1. What information can be found on a statement of stockholders' equity?

a. A reconciliation of the cash account and the retained earnings account.

b. A reconciliation of the beginning and ending balances of all accounts that appear in the stockholders' equity section of the balance sheet.

c. A reconciliation of the operating, investing and financing activities of a firm.

d. A reconciliation of net profit or loss and the cash account.

2. What item is not included in the notes to the financial statements?

a. Details about inventory and property, plant and equipment.

b. Information about major acquisitions or divestitutures.

c. The management discussion and analysis.

d. A summary of the firm's accounting policies.

3. What type of audit report indicates that the financial statements have not been presented fairly?

a. A disclaimer of opinion.

b. An unqualified report.

c. A qualified report.

d. An adverse opinion.

4. What type of audit report indicates that the financial statements have been presented fairly?

a. An unqualified report.

b. A disclaimer of opinion.

c. A qualified report.

d. An adverse opinion.

5. What does Section 404 of the Sarbanes-Oxley Act of 2002 require?

a. The external auditors must that adequate internal control structure for the firm being audited.

b. The external auditors must approve of all internal auditors hired by a firm.

c. The inclusion of an internal control report in the annual report.

d. The external auditors need to perform internal audit services.

6. Why does the management discussion and analysis help the analyst?

a. It contains information that cannot be found in the financial data.

b. It provides predictions of all future financial statement numbers.

c. It outlines the accounting choices made by the firm.

d. It explains the market valuation of the firm's stock.

7. How are marketable securities valued on the balance sheet?

a. Historical cost.

b. At cost or fair value depending on how the securities are classified.

c. Market value.

d. At fair value with the difference between cost and fair value reported as revenue.

8. What does the term "net realizable value" mean with regard to the accounts receivable account?

a. The gross amounts owed by customers for credit purchases.

b. Total accounts receivable plus an amount estimated for bad debts.

c. The allowance for doubtful accounts less bad debt expense.

d. Actual amounts of accounts receivable less an allowance for doubtful accounts.

9. Which of the following items would not be considered when analyzing accounts receivable and allowance for doubtful accounts?

a. The relationship among changes in sales, accounts receivable and the allowance for doubtful accounts.

b. A comparison of actual write-offs relative to amounts recognized as bad debts.

c. The relationship between accounts receivable, inventory , and accounts payable.

d. An analysis of the "Valuation and Qualifying Accounts" schedule required in the Form 10-K.

10. The inventory of a retail company is comparable to which type of inventory of a manufacturing company?

a. Finished goods.

b. Work in process.

c. Supplies.

d. Raw materials.

11. Which type of firm would carry little or no inventory?

a. A manufacturing firm.

b. A retail firm.

c. A service firm.

d. A wholesale firm.

12. If a company chooses the LIFO method of inventory valuation, which inventory will appear as ending inventory on the balance sheet?

a. The last inventory purchased.

b. The first inventory purchased.

c. An average of all inventory purchased.

d. The actual inventory which has not been sold.

13. Which of the following statements is false?

a. Goodwill arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

b. Goodwill should be depreciated.

c. Goodwill must be evaluated annually to determine if there has been a loss of value.

d. If the carrying value of goodwill exceeds the fair value, the excess book value must be written off as an impairment expense.

14. Which of the following would cause the recognition of a liability?

a. Credit extended by suppliers.

b. Receipt of cash in advance for services.

c. Recognition of expense prior to the actual payment of cash.

d. All of the above.

15. Which items would be classified as liabilities?

a. Accounts payable, unearned revenue, pension liabilities.

b. Common stock, retained earnings, bonds payable.

c. Commitments and contingencies, additional paid-in capital, notes payable.

d. Deferred taxes, accrued expenses, treasury stock.

16. What causes the creation of a deferred tax account on the balance sheet?

a. Permanent differences in income tax accounting.

b. The use of the straight-line method of depreciation for both reporting and tax purposes.

c. Temporary differences in the recognition of revenue and expense for taxable income relative to reported income.

d. Municipal bond revenue and life insurance premiums on officers.

17. Which statement best describes the retained earnings account?

a. The retained earnings account is equal to the cash account less dividends paid.

b. Retained earnings are funds a company has chosen to reinvest in the operations of a business rather than pay out to stockholders in dividends.

c. Retained earnings represent unused cash of the firm.

d. The retained earnings account is the measurement of all distributed earnings.

18. Which item would be included in the account "Accumulated other comprehensive income (expense)"?

a. Treasury stock.

b. Preferred stock.

c. Foreign currency translation adjustments.

d. Additional paid-in capital.

19. Which of the following is not an acceptable method to report total comprehensive income?

a. On the face of the income statement.

b. In a separate statement of comprehensive income.

c. In the equity section of the balance sheet.

d. In the statement of stockholders' equity.

20. Why is the common-size income statement valuable to the analyst?

a. The common-size income statement shows the relative magnitude of revenues and expenses to total assets.

b. The common-size income statement allows the analyst to compare the firm to itself from year-to-year, but not to its competitors.

c. The common-size income statement shows the relative magnitude of revenues and expenses relative to profits.

d. The common-size income statement shows the relative magnitude of expenses relative to net sales.

21. What could be the cause of an increase in a firm's sales number?

a. The firm has decreased prices.

b. Fewer units of product have been sold.

c. The firm has increased prices and volume of sales.

d. The firm has decreased prices and volume of sales.

22. Which of the following statements is true?

a. Only service companies report both cost of goods sold and gross profit.

b. Cost of goods sold is the largest expense item for many firms.

c. Cost of goods sold is not affected by the choice of inventory valuation method.

d. Cost of goods sold equals gross profit.

23. Of what value is the calculation of gross profit margin?

a. The gross profit margin helps the analyst assess the capital structure of the firm.

b. The gross profit margin allows the analyst to determine if the firm has been affected by inflation.

c. The gross profit margin indicates the profitability of a firm after considering all operating expenses.

d. The gross profit margin is the first step of profit measurement indicating how much profit the firm generates after deducting cost of goods sold.

24. When will volume changes cause volatility in the gross profit margin?

a. If cost of goods sold includes fixed costs which do not vary proportionately with volume changes.

b. In industries with little capital.

c. In industries having no fixed costs.

d. If cost of goods sold includes costs that vary proportionately with volume changes.

25. How should gross profit margin be analyzed for firms having more than one revenue source?

a. The overall gross profit margin should be calculated for all revenue sources.

b. Gross profit margin cannot be analyzed if a firm has multiple revenue sources.

c. A separate gross profit margin for each revenue source should be calculated.

d. The gross profit margins from each revenue source should be calculated and then averaged.

26. Which items below would be classified as operating expenses?

a. Depreciation, capital leases, operating profit.

b. Interest expense, interest income, rent expense.

c. Accounts payable, lease payments, depreciation.

d. Advertising, selling and administrative, repairs and maintenance.

27. Which of the following statements is false?

a. It is important to analyze operating expenses over which management exercises discretion and that have considerable impact on the firm's profitability.

b. Impairment charges do not need to be analyzed since they are generally a non-recurring expense.

c. Operating expenses should be tracked in terms of trends, absolute amounts, relationship to sales, and relationship to industry competitors.

d. Operating expenses can be easily analyzed by preparing a common-size income statement.

28. What is another term frequently used when referring to operating profit?

a. Earnings before interest and taxes (EBIT).

b. Earnings before interest, taxes, depreciation and amortization (EBITDA).

c. Net profit.

d. Earnings before interest (EBI).

29. Which of the items below would be analyzed separate from operating profit?

a. Salaries, interest expense, equity losses.

b. Equity earnings, discontinued operations, interest income.

c. Research and development, dividend income, interest expense.

d. Advertising, cost of goods sold, selling and administrative expenses.

30. Which of the following statements is true?

a. Equity earnings is an internal source of cash.

b. Equity earnings are recorded when investment ownership is over 50%.

c. Equity earnings may never result in the actual receipt of cash.

d. Equity earnings are recorded when investment ownership is 100%.

31. How is it possible for a U.S. firm to have an effective tax rate that is less than the U.S. federal statutory tax rate?

a. The firm has expenses that are not deductible for tax purposes.

b. Tax rates in foreign countries where the firm operates are higher.

c. Tax rates in foreign countries where the firm operates are lower.

d. It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.

32. How is a firm's average income tax rate calculated?

a. Income taxes divided by earnings before income taxes.

b. Income taxes divided by net income.

c. Income taxes divided by sales.

d. Income taxes divided by gross profit.

33. What is the required reporting for discontinued operations?

a. The results of discontinued operations should be reported as an extraordinary item.

b. The gain or loss on the disposal should be reported in comprehensive income.

c. The operating results of discontinued operations should be reported as part of continuing operations and any gain or loss on disposal should be disclosed separately from continuing operations.

d. The operating results of discontinued operations should be reported separately from continuing operations and any gain or loss on disposal should be also be disclosed separately from continuing operations.