinking fund to retire bonds when they mature.
A decrease in cash on the balance sheet with an equal increase in the investment and funds section of the balance sheet.
A decrease in the total amount of retained earnings presented on the balance sheet.
The disclosure that management does not intend to distribute assets, in the form of dividends, equal to the amount of the appropriation.

The statement of shareholdersâ€™ equity shows a

Reconciliation of the beginning and ending balances in shareholdersâ€™ equity accounts.
Listing of all shareholdersâ€™ equity accounts and their corresponding dollar amounts.
Computation of the number of shares outstanding used for earnings per share calculations.
Reconciliation of net income to net operating cash flow.

Unless the shares are specifically restricted, a holder of common stock with a preemptive right may share proportionately in all of the following exce...

The vote for directors.
Corporate assets upon liquidation.
Cumulative dividends.
New issues of stock of the same class.

Which one of the following statements is correct regarding the effect preferred stock has on a company?

The firm’s after-tax profits are shared equally by common and preferred shareholders.
Control of the firm is now shared by the common and preferred shareholders, with preferred shareholders having greater control.
Preferred shareholders’ claims take precedence over the claims of common shareholders in the event of liquidation.
Nonpayment of preferred dividends places the firm in default, as does nonpayment of interest on debt

A retained earnings appropriation can be used to

Absorb a fire loss when a company is self-insured.
Provide for a contingent loss that is probable and reasonable.
Smooth periodic income.
Restrict earnings available for dividends.

Which one of the following statements regarding treasury stock is correct?

It is unretired but no longer outstanding, yet it has all the rights of outstanding shares.
It is an asset representing shares that can be sold in the future or otherwise issued in stock option plans or in effectuating business combinations.
It is unable to participate in the liquidation proceeds of the firm but able to participate in regular cash dividend distributions as well as stock dividends and stock splits.
It is reflected in shareholders’ equity as a contra account.

Tyler Corporation purchased 10,000 shares of its own $5 par-value common stock for $25 per share. This stock originally sold for $28 per share. Tyler ...

Treasury stock and total shareholders’ equity.
Additional paid-in capital and retained earnings.
Paid-in capital from treasury stock and retained earnings.
Additional paid-in capital and treasury stock.

A statement of cash flows is intended to help users of financial statements

Evaluate a firm’s liquidity, solvency, and financial flexibility.
Evaluate a firm’s economic resources and obligations.
Determine a firm’s components of income from operations.
Determine whether insiders have sold or purchased the firm’s stock.

On February 1, Year 1, a computer software firm agrees to program a software package. Twelve payments of $10,000 on the first of each month are to be ...

$0
$100,000
$110,000
$120,000

For financial statement purposes, the installment method of accounting may be used if the

Collection period extends over more than 12 months.
Installments are due in different years.
Ultimate amount collectible is indeterminate
Percentage-of-completion method is inappropriate.

Several of Fox, Inc.’s customers are having cash flow problems. Information pertaining to these customers for the years ended March 31, Year 7 and Y...

$2,000
$3,000
$5,000
$15,000

How should the balances of progress billings and construction in progress be shown at reporting dates prior to the completion of a long-term contract?

Progress billings as deferred income, construction in progress as a deferred expense.
Progress billings as income, construction in progress as inventory.
Net, as a current asset if debit balance and current liability if credit balance.
Net, as gross profit from construction if credit balance, and loss from construction if debit balance.

During Year 1, Tidal Co. began construction on a project scheduled for completion in Year 3. At December 31, Year 1, an overall loss was anticipated a...

No effect No effect
No effect Decrease
Decrease No effect
Decrease Decrease

The measurement basis most often used to report a long-term payable representing a commitment to pay money at a determinable future date is

Historical cost.
Current cost.
Net realizable value.
Present value of future cash flows.

Johnson Company uses the allowance method to account for uncollectible accounts receivable. After recording the estimate of uncollectible accounts ex...

Decrease Decrease
No effect Decrease
Decrease No effect
No effect No effect

A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates that 5% of sales will be returned within the 90-da...

$185,000
$190,000
$195,000
$200,000

Unrealized gains and losses on trading securities should be presented in the

Statement of financial position.
Income statement.
Notes to the financial statements.
Statement of retained earnings.

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was ...

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss
Describe the nature of the contract in a note to the financial statements, but do not recognize a loss in the income statement.
Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation account.
Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet.

Which one of the following statements is correct about the reconciliation of U.S. GAAP and International Financial Reporting Standards (IFRS)?

The costs of development must be expensed under U.S. GAAP, but are capitalized under IFRS if they meet specific criteria.
The costs of research must be expensed under U.S. GAAP, but are capitalized under IFRS if they meet specific criteria.
All costs of research and development must be expensed under both U.S. GAAP and IFRS.
Internally generated goodwill may not be capitalized under U.S. GAAP, but it may be capitalized under IFRS.

Income-tax-basis financial statements differ from those prepared under GAAP because they

Do not include nontaxable revenues and nondeductible expenses in determining income.
Include detailed information about current and deferred income tax liabilities.
Contain no disclosures about capital and operating lease transactions.
Recognize different revenues and expenses in different reporting periods

Selected financial information for Windham, Inc., for the year just ended is shown below. Pretax income $5,000,000 Intere...

$960,000
$1,360,000
$1,760,000
$2,640,000

Cali, Inc. had a $4,000,000 note payable due on March 15, year 3. On January 28, year 3, before the issuance of its year 2 financial statements, Cal...

As a current liability, with separate disclosure of the note refinancing.
As a current liability, with no separate disclosure required.
As a noncurrent liability, with separate disclosure of the note refinancing.
As a noncurrent liability, with no separate disclosure required.

On March 22, year 1, Cole Corporation received notification of legal action against the firm. Cole’s attorneys determine that it is probable the c...

As a loss recorded in other comprehensive income.
As a contingent liability reported in the balance sheet and a loss on the income statement.
As a provision for loss reported in the balance sheet and a loss on the income statement.
In the footnotes to the financial statements as a contingency.

Green, a calendar-year taxpayer, is preparing a personal statement of financial condition as of April 30, year 2. Green’s year 1 income tax liabil...

$0
$20,000
$40,000
$60,000

On December 31, year 1, Shane is a fully vested participant in a company-sponsored pension plan. According to the plan’s administrator, Shane has ...

$0
$ 90,000
$ 95,000
$100,000

Clint owns 50% of Vohl Corp.’s common stock. Clint paid $20,000 for this stock in year 1. At December 31, year 4, Clint’s 50% stock ownership in...

$ 20,000
$150,000
$170,000
$180,000

Jen has been employed by Komp, Inc. since February 1, year 1. Jen is covered by Komp’s Section 401(k) deferred compensation plan. Jen’s contribu...

$11,900
$ 8,200
$ 7,000
$ 1,200

The estimated current values of Lane’s personal assets at December 31, year 1, totaled $1,000,000, with tax bases aggregating $600,000. Included i...

$120,000
$117,000
$ 3,000
$0

Shea, a calendar-year taxpayer, is preparing a personal statement of financial condition as of April 30, year 2. Shea’s year 1 income tax liabilit...

$0
$25,000
$30,000
$55,000

Personal financial statements usually consist of

A statement of net worth and a statement of changes in net worth.
A statement of net worth, an income statement, and a statement of changes in net worth.
A statement of financial condition and a statement of changes in net worth.
A statement of financial condition, a statement of changes in net worth, and a statement of cash flows.

Personal financial statements should report assets and liabilities at

Estimated current values at the date of the financial statements and, as additional information, at historical cost.
Estimated current values at the date of the financial statements.
Historical cost and, as additional information, at estimated current values at the date of the financial statements.
Historical cost.

Personal financial statements should report assets and liabilities at

A business interest that constitutes a large part of an individual’s total assets should be presented in a personal statement of financial conditi...

A separate listing of the individual assets and liabilities at cost.
Separate line items of both total assets and total liabilities at cost.
A single amount equal to the proprietorship equity.
A single amount equal to the estimated current value of the business interest.

Smith owns several works of art. At what amount should these artworks be reported in Smith’s personal financial statements?

Original cost.
Insured amount.
Smith’s estimate.
Appraised value.

In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be ...

As liabilities.
As deductions from the related assets.
Between liabilities and net worth.
In a footnote disclosure only.

In personal financial statements, how should estimated income taxes on the excess of the estimated current values of assets over their tax bases be ...

As liabilities.
As deductions from the related assets.
Between liabilities and net worth.
In a footnote disclosure only.

The accounting equation (assets – liabilities = equity) reflects the

Entity point of view.
Fund theory.
Proprietary point of view.
Enterprise theory.

Which of the following is not a measure of asset utilization?

Inventory turnover.
Average accounts receivable collection period.
Fixed asset turnover.
Debt to total assets.

What financial analysis technique would imply bench marking with other firms?

Horizontal analysis.
Vertical analysis.
Cross-sectional analysis.
Ratio analysis.

The Dawson Corporation projects the following for the year 2012: .tg {border-collapse:collapse;border-spacing:0;} .tg td{font-family:Arial, sans...

$2.34
$2.70
$3.90
$2.10

The Dawson Corporation projects the following for the year 2012: .tg {border-collapse:collapse;border-spacing:0;} .tg td{font-family:Arial, sans...

$125
$ 56
$ 72
$ 68

Which of the following best describes the reference to the expression â€œtaken as a wholeâ€ in the PCAOBâ€™s fourth generally accepted...

It applies equally to a complete set of financial statements and to each individual financial statement.
It applies only to a complete set of financial statements.
It applies equally to each item in each financial statement.
It applies equally to each material item in each financial statement.

A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements follow

Generally accepted accounting principles.
Public Company Accounting Oversight Board standards.
Generally accepted auditing standards.
International accounting standards.

Which of the following is not correct concerning information included in an audit report of financial statements issued under the requirements of th...

The report should include the title â€œReport of Independent Registered Public Accounting Firm.â€
The report should refer to the standards of the PCAOB.
The report should include a paragraph referring to the auditorâ€™s report on compliance with laws and regulations.
The report should contain the city and state or country of the office that issued the report.