Basic of financial reporting

1. BASICS OF FINANCIAL
REPORTING

2. The board of directors of Pilgrim Company authorizes a $100,000
restriction of retained earnings for a future plant expansion. This action
will do which of the following?
A.Decrease total assets and total stockholders’ equity.
B.Increase stockholders’ equity and decrease total liabilities.
C.Reduce the amount of retained earnings available for dividend
declarations.
D.Decrease total retained earnings and increase total liabilities.

3. How are financial statements related to the objective of financial reporting?
A.Companies use financial statements to document their cash flow, and
documenting cash flow is the objective of financial reporting.
B.Companies use financial statements to determine selling prices of products,
and determining selling prices of products is the objective of financial reporting.
C.Companies use financial statements to determine which new projects to
pursue, and deciding which projects to pursue is the objective of financial
reporting.
D.Companies use financial statements to provide financial information to
potential capital providers, and providing information to capital providers is the
objective of financial reporting.

4. A justification for the periodic recording of depreciation expense can be
demonstrated by which of the following?
A.The association of efforts (expense) with accomplishments (revenue)
B.Immediate recognition of an expense
C.Minimization of income tax liability
D.Systematic and rational allocation of cost over the periods benefited

5. How can comparing a company's income statement to its statement of cash
flows reveal information about the “quality” of the company's reported net
income?
A.The statement of cash flows reflects accrual-based accounting technique and
thus relies on fewer estimates than the income statement.
B.The statement of cash flows reflects cash-based accounting technique and
thus relies on more estimates than the income statement.
C.The statement of cash flows reflects accrual-based accounting technique and
thus relies on more estimates than the income statement.
D.The statement of cash flows reflects cash-based accounting technique and
thus relies on fewer estimates than the income statement.

6. The most likely use of an income statement prepared by a business
enterprise is its use by which of the following?
A.Investors interested in the financial position of the entity.
B.Labor unions to examine earnings closely as a basis for salary
discussions.
C.Government agencies to formulate tax and economic policy.
D.Customers to determine a company's ability to provide needed goods
and services

7. Which of the following would cause a reduction in stockholders’ equity
on the balance sheet?
A.A stock split
B.A stock dividend
C.A restriction on retained earnings
D.A deficit in retained earnings

8. All of the following are elements of an income statement except:
A.gains and losses.
B.shareholders' equity.
C.expenses.
D.revenue.

9. How are expenses and losses similar?
A.They both increase net income.
B.They both decrease net income.
C.They both refer to transactions related to major operations.
D.They both refer to transactions related to peripheral operations.

10. Samantha is classifying her company's equity and debt securities. Which major
difference does Samantha need to remember as she performs her analysis?
A.Debt securities can be classified as trading securities but not as held-to-
maturity securities, whereas equity securities can be classified as either.
B.Equity securities can be classified as held-to-maturity securities but not as
trading securities, whereas debt securities can be classified as either.
C.Debt securities can be classified as held-to-maturity securities but not as
trading security, whereas equity securities can be classified as either.
D. Equity securities can be classified as trading securities but not as held-to-
maturity securities, whereas debt securities can be classified as either.

11. McCarthy Corp. is issuing its first financial statements. The CFO of the
company is of the view that all assets shall be recorded at historical
cost throughout the life of the organization. Which of the following is
the best critique of such a disclosure?
A.Historical value assumes that the value of an asset is the amount that
would have to be paid to replace the asset on the balance sheet date.
B.Historical value takes into account the effects of inflation on the asset;
therefore, the value fluctuates in each period.
C.Historical value does not take into account the effect of depreciation;
therefore, the true value of the asset cannot be determined.
D.Historical value is less relevant for assessing a company's current
financial position.