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13.  Information regarding which of the following items is usually included in the footnotes to financial statements?

A. A five-year summary of the company’s financial performance.

B. A summary of significant accounting policies.

C. A review of the company’s operating performance and financial condition.
    Ans: B.

The summary of significant accounting policies is generally the first of the footnotes presented with audited financial statements prepared in conformity with generally accepted accounting principles. The footnotes are an integral part of statements.

A is incorrect. A five-year summary of financial performance is generally included with the (unaudited) supplementary schedules, which are not part of the footnotes.

C is incorrect. A review of the company’s operating performance and financial condition is included as part of the management discussion and analysis (MD&A) section, which is not part of the footnotes.

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12. An issue subject to a vote at a stockholders’ meeting is presented in a(n):

A. interim report.

B. proxy statement.

C. management statement of responsibility.
    Ans: B.

Proxy statements are prepared and distributed to shareholders on matters that are to be put to a vote at shareholder meetings.

B is incorrect. Public companies are generally required to provide interim financial information, either quarterly or semiannually. Interim financial reports, which include the key financial statements and footnotes, are not audited. They provide updates to a company’s audited annual financial information so that investors, analysts, and other interested parties can assess a company’s incremental financial performance.

C is incorrect. The issue subject to a vote at a stockholders’ meeting will not be presented in management statement of responsibility.

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11. When the financial statements materially depart from accounting standards and are not fairly presented, the audit opinion would be a(n):

A. adverse opinion.

B. qualified opinion.

C. disclaimer of opinion.
    Ans: A.

An adverse opinion occurs when the financial statements materially depart from accounting standards and are not fairly presented. A qualified opinion is one in which there is some limitation or exception to accounting standards.

B is incorrect. A qualified opinion is issued when there is a material instance of noncompliance with applicable accounting standards or there is a limitation on the auditor’s ability to complete the audit as required by auditing standards. A qualified opinion will include an explanatory paragraph describing the problem that prevents the auditors from issuing an unqualified opinion.

C is incorrect. A disclaimer of opinion s issued when the auditor doer not have the ability to issue an opinion for some reason.

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10.Making any necessary adjustments to the financial statements to facilitate comparison with respect to accounting choices is done in which step of the financial statement analysis framework?

A. Collect data.

B. Process data.

C. Analyze/interpret the processed data.

  
    Ans: B.

Making any adjustments is part of the processing data step. Commonly used data bases (part of the collection phase) do not make adjustments for differences in accounting choices.

A is incorrect. Collect data includes: Acquire the company’s financial statements and other relevant data on its industry and the economy. Ask questions of the company’s management, suppliers, and customers, and visit company sites.

C is incorrect. Analyze/interpret the processed data includes: Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports.

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9. Which of the following statements best describes the level of accuracy provided by a standard audit report with respect to errors? The audited financial statements are:

A. fully assured to be free of material errors.

B. reasonable assured to be free of all errors.

C. reasonable assured to be free of material errors.

  
    Ans: C.

Audits provide reasonable assurance that the financial statements are fairly presented, meaning that there is a high degree of probability that they are free of material error, fraud or illegal acts.

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8. An analyst finds information about significant uncertainties affecting a company’s liquidity, capital resources and results of operations in the:

A. notes to the financial statements.

B. balance sheet and income statement.

C. management discussion and analysis.

  
    Ans: C.

Management discussion and analysis includes topics: a review of the company’s consolidated operating performance and its financial condition, an assessment of the significant effects of known treads, the capital resources available to the firm and its liquidity, extraordinary or unusual events, and a review of the performance of operating segments.

Management must highlight any favorable and unfavorable trends and identify significant events and uncertainties that affect the company’s liquidity, capitalresources and results of operations in the management discussion and analysis (MD&A).

A is incorrect. Notes to the financial statement provide detailed disclosures. For example, a summary of the significant accounting policies, disclosures for most asset categories and income taxes.

B is incorrect. Balance sheet reports major classes and amounts of assets, liabilities, and equity capital at a specific point in time. The income statement reports on the performance of the firm for a specific period of time.

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7. An analyst’s examination of the performance of a company is least likely to include an assessment of a company’s:

A. profitability.

B. cash flow generating ability.

C. assets relative to its liabilities.

  
    Ans: C.

Assessment of performance includes analysis of profitability and cash flow generating ability. The relationship between assets and liabilities is used to assess a company’s financial position, not its performance.

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6. Common-size financial statements are most likely an output of which step in the financial analysis framework?

A. Collect data

B. Process data

C. Analyze/interpret data

  
    Ans: B.

The financial statement analysis framework consists of six steps:

1.  State the objective and context. Determine what questions the analysis seeks to answer, the form in which this information needs to be presented, and what resources and how much time are available to perform the analysis.

2.  Gather data. Acquire the company’s financial statements and other relevant data on its industry and the economy. Ask questions of the company’s management, suppliers, and customers, and visit company sites.

3.  Process the data. Make any appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets.

4.  Analyze and interpret the data. Use the data to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports.

5.  Report the conclusion or recommendations. Prepare a report and communicate it to its intended audience. Be sure the report and its dissemination comply with the Code and Standards that relate to investment analysis and recommendations.

6.  Update the analysis. Repeat these steps periodically and change the conclusions or recommendations when necessary.

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5. Which of the following is least likely to appear in a company’s proxy statement?

A. Compensation arrangements for management and directors

B. Significant event and contingencies that may affect future operations

C. Potential conflicts of interest between management, directors, and shareholders.
    Ans: B

Proxy statements are issued by publicly held companies in connection with shareholder meetings and contain useful information about board members and management, executive compensation, stock options and major shareholders.

Significant events, conditions, trends, and contingencies that may affect future operations are contained in Management’s Discussion and Analysis. Compensation agreements for directors and management and their potential conflicts of interest are required in the proxy statement.

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4. Information about management compensation and any potential conflicts of interest that may exist between management and shareholders is most likely found in the:

A. Proxy statement.

B. Notes to the financial statements.

C. Management discussion and analysis

  
    Ans: A

A is correct. Information about management compensation and any potential conflicts of interest that may exist between management and shareholders is typically provided in the proxy statement.

B is incorrect. Notes to the financial statement provide detailed disclosures. For example, a summary of the significant accounting policies, disclosures for most asset categories and income taxes.

C is incorrect. Management discussion and analysis includes topics: a review of the company’s consolidated operating performance and its financial condition, an assessment of the significant effects of known treads, the capital resources available to the firm and its liquidity, extraordinary or unusual events, and a review of the performance of operating segments.