MCQs > Finance & Management > Financial Statements MCQs > Basic Financial Statements MCQs

Basic Financial Statements MCQ

1. Property, plant, and equipment are categorized as ________.

Answer

Correct Answer: Fixed assets

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2. Which of the following transactions does NOT result in an inflow of cash?

Answer

Correct Answer: Acquisition of additional equipment

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3. Which of the following ratios measures how many times Accounts Receivable is turned over during each period?

Answer

Correct Answer: Accounts Receivable Turnover Ratio

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4. ____________ is/are the excess of expenses over revenue for a given period.

Answer

Correct Answer: Net loss

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5. The ________________ generally includes cash, marketable securities, and accounts receivable in its numerator.

Answer

Correct Answer: Quick Ratio

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6. Assume that the debt-equity ratio of XYZ Company is .5 to 1. If the company issued a long-term note in the purchase of some land, what effect would this transaction have on the debt-equity ratio?

Answer

Correct Answer: It would increase the debt-equity ratio.

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7. Which of the following is NOT used to assess short-term liquidity risk?

Answer

Correct Answer: Accounts Receivable Turnover

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8. Assume that the current ratio of XYZ Company is 2.5:1. What effect would an equal dollar increase in current assets and current liabilities have on the current ratio?

Answer

Correct Answer: It would decrease the current ratio.

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9. The _____________ states that if bond indentures require periodic repayments of principal on long-term liabilities, the denominator of the interest coverage ratio might include such repayments.

Answer

Correct Answer: Fixed Charges Coverage Ratio

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10. Which of the following would NOT be used to evaluate a firm's operating cycle?

Answer

Correct Answer: Current Ratio

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11. In computing the rate of return on assets, interest expense net of income tax savings is added to net income. Assume that XYZ Company has interest expense of $20 million and net income of $50 million. Assume that the income tax rate is 40 percent. In computing the rate of return on assets, what would the numerator be?

Answer

Correct Answer: $62 million

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12. Which of the following is NOT a current liability?

Answer

Correct Answer: Mortgage Payable

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13. The _______________is supposed to indicate the ability of the firm to meet its current obligations.

Answer

Correct Answer: Current Ratio

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14. The _______________ is used to indicate the relative protection of bondholders and to assess the probability of a firm's failing to meet required interest payments.

Answer

Correct Answer: Interest Coverage Ratio

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15. Which of the following ratios uses sales in its numerator?

Answer

Correct Answer: Both a & c

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16. Revenues are a measure of the inflows of assets (or reductions in liabilities) from selling goods and providing services to customers. Which of the following is NOT a revenue transaction?

Answer

Correct Answer: Borrowing money from a local bank to be used in the business

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17. Which of the following is NOT a measure of profitability?

Answer

Correct Answer: Accounts Payable Turnover Ratio

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18. Financial statements that are prepared using a particular set of assumptions are called ___________________.

Answer

Correct Answer: Pro-Forma Financial Statements

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19. Outflows of assets used up in generating revenue are called ______________.

Answer

Correct Answer: Expenses

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20. The ______________ is the sequence of activities in which inventory is purchased on account from suppliers, inventory is sold on account to customers, customers pay the amounts due, and suppliers are paid the amounts due to them.

Answer

Correct Answer: Operating Cycle

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21. Financial leverage can increase the return to common shareholders as long as ______________.

Answer

Correct Answer: the rate of return earned on assets exceeds the rate paid for the capital used to acquire those assets

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22. Which of the following ratios measures the firm's performance in generating earnings that are assignable to the common shareholders' equity?

Answer

Correct Answer: Rate of Return on Common Shareholders' Equity

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23. Which of the following would NOT appear on an Income Statement?

Answer

Correct Answer: Salaries Payable

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24. The _______________ represent/s the earnings, or profits, in excess of dividends distributed to shareholders that have been realized by the firm since its formation.

Answer

Correct Answer: Retained Earnings

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25. The _____________ considers the availability of liquid assets to cover various levels of debt. For a financially healthy firm, the ratio should be 20 percent or more.

Answer

Correct Answer: Cash Flow from Operations to Total Liabilities Ratio

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26. XYZ Company's retained earnings increased by $100,000 during the year. Also during the year, dividends totaling $22,500 were declared and paid to shareholders. What was XYZ Company's net income for the year?

Answer

Correct Answer: $122,500

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27. Which of the following ratios would probably NOT be used to analyze the Total Assets Turnover Ratio?

Answer

Correct Answer: Long-Term Debt Ratio

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28. The _______________ is the financial statement that presents the results of earnings activity over time.

Answer

Correct Answer: Income Statement

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29. In computing the rate of return on common shareholders' equity, do dividends on preferred stock have to be added to net income?

Answer

Correct Answer: No

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30. In the _____________, earnings per share amount are compared with the market price of the stock.

Answer

Correct Answer: Pricing Earnings Ratio

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31. Which of the following transactions does NOT result in an outflow of cash?

Answer

Correct Answer: Issuance of long-term debt

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32. Which of the following ratios provides a measure of the sales generated for each dollar invested in assets?

Answer

Correct Answer: Total Assets Turnover Ratio

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33. The ________________ indicates the number of times that the average inventory has been sold during a particular period.

Answer

Correct Answer: Inventory Turnover Ratio

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34. A creditor's claim on the resources of the company is called ____________.

Answer

Correct Answer: a liability

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35. During the year, XYZ Company issued additional common stock. This transaction is an example of which of the following?

Answer

Correct Answer: A financing activity

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36. Which of the following is NOT a current asset?

Answer

Correct Answer: Accounts Receivable

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37. Economic resources that have the potential or ability to provide future services or benefits to the firm are called _________________.

Answer

Correct Answer: assets

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38. A __________________ involves comparing the changes in a firm's ratios over a multiple-year period.

Answer

Correct Answer: Time-Series Analysis

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39. XYZ Company reports total assets and total shareholders' eQuity of $375,000 and $220,000, respectively, at the end of its first year of business. The company reported earnings of $100,000 and distributed $40,000 in dividends during its first year. Also during the year, the company issued additional shares of stock for $75,000. What are the firm's liabilities at year end and the firm's contributed capital at the beginning of the year, respectively?

Answer

Correct Answer: $155,000 and $85,000

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40. Which of the following organizations, despite the fact that it has no legal authority, has played a role in developing acceptable accounting principles worldwide?

Answer

Correct Answer: IASC

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41. Which of the following terms refers to the practice of using debt and preferred stock for financing in order to increase the return to the common shareholders

Answer

Correct Answer: Financial Leverage

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42. XYZ Company sells on credit with terms of Net 30 days. If the company's credit policy and collection activity are working efficiently, how many times should the company's Accounts Receivable turn in a year?

Answer

Correct Answer: 12 times

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43. The primary source of cash for most firms should be _______________.

Answer

Correct Answer: operating activities

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44. The ______________ is a private sector group that has been given the responsibility of establishing acceptable accounting standards in the United States.

Answer

Correct Answer: FASB

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45. Which of the following ratios assesses the firm's operating performance independently of financing decisions?

Answer

Correct Answer: Answers: Rate of Return on Assets

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46. The ______________ is computed by dividing cash flow from operations by average current liabilities.

Answer

Correct Answer: Cash Flow from Operations to Current Liabilities Ratio

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47. A ______________ involves comparing a given firm's ratios with those of other firms for a particular period.

Answer

Correct Answer: Cross-Section Analysis

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48. Which of the following approaches does the Financial Accounting Standards Board follow in establishing generally accepted accounting principles?

Answer

Correct Answer: Both b and c

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49. The ______________ is a useful measure for assessing a firm's performance in using assets to generate earnings.

Answer

Correct Answer: Rate of Return on Assets

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50. Which of the following terms refers to the "nearness of cash" of a firm

Answer

Correct Answer: Liquidity

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51. In computing the quick ratio, which of the following items is customarily excluded from the numerator?

Answer

Correct Answer: Inventory

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52. The ________________ indicates the length of the period between the purchase of inventory on account and the payment of cash to suppliers.

Answer

Correct Answer: Accounts Payable Turnover Ratio

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53. Which of the following ratios indicates the proportion of a firm's long term capital that is provided by creditors

Answer

Correct Answer: Long-Term Debt Ratio

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54. The ____________ is an agency of the federal government and has the legal authority to set acceptable accounting standards in the United States.

Answer

Correct Answer: SEC

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55. Which of the following would not appear on a Balance Sheet?

Answer

Correct Answer: Cost of Goods Sold

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56. The ____________ is the financial statement that presents an overall view of a company's financial position as of a given date.

Answer

Correct Answer: Balance Sheet

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57. Which of the following equations is incorrect?

Answer

Correct Answer: All of the above equations are correct.

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58. Which of the following does NOT describe an expense?

Answer

Correct Answer: Dividends paid to shareholders

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59. When an auditor feels that an opinion cannot be expressed as to the fairness of a company's financial statements as a whole, he issues a/an ________________ .

Answer

Correct Answer: unqualified opinion

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60. Which of the following ratios would NOT be used to assess a firm's long-term liquidity risk?

Answer

Correct Answer: Current Ratio

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61. Which of the following transactions does NOT result in an inflow of cash?

Answer

Correct Answer: Distribution of dividends to shareholders

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62. If a company's rate of return on assets is 20 percent and the profit margin percentage is 5 percent, the company's total assets turnover must be which of the following?

Answer

Correct Answer: 4

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63. The ______________ is computed by dividing net income attributable to common stock by the average number of common shares outstanding during the period.

Answer

Correct Answer: Earnings Per Share

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64. Comparisons of a given firm's ratios with those of other firms for a particular period is referred to as ____________________.

Answer

Correct Answer: Cross-Section Analysis

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65. The _______________ provides a measure of the sales generated for each dollar invested in fixed assets.

Answer

Correct Answer: Fixed Asset Turnover Ratio

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66. The _______________ is a measure of a firm's ability to control the level of costs, or expenses, relative to sales.

Answer

Correct Answer: Profit Margin Ratio

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67. Which of the following financial statements provides information about inflows and outflows of cash?

Answer

Correct Answer: Statement of Cash Flows

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68. The _______________ reports the net cash flows relating to operating, investing, and financing activities for a particular period of time.

Answer

Correct Answer: Cash Flow Statement

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69. Which of the following financial statements provides information about economic resources and claims on those resources?

Answer

Correct Answer: Balance Sheet

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70. Where should purchased machinery appear on the statement of cash flows?

Answer

Correct Answer: Under cash flows from investing activities

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71. Where would an entry be made for the purchase of delivered goods or completed services?

Answer

Correct Answer: Under liabilities as accounts payable

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72. True or false? A declared dividend reduces shareholders’ equity.

Answer

Correct Answer: True

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73. On a balance sheet, which of the following is not subject to depreciation or amortization?

Answer

Correct Answer: land

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74. Which four components are contained in a financial statement?

Answer

Correct Answer: Balance sheet, income statement, statement of retained earnings, statement of cash flow

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75. Which of the following is NOT a possible indication that a lease should be considered a Capital lease?

Answer

Correct Answer: The lease term encompasses half of the useful life of the asset

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76. Which of the following R&D costs should NOT be expensed?

Answer

Correct Answer: Reimbursed costs

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77. Accumulated Depreciation falls under which of the following categories?

Answer

Correct Answer: Contra-asset

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78. A company lost a building with a book value of $65,000 and fair value of $80,000 to a flood. $20,000 was paid for removal and clean-up. What is the loss on this involuntary conversion?

Answer

Correct Answer: $85,000

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79. Which of the following journals entries correctly records the disposal of a fully depreciated piece of machinery from which no proceeds were received?

Answer

Correct Answer: Debit Accumulated Depreciation Credit Machinery & Equipment

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80. True or false? Freight-out is classified as an operating expense.

Answer

Correct Answer: True

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81. What does a company's Days Sales Outstanding (DSO) reveal?

Answer

Correct Answer: The average number of days it takes a company to convert its account receivables to cash.

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82. According to SOX, an audit committee must have AT LEAST how many members?

Answer

Correct Answer: 3

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83. How should a customer overpayment be classified in the financial statements?

Answer

Correct Answer: Liability

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84. A deferred tax asset would result from which of the following situations:

Answer

Correct Answer: A firm overpaid taxes in the current year

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85. An employer grants each of its two employees 10 sick days to be used throughout the year or carried into the next year. Both employees are paid $200 per day. If neither employee used any sick days in Year 1, what amount should be accrued as compensated absence liability at the end of the year?

Answer

Correct Answer: 4,000

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86. A US company invoiced a German company in USD in January and received payment in February. The Euro weakened from January to February. In which section of the financial statements will the US company record the foreign currency gain?

Answer

Correct Answer: No gain will be recorded in the financial statements

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87. Which of the following is a contra-asset?

Answer

Correct Answer: Bad Debt Reserve

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88. According to the Financial Accounting Standards Board (FASB), what are UTPs?

Answer

Correct Answer: Uncertain Tax Positions

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89. If a share of common stock with a par value of $.01 is issued for $5 the journal entry to record the transaction would be:

Answer

Correct Answer: Debit Cash $5 Credit Common Stock $.01 Credit Additional-paid-in-capital $4.99

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90. Which basic accounting principle directs accountants to disclose anticipated losses but not anticipated gains?

Answer

Correct Answer: Conservatism

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91. Which components are necessary to compute a company's break-even point?

Answer

Correct Answer: Fixed Costs, Variable Costs, Sales Price

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92. How is the acid-test ratio calculated?

Answer

Correct Answer: (Cash + AR + Short Term Investments) / Current Liabilities

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93. On a classified Balance Sheet, the asset line items appear in which order?

Answer

Correct Answer: Current Assets; Long-term Investments; Property, Plant, and Equipment; Intangible Assets; Other Assets

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94. In which section of cash flow statement ,loss on sale of assets is dealt.

Answer

Correct Answer: Operating section

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95. Which of the following is NOT a potential off-balance-sheet liability?

Answer

Correct Answer: (none of these)

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96. Which of the following activities would be regarded as a financing activity on the Statement of Cash Flows?

Answer

Correct Answer: Dividend distributions

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97. Using the financial statements, how is Free Cash Flow calculated?

Answer

Correct Answer: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditures

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98. What are the two basic formats of the Income Statement?

Answer

Correct Answer: Single-Step and Multi-Step

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99. A financial statement is a smaller piece of a much larger annual document submitted to the Securities Exchange Commission. What is the name of the document?

Answer

Correct Answer: 10K

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100. On which Financial Statement(s) are Discontinued Operations reported?

Answer

Correct Answer: Income Statement

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101. In the DuPont system, what is the Return On Equity equal to?

Answer

Correct Answer: Profit Margin times Total Asset Turnover times Equity Multiplier

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102. True or false? A declared dividend decreases shareholders’ equity.

Answer

Correct Answer: True

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103. Which of the following does NOT increase cash flows?

Answer

Correct Answer: Increase in accounts receivable

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104. Two figures must be transferred to the balance sheet before the final result can be calculated. What are they, and where are they transferred from?

Answer

Correct Answer: Retained earnings from the statement of retained earnings, and cash from the statement of cash flows.

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105. Which entity is primarily responsible for setting accounting standards?

Answer

Correct Answer: the FASB

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106. Why would a creditor heavily scrutinize a company's statement of retained earnings?

Answer

Correct Answer: Every dollar that is paid to the stockholders as dividends is a dollar not available to pay back its debt.

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107. What does a company’s debt-to-equity ratio describe?

Answer

Correct Answer: The nature of the company’s capitalization

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108. When you have finished calculating your statement of cash flows, where is the final result transferred to?

Answer

Correct Answer: The balance sheet.

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109. Which value appears on all three components of financial statements?

Answer

Correct Answer: Net profits

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110. What is the final line of the statement of operations?

Answer

Correct Answer: Net after-tax profits

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111. Gross profit equals

Answer

Correct Answer: Net revenues minus cost of sales

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112. Where would an entry be made for the purchase of goods or services without a contract or note?

Answer

Correct Answer: Under liabilities as accounts payable

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113. Which of the following is not an element included in the statement of retained earnings?

Answer

Correct Answer: Stockholder equity

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114. Which items are traditionally disclosed separately on an Income Statement?

Answer

Correct Answer: Extraordinary items, changes in accounting principles and discontinued operations

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115. Within the context of stockholders equity, what are cash and other assets considered?

Answer

Correct Answer: Contributed capital

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116. Which of the following is NOT one of the four GAAP principles?

Answer

Correct Answer: Market value principle

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117. The Dividend Payout Ratio is calculated by dividing total dividends by:

Answer

Correct Answer: Net Income

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118. What does it mean when a company's change in cash is negative?

Answer

Correct Answer: The company did not make enough money to repay creditors, pay dividends for the next year.

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119. Which of the following is NOT a method of calculating depreciation?

Answer

Correct Answer: Mechanical valuation method

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120. Cost of Goods Sold is calculated using which of the following?

Answer

Correct Answer: Beginning Inventory + Cost of Goods Purchased - Ending Inventory

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121. Analysis of risk has what intention?

Answer

Correct Answer: Revealing a company's credit risk

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122. Which of the following would be reported as a cash inflow from investing activities?

Answer

Correct Answer: Proceeds from selling investments in the equity securities of other companies

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123. What is the overall objective of using ratio analysis?

Answer

Correct Answer: Evaluate how well the business is using its resources

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124. How will a business acquisition typically impact a company’s cash flow?

Answer

Correct Answer: decrease

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125. Which of the following is NOT a component of the acronym EBITDA?

Answer

Correct Answer: Assets

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126. When profits are reinvested into the business, what are they called?

Answer

Correct Answer: Retained earnings

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127. How do you calculate the Quick Ratio?

Answer

Correct Answer: (Current assets – Inventories) / Current Liabilities

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128. SOX stands for:

Answer

Correct Answer: The Sarbanes-Oxley Act

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129. What is Goodwill?

Answer

Correct Answer: An asset that captures the excess purchase price of an acquired business bought for greater than fair market value.

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130. If you needed to replace machinery at your company, where would you list this on the statement of cash flows?

Answer

Correct Answer: Under cash flows from investing activities

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131. What is ROE, and why is it important?

Answer

Correct Answer: Return on equity; It is important because it tells you the amount of net income returned as a percentage of shareholders equity

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132. Companies report accounts receivable at:

Answer

Correct Answer: Net Realizable Value

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133. Parentheses around a number in financial statements indicates what?

Answer

Correct Answer: The number is a loss or decrease

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134. Income from Operations is equal to Gross Profit less:

Answer

Correct Answer: Operating Expenses

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135. All are Profitability Ratios, except:

Answer

Correct Answer: Current Ratio

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136. When all statements and documents are collated, what activity does it allow investors to partake in?

Answer

Correct Answer: Business valuation

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137. How are retained earnings calculated?

Answer

Correct Answer: Net income minus dividends

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138. What is the first statement to calculate before moving on to the statement of retained earnings?

Answer

Correct Answer: Income statement.

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139. Which component of a financial statement will tell you, ultimately, whether a company has earned or lost money?

Answer

Correct Answer: Income statement

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140. How do you calculate the Current Ratio?

Answer

Correct Answer: Total Current Assets / Total Current Liabilities

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141. True or false? A company can never have negative income tax liabilities.

Answer

Correct Answer: False

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142. What's the difference between a Capital lease and an Operational lease?

Answer

Correct Answer: Capital leases are traditionally used for long-term leases while Operational leases are for short-term leases.

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143. What is the order in which assets are typically listed on the balance sheet?

Answer

Correct Answer: In order of liquidity

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144. Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment are referred to as:

Answer

Correct Answer: Capital Expenditures

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145. What do the footnotes to financial statements typically provide?

Answer

Correct Answer: All of these

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146. What does the statement of retained earnings tell you about a company's position?

Answer

Correct Answer: It tells you how it has been affected by net income and distribution of dividends

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147. What four components are contained in a financial statement?

Answer

Correct Answer: Balance sheet, income statement, statement of retained earnings, statement of cash flow

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148. Current assets are assets that are intended to be converted into cash or consumed within:

Answer

Correct Answer: One year

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149. Is net income equal to the net cash generated by operations? Where is net cash reported?

Answer

Correct Answer: No. Net cash is reported on the cash flow statement.

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150. On a balance sheet, which of the following is subject to depreciation?

Answer

Correct Answer: All long-term assets except for land

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151. What equation is used when calculating the statement of retained earnings?

Answer

Correct Answer: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

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152. What category would cash paid for taxes fall under?

Answer

Correct Answer: Cash flows from operating activities

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153. The income statement is also called what?

Answer

Correct Answer: Statement of earnings

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154. Which corporate officers must certify the accuracy of financial statements?

Answer

Correct Answer: CEO and CFO

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155. What does it mean when a company's stock is volatile?

Answer

Correct Answer: The value of the stock often changes drastically

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156. What happens to retained earnings as dividends are declared?

Answer

Correct Answer: Retained earnings decrease.

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157. Current assets do NOT include which of the following

Answer

Correct Answer: Machinery and equipment

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158. When goods have been sold but not paid for, where are they documented in the balance sheet?

Answer

Correct Answer: As accounts receivable.

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159. When are current liabilities due to be paid?

Answer

Correct Answer: Within the next 12 months

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160. True or False? All expenses required to be paid in the same accounting period.

Answer

Correct Answer: False

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161. What is an example of a liability?

Answer

Correct Answer: A property tax bill

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162. Of the following, which is an item that doesn't belong in the heading of a balance sheet?

Answer

Correct Answer: Address of the business

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163. Almost all financial statements use what form of accounting?

Answer

Correct Answer: Accrual basis accounting

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164. Which of the following is NOT a division of sources and uses of cash flow on the cash flow statement?

Answer

Correct Answer: Material business activities

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165. Which of the following is NOT a primary section of a company’s financial statements?

Answer

Correct Answer: Letter from the CEO

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166. A company’s working capital is defined as

Answer

Correct Answer: Current assets minus current liabilities

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167. What information is found on the Income Statement?

Answer

Correct Answer: Revenues, Expenses, Net Profit or Loss

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168. Which two line items are used to calculate Working Capital?

Answer

Correct Answer: Current Assets and Current Liabilities

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169. What is the basic accounting equation used to calculate the balance sheet?

Answer

Correct Answer: Assets = Liabilities + Stockholders Equity

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170. Which item does not depreciate?

Answer

Correct Answer: Goodwill

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171. True or False? Liabilities and shareholders’ equity must be equal.

Answer

Correct Answer: False

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172. What are retained earnings?

Answer

Correct Answer: Earnings that have been reinvested back into the business

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173. What agency does a publicly traded company file with if they sell stock?

Answer

Correct Answer: The Securities Exchange Commission

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174. On a balance sheet, goodwill is an example of what?

Answer

Correct Answer: Intangible Assets

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175. What should balance on a company’s balance sheet?

Answer

Correct Answer: Total Assets and the sum of Liabilities and Shareholders’ Equity

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176. Which of the following is NOT one of the four basic financial statements?

Answer

Correct Answer: Audit Statement

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177. What is GAAP, and why is it important?

Answer

Correct Answer: Generally Accepted Accounting Principles; It is important because it is responsible for standardizing accounting procedures.

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178. What sources of cash flow are included on the statement of cash flows?

Answer

Correct Answer: Cash flows from operating activities, investing activities, and financing activities

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179. What are revenues?

Answer

Correct Answer: Income from goods or services that have been sold

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180. What is the calculation used on the income statement?

Answer

Correct Answer: Revenues – Expenses = Net Income

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181. What information is found on the Balance Sheet?

Answer

Correct Answer: Assets, Liabilities and Shareholder's Equity

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182. What audience is an annual report addressing?

Answer

Correct Answer: Shareholders

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183. What is another name for the Balance Sheet?

Answer

Correct Answer: Statement of Financial Position

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184. Why would investors have an interest in a company's statement of retained earnings?

Answer

Correct Answer: Investors want to know that a company is reinvesting enough of their earnings to support future growth and pay dividends

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185. How is the return on assets calculated?

Answer

Correct Answer: Net income divided by total assets

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186. What is an accounting entity?

Answer

Correct Answer: A clearly defined unit that must be accounted for separately

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