Diff: 2 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
101) What do creditors such as bankers look for when reviewing assets and liabilities on the balance sheet?
Answer: Assets show what the company can pledge as collateral that a creditor can collect in the event of the company failing to pay its debts. Liabilities indicate how much the company owes other creditors. Assets should be increasing faster than liabilities over time. The amount of assets should exceed the amount of liabilities.
Diff: 2 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
102) What is the purpose of a cash flow statement?
Answer: A cash flow statement reports how the company generates and uses its cash. Wise use of cash generates revenues and additional cash. Operating activities should be the main source of cash. The cash flow statement provides information that would be difficult to obtain from analyzing the other financial statements.
Diff: 2 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
1.3 Explain the relationships among the financial statements
1) Which financial statement must be prepared before the others?
A) income statement
B) balance sheet
C) cash flow statement
D) retained earnings statement
Answer: A
Diff: 2 Type: MC
L.O.: 1-3
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
2) Describe the relationship between the Income Statement, Statement of Retained Earnings and the Balance Sheet.
Answer: The income statement needs to be prepared first as the net income figure is part of the calculation of ending retained earnings on the Statement of Retained Earnings. Once the Statement of Retained Earnings has been prepared this figure is then inserted in the Balance Sheet in the Shareholders' Equity section.
Diff: 2 Type: ES
L.O.: 1-3
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
3) The closing retained earnings balance as determined by compiling the balance sheet is used to complete the statement of retained earnings.
Answer: FALSE
Explanation: The closing retained earnings balance as determined by completing the statement of retained earnings is reported as part of shareholders' equity on the balance sheet.
Diff: 2 Type: TF
L.O.: 1-3
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
4) Tap Corporation gathered together the following information regarding the asset, liability, shareholders' equity, revenue, and expense accounts as of the end of its first year in operations, August 31, 2017: