1. Which of the following statements least accurately describes a role of financial statement analysis? a.

Use the information in financial statements to make economics decisions. b. Provide reasonable assurance that the financial statements are free of material errors. c. Evaluate an entitys financial position and past performance to form opinions about its 2. A firms financial position at a specific point in time is reported in the: a. Balance sheet b. Income statement c. Cash flow statement 3. Information about accounting estimates, assumptions, and methods chosen for reporting is most likely found in: a. The auditors opinion b. Financial statement notes. c. Managements Discussion and analysis 4. If auditor finds that a companys financial statements have a specific exception to applicable accounting principles, she is most likely to issue a: a. Dissenting opinion b. Cautionary note c. Qualified opinion 5. Which of these steps is least likely to be a part of the financial statement analysis framework? a. State the purpose and context of the analysis. b. Determine whether the companys securities are suitable for the client c. Adjust the financial statement data and compare the company to its industry peers.

Financial Reporting Mechanics

1, Accounts receivable and accounts payable are most likely classified as which financial statement elements? Accounts receivable A. B. C. Assets Liabilities Revenue Accounts payable Liabilities Assets Liabilities

2. The accounting equation is least accurately stated as: A. openers equity = liabilities assets. B. ending retained earnings = assets contributed capital liabilities. C. Assets = liabilities + contributed capital + beginning retained earnings + revenue expenses dividends. 3. An electrician repaired the light fixtures in a retail shop on October 24 and sent the bill to the shop on November 3. If both the electrician and the shop prepare financial statement under the accrual method on October 31, how will they each record this transaction? Electrician A. B. C. Accrued revenue Accrued expense Unearned revenue Retail Shop Accrued expense Prepaid expense Accrued expense

4. If a firm raises $10 million by issuing new common stock, which of its financial statements will reflect the transactions? A. Income statement and statement of owners equity B. Balance sheet; income statement, and cash flow statement C. Balance sheet; cash flow statement, and statement of owners equity.

Paul was unemployed and unable to find a job. He therefore decided to open a business venture. New Year was approaching, and so he decided to buy gift wrapping paper from a local supplier and to sell it on the corner of his local high street. He felt that the price of wrapping paper in high street shops was too high. This provided him with a useful business opportunity. He began the venture with $40 of his own money, in cash. On Monday, Pauls first day of trading, he bought wrapping paper for $40 and sold three-quarter of it for $45 in cash. A, What cash movements took place during Monday? ( Cash flow statement) B, How much wealth ( that is, profit) was generated by the business during Monday? (Income statement) C, What is the accumulated wealth at Monday evening? ( Balance sheet) On Tuesday, Paul bought more wrapping paper for $20 cash. He managed to sell all of the new inventories and all of the earlier inventories, for a total of $48. What happened to the financial statements for Pauls business? On Wednesday, Paul bought more wrapping paper for $46 cash. However, it was raining hard for much of the day and sales were slow. After Paul had sold half of his total inventories for $32, he decided to stop trading until Thursday morning. Have a go at drawing up the three financial statements for Pauls business for Wednesday.

Statement of cash flows for Monday Opening balance (cash introduced) Cash from sales of wrapping paper Cash paid to buy wrapping paper (40) Closing balance of cash 45 The statement shows that Paul placed 40 cash into the business. The business received 45 cash from customers, but paid 40 cash to buy the wrapping paper. This left 45 of cash by Monday evening. How much wealth (that is, profit) was generated by the business during Monday? Income statement (profit and loss account) for Monday Sales revenue 45 Cost of goods sold ( 3/4 of 40) (30) Profit 15 Note that it is only the cost of the wrapping paper sold that is matched against (and deducted from) the sales 40 45

revenue in order to find the profit, not the whole of the cost of wrapping paper acquired. Any unsold inventories (in this case 1/4 of 40 = 10) will be charged against the future sales revenue that they generate. What is the accumulated wealth at Monday evening? Statement of financial position (balance sheet) as at Monday evening Cash (closing balance) 45 Inventories of goods for resale ( 1/4 of 40) 10 Total assets 55 Equity 55 Let us now continue with our example. On Tuesday, Paul bought more wrapping paper for 20 cash. He managed to sell all of the new inventories and all of the earlier inventories, for a total of 48. The statement of cash flows for Tuesday will be as follows:

Statement of cash flows for Tuesday Opening balance (from Monday evening) 45 Cash from sales of wrapping paper 48 Cash paid to buy wrapping paper (20) Closing balance 73 The income statement for Tuesday will be as follows: Income statement for Tuesday Sales revenue 48 Cost of goods sold (20 + 10) (30) Profit 18 The statement of financial position as at Tuesday evening will be: Statement of financial position as at Tuesday evening

Cash (closing balance) 73 Inventories Total assets 73 Equity 73 On Wednesday, Paul bought more wrapping paper for 46 cash. However, it was raining hard for much of the day and sales were slow. After Paul had sold half of his total inventories for 32, he decided to stop trading until Thursday morning. Have a go at drawing up the three financial statements for Pauls business for Wednesday. Statement of cash flows for Wednesday Opening balance (from Tuesday evening) 73 Cash from sales of wrapping paper 32 Cash paid to buy wrapping paper (46) Closing balance 59

Income statement for Wednesday Sales revenue 32 Cost of goods sold ( 1/2 of 46) (23) Profit 9 Statement of financial position as at Wednesday evening Cash (closing balance) Inventories ( 1/2 of 46) Total assets Equity

59 23 82 82