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SU1:
Ethics for the Organization and Basic Financial
Statements
1.3 Basic Financial Statements and Their Users
1- The basic financial statements include a:
a- Balance sheet, income statement, statement of retained
earnings, and statement of changes in retained earnings.
b- Statement of financial position, income statement,
statement of retained earnings, and statement of changes
in retained earnings.
c- Balance sheet, statement of financial position, income
statement, and statement of changes in retained
earnings.
d- Statement of financial position, income statement,
statement of cash flows, and statement of retained
earnings.
2- Financial statement users with a direct economic interest
in a specific business include:
a- Financial advisers.
b- Regulatory bodies.
c- Stock markets.
d- Suppliers.
3- A primary objective of external financial reporting is:
a- Direct measurement of the value of a business
enterprise.
b- Provision of information that is useful to present and
potential investors, creditors, and others in making
rational financial decisions regarding the enterprise.
c- Establishment of rules for accruing liabilities.
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d- Direct measurement of the enterprises stock price.
4- Notes to financial statements are beneficial in meeting
the disclosure requirement of financial reporting. The notes
should not be used to:
a- Describe significant accounting policies.
b- Describe deprecation methods employed by the
company.
c- Describe principles and methods peculiar to the
industry in which the company operates, when these
principles and methods are predominantly followed in
that industry.
d- Correct an improper presentation in the financial
statements.
5- Which of the following is not a need of financial
statement users?
a- Financial advisers and analysts need financial statements
to help investors evaluate particular investment.
b- Stock exchanges need financial statements to set a firms
stock price.
c- Regulatory agencies need financial statements to
evaluate price changes for regulated industries.
d- Employees need financial information to negotiate wages
and fringe benefits.
6- Which financial statement should ABC. Co primarily uses
to assess the amounts, timing, and uncertainty of future
cash flows??
a- Income statement.
b- Statement of retained earnings.
c- Statement of cash flows.
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d- Balance sheet.
1.4 Statement of Financial Position (Balance Sheet):
7- The primary purpose of the statement of financial
position is to reflect:
a- The fair value of the firms assets at some moment in
time.
b- The status of the firms assets in case of forced
liquidation of the firm.
c- The success of a companys operation for a given amount
of time.
d- Items of value, debt and net worth.
8- Prepaid expenses are valued on the statement of financial
position at the:
a- Cost to acquire the asset.
b- Face amount collectible at maturity.
c- Cost to acquire minus accumulated amortization.
d- Cost less expired or used portion.
9- A statement of financial position allows investors to
assess all of the following except the:
a- Efficiency with which enterprise assets are used.
b- Liquidity and financial flexibility of the enterprise.
c- Capital structure of the enterprise.
d- Net realizable value of enterprise assets.
10- The accounting equation (assets- liabilities= equity)
reflect the:
a- Entity point of view.
b- Fund theory.
c- Proprietary point of view.
d- Enterprise theory.
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11- Abernathy Corporation uses a calendar year for
financial and tax reporting purposes and has $100 million of
mortgage bonds due on January 15, year2. By January 10,
year2m Abernathy intends to refinance and has entered into
a financing agreement that clearly demonstrates its ability
to consummate the refinancing. This debt is to be:
a- Classified as a current liability on the statement of
financial position at December 31, year 1.
b- Classified as a long- term liability on the statement of
financial position at December 31, year1.
c- Retired as of December 31, year 1.
d- Considered off- balance sheet debt.
1.5 Statement of Income and Statement of Retained
Earnings:
12- An income statement for a business prepared under the
current operating performance concept would include only
the recurring earnings from its normal operations and:
a- No other items.
b- Any extraordinary items.
c- Any prior- period adjustments.
d- Any gain or losses from extinguishment of debt.
13- In a multiple- step income statement for a retail
company. All of the following are included in the operating
section except:
a- Sales.
b- Cost of goods sold.
c- Dividend revenue.
d- Administrative and selling expenses.
14- When reporting extraordinary items,
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a- Each item (net of tax) is presented on the face of the
income statement separately as a component of net income
for the period.
b- Each item is presented exclusive of any related income
tax.
c- Each item is presented as an unusual item within income
from continuing operations.
d- All extraordinary gains or losses that occur in a period
are summarized as total gains and total extraordinary gain
or loss.
15- Which one of the following items is included in the
determination of income from continuing operations??
a- Discontinued operations.
b- Extraordinary loss.
c- Cumulative effect of a change in an accounting principle.
d- Unusual loss from a write down of inventory.
1.6 Statement of Cash Flows- Contents:
16- When preparing the Statement of cash flows, companies
are required to report separately as operating cash flows all
of the following except:
a- Interest received on investments in bonds.
b- Interest paid on the companys bonds.
c- Cash collected from customers.
d- Cash dividends paid on the companys stock.
17- A statement of cash flows is intended to help users of
financial statements:
a- Evaluate a firms liquidity, solvency, and financial
flexibility.
b- Evaluate a firms economic resources and obligations.
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c- Determine a firms components of income from
operations.
d- Determine whether insiders have sold or purchased the
firms stock.
18- Which of the following items is specifically included in
the body of a statement of cash flows??
a- Operating and non-operating cash flow information.
b- Conversion of debt to equity.
c- Acquiring an asset through a capital lease.
d- Purchasing a building by giving a mortgage to the seller.
19- Depreciation expense is added to net income under the
indirect method of preparing statement cash flows in order
to:
a- Report all assets at gross carrying amount.
b- Ensure depreciation has been properly reported.
c- Reverse noncash charges deducted from net income.
d- Calculate net carrying amount.
20- All of the following should be classified under the
operating section in a statement of cash flows except a:
a- Decrease in inventory.
b- Depreciation expense.
c- Decrease in prepaid insurance.
d- Purchase of land and building in exchange for a long-
term note.
1.7- Statement of Cash Flows- Calculations:
21- The net income for Cypress, inc, was 3,000,000$ for the
year ended December 31.
Additional information is as follows:
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Depreciation on fixed assets 1,500,000
Gain from cash sale of land 200,000
Increase in accounts payable 300,000
Dividends paid on preferred stock 400,000
The net cash provided by operating activities in the
statement of cash flows for the year ended December 31
should be:
a- $4,200,000.
b- $4,500,000.
c- $4,600,000.
d- $4,800,000.
Questions 22-24 on the following information:
Royce Company had the following transactions during the
fiscal year ended December 31. Year2:
Accounts receivable decreased from $115,000 on
December 31, Year1, to $100,000 on December 31, Year 2.
Royces board of directors declared dividends on
December 31, Year 2, of $.05 per share on the 2.8 million
shares outstanding, payable to shareholders of record on
January 31, Year3. The company didnt declare or pay
dividends for fiscal Year1.
Sold a truck with a net carrying amount of 7,000$ for
$5,000 cash, reporting a loss of $2,000.
Paid interest to bondholders of $780,000.
The cash balance was $106,000 on December 31, year1,
and $284,000 on December 31, Year2.
22- Royce Company uses the direct method to prepare its
statement of cash flows at December 31, Year2. The interest
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paid to bondholders is reported in the:
a- Financing section, as a use or outflow of cash.
b- Operating section, as a use or outflow of cash.
c- Investing section, as a use or outflow of cash.
d- Debt section, as a use or outflow of cash.
23- Royce Company uses the indirect method to prepare its
Year 2 statement of cash flows. It reports a (n):
a- Source or inflow of funds of $5,000 from the sale of the
truck in the financing section.
b- Use of outflow of funds of $140,000 in the financing
section, representing dividends.
c- Deduction of $ 15,000 in the operating section,
representing the decrease in year- end accounts
receivable.
d- Addition of $2,000 in the operating section for the $2,000
loss on the sale of the truck.
24- The total of cash provided (used) by operating activities
plus cash provided by investing activities plus cash provided
by financing activities is:
a- Cash provided of $ 284,000.
b- Cash provided of $178,000.
c- Cash used of $582,000.
d- Equal to net income reported for fiscal year ended
December 31, Year2.
25- The following information was taken from the
accounting records of Oak Corporation for the year ended
December 31:
Proceeds from issuance of preferred stock F $4,000,000
Dividends paid on preferred stock F 400,000
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Bonds payable converted to common stock 2,000,000
Payment for purchase of machinery 500,000
Proceeds from sale of plant building 1,200,000
2% stock dividend on common stock 300,000
Gain on sale of plant building 200,000
The net cash flows from investing and financing activities
that should be presented on Oaks statement of cash flows
for the year ended December 31 are, respectively:
a- $700,000 and 3,600,000.
b- $700,000 and 3,900,000.
c- $900,000 and 3,900,000.
d- $900,000 and 3,600,000.
1.8 Common Size Financial Statements:
26- In financial statement analysis, expressing all financial
statement items as a percentage of base- year amounts is
called:
a- Horizontal common- size analysis.
b- Vertical common- size analysis.
c- Trend analysis.
d- Ratio analysis.
27- On a common- size balance sheet, what would represent
100%??
a- Total current assets.
b- Total assets.
c- Total liabilities.
d- Total stockholders equity.
Because Sky is your limit