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Worksheetschapter 15-16
Total questions: 102
Worksheet time: 51mins
A company has an assets-to-liabilities ratio of 3:2 and total assets worth $6 million. What is its owners' equity?
$1 million
$2 million
$4 million
$9 million
$12 million
How much profit does a company which has a total of 5millioninvestedbyitsownersand 4 million in liabilities need to make in order to have an assets-to-liabilities ratio of 2:1?
$2 million
$3 million
$5 million
$7 million
$8 million
Which of the following represents the accounting equation?
Assets = Liabilities + Owners' Equity
Owners' Equity = Assets + Liability
Liability = Assets + Owners' Equity
Assets = Liabilities - Owners' Equity
Assets = Liabilities × Owners' Equity
Why is a company's owners' equity important for investors and lenders?
Owners' equity indicates potential profit.
Owners' equity determines how quickly liabilities will increase.
Owners' equity determines how much will be paid out as dividends.
Owners' equity indicates how much the owner has invested in the company.
Owners' equity indicates the level of security.
A company with a very high amount of liabilities will always find it more difficult to secure loans than a company with a very low amount of liabilities.
True
False
The percentage of liabilities in a company's assets plus the percentage of owners' equity in its assets is always equal to 100.
True
False
Owners' equity is net worth minus liabilities.
True
False
If a company's assets exceed its liabilities, owners' equity is negative.
True
False
What two sources of capital make up owners' equity?
Original investments by owners and profits retained in the company
Borrowed funds and dividends paid
Sales revenue and the value of assets
Owners' withdrawals and outstanding liabilities
Interest paid and taxes owed
What is the accounting equation?
Assets = Liabilities + Owners' Equity
Assets = Owners' Equity − Liabilities
Assets = Liabilities − Owners' Equity
Assets = Owners' Equity × Liabilities
Assets = Revenues + Expenses
What distinguishes the two most commonly used categories of owners' equity?
The amount of equity within each type of asset—current versus fixed and intangible
The financial form of the equity—cash investments versus stock and bond investments
The source of the equity—paid-in capital versus retained earnings
The use of the equity—invested versus saved
The age of the equity—older investments and earnings versus newer investments and earnings
What are the major categories within an income statement?
Operating costs and profits, investing costs and profits, and financing costs and profits
Current revenue, long-term revenue, and net revenue
Revenue, sales, and income
Assets, liabilities, and owners' equity
Revenues, cost of revenues, operating expenses, and net income
Which of the following is the difference between revenues and the cost of revenues?
Net income
Gross profit
Accounts payable
Interest expense
Cash flow
Which of the following BEST demonstrates cash flow from operations?
Transactions involved in buying and selling goods and services
Net cash used in or provided by investment
Cash flow from borrowing or issuing stock
Outflows for payments of dividends
Inflows of cash that will be used to repay borrowed money
Which of the following is considered to be the most important internal financial statement for planning, controlling, and decision making?
Income statement
Flow of cash statement
Balance sheet
Budget
Statement of projected earnings
Which of the following statements BEST describes the difference between current and long-term liabilities?
Current liabilities are debts that need to be paid immediately, whereas long-term liabilities do not.
Current liabilities are those which will cost less in debt interest than long-term liabilities.
Current liabilities are debts that are settled sooner than long-term debts.
Current liabilities are debts on tangible assets, whereas long-term liabilities are debts on intangible assets.
Current liabilities are debts on current assets, whereas long-term liabilities are debts on fixed and intangible assets.
Which of the following refers to the financial statement detailing a firm's assets, liabilities, and owners' equity?
Income statement
Statement of cash flow
Balance sheet
Expense report
Annual budget
Which of the following describes assets such as land, building, and equipment?
Liquid assets
Fixed assets
Intangible assets
Current assets
Limited assets
Which of the following BEST describes depreciation?
The process of increasing the value of fixed assets over time
The process of deducting operating expenses from the value of fixed assets
The process of reducing the value of fixed assets over time
The process of distributing the cost of liabilities over time
The process of distributing the cost of intangible assets over time
Which of the following describes assets such as patents and trademarks?
Liquid assets
Fixed assets
Intangible assets
Current assets
Limited assets
Which of the following terms refers to the amount paid for an existing business beyond the value of its other assets?
Goodwill
Excess compensation
Licensing
Asset promotion
Liability deduction
Which of the following terms refers to the difference calculated by subtracting income taxes from the operating income of an organization?
Gross revenue
Net income
Gross profit
Cash flow
Leverage
What does a statement of cash flow describe?
Gross profit compared to operating expenses
Value of revenues compared to cost of revenues
Yearly cash receipts and cash payments
Cost of obtaining materials needed to produce products
Funds that flow into the business from the sale of the goods or services provided
Which of the following best describes the revenues of an organization?
Gross profit compared to operating expenses
Value of revenues compared to cost of revenues
Yearly receipts and cash payments
Cost of obtaining materials needed to produce products
Funds that flow into the business from the sale of the goods or services provided
Which of the following are the three categories on a company's statement of cash flows
Operating activities, purchase activities, taxes
Profit inflow, debt outflow, taxes
Profitable activities, deficit activities, taxes
Operating activities, investing activities, taxes
Operating activities, investing activities, financing activities
Assets are categorized by the capacity in which they benefit the company.
True
False
The most liquid asset for a firm is marketable securities that can be sold very quickly.
True
False
Retained earnings are net profits minus dividend payments to stockholders.
True
False
Current assets are all assets that are able to be liquidated in a short amount of time.
True
False
Explain fixed assets and how accountants spread the cost of an asset over the years of its useful life.
Fixed assets have long-term use or value and accountants use depreciation to allocate their cost over the useful life, reducing book value each year.
Fixed assets are short-term items and accountants expense the entire cost immediately in the year of purchase.
Fixed assets have indefinite life and are never reduced in value; accountants only record appreciation over time.
Fixed assets include only intangible items and accountants amortize them over one year.
What is the statement of cash flow required by the SEC and why is it required?
It is a report for publicly traded firms that shows yearly cash receipts and payments and the effects on cash of operating, investing, and financing activities to inform investors and creditors.
It is an internal budget report required of all companies to project future sales by product line for the next fiscal year.
It is a tax filing that summarizes income and expenses for the IRS and replaces the income statement for large corporations.
It is a quarterly memo that explains management’s earnings targets and discloses confidential financing plans.
Which of the following terms refers to the formal recording and reporting of revenues in financial statements?
Full disclosure
Revenue recognition
Compliance
Ethical practice
Materiality
Financial statements that do not include interpretation and explanation by management are in violation of which GAAP principle?
Principle of sincerity
Principle of continuity
Principle of full disclosure
Principle of regularity
Principle of prudence
Which of the following requires managers to share information about events inside the company and explain certain transaction?
Earning cycle reports
Revenue recognition
Statement of cash flow
Solvency ratios
Full disclosure
Revenue from the earnings of a particular transaction is able to be reported as soon as the product or service is delivered.
True
False
The primary goal for the standard practices and principles in accountant reporting is to ensure external users that the information is accurate and has meaning.
True
False
Explain what is covered by GAAP and why it is important to use these standards.
GAAP provides uniform standards for preparing external financial reports, improving comparability and confidence in the information.
GAAP is a voluntary set of internal guidelines focused mainly on budgeting and managerial decision making.
GAAP limits disclosure to protect proprietary information and reduces the need for public reporting.
GAAP applies only to revenue recognition and does not address disclosure or comparability across companies.
Discuss the principle known as full disclosure.
Full disclosure requires managers to provide additional explanations and interpretations so users can understand events, transactions, and the circumstances behind reported numbers.
Full disclosure limits notes to the financial statements to historical cost figures and prohibits management commentary.
Full disclosure applies only to firms with audited statements and exempts unaudited companies from providing explanatory information.
Full disclosure focuses on tax reporting and does not affect external financial statements.
Which of the following ratios measures a firm's ability to meet its current debt obligations?
Short-term solvency ratio
Long-term solvency ratio
Profitability ratio
Activity ratio
Equity ratio
Which of the following ratios measures a firm's potential earnings?
Short-term solvency ratio
Long-term solvency ratio
Profitability ratio
Activity ratio
Equity ratio
Which of the following ratios evaluates management's use of resources?
Short-term solvency ratio
Long-term solvency ratio
Activity ratio
Profitability ratio
Equity ratio
What type of ratio measures a firm's ability to generate cash to meet current obligations by selling inventory and collecting revenue?
Earnings per share
Debt
Revenue recognition
Current
Activity
Which of the following indicates a firm will be able to pay its bills in a satisfactory manner?
A debt to equity ratio of 1:1 or higher
An activity ratio of 5:1 or less
A net income to common shares outstanding ratio of 1:1 or less
A current ratio of 2:1 or higher
A profitability ratio of 5:1 or higher
Why is the long-term solvency ratio important for stakeholders?
It may indicate excessive inventories that cannot be sold.
It indicates the earnings per share a stakeholder can expect to receive.
It indicates the efficiency with which a firm uses resources.
It indicates the firm's ability to generate cash.
It may indicate collapse or takeover opportunities.
When might high debt levels be a benefit to an organization?
When trying to make otherwise unaffordable investments
When trying to prevent a leveraged buyout
When determining earnings per share on common stock
When calculating the current ratio to determine short-term solvency
When the firm's short run credit risk is strong
What is the term for the amount a firm will pay shareholders based on the size of their investment in the company?
Leverage per share
Earnings per share
Solvency return
Current ration return
Profitability ratio
Which of the following is an indication of how efficiently a firm is using its resources?
Earnings per share
Debt
Activity ratio
Leverage
Profitability
Activity ratios allow investors to compare the relative efficiencies of similar companies.
True
False
The most commonly used liquidity ratio is found by calculating current assets to current liabilities.
True
False
A long-term ratio of 2:3 indicates that the company has more equity than debt by a half.
True
False
Major projects, such as corporate mergers or buyouts, can adversely affect the long-term solvency ratio of a company.
True
False
What is a leveraged buyout?
An acquisition primarily financed with significant debt taken on by the buyer to purchase another company
A merger funded entirely with equity issued to existing shareholders
A purchase of assets using internal cash flow only, with no borrowing
A stock repurchase program aimed at increasing earnings per share
Discuss earnings per share and how they are used.
Earnings per share is net income divided by common shares outstanding; investors use it as an indicator of wealth potential and dividend capacity, often affecting buy/sell decisions and stock value.
Earnings per share is total revenue divided by preferred shares outstanding and is used mainly to assess inventory turnover.
Earnings per share is operating cash flow divided by total assets and is used to measure short-term solvency.
Earnings per share is market capitalization divided by debt and is used to evaluate leverage.
Which organization provides guidelines for ethical conduct for public accountants?
AICPA
SEC
GAAP
FASB
CMA
Why is ethics in accounting practices important?
So stakeholders can seek a higher return on their investment
Accounting methods depend on the veracity of their application
To ensure consistency between firms
To allow for uniformity in CPA standards and application
To allow multinational firms to understand international investment
What does the success of the AICPA code depend on?
Understanding of the code by its users
The exercising of moral judgement in all things
The acceptance and use by the professionals governed by the code
Lack of misleading statements that destroys public confidence in the accounting profession
Supporting the public interest in accounting practices
Demonstrating a commitment to the profession by respecting and maintaining the public trust and serving the public honorably is an example of what type of obligation under the code of Ethics for CPAs?
Responsibilities as a professional
Being objective and independent
Maintaining technical and ethical standards through due care
Serving the public interest
Increasing profitability
Under the Code of Ethics for CPAs, what should a CPA do in regards to their responsibilities as a professional?
The CPA should demonstrate commitment to the profession by respecting and maintaining the public trust.
The CPA should perform all professional activities with highest regards for profitability.
The CPA should exercise "due care," through professional improvement.
The CPA should identify conflicts of interest and the appearance of conflicts of interest in performing their professional responsibilities.
The CPA should use a high level of morality that is sensitive to bringing credit to their profession.
What can a CPA do to maintain technical and ethical standards through due care?
Update competence through continuing accounting education and improving the quality of services.
Abide by the meaning and intent of the Code when determining the type of services offered to clients.
Be independent from clients when certifying that statements are true and genuine.
Promote the public's confidence in the profession at every opportunity.
Serve the public honorably.
Unethical accounting methods have affected public confidence only in the company found to have committed accounting violations.
True
False
Ethical behavior requires that a CPA give precedence to public trust in the profession over the directions of her or his employer.
True
False
One of the purposes of ethics in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.
True
False
What are the six ethics-related areas enforced by the American Institute of Certified Public Accountants?
Responsibilities; public interest; integrity; objectivity and independence; due care; scope and nature of services
Responsibilities; integrity; independence; profitability; due care; scope of practice
Public interest; integrity; independence; due care; scope and nature of services; compliance with GAAP
Responsibilities; public interest; integrity; independence; professional improvement; scope and nature of services
Why is it important to have ethical codes in the field of accounting?
To maintain public confidence and ensure accounting tools and methods are applied with veracity while discouraging misconduct
To increase profitability by allowing accountants to select standards that favor their clients
To enable firms to avoid regulatory oversight by relying on professional judgment alone
To prioritize the interests of employers over public trust in the profession
Which of the following statements BEST describes the need for global accounting standards?
The complexity of the global market increases the risk of unethical accounting behavior by allowing accountants to choose which national GAAP standards are best for their clients.
The rise of the global market increases the risk of money laundering and offshore accounting.
The rise of the global market increases the risk of fraudulent business transactions across borders.
The rise of the global market increases the risk of international dumping and profit-skimming.
The rise of the global market increases the risk of the creation of dummy companies and accounts for the purpose of dumping toxic assets.
Why should there be universal accounting procedures?
To allow for the international promotion of CPA
To allow stakeholders to interpret and compare financial statements accurately
To ensure conformity to U.S. standards of ethics
To ensure all multinational firms report information accurately
To prevent fraudulent business operations
Who is responsible for developing and gaining support for global accounting standards and gaining support and cooperation to implement those standards?
Securities and Exchange Commission
Sarbanes-Oxley
International Accounting Standards Board
Financial Accounting Standards Board
Institute of Management Accountants
How does the lack of global accounting standards affect U.S.-based companies?
Unethical U.S. companies will use whichever standard creates the most benefit for them.
Using standards in countries where they do business allows for greater opportunity in the international market.
Reporting performance in a variety of consolidated statements for global affiliates will minimize understanding, thereby minimizing attempted leveraged buyouts.
There may be inconsistent and conflicting information that creates confusion for stakeholders.
Assets can be values according to one standard, revenue and debt according to other standards, in an overall goal of presenting positive performance levels.
When valuing assets, the U.S. GAAP allows an asset to be decreased if its value decreases, but cannot be increased if the value increases later. What is the IASB standard for this activity?
The value of the asset must remain as initially recorded.
The value of the asset must be increased annually.
The value of the asset can be averaged over time.
The value of the asset can be increased to reflect the increased market value.
The value of the asset must remain the same for four accounting cycles, then can be changed to reflect current market value.
In which accounting standard did the FASB and the IASB jointly propose new standards designed to improve the comparability of disclosures in financial statements?
In devaluing financial assets
In revenue recognition
In valuing assets
In expected loss modeling
In fair value discloser
In general, the accounting standards from the IASB and from U.S. GAAP align nearly perfectly.
True
False
The International Accounting Standards Board is the prominent international organization for global accounting standards.
True
False
What is the International Accounting Standards Board?
An independent nonprofit established in 2001 in London that develops global accounting standards and promotes their implementation.
A U.S. federal agency that enforces GAAP domestically.
A private auditing firm network that certifies IFRS compliance.
A committee within the SEC that sets stock exchange rules.
Why are efforts to standardize global accounting practices important?
They reduce inconsistencies across countries, improve comparability of financial statements, and protect investors in a global economy.
They eliminate the need for consolidated reporting by multinational companies.
They allow companies to report larger balance sheet figures under U.S. GAAP.
They ensure every country adopts U.S. GAAP immediately.
What is the fair value disclosure standard being jointly developed by the FASB and the IASB intended to accomplish?
Improve comparability of fair value disclosures by defining fair value consistently for assets, liabilities, and equity items and requiring disclosure of measurement techniques and inputs.
Eliminate fair value reporting from financial statements entirely.
Require that only local GAAP determine fair value without disclosure.
Limit fair value reporting to tangible assets and exclude liabilities.
Which of the following banking instruments has a fixed term?
Demand deposits
Time deposits
Money market mutual funds
Credit card accounts
Savings accounts
Which of the following BEST describes the portability characteristic of money?
If it wears out, it can be replaced.
Units of money can be matched with the value of goods.
It can be exchanged across national borders.
Units of money allow people to measure the relative value of goods and services.
It is light and easy to handle.
Which of the following is a consequence of the divisibility characteristic of money?
Units of money do not expire after a certain time limit.
Units of money can be accurately matched with the value of goods.
Units of money are easily carried.
Units of money have relatively stable value.
Units of money of different nations are easily converted to other units of money.
Which of the following affects the value of money?
How much currency is in circulation
How many units the currency can be divided into
How portable the form of currency is
How durable the form of currency is
How much currency has been saved
Which of the following BEST describes the durability characteristic of money?
Units of money do not expire after a certain time limit.
Units of money can be matched with the value of goods.
Units of money allow people to measure the relative value of goods and services.
Units of money of different nations are easily converted to other units of money.
Units of money have lasting value.
Which of the following BEST describes the stability characteristic of money?
Units of money do not expire after a certain time limit.
Units of money of different nations are easily converted to other units of money.
Units of money can be matched with the value of goods.
Units of money allow people to measure the relative value of goods and services.
Units of money have relatively constant value.
Money frees society from a system of barter. In doing so, money is performing which of the following functions?
Store of value
Measure of worth
Unit of account
Determination factor
Medium of exchange
Which of the following is NOT part of the M-1 supply?
Currency at hand
Currency amount of written checks
Currency available through a debit card
Currency in checking accounts
Currency value of time deposits
Which of the following is NOT part of the M-2 money supply?
Certificates of deposit
Time deposits
Money market mutual funds
Savings account
Credit card account
What measure of the money supply is most often used by businesses and governments for economic planning?
M-2
Currency
Demand deposits
Liquidity
M-1
Why are credit cards excluded from the measure of the nation's money supply?
Because debt continues to accrue as the credit card is used
Because money is not moved until the debt is paid
Because there are few spending controls on credit cards
Because credit cards represent a convenience, not a service
Because only the interest paid on the credit card is considered liquid money
Any object can serve as money if it is portable, divisible, durable, and stable.
True
False
The overall value of the U.S. M-2 has grown considerably since 1979 due primarily to the increased use of credit cards and debit cards.
True
False
The divisibility characteristic of money is illustrated by a financial company's ability to divide its monetary assets among several investments.
True
False
The reason why a savings account is not considered a component of the M-1 money supply is that it bears interest.
True
False
A check is an order to a bank to withdraw funds at any time.
True
False
What are the components of the M-1 money supply?
Currency (cash), checks, and checking accounts (demand deposits)
Time deposits, savings accounts, and money market mutual funds
Credit cards, mortgages, and savings bonds
Securities, mutual funds, and certificates of deposit
What are the components of the M-2 money supply?
Everything in M-1 plus time deposits, savings accounts, and money market mutual funds
Only currency and demand deposits
Credit cards and mortgages
Gold reserves and foreign exchange holdings
Why are savings accounts not considered a component of M-1, whereas checking accounts are?
Savings deposits are not immediately available for spending, while checking deposits are immediately usable via checks
Savings accounts are not insured, while checking accounts are insured
Savings accounts lack interest, while checking accounts pay high interest
Savings deposits circulate as currency, while checking deposits do not
Which of the three functions of money does a time deposit account MOST exemplify?
Medium of exchange
Measure of worth (unit of account)
Store of value
Which of the following financial institutions earn profits from loans taken from the funds in each of its depositors' accounts?
Securities investment firms
Pension funds
Finance companies
Commercial banks
Nondeposit institutions
Which of the following financial institutions are considered to be owned by their depositors?
Commercial banks and savings and loan associations
Savings and loan associations and mutual savings banks
Mutual savings banks and credit unions
Credit unions and pension funds
Pension funds and savings institutions
Which of the following terms represents a promise by the bank to pay a firm on behalf of another firm, if specified conditions are met?
Banker's acceptance
Bank trust service
Certified check
Letter of credit
Currency exchange agreement
Which of the following reasons is the primary motivator for a commercial bank to acquire new depositors?
A new deposit account will make more funds available to pay the interest on other deposit accounts.
A new deposit account will make more funds available to pay the bank's employees.
A new deposit account will make more funds available to give out in loans.
A new deposit account will make more funds available to give out in dividends to its investors.
A new deposit account will make more funds available to facilitate brokerage transactions.
Which of the following represents a pool of managed funds that provide retirement income for members?
Insurance companies
Finance companies
Securities investment dealers
Nondeposit institutions
Pension funds
Which type of pension trust service includes tax-deferred funds that wage earners and their spouses can use to supplement their retirement funds?
Trust services
Securities investment deals
Pension funds
Individual retirement accounts (IRAs)
Savings
What types of firms lend to businesses needing capital or long-term funds?
Insurance companies
Pension and trust services
Commercial finance companies
Pension funds
Securities investment dealers
