Multiple Choice Question
1. Which of the following is not one of the four basic financial statements?
a. Balance sheet
b. Audit report
c. Income statement
d. Statement of cash flows
2. As stated in the audit report, or Report of Independent Accountants, the primary responsibility for a company’s financial statements lies with
a. The owners of the company.
b. Independent financial analysts.
c. The auditors.
d. The company’s management.
3. Which of the following is true?
a. FASB creates SEC.
b. GAAP creates FASB.
c. SEC creates AICPA.
d. FASB creates GAAP.
4. Which of the following regarding retained earnings is false?
a. Retained earnings is increased by net income and decreased by a net loss.
b. Retained earnings is a component of stockholders’ equity on the balance sheet.
c. Retained earnings is an asset on the balance sheet.
d. Retained earnings represents earnings not distributed to stockholders in the form of dividends.
5. Which of the following is not one of the four items required to be shown in the heading of a financial statement?
a. The financial statement preparer’s name.
b. The title of the financial statement.
c. The unit of measure in the financial statement.
d. The name of the business entity.
6. Which of the following statements regarding the statement of cash flows is true?
a. The statement of cash flows separates cash inflows and outflows into three major categories: operations, investing, and financing.
b. The ending cash balance shown on the statement of cash flows must agree with the amount shown on the balance sheet for the same fiscal period.
c. The total increase or decrease in cash shown on the statement of cash flows must agree with the “bottom line” (net income or net loss) reported on the income statement.
d. “a” and “b.”
e. All of the above.
7. Which of the following is not a typical note included in an annual report?
a. A note describing the auditor’s opinion of the management’s past and future financial planning for the business.
b. A note providing more detail about a specific item shown in the financial statements.
c. A note describing the accounting rules applied in the financial statements.
d. A note describing financial disclosures about items not appearing in the financial statements.
8. Which of the following is true regarding the income statement?
a. The income statement is sometimes called the statement of operations.
b. The income statement reports revenues, expenses, and liabilities.
c. The income statement reports only revenue for which cash was received at the point of sale.
d. The income statement reports the financial position of a business at a particular point in time.
9. Which of the following is false regarding the balance sheet?
a. The accounts shown on a balance sheet represent the basic accounting equation for a particular business entity.
b. The retained earnings balance shown on the balance sheet must agree with the ending retained earnings balance shown on the statement of retained earnings.
c. The balance sheet reports the changes in specific account balances over a period of time.
d. The balance sheet reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time.
10. Which of the following regarding GAAP is true?
a. U.S. GAAP is the body of accounting knowledge followed by all countries in the world.
b. Changes in GAAP can affect the interests of managers and stockholders.
c. GAAP is the abbreviation for generally accepted auditing procedures.
d. Changes to GAAP must be approved by the Senate Finance Committee.