Test 2-University of Alabama

The Five Main Financial Statement Users of Business Accounting

Managers, Directors, Government, Creditors, Investors

When auditors conclude that a company's financial statements conform to GAAP, the audit report said to be:
A. Validated
B.Qualified
C.Unqualified
D. Adjusted
E. Relevant

D. Unqualified

Which of the following measures is most useful is most useful in analyzing a company's ability to control expenses?
A.Debt-to-assets ratio
B.Asset turnover ratio
C.Net Profit margin ratio
D.Current Ratio

C. Net Profit Margin Ratio

What is the purpose of a Creditor?

They are used to determine certain financial targets to include in debt contracts, to decide whether to enter into contracts with another company, and also to administer contracts if broken or an agreement has been reached.

What do Investors use accounting information for?

to evaluate the financial strength of business and ultimately to estimate its value, to assess stock price.

What are two examples of governement agencies who look closely at financial statements and what are their jobs?

The Securities and Exchange Commission(SEC)-resposible for the functioning of stock markets and keeps watch on the information that public companies report in financial statements.
The Internal Revenue Service(IRS)-gives the starting point for determining

The Fraud Triangle Components

1st: Incentive (Why?)
2nd: Opportunity(How?)
3rd: Character (Who?)

Two incentives to commit fraud

1. Creating Business Opportunities(Misreporting on financial statements or attract business partners)
2. Satisfying Personal Greed(Money laundering, increasing personal wealth)

What are internal controls?

Methods that a company uses to protect against theft of assets, to enhance the reliability of accounting information and to promote efficient and effective operations, and to ensure compliance with laws and regulations.

The Sarbanes-Oxley Act

Created during the frauds and scandals of the 1990s and early 2000s to counteract incentives to commit fraud(Fines and Prison Terms), stricter oversight of workers, and internal control audits by external auditors.

What is the purpose of the Sarbanes-Oxley(SOX) Act

1. Counteract Incentives
2. Reduce Opportunites
3. Encourage Good Character

What is an advantage of using an comparative financial statement?

It allows auditors and companies to see changes over time and compare account balances from one period to the next.

What is the purpose of a Multistep Income Statement

to display important measures of profit in addition to net income.

What two subtotals are added on the multistep income statement?

Income from Operations and Income before Income Tax Expense

Companies report a statement of retained earnings to show how Net Income ____________ and Decreases _________

1. increased
2. dividends

Which of the following measures is most useful is most useful in analyzing a company's ability to control expenses?
A.Debt-to-assets ratio
B.Asset turnover ratio
C.Net Profit margin ratio
D.Current Ratio

C. Net Profit Margin Ratio

Which of the following reports is filed annually with the SEC?
A.Form 10-Q
B.Form 10-K
C. Form 8-K
D.Press Release
E.All of the above

Form 10-K

Numerous accounting scandals and misrepresentation of financial results have been reported in the news during the past few years. As a result the SEC recently has:
A.taken over responsibility for setting accounting rules in the United States.
B.required c

D. introduced severe fraud charges for managers found guilty of such actions.

All other things equal, in which of the following cases would an analyst rank the company most favorably?
A. The company has the highest debt-to-assets ratio in the industry as as the highest profit margin ratio and asset turnover ratio
B. The company has

D.The company has the lowest debt-to-assets ratio in the industry as well as the highest profit margin ratio and asset turnover ratio.

A company has an asset turnover ratio of 1.15. Which of the following statements is true?
A. The company generates $1.15of net income for every $1 in reported assets
B. The company buys assets more frequently than it sells them.
C. The company generates $

C. The company generates $1.15 of sales revenue for every $1 in reported assets.

A company had the same amount of assets at the end of 2011 and 2012, $300,000. In 2012, net income was $40,000 and sales revenue was $390,000. At the end of 2012, total liabilities are $120,000. What is the asset turnover for 2012?
A.1.30
B.7.50
C.2.60
D.

A.1.30

Which of the following statements is NOT true concerning the independent external audit?
A. The SEC requires all publicly traded companies to have their internal controls audited by external auditors.
B. Many privately owned companies have their financial

D. The auditors are required to check every transaction in order to provide assurance to financial statement users.

Segregation of duties means that a company assigns responsibilities so that:
A. sufficient workers are available to cover all necessary jobs.
B. responsibilities for related activities are assigned to two or more people.
C. employees are restricted to job

B. responsibilities for related activities are assigned to two or more people.

Which of the following statements is TRUE?
A. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations.
B. An organization impl

A. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations.

Before reconciling to its bank statement, Lauren Cosmetics Corporation's general ledger had a month-end balance in the cash account of $5,250. The bank reconciliation for the month contained the following items:
Deposits in transit: $750
Outstanding check

C. $5,160.

Which of the following bank reconciliation items would not result in an adjusting journal entry in the company's books?
A. Service charge.
B. Outstanding checks.
C. A customer's check returned NSF.
D. Interest earned on deposits.
E. Error made by company

B. Outstanding checks.

Which of the following situations would cause the balance per bank to be more than the balance per books?
A. Deposits in transit.
B. Service charges.
C. Outstanding checks.
D. Checks from customers returned as NSF.
E. All of the above.

C. Outstanding checks.

Which one of the following internal control principles best demonstrates the requirement that all customers be given a sales receipt?
A. Segregate duties
B. Establish responsibility
C. Restrict access
D. Document procedures
E. Independently verify

D. Document procedures

Which of the following is an activity in the operations of a manufacturer, but not in the operations of a merchandising or service company?
A. Selling the good to consumers.
B. Receiving cash.
C. Selling the good to other firms.
D. Buying raw materials.

D. Buying raw materials.

The LIFO inventory costing method assumes that the cost of the units most recently purchased is:
A. the last to be assigned to cost of goods sold.
B. the first to be assigned to ending inventory.
C. the first to be assigned to cost of goods sold.
D. not a

C. the first to be assigned to cost of goods sold.

During 2010, Shockglass Company recorded inventory purchases of $45,000 and cost of goods sold of $50,000. If inventory at the beginning of the year was $15,000, the ending inventory balance must have been:
A. $10,000.
B. $25,000.
C. $26,000.
D. $27,000.

A. $10,000.

Use this information:
Beginnng Inventory: 300 units $780
Purchased on June 10: 400 units $1,170
Purchased on June 15: 500 units $1,260
Purchased on June 28: 300 units $990
1,500 $4200
The company sold 1,000 units during June and 500 units were in its endi

A. $1,494.

Beginnng Inventory: 300 units $780
Purchased on June 10: 400 units $1,170
Purchased on June 15: 500 units $1,260
Purchased on June 28: 300 units $990
1,500 $4200
The company sold 1,000 units during June and 500 units were in its ending inventory on June 3

C. $1,400.

The Acme Corporation buys 300 units of merchandise in January at $5 each. Acme buys 500 units at $4 each in February and 200 units at $6 each in March. Acme sells 150 units during this quarter. Acme uses a periodic inventory system and had no beginning in

D. $900

E. Flynn Company uses a perpetual inventory system and had the following transactions during November:
November 6: Purchased $5,800 of inventory on account, terms 2/10, n/30.
November 8: Returned $800 of defective units and received full credit.
November

A. Option A

. A company had been selling its product for $20 per unit, but recently lowered the selling price to $15 per unit. The company's current inventory consists of 200 units purchased at $16 per unit. The replacement cost of this merchandise is currently $13 p

A. $2,600

In a period of rising prices, the inventory costing method that will cause the company to have the lowest income taxes is
A. LIFO.
B. FIFO.
C. Weighted average.
D. Specific identification.

A. LIFO.

Before adjustment, the allowance for doubtful accounts has a credit balance of $2,700. The company had $140,000 of net credit sales during the period and historically fails to collect 4% of credit sales. The company uses the percentage of credit sales met

C. $8,300

Over the past five years, a company had average annual credit sales of $320,000 and write-offs this year of $2,000. Credit sales in the current year are $300,000. The balance in the Allowance for Doubtful Accounts is a $500 credit. Using the percentage of

B. $3,000

The amount of uncollectible accounts at the end of the year is estimated to be $25,000, using the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts account is an $8,000 credit before adjustment. What should the account

C. $25,000.

When an adjusting entry is made in anticipation of some receivables being uncollectible, the adjustment reduces:
A. net income and selling expenses.
B. net income and increases liabilities.
C. net accounts receivable and increases liabilities.
D. both net

D. both net income and net accounts receivable

A company extends credit to customers because it expects the:
A. rise in sales revenue to be greater than the rise in cost of extending credit.
B. delay in receiving cash to cost more than the increase in wage costs.
C. tax savings from a lower net income

A. rise in sales revenue to be greater than the rise in cost of extending credit.

. Total doubtful accounts at the end of the year are estimated to be $25,000 based on an aging of accounts receivable. If the balance in the Allowance for Doubtful Accounts is a $7,000 debit before adjustment, what will be the amount of bad debt expense r

B. $32,000

The Grass is Greener Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. According to the revenue recognition principle and the matching principle, the co

B. record an estimate of bad debt expense in the same period as the lawn care is provided.

Who are the Main users of Financial Statements
(Hint: There are Five)

1.Managers
2. Investors
3. Creditors
4.Directors
5. Government Agencies

What are the job of the The Users of Financial Statements?

Managers at all levels within a company use accounting information to run the business by making decisions, such as obtaining debt versus issuing more stock.
Directors use accounting information to oversee the business. One decision the directors make is

Which of the following is true of a company's quarterly report?
A.Contains the same detail as is found in the annual report.
B.Is an audited report.
C.Does not include any discussion of financial results.
D.Has the benefit of being released on a timelier

D.Has the benefit of being released on a timelier basis.

Which of the following is not one of the four main external users of financial statements?
A. Government
B.Managers
C.Creditors
D. Investors

B. Managers
* Creditors, investors, and the government are external users.

Which of the following would NOT be true regarding financial statements prepared using IFRS versus U.S.GAAP?
A. The order of total liabilities and total stockholders' equity differs.
B.The order of current and noncurrent assets differs.
C.The financial st

D.Within the current classification, there is no difference between the order in the presentation using IFRS versus U.S. GAAP.
*Assets are listed in decreasing order of liquidity under GAAP, but under IFRS they are shown in increasing order of liquidity.

If a publicly traded company is trying to maximize its perceived performance, as reported to decisions makers external to the corporation, the company is most likely to understate which of the following on its balance sheet?
A.Liabilities
B.Retained Earni

A.Liabilities
*Assets, Retained earnings, and Contributed capital would not be understated, they would be overstated, if a company was trying to maximize perceived performance.

A company sells goods at a selling price of $20,000. The cost of the goods is $15,000 Under a perpetual inventory system the journal entries to record the sale will include:
A.$15,000 will be debited to Cost of goods sold and $15,000 will be credited to S

D.$15,000 will be debited to Cost of goods sold and $15,000 will be credited to Inventory.
*The entry to record the sale when the perpetual inventory system is used includes a debit to Cost of goods Sold and a credit to Inventory for the cost of the merch

When preparing this month's bank reconciliation, you find that you failed to record a $95 deposit for a payment you received from a customer. You immediately prepare a journal entry to record the deposit. Which of the following describes the actions to be

D.No further action is necessary.
*The journal entry made to adjust the current month's balance will not affect the next month's reconciliation.

Your company receives $857 and makes a deposit in its checking account. Which of the following describes how this transaction should be accounted for?
A.You add $857 to your recorded cash balance and the bank deducts $857 from your checking account balanc

C.You add $857 to your recorded cash balance and the bank adds $857 to your checking account balance.
*When a company makes a deposit in its bank account, both the company's cash account and the bank's record of the checking account should be increased.

The receipt of cash is one of the operating activities of:
A.merchandising, manufacturing, and service companies.
B .companies that sell goods they bought from others but not of companies that make the goods they sell.
C.companies that sell to consumers b

A.merchandising, manufacturing, and service companies.
*All types of businesses have operating activities that involve cash receipts

The main purposes of internal controls do not include:
A.prevention of error, theft, and fraud.
B.ensuring compliance with laws and regulations.
C.promotion of operational efficiency.
D.providing more favorable financial information

A.prevention of error, theft, and fraud.
*Providing more favorable financial information is not a purpose of internal control. Enhancing the reliability of accounting information is one of the purposes

Which of the following is not stated as a primary objective of a company's internal control policies and procedures?
A.The prevention or detection of unauthorized activities involving a company's records.
B.The proper recording and authorization of transa

C.The provision of current information for outside investors and analysts.
*Internal controls are concerned with creating an ethical business environment and with improving financial performance

During the month of June, Ace Incorporated purchased goods from two suppliers. The sequence of events was as follows:
June 3 Purchased goods for $4,500 from Diamond Inc. with terms 1/10, n/30.
5 Returned goods costing $1,300 to Diamond Inc. for full credi

Purchases$ 6,500
Less: Purchase returns1,300
Less: Purchase discount from Diamond 32
Cost of inventory as of June 30$ 5,168
Explanation:
Purchases ($4,500 + $2,000) = 6,500
Purchase discount from Diamond [($4,500 - $1,300) x 1%] = (32)*
* Diamond was paid

During the months of January and February, Axe Corporation purchased goods from three suppliers.The sequence of events was as follows:
Jan. 6 Purchased goods for $2,800 from Green with terms 2/10, n/30.
6 Purchased goods from Munoz for $1,200 with terms 2

Purchases $ 4,410
Less: Purchase discount from Green 56
Cost of inventory as of February 28 $ 4,354
Purchases ($2,800 + $1,200 + $410) = 4,410
Purchase discount from Green ($2,800 x 2%) =-56*
* Green was paid 8 days after the purchase (within the discount

What do Investors use accounting information for?

to evaluate the financial strength of business and ultimately to estimate its value, to assess stock price.

What are two examples of governement agencies who look closely at financial statements and what are their jobs?

The Securities and Exchange Commission(SEC)-resposible for the functioning of stock markets and keeps watch on the information that public companies report in financial statements.

What is the purpose of an auditor?

Auditors provide quality assurance by reporting on the effectiveness of a company's internal controls over financial reporting and by providing an independent opinion about whether the company's financial statements are prepared in accordance with GAAP.

Compare fraudulent misreporting and academic dishonesty

Like fraudulent financial reporting, academic dishonesty will occur only if an individual has incentives, opportunities, and the personality to cheat. Like the impact of bonuses and stock options on managers, the impact of potentially higher grades on ass

Why are other countries adopting IFRS?

Countries are adopting IFRS to reduce or eliminate differences in accounting rules that have developed previously on a country-by-country basis. As well, these improvements in comparability are needed as a result of increasing globalization in corporate o

What are Auditors?

Certified Public Accounts who are independent of the company.

Unqualified Audit Opinion

Financial statements are presented in accordance with GAAP

Qualified Audit Opinion

Financial statements fail to follow GAAP or not able to complete needed test

Most public companies announce quarterly and annual earnings through a ____________that is sent to news agencies. This is issued __________ after the accounting period ends

Press Release
Three to Five Weeks

Summarized Financial data

Key figures covering a period of 5 or 10 years.

Management's report on internal control

a statement that describe management's reponsibility for ensuring adequate internal control over financial reporting and that report on the effectiveness of these controls during the year.

What are required in the GAAP Financial Statements?

1. Balance Sheet
2. Income Statement
3.Statement of stockholder's equity
4. Statement of cash flows

What are required in the IFRS Financial Statements?

Statement of fiancial position
Statement of comprehensive income
Statement of shareholders' equity
Statement of cash flows

What is the goal of ratio analysis

is to get to the heart of how a company performed given the resources it had available.

What are the four parts to a business Model?

� Obtain financing from lenders and investors, which is used to invest in assets.
� Invest in assets, which are used to generate revenues.
� Generate revenues, which produce net income.
� Produce net income, which is needed to satisfy lenders and investor

Net Profit Margin

Net Income / Total Sales Revenues

Debt-to-asset ratio

Total Liabilities/Total Assets

Asset Turnover Ratio

Sales Revenue/Average Total Asset

The asset turnover ratio determines how efficiently assets are used to generate sales.

...

Why can internal controls never completely prevent and detect errors and fraud?

Benefits vs. Cost
Human Error or Fraud?

Why is internal control of cash important to large businesses?

The volume of cash is enormous
The cash is valuable and "owned" by person possessing it

What duties have to be seperated in receiving cash in person?

Cashier
Custody
Recording

Two Examples of receiving cash from a remote source

Cash received by mail
Cash Received Electronically

Examples of Cash Payments

-writing a check
-Electronic Funds Transfer

How Banks provide services to help businesses control their cash?

-by restricting access to private cash
-Documenting all cash transaction procedures
-Having companies independently verify cash transactions.

What is a bank reconciliation?

the internal report prepared to verify accuracy of both the bank statement and the cash accounts of business or individual.

Bank Reconciliation Goals

-Identify the deposits in transit
-Identify the outstanding checks
-Record other transactions on the bank statement
-

Inventory accounting systems play three roles by providing information about:

-Inventory Quantity
-Inventory Costs
-Financial Statements

Unsold Inventory-Balance Sheet
Sold Inventory-Income statement

...

What is Perpetual Inventory?

In a perpetual inventory system, the inventory records are updated "perpetually," that is, every time inventory is bought, sold, or returned. Perpetual systems often are combined with bar codes and optical scanners.

What is Periodic Inventory?

In a periodic inventory system, the inventory records are updated "periodically," that is, at the end of the accounting period. To determine how much merchandise has been sold, periodic systems require that inventory be physically counted at the end of th

What is Sales Discounts?

A sales discount is a sales price reduction given to customers for prompt payment of their account balance.

Sales-Related Transactions

The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.

Gross Profit Percentage

Gross Profit/Net Sales x 100

Cost of Goods Sold Equation: BI + P - CGS = EI

...

Inventory Costing Methods

1. Specific Identification
2.FIFO
3. LIFO
4.Weighted average

Weighted Average Cost

Cost of goods Available/Number of Units Avaliable