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Exam 17: Understanding Accounting and Financial Information

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Question 21

True/False

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The accounting profession is divided into two main fields: bookkeeping and auditing.

A) True
B) False

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Question 22

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Purchasing insurance, paying employees, and using supplies are examples of financial transactions.

A) True
B) False

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Question 23

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The Balance Sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct?

The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations.

As a certified public accountant (CPA), Kay might become involved in helping clients select appropriate accounting computer software for their firm.

Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger.

FIFO and LIFO are two common:

According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory.

The Internal Revenue Service is responsible for establishing accounting standards used by accountants working in government accounting.

refers to the value that stockholders or owners have in a company.

There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger.

Net income before taxes is found by deducting total operating expenses from gross profit.

The Barkley Company has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.

One of the statements prepared in the accounting cycle is the statement of cash flows.

The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements.

A company's income statement is important to accountants and other stakeholders. It reveals:

Peak Performance Sporting Goods Company continues to perform well in spite of an economic recession. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period = .

The steps in the accounting cycle do not need to be followed in the order stated. Monthly financial statements can be prepared with a good amount of accuracy, prior to posting in the ledger or preparing the trail balance.

An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise.

As the burden of taxes grows, the role of the auditor becomes increasingly important to the organization.