Practice exam problems

Gains differ from revenues because gains:

a. are not a result of the entity's ongoing, central operations.

b. do not have to be realized.

c. are reported as income from operating activities.

d. do not involve any offsetting costs or expenses.

2.
The gross profit ratio is useful to the manager for each of the following purposes except that:

a. it can be used to determine the selling price to set for an item.

b. it can be used to estimate the amount of inventory lost in a fire.

c. it can be used to determine the amount available from a given amount of revenue to cover operating expenses.

d. it can be used to estimate the amount of operating expenses for a period.

3.
Income from operations is:

a. sometimes called the "bottom line".

b. sometimes used in the ROI calculation.

c. usually used in the ROE calculation.

d. usually calculated after income tax expense.

4.
The major difference between the indirect and the direct method of a statement of cash flows appears in which the following activities section(s)?

a. The investing activities and financing activities sections.

b. The investing activities section only.

c. The operating activities and financing activities sections.

d. The operating activities section only.

5.
In the statement of cash flows, the amount of depreciation and amortization expense is added back to net income because:

a. these expenses do not affect cash, but were subtracted in the determination of net income.

b. these expenses affect investing activities, not operating activities.

c. the cash disbursements for these accrued expenses will be made in a future period.

d. these expenses are recognized for accounting purposes, but they do not represent economic costs.

6.
Corporate governance include concerns about:

a. business ethics and social responsibility.

b. the responsibilities of the board of directors.

c. equitable treatment of stakeholders.

d. disclosures and transparency.

e. all of these.

7.
The explanatory notes to the financial statements:

a. should be referred to if more than a cursory, and perhaps misleading impression of a firm's financial position and its results of operations is to be achieved.

b. are not an integral part of the financial statements.

c. include a great deal of detailed information that is potentially useful only to a financial analyst making a detailed appraisal of the future prospects of the entity.

d. are used by many entities to hide information from the reader of the financial statements by including in the explanatory notes information that should be shown in detail on the financial statements themselves.

8.
Significant accounting policies are described in the explanatory notes to the financial statements because:

a. there isn't enough space for them to be included in the captions of the financial statements.

b. if the accrual basis of accounting is used, "matching" of revenues and expenses may not take place.

c. the reader must be aware of which of the alternative generally accepted accounting practices have been used.

d. none of these.

9.
Management's statement of responsibility:

a. explains that the entity's financial statements are the responsibility of the entity's auditors.

b. states that the financial statements are free of significant error.

c. affirms that management is responsible for assuring adherence to internal control policies and procedures.

d. guarantees that the firm has operated in a highly ethical manner.

10.
A firm's independent auditors have the responsibility to:

a. assess the firm's accounting policies.

b. ascertain the firm's profit potential.

c. uncover all fraudulent activities.

d. assess management's discussion and analysis.