Ch10 Exam Prep Corporate Governance, Notes to the Financial

Accounting - What the Numbers Mean, 12e (Marshall)

Chapter 10 Corporate Governance, Notes to the Financial Statements,

and Other Disclosures

1) Corporate governance includes concerns about:

A) business ethics and social responsibility.

B) the responsibilities of the board of directors.

C) equitable treatment of all stakeholders.

D) disclosures and transparency.

E) All of these answers are correct.

2) The most powerful corporate governance legislation to date has been:

A) the Sarbanes-Oxley Act (SOX) of 2002.

B) the creation of the American Institute of Certified Public Accountants.

C) Corporate Ethics Code of 2007.

D) the regulation of inventory management practices by the SEC.

3) The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:

A) financial information systems design and implementation.

B) internal audit outsourcing services.

C) tax services.

D) "expert" services.

E) SOX specifically prohibits an independent auditor from performing all of these non-audit services for an audit client.

4) Which of the following descriptions is not one of the "Thirteen Financial Shenanigans" identified by Schilit and Perler, and listed in Exhibit 10-1?

A) recording revenue too soon or that is of a questionable quality.

B) boosting income with one-time gains.

C) failing to record intangible assets which the company has ownership rights to.

D) shifting future expenses to the current period as a special charge.

E) failing to record or improperly reducing liabilities.

5) The 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 notes information that should be shown in detail on the financial statements themselves.

6) The nature and content of note disclosures relate to all of the following except:

A) accounting changes.

B) segment information.

C) management's plans for the future.

D) contingencies and commitments.

E) events subsequent to the balance sheet date.

7) Which of the following is not a topic that is likely to be discussed as a significant accounting policy?

A) Depreciation method.

B) Earnings per share of common stock calculation details.

C) Inventory valuation method.

D) Method of estimating uncollectible accounts receivable.

8) The notes to the financial statements:

A) are not an integral part of the financial statements.

B) explain the significant accounting policies of the company.

C) usually disclose the amount of the company's bad debts expense.

D) describe management's product development plans for the coming year.

9) Significant accounting policies are described in the 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) details concerning the reporting entity's accounting information system and data processing methods must be disclosed.

10) When an entity changes its accounting from one generally accepted method to another generally accepted method:

A) financial statements of all prior years must be restated to maintain comparability.

B) an explanatory note stating that the change was approved by the Financial Accounting Standards Board is required.

C) the dollar effect of the change on both the balance sheet and income statement must be disclosed.

D) accounting changes like this are not permitted.

11) The impact of changing price levels on amounts reported in financial statements is:

A) reported as a separate item on the balance sheet.

B) accomplished by reporting assets at their replacement cost.

C) required to be described in the notes to the financial statements.

D) encouraged, but not required to be described in the notes to the financial statements.

12) 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.

13) Firms that issue registered securities are required to file, with the SEC on an annual basis, which of the following?

A) An annual report.

B) A form 10-K.

C) A set of financial statements.

D) All of these are mandatory annual SEC filings for firms that have issued registered securities.

14) A firm's cash dividends were $1.98 per share of common stock for calendar 2019. In 2020, the stock was split 3-for-1, and in 2021 a 10% stock dividend was issued. Dividends per share for 2019, to be reported in the firm's annual report for 2021, are:

A) $0.60

B) $0.66

C) $0.73

D) $1.98

15) Business segment information is included in the notes to financial statements because:

A) the amounts shown on the financial statements of most companies are just too large to comprehend.

B) current and potential investors can make more informed judgments about the company.

C) net income from various geographic areas can be clearly determined.

D) by combining these amounts for each segment, ROI and cash flows for the company as a whole can be determined.

16) For 2019, Skresso Co. reported $1.82 of earnings per share of common stock. During 2020, the firm had a 4% common stock dividend. The 2019 earnings per share to be reported in the annual report for 2020 are:

A) $1.90

B) $1.82

C) $1.75

D) $1.70

17) Management's statement of responsibility:

A) refers to the company's system of internal controls.

B) emphasizes that the auditors are responsible for the financial statements.

C) includes a disclaimer of responsibility for the level of the P/E ratio of the company's common stock.

D) allows the president of the company to explain why profits changed.

18) Which of the following is the proper paragraph sequence for an independent Auditor's Report?

A) Scope, introduction, opinion.

B) Introduction, scope, opinion.

C) Opinion, scope, summary.

D) Introduction, opinion, scope.

19) 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.

20) The independent auditors' report usually:

A) presents a "clean bill of health" for the company.

B) refers to the quality of the company's products or services.

C) includes an opinion that the financial statements are correct.

D) includes an opinion that the financial statements present fairly, in all material respects, financial information about the company.

21) An audit conducted in accordance with generally accepted auditing standards includes each of the following except:

A) examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.

B) evaluation of the efficiency and effectiveness of management.

C) assessment of the accounting principles used and significant estimates made by management.

D) planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements.

22) Which of the following circumstances requires an explanatory paragraph in the independent auditors' report?

A) Basing the opinion in part on the work of another auditor.

B) Uncertainties about the outcome of a significant event that would have affected the presentation of the financial statements if the outcome could have been estimated.

C) Substantial doubt about the entity's ability to continue as a going concern.

D) A material change from a prior accounting period in the application of an accounting principle.

E) An explanatory paragraph in the independent auditors' report is required in each of these circumstances.

23) Management's Discussion and Analysis (MD&A):

A) is designed to enhance public disclosure of information about the corporation.

B) is a part of the annual report that should be read by current and potential investors.

C) often includes disclosures concerning non-GAAP financial measures and key performance indicators that are used to assess the company's financial and operating results.

D) All of these answers are correct.

24) For the year ended December 31, 2019, Flagpole, Inc., reported earnings per share of $4.83. During 2020, the company had a 3-for-1 stock split.

Required:

Calculate the 2019 earnings per share that will be reported in Flagpole, Inc.'s 2020 annual report for comparative purposes.

25) During the fiscal year ended September 30, 2020, Happster Co. had a 5-for-1 stock split. In its annual report for 2020, the company reported earnings per share for the year ended September 30, 2019, on a restated basis, of $0.85.

Required:

Calculate the originally reported earnings per share by Happster Co. for the year ended September 30, 2019.