Accounting for Decision Making Unit 2

The most favorable audit opinion that a company can receive is a(n):

unqualified opinion.

Which of the following is not a component of the fraud triangle?

Reliance

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, which type of audit opinion will be issued by the auditor?

Adverse opinion

Which of the following is not an internal control procedure for the control of cash receipts?

Use of prenumbered checks

Which of the following statements concerning internal controls is true?

A system of internal controls is designed to prevent or detect errors and fraud.

The primary focus of financial statement audits is the discovery of fraud.

False (The financial audit is a detailed examination of a company’s financial statements and the documents that support those statements. It also tests the reliability of the accounting system used to produce the financial reports. Financial audits are not directed toward the discovery of fraud.)

Which of the following is not considered a common control activity?

Duplication of duties

Which of the following is not a primary role of an independent auditor?

Advise client on tax strategies

A common control activity involve safeguarding assets and ensuring reliable accounting records.

True

A common control activity is requiring employees to take regular vacations and rotating their duties periodically

False

Whenever possible, the functions of authorization, custody of assets, and recording should be performed by separate employees

False

Receipt and disbursement points are the points where cash is most susceptible to theft.

True

Even a well-designed internal control system can be overridden by employee collusion.

True

The internal controls of a business are designed to reduce the opportunities for fraud.

True (Internal controls are policies and procedures that a company uses to reduce opportunities for fraud and to assure that the entity’s objectives will be accomplished.)

Which of the following is not a common internal control activity (or procedure)?

Customer service comment cards

The study of an individual financial statement item over several accounting periods is called:

horizontal analysis.

Common methods of financial statement analysis include all of the following except:

incremental analysis.

Factors involved in communicating useful information are:

attributes of the users

purposes for which the information will be used

processes by which the information is analyzed

All of these answers are correct.

In which section of a statement of cash flows would the payment of cash dividends be reported?

Financing activities

Operating expenses reported on the income statement decrease retained earnings.

True

Stockholders’ equity and liabilities can be viewed either as sources of assets or claims to assets of the business.

True

Retained earnings is increased by loans received from a bank.

False

Dividends paid to stockholders decrease common stock.

False

Stockholders’ equity is the residual interest in the company resulting from the difference between assets and liabilities.

True

Which of the following would appear in the investing activities section of the statement of cash flows?

Cash outflow for the purchase of land.

Salaries expense appears in the:

expense section of the income statement.

The statement of changes in stockholders’ equity shows changes in which of the following accounts?

Common Stock and Retained Earnings

Which of the following transactions would be reported on the statement of changes in stockholders’ equity?

Paid a $100 cash dividend to the stockholders

The four financial statements prepared by a business bear no relationship to each other.

False

The amount of retained earnings is shown on the

balance sheet and statement of changes in stockholders' equity.

Dividends are reported on which financial statement?

Statement of Changes in Stockholders’ Equity

Which of the following financial statements provides information about a company as of a specific point in time?

Balance sheet

The ending cash balance on the statements of cash flows Blank______ the cash reported on the balance sheet.

always matches

The financial statement that shows all the benefits earned and sacrifices incurred during the accounting period is the ____

income statement

If expenses exceed revenues, the company reports Blank______ on the income statement.

Net loss

The practice of pairing revenues with expenses on the income statement is called the ______ concept.

matching

The accounting period is always one year.

False

Net income and dividends are reported on the ____

statement of changes in stockholders' equity only

The financial statement that shows all the revenues earned and expenses incurred during the accounting period is the _____

Income statement

Which financial statement(s) reports the effects of transactions on common stock and retained earnings?

Statement of Changes in Stockholders' Equity

A company that has $2,000 in revenue and $1,900 in expenses will report ____

net income on the income statement

Which statement reports ending balances for total assets, total liabilities, and total stockholders' equity?

Balance Sheet

The term used to describe pairing expenses with revenues earned during the accounting period is the ____ concept

matching

Assets reported on the balance sheet are listed in the order of ___

liquidity

The income statement reports revenues and expenses over the ______ period.

accounting

The ending cash balance on the statements of cash flows ______ the cash reported on the balance sheet.

always matches

"As of" in the date line of a balance sheet indicates that the information reported refers to

the financial condition of the company at a specific point in time

The statement of changes in stockholder's equity reports changes in the company's ____

Common stock and Retained Earnings

Cash inflows and outflows are reported on the ____

statement of cash flows

Which financial statement draws its name from the accounting equation?

Balance Sheet

How fast an asset can be converted to cash is the measure of financial

liquidity

Financing activities include ____

paying a dividend to stockholders

repaying the principal on a loan

issuing common stock

The period of time that a company measures net income is known as the ______ period.

accounting

Which of the following is an investing activity?

Selling equipment used in manufacturing process

Which financial statement only reports account balances as of a specific point in time?

Balance Sheet

The financial statement that explains how a company obtained and used cash during the accounting period is the

statement of cash flows

Which of the following are operating activities?

Paying expenses

Paying employees

Cash receipts from customers

Activities dealing with raising money to start a business are ______ activities.

financing

Activities dealing with purchasing and selling long-term assets used in the operations of a business are ______ activities.

Investing

The term articulation is used to describe the interrelationships among the various components of the financial statements.

True

What are the primary categories of activity reported on the statement of cash flows?

• Financing

• Investing

• Operating

What equals Net Income on the Income Statement?

Revenue - Expenses

which type of activity is paying cash dividends?

financing

Assets are listed in what order on the Balance Sheet?

liquidity

Which statement explains changes in Common Stock & Retained Earnings?

Statement of Changes in Equity

which type of business activity is borrowing cash from creditors?

financing

paying cash for salary expenses is what activity?

operating

which financial statement shows information at a point in time?

Balance Sheet

what type of business activity is purchasing land with cash?

investing

internal control ensures compliance with laws and regulations.

true

what is the main purpose of using prenumbered documents in internal control systems?

to ensure all documents are accounted for

what role does an independent auditor play in financial reporting?

conducts a detailed examination of financial statements

Which audit opinion indicates that financial statements are fairly presented and comply with GAAP?

unqualified opinion

which financial statement reports the effects of transactions on common stock and retained earnings?

Statement of Changes in Stockholders' Equity

ending balances for assets, liabilities, and stockholder's equity are reported on the:

Balance Sheet

Which is not a section of business activities on the Statement of Cash Flows?

income

which is not a part of the fraud triangle?

greed

rotating employees duties is what type of internal control principle?

Human Resource Controls

sales revenues is reported on which financial statement?

income statement

which of the following transactions would be reported on the statement of changes in stockholders’ equity?

paid a cash dividend

dividends are reported on which financial statement

Statement of Changes in Equity

factors involved in communicating useful information are

users of financial statements
how the information is analyzed
types of decisions that will be made

all are correct

which of the following is not a common control activity?

duplication of duties

which of the following is not a primary role of an independent auditor?

advise clients on tax strategies

True or false - The internal controls of a business are designed to reduce the opportunities for fraud.

True

whenever possible, the functions of authorization, recording, and custody should be performed by the same person.

False

Current Ratio is a solvency ratio

False

profitability ratios measure the operating success of a company for a given period of time

True

Working Capital = Current assets - current _______________________

Liabilities

Current ratio = ___________/ Current Liabilities

Current Assets

Debt to Assets Ratio = Total Liabilities / Total ____________

Assets

Debt to Equity Ratio = Total ___________ / Total Equity

Liabilities

Profit Margin = __________ / Sales Revenue

Net Income

Gross Profit Ratio = Gross Profit / ____________

Sales Revenue