Financial Reporting and Analysis

1. Which would be issued by auditors where there is a history of significant losses coupled with uncertain prospects?

A. An "except for" qualification
B. An adverse opinion
C. A disclaimer of opinion
D. An audit warning

2. Which of the following would require the filing of Form 8-K?

I. Major acquisition
II. Audited financial statements
III.Bankruptcy
IV. Change in management control

A. I and III
B. II and IV
C. I, III and IV
D. I, II, III and IV

3. Which of the following is not considered part of GAAP?

A. Statements of Financial Accounting Standards (SFAS)
B. International Accounting Standards (IAS)
C. Accounting Research Bulletins (ARB).
D. Accounting Principles Board Opinions (APB).

4. Which of the following is not considered a monitoring mechanism?

A. The Securities and Exchange Commission (SEC)
B. Top level management
C. The board of director's audit committee
D. The external auditors

5. Which of the following statements about directors of a company is true?

A. Directors are elected by management of a company.
B. Directors only get paid if the company increases its profitability that year.
C. Directors are shareholders' representatives.
D. All directors of a company are senior managers in that company.

6. Which of the following statements about accruals and cash flows is true?

A. All cash flows are value relevant.
B. Cash flows cannot be manipulated.
C. Cash flows are more reliable than accruals.
D. All accrual accounting adjustments are value irrelevant.

7. Which of the following statements about accruals and cash flows is false?

A. Company value can be determined by using accrual accounting numbers.
B. Accrual accounting numbers are subject to accounting distortions.
C. Cash flows are more reliable than accruals.
D. Cash flows cannot be manipulated.

8. The two primary qualities of accounting information to make it useful for decision making are:

A. reliability and comparability.
B. relevance and reliability.
C. materiality and comparability.
D. full disclosure and relevance.

9. Financial accounting data has some inherent limitations. Which of the following are limitations?

I. Not all economic events are easily quantifiable.
II. Many accounting entries rely heavily on estimates.
III. Historical cost can distort statements.
IV. Inflation can distort accounting data.

A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II, III and IV

10. Audit risk represents a danger to users of audited financial statements. The following are attributes pointing to potential areas of vulnerability except

A. company in financial distress requiring financing.
B. management dominated by one or more strong-willed individuals.
C. deterioration in liquidity or solvency.
D. company earning high profits consistently over a number of years.

11. If a company fails to record a material amount of depreciation in a previous year, this is considered:

A. a change in accounting principle.
B. an unusual item.
C. an accounting error.
D. a change in estimate.

12. Which of the following are examples 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, II and III
C. II and III
D. I and III

13. Which of the following would affect the comparability of accounting information for a given company from one accounting period to the next?

I. Change in accounting principles
II. Disposition of segment of business
III.Restructuring expenses
IV. Change in auditors

A. I and II
B. I and III
C. I, II and III
D. I, III and IV

14. Which of the following would affect the comparison of financial statements across two different firms?

I. Different accounting principles
II. Different sizes of the companies
III. Different reporting periods
IV.Different industries

A. I, III and IV
B. I and IV
C. I and II
D. I, II, III and IV

Byfort Company reports the following in its financial statements:

*All sales are on credit.

15. How much did the company collect in cash from debtors during 2006?

A. $445,389K
B. $454,611K
C. $484,289K
D. $488,900K

16. How much sales would have been reported by the company in 2006 if Byfort would have been using cash accounting and not accrual accounting?

A. $445,389K
B. $454,611K
C. $484,289K
D. $488,900K

17. 10-K reports are:

A. the quarterly reports to stockholders.
B. quarterly filings made by a company with the SEC.
C. annual filings made by a company with SEC.
D. filings made by a company with SEC when a company changes auditors.

18. The management of Finner Company believes that "the statement of cash flows is not a very useful statement" and does not include it with the company's financial statements. As a result the auditor's opinion should be:

A. qualified.
B. unqualified.
C. adverse.
D. disclaimed.

19. Which of the following statements is incorrect?

A. Under GAAP, statements are prepared using accrual accounting.
B. Under GAAP, all assets are marked to market each accounting period.
C. Under GAAP, it is necessary to make certain estimates.
D. Annual statements submitted to the SEC (10-K) must be prepared using GAAP.

20. When analyzing financial statements it is important to recognize that accounting distortions can arise. Accounting distortions are those things that cause deviations in accounting information from the underlying economics. Which of the following statements is not correct? Accounting distortions:

A. can arise as management may deliberately manipulate financial statements.
B. arise often through application of (correct) accounting principles.
C. can affect the quality of earnings.
D. arise if the stock market is not efficient.

21. Which of the following is a change in an accounting estimate?

I. A change from straight line depreciation to an accelerated depreciation method.
II. A change in estimated salvage value of depreciable asset.
III. A change in estimated useful life of an asset.
IV. Recording depreciation for the first time on machinery purchased five years ago.

A. I, II, III and IV
B. II, III and IV
C. I, III and IV
D. II and III

22. Which of the following are changes in accounting principle?

I. A change from LIFO to FIFO.
II. A change in estimated salvage value of depreciable asset.
III. A change from an accelerated depreciation method to straight line depreciation.
IV. Recording depreciation for the first time on machinery purchased five years ago.

A. I, II, III and IV
B. I, II and III
C. I, III and IV
D. I and III

23. Which of the following is not a source of industry information?

A. SEC manuals
B. Standard and Poor's
C. Trade journals
D. Robert Morris Associates

24. Which of the following information would not be filed with the SEC by a publicly traded company?

A. 10-K report
B. Prospectus
C. Proxy statement
D. Tax return

25. Accounting Standards are best described as:

A. the result of a political process among groups with diverse interests.
B. presentation standards mandated by the Securities and Exchange Commission.
C. the state-of-the-art presentation of the science of accounting.
D. measuring the quality of safeguarding assets.

26. 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.

27. If a company changes auditors, it is required to file the following with the SEC:

A. 10-K
B. 10-Q
C. 8-K
D. S-1

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

A. board of directors.
B. SEC.
C. management.
D. auditors.

29. Which of the following is incorrect? When using the 10-Q, the analyst should be aware that the usefulness of the quarterly financial statements might be affected by:

A. seasonality.
B. adjustments made in the final quarter of the year.
C. the use of cash accounting.
D. the increased use of estimates.

30. Voluntary disclosure by managers is becoming an increasingly important source of information. Which of the following is least likely to be a reason for this increased disclosure?

A. Protection under Safe Harbor Rules.
B. To manage investors' expectations.
C. To signal information to investors.
D. To respond to increased demands by labor unions.

31. The two secondary qualities of accounting information to make it useful for decision making are:

A. consistency and comparability.
B. relevance and reliability.
C. materiality and comparability.
D. full disclosure and relevance.

32. Economic income measures change in:

A. asset value.
B. liability value.
C. shareholder value.
D. net cash flows.

33. Which one of the following is not an example of a red flag, used to evaluate earnings quality?

A. Qualified audit report
B. Net income this year is higher than net income last year
C. Poor financial performance
D. Frequent or unexplained changes in accounting policies

34. Economic income includes:

A. recurring components only.
B. nonrecurring components only.
C. both recurring and nonrecurring components.
D. neither recurring nor nonrecurring components.

35. For a going concern, company value can be expressed by:

A. dividing permanent income by the cost of capital.
B. multiplying permanent income by the cost of capital.
C. dividing permanent income by the market value per share.
D. multiplying permanent income by the market value per share.

36. Accounting income consists of all the following components except:

A. permanent component.
B. transitory component.
C. value irrelevant component.
D. temporary component.

37. To determine a company's sustainable earning power, an analyst needs to first determine the recurring component of the current period's accounting income by excluding nonrecurring components of accounting income. Such adjusted earnings are often referred to as:

A. core earnings.
B. permanent earnings.
C. basic earnings.
D. operating earnings.

38. SFAS 157 defines fair value as the:

A. market price.
B. exchange price.
C. net asset value.
D. real value.

39. SFAS prescribes that information about the level of inputs used for determining fair values must be reported in the:

A. balance sheet.
B. director's letter.
C. footnotes.
D. MD&A.

40. All of the following are basic approaches to valuation except:

A. market approach.
B. asset approach.
C. income approach.
D. cost approach.