Question 21

Retained Earnings on the Balance sheet represents all net income ever earned by the company less all
dividends the company has ever declared.

Select one:

True

False
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The answer is 'True'.

Question 22
Depreciation is added back to net income as a step in determining cash from operating activities under
the indirect method.

Select one:

True

False
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The answer is 'True'.

Question 23
The appropriate time to recognize revenue is

Select one:

A. defined by GAAP for every situation

B. the same for every industry

C. dependent upon the nature of the business or industry

D. easily defined by the FASB

Feedback
The answer is: dependent upon the nature of the business or industry

Question 24
Both the direct approach and indirect approach will arrive at the same amount for cash flow from
operations.

Select one:

True

False
Feedback
The answer is 'True'.

Question 25
A Parent-Subsidiary relationship between companies develops when one company owns greater than
50% of another company's voting stock.
Select one:

True

False
Feedback
The answer is 'True'.

Question 26
Deferred income taxes often result from temporary timing differences in the recognition of revenue and
expense items for taxable income relative to reported income on financial statements.

Select one:

True

False
Feedback
The answer is 'True'.

Question 27
A company purchases a piece of equipment and plans on depreciating it using straight-line depreciation
for financial statement purposes, and an accelerated method of depreciation for tax purposes. Taking this
into consideration, which of the following is true for the first year of the equipment's depreciation?

Select one:

A. This approach will reduce my net income as reported on the financial statements to investors and
thereby reduce my taxes - a benefit to my investors.

B. Applying the two different depreciation methods above between book accounting and tax accounting

will result in a deferred income tax liability.

C. The above scenario will result in a greater tax bill to me from the IRS

D. Recording the taxes due under the above scenario will require a debit to cash or taxes payable, and a
credit to tax expenses and deferred taxes.

E. None of the above are true.

Feedback
The answer is: Applying the two different depreciation methods above between book accounting and tax
accounting will result in a deferred income tax liability.

Question 28
If I capitalize an item that should have been expensed, my cash flow from operations will be overstated
and my cash flow from investing activities will decrease.

Select one:

True

False
Feedback
The answer is 'True'.
Question 29
The best measure of a firm's sustainable income is

Select one:

A. income from continuing operations.

B. income before extraordinary items.

C. income before extraordinary items and changes in accounting principles.

D. net income.
Feedback
The answer is: income from continuing operations.

Question 30
You just reviewed the cash flow statement for a company for the past several years and you
made the following very general observations about its cash flows from operating activities
(CFO), investing activities (CFI), and financing activities (CFF): The company has weak and
shrinking CFO; it has a positive CFI that has become more significant recently; and its CFF is
negative. Based only on this limited cash flow statement information that you assembled, what
general conclusions can you draw about this company's financial position, dividend policy,
investment opportunities, growth and life cycle stage (start-up, expansion, growth, mature,
decline)?
Overall, this information indicates that the companys financial position is fairly weak.
The company has weak and shrinking CFO which indicates reduced cash generation and companys
business is not growing. Shrinking CFO also indicates that the business may be in the decline life cycle
stage.
The company has a positive CFI that has become more significant recently which indicates that the
company is selling its fixed assets and investments to fund its business operations. Their asset base is
reducing which indicates the company is not finding any good investment opportunities.
The companys CFF is negative which tells us that the company is repaying its long term borrowings and
repaying shareholders through shares repurchases. It also indicates regular dividend pay-out to
shareholders.
Comments
Comment:

Question 31
All of the information needed by professional analysts to give a complete picture of a company is found in
the published financial statements.

Select one:

True

False
Feedback
The answer is 'False'.

Question 32
Current assets are generally listed on the balance sheet in order of their liquidity with the most-liquid of
these assets being listed first and the least liquid being shown last.

Select one:

True

False
Feedback
The answer is 'True'.

Question 33
A firm provides the following information from its Year 3 and Year 4 financials:

How much inventory was purchased during Year 4?

Select one:

A. $130,000

B. $215,000

C. $225,000

D. $235,000
Feedback
The answer is: $235,000

Question 34
A decrease in accounts receivable of $16,000 for the year

Select one:

A. decreases cash flow from operations by $8,000.

B. increases cash flow from operations by $8,000.

C. decreases cash flow from operations by $16,000.

D. increases cash flow from operations by $16,000.

Feedback
The answer is: increases cash flow from operations by $16,000.

Question 35
All financial statements submitted to the SEC including annual (10-K) and quarterly (10-Q) statements
must be audited by an independent, certified public accountant (CPA).

Select one:

True

False
Feedback
The answer is 'False'.

Question 36
The Common Stock account is reported on the balance sheet at the current market price of the stock.

Select one:

True

False
Feedback
The answer is 'False'.

Question 37
When the ownership percentage of stock exceeds 20 percent, GAAP presumes that the investor
company

Select one:

A. has no influence to exert over the investee company.

B. is only investing for a short term trading position.

C. is able to exert influence over the investee company.

D. is trying to take over the investee company.

Feedback
The answer is: is able to exert influence over the investee company.

Question 38
A manufacturing company purchased production line equipment on March 1, 2013. The total price for the
equipment was $60,000. Management believes that the equipment has a useful life of 5 years, and after
use, the equipment will have no residual value. Management estimates that the equipment can produce a
total of 60,000 parts during its useful life. At the end of 2013, the company manufactured 11,500 parts
using the new equipment. How much depreciation expense will the company record for all of 2013 in
conjunction with the use of this equipment if the company decides to depreciate it using the Units-of-
Production method?

Select one:

A. Approximately $14,000

B. $11,50
C. $5,00

D. $5,75

E. The same as applying straight-line depreciation

Feedback
The answer is: $11,50

Question 39
Which of the following statements is ?

Select one:

A. The direct approach and the indirect approach are two alternative methods of presenting cash flows

from investing activities

B. FASB recommends using the direct method of preparing the statement of cash flows while the method
used by the majority of firms is the indirect method

C. The Indirect Method of presenting the Cash Flow Statement is not allowed by the SEC. If companies
show their Cash Flow Statement using this method, they also have to show the Cash Flow Statement
using the Direct Method

D. When it comes to the Financing and Investing Activities sections of the Cash Flow Statement, there is
no difference between the Direct and Indirect Method of Cash Flow Statement reporting
Feedback
The answer is: FASB recommends using the direct method of preparing the statement of cash flows
while the method used by the majority of firms is the indirect method

Question 40
I am trying to learn more about a particular company's revenue growth trends and expense
patterns. Specifically, I want to see how the company has grown and where it may have opportunities for
future growth. I also want to identify expenses that may be holding the company down. Which financial
statements and/or financial documents/submittals to the SEC for this company would you recommend I
review to learn what I seek AND why do you recommend these sources of information?

I recommend the income statement because the revenues of a company are mainly determined by
studying the trends analysis and cross-sectional analysis of this document. The I/S contains net income,
profitability information, as well as the details about the various sources of revenues for the company.
This enables the company to focus on areas where the historical data shows growth in revenues and also
the future forecast and trends of revenues.
The cash flow statement would also be a great source since that would detail exactly where cash is going
and coming from, providing even more insight to growth trends and expense patterns.
Comments
Comment:

Question 41
Issuing capital stock for cash represents an investing activity.

Select one:

True
 False
Feedback
The answer is 'False'.

Question 42
I purchased a piece of equipment for $20,000. It has an estimated productive life of five years and a
salvage value of $5,000 after the five-year period. Applying straight-line depreciation, I will recognize
depreciation expense of $3,000 during the first full productive year of this asset.

Select one:

True

False
Feedback
The answer is 'True'.

Question 43
Acme Company buys and sells widgets. On January 1, 2014, Acme had 1,200 widgets in inventory. On
its balance sheet, these widgets were valued at $2,400. In 2014, Acme made the following widget
purchases for its inventory:

On December 20, 2014, Acme sells 1,200 widgets (assume no previous sales for the year). This is its
total sales for the year. Assuming Acme uses the FIFO (First-in-first-out) method of inventory valuation,
what is the cost of goods sold for the 1,200 widgets Acme sold?

Select one:

A. $2,400

B. $3,450

C. $2,925

D. It depends on which units Acme sold.

Feedback
The answer is: $2,400

Question 44
Acme Company buys and sells widgets. On January 1, 2014, Acme had 1,200 widgets in inventory. On
its balance sheet, these widgets were valued at $2,400. In 2014, Acme made the following widget
purchases for its inventory:
Assume Acme uses the Average Cost method of inventory valuation and sells 800 widgets on December
31, 2014 (assume no previous sales for the year). On its December 31, 2014 balance sheet, what will the
ending inventory balance be?

Select one:

A. $1,950

B. $4,000

C. $3,900

D. $4,650
Feedback
The answer is: $3,900

Question 45
The principle/concept of "matching" involves recognizing expenses in the same period in which revenue
generated by these expenses are recognized

Select one:

True

False
Feedback
The answer is 'True'.