Multiple Choice Questions $(6-10)$

Financial accounting data has some inherent limitations to investors. Which of the following is a

limitation$?$

I. Not all economic events are easily quantifiable.

II$.$ Many accounting entries rely heavily on estimates.

III. Historical costs do not accurately reflect the true value of firms.

IV$.$ Inflation can distort analysis of accounting data.

A$.$ I, II and III

B$.$ I, III, and IV

C$.$ II$,$ III, and IV

D$.$ I, II$,$ III, and IV

Which of the following is an example of judgments made in the accounting reporting process?

I. Useful life of machinery

II$.$ Allowance for doubtful accounts

III. Obsolescence of assets

IV$.$ Interest payment on bonds

A$.$ I, II$,$ III, and IV

B$.$ I, III, and III

C$.$ II and III

D$.$ I and III Chapter Two $-$ Exercises

Byfort Company reports the following in its financial statements:

${?}^{**}$ All sales are on credit.

How much did the company collect in cash from customers during $2006?$

A$.$ $$445,389$

$$454,611$

C$.$ $$484,289$

D$.$ $$488,900$

The matching principle requires that:

A$.$ revenues earned and expenses incurred in generating those revenues should be reported in

the same income statement.

B$.$ non$-$operating gains and losses should be netted against each other.

C$.$ a proportion of each dollar collected will be assumed to be a recovery of cost$.$

D$.$ assets will be matched to the liabilities incurred to purchase them.

The primary responsibility for fair and accurate financial reporting rests with the:

A$.$ shareholders.

B$.$ SEC.

C$.$ management.

D$.$ auditors. True $/$ False Questions $(1-5)$

External auditors provide "reasonable", as opposed to "absolute" assurance that the financial

statements provide no material misstatement.

True False

Accounting information is "material" if its omission would cause a reasonable person to make a

different decision if the information was included.

True False

Operating income is often referred to as net operating profit before tax.

True False

Operating earnings includes all revenue and expense components that pertain to the company's

operating business, regardless of whether they are recurring or nonrecurring.

True False

Under the fair value model, income is determined by matching costs to recognized revenues,

which have to be realized and earned.

True FalseChapter $2$ Exercises: