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Question Answer Chapter 2 FInancial Reporting

This document contains questions and answers about financial reporting and analysis. It addresses topics like types of auditor's opinions, the purpose of financial statements, accounting principles, and corporate governance requirements. Key topics covered include the responsibilities of management and auditors, components of the income statement and balance sheet, notes to the financial statements, accounting for business combinations, and SEC rules regarding codes of ethics.

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1K views

Question Answer Chapter 2 FInancial Reporting

This document contains questions and answers about financial reporting and analysis. It addresses topics like types of auditor's opinions, the purpose of financial statements, accounting principles, and corporate governance requirements. Key topics covered include the responsibilities of management and auditors, components of the income statement and balance sheet, notes to the financial statements, accounting for business combinations, and SEC rules regarding codes of ethics.

Uploaded by

nasir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial Reporting Analysis

CH.2

QUESTIONS & Answers


2- 1. a. Unqualified opinion with explanatory paragraph b. Unqualified opinion with
explanatory paragraph c. Unqualified opinion d. Adverse opinion e. Qualified opinion
2- 2. The responsibility for the preparation and integrity of financial statements
rests with management. The auditor simply examines them for fairness, conformity
with GAAP, and consistency.
2- 3. The basic purpose of the integrated disclosure system is to achieve uniformity
between annual reports and SEC filings. It is hoped that this will improve the quality
of disclosure and lighten the disclosure load for the companies reporting.
2- 4. The explanatory paragraphs explain important considerations that the
reviewer of the financial statements should be aware of. An example would be a
doubt as to going concern ability.
2- 5. A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with generally accepted auditing standards.
2- 6. No. The accountant's report will indicate that they are not aware of any
material modifications that should be made to the financial statements in order for
them to be in conformity with generally accepted accounting principles, and the
report will indicate departures from generally accepted accounting principles.
2- 7. The accountant does not express an opinion or any other form of assurance
with a compilation.
2- 8. No. Some statements have not been audited, reviewed, or compiled. These
statements are presented without being accompanied by an accountant's report.
2- 9. Balance Sheet The purpose of a balance sheet is to show the financial position
of an accounting entity as of a particular date. Income Statement The income
statement summarizes the results of operations for an accounting period.
Statement of Cash Flows The statement of cash flows details the inflows and
outflows of cash during a specified period of time.
2-10. Footnotes (notes) increase the full disclosure of the statements by providing
information on inventory and depreciation methods, subsequent events, contingent
liabilities, etc.
2-11. Contingent liabilities are dependent on an occurrence to determine if
payment will be necessary. Liabilities from lawsuits are dependent on the outcome
of the cases; they therefore represent contingent liabilities.

2-12. a, c.
2-13. A proxy is the solicitation sent to stockholders for the election of directors and
for the approval of other corporation actions. The proxy represents the shareholder
authorization regarding the casting of that shareholders vote.
2-14. A summary annual report is a condensed annual report that omits much of
the financial information included in a typical annual report.
2-15. The firm must include a set of fully audited statements and other required
financial disclosures in the proxy materials sent to shareholders. The 10-K is also
available to the public.
2-16. There is typically a substantial reduction in nonfinancial pages and financial
pages. The greatest reduction in pages is usually in the financial pages.
2-17. Cash flows from operating activities, cash flows from investing activities, and
cash flows from financing activities.
2.18. The income statement and the statement of cash flows. The income
statement describes income between two balance sheet dates. The statement of
cash flows describes cash flows between two balance sheet dates.
2-19. Assets, liabilities, and owners equity
2-20. No. Cash dividends are paid with cash. This reduces the cash account and the
retained earnings account.
2-21. Footnotes are an integral part of financial statements. A detailed review of
footnotes is absolutely essential in order to understand the financial statements.
2-22. APB Opinion No. 22 requires disclosure of accounting policies as the first
footnote to financial statements or just prior to the footnotes.
2-23. They are interchangeable terms referring to ideals of character and conduct.
These ideals, in the form of codes of conduct, furnish criteria for distinguishing
between right and wrong.
2-24. Law can be viewed as the minimum standard of ethics.
2-25. Assets = Liabilities + Stockholders' equity (capital).
2-26. The scheme of the double-entry system revolves around the accounting
equation: Assets = Liabilities + Stockholders' Equity With double-entry, each
transaction is recorded with the total dollar amount of the debits equal to the total
dollar amount of the credits. Each transaction affects two or more asset, liability, or
owners' equity accounts (including the temporary accounts).
2-27. a. Assets, liabilities, and stockholders' equity accounts are referred to as
permanent accounts because the balances in these accounts carry forward to the

next accounting period. b. Revenue, expense, gain, loss, and dividend accounts are
not carried into the next period. These accounts are closed to Retained Earnings.
They are referred to as temporary accounts.
2-28. Because the employee worked in the period just ended, the salary must be
matched to that period's revenue.
2-29. Most of the accounts are not up to date at the end of the accounting period.
These accounts need to be adjusted so that all revenues and expenses are
recognized and the balance sheet accounts have a correct ending balance.
2-30. Companies use a number of special journals to improve record keeping
efficiency that could not be obtained by using only the general journal.
2-31. The SEC requires foreign registrants to conform to U.S. GAAP, either directly or
by reconciliation. This approach presents a problem to the U.S. Securities
exchanges, such as the NYSE. This is because the U.S. standards are perceived to
be the most stringent. This puts exchanges like the NYSE at a competitive
disadvantage with foreign exchanges that are perceived to have lower standards.
2-32. Sole Proprietorship A sole proprietorship is a business entity owned by one
person. Partnership A partnership is a business owned by two or more individuals.
Corporation A corporation is a legal entity incorporated in a particular state.
Ownership is evidenced by shares of stock.
2-33. The use of insider information could result in abnormal returns.
2-34. In an efficient market the method of disclosure is not as important as whether
or not the item is disclosed.
2-35. Abnormal returns could be achieved if the market does not have access to
relevant information or if fraudulent information is provided.
2-36. Purchase With the purchase method the firm doing the acquiring records
the identifiable assets and liabilities at fair value at the date of acquisition. The
difference between the fair value of the identifiable assets and liabilities and the
amount paid is recorded as goodwill (an asset).
2-37. Consolidated statements reflect an economic, rather than a legal, concept of
the entity.
2-38. The financial statements of the parent and the subsidiary are consolidated for
all majority-owned subsidiaries unless control is temporary or does not rest with the
majority owner.
2-39. The SEC requires that a copy of the companies code of ethics be made
available by filing and exhibit with its annual report, or by providing it on the
companys Internet Web Site.

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