Short Multiple Choice Questions on Accounting Principles and Financial Statements

1. Who developed Generally Accepted Accounting Principles?

1. Which of the following has primary responsibility to develop Generally Accepted Accounting Principles?

a. Financial Accounting Standards Board.
b. Company Executives.
c. Securities and Exchange Commission.
d. Public Company Accounting Oversight Board.

2. Which of the following has the legal authority to determine financial reporting in the United States?

a. Financial Accounting Standards Board.
b. American Accounting Association.
c. Securities and Exchange Commission.
d. Public Company Accounting Oversight Board.

3. Which of the following is not an alternate title for the financial statement that reports revenues and expenses?

a. Statement of Earnings.
b. Statement of Net Income.
c. Statement of Operations.
d. Statement of Income.

4. Which of the following statements pertaining to the audit function is incorrect?

a. The primary responsibility for the information in the financial statements lies with the auditors.
b. The audit report describes the auditor's opinion of the fairness of the financial statements.
c. An audit ensures that the financial statements conform to generally accepted accounting principles.
d. The auditor is a person who is independent of the reporting company. 

5. Which of the following statements is false?

a. Annual reports must include three-year audited balance sheets and two-year audited income statements.
b. The balance sheet is prepared on a particular date.
c. Interim statements are generally prepared quarterly.
d. When a parent company owns more than 50% of the voting stock of a subsidiary, the financial statements are consolidated for both entities.

6. What is a Form 10-Q?

a. The annual report of a publicly-held company which must be filed with the SEC.
b. The quarterly report of a publicly-held company which must be filed with the SEC.
c. The bankruptcy report of a publicly-held company which must be filed with the SEC.
d. The form required to report a change of auditor.

7. What does an unqualified auditor’s report indicate?

a. The financial statements unfairly and inaccurately present the company’s financial position for the accounting period.

b. The financial statements present fairly the financial position, the results of operations, and the changes in cash flows for the company.

c. There are certain factors that might impair the firm’s ability to continue as a going concern.

d. Certain managers within the firm are unqualified and, as such, are not fairly or adequately representing the interests of the shareholders.

8. Which of the following statements does not properly describe the accrual basis of accounting?

a. Expenses are recognized when incurred in generating revenues regardless of the timing of cash flows.

b. Revenues are recognized when the company transfers promised goods or services to customers regardless of the timing of cash flows.

c. Generally accepted accounting principles require use of the accrual basis.

d. Accrual accounting should not be used when providing financial statements to external decision makers. 

9. Which of the following best describes the proper presentation of accounts receivable in the financial statements?

a. Gross accounts receivable plus the allowance for doubtful accounts in the asset section of the balance sheet.

b. Gross accounts receivable in the asset section of the balance sheet and the allowance for doubtful accounts in the expense section of the income statement.

c. Gross accounts receivable less bad debt expense in the asset section of the balance sheet.

d. Gross accounts receivable less the allowance for doubtful accounts in the asset section of the balance sheet.

10. If two companies each use different inventory methods, the companies can be made comparable by:

a. converting the FIFO Reserve to a LIFO inventory.
b. converting inventory at cost to inventory at lower of cost or market (net realizable value).
c. converting cost of goods sold to lower of cost or market (net realizable value).
d. converting inventory on a LIFO basis to a FIFO basis using the LIFO Reserve.

11. When inventory prices are increasing, the FIFO costing method will generally result in:

a. A lower inventory value than under LIFO.
b. A higher gross margin than under LIFO.
c. A lower owners’ equity balance than under LIFO.
d. A higher cost of goods sold than under LIFO.

12. Which of the following is true concerning goodwill?

a. Goodwill can never be recorded.
b. Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets.
c. Goodwill is recorded when the market value of a company exceeds the fair value of its identifiable net assets.
d. Goodwill is recorded as a revenue in the income statement.

13. Which of the following is not a characteristic of a liability?

a. It represents a probable, future sacrifice of economic benefits.
b. It must be payable in cash.
c. It arises from present obligations to other entities.
d. It results from past transactions or events.