Pre-Test
How to Read and Interpret Financial Statements
Second Edition
Course Code 98002
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1. Costs that do not change within a workable range of activity are:
(a) variable.
(b) mixed.
(c) fixed.
(d) direct.
2. Based on the following facts, what is the break-even point? A company has a fixed cost of $28,000 and a variable cost per unit of $30. The unit’s selling price is $100.
(a) 300 units
(b) 200 units
(c) 400 units
(d) 500 units
3. Based on the following facts, how many units must be sold to earn a profit of $700? A company has a fixed cost of $28,000 and a variable cost per unit of $30. The unit’s selling price is $100.
(a) 410 units
(b) 401 units
(c) 400 units
(d) 470 units
4. Which of the following ratios is calculated by dividing current assets by current liabilities?
(a) Quick
(b) Current
(c) Time interest earned
(d) None of the above
5. Which of the following ratios gives the most conservative indication of liquidity?
(a) Quick
(b) Current
(c) Time interest earned
(d) None of the above
6. Which of the following categories of ratios answers the question: How well does the company manage its resources?
(a) Liquidity
(b) Activity
(c) Profitability
(d) Leverage
7. What does the following formula measure?
Cost of Beginning Inventory + Net Purchases − Cost of Ending Inventory
(a) Cost of goods sold
(b) Gross margin
(c) Cost of goods available for sale
(d) Cost of manufactured goods
8. Complete the following formula:
Gross Profit – Operating Expenses = ______________.
(a) Net income
(b) Operating income
(c) Gross profit
(d) Contribution margin
9. Which is the lowest level of report issued by a Certified Public Accountant after developing a working knowledge of the entity and reading the financial statements to confirm that they are in the correct form and free from obvious material errors?
(a) Compilation
(b) Review
(c) Standard Audit
(d) Qualified Opinion
10. One metric that management can calculate to see if there was adequate cash flow during the period to keep productive capacity at current levels is Free Cash Flow (FCF). FCF is calculated by taking values from the ________________.
(a) balance sheet
(b) statement of cash flows
(c) retained earnings statement
(d) income statement
11. Which of the following is the organization that is empowered to issue statements of financial accounting standards and interpretations?
(a) AAA
(b) PCAOB
(c) FASB
(d) IMA
12. Which of the following is not a current asset of a business?
(a) Fixed assets
(b) Accounts receivable
(c) Inventories
(d) None of the above, since all are current assets
13. Which of the following are assets?
(a) Inventories
(b) Accounts receivable
(c) Land
(d) All of the above
14. Additional paid-in capital is:
(a) the same as treasury stock.
(b) a type of equity account.
(c) always preferred stock.
(d) a long-term liability.
15. Which of the following is the asset name for amounts due from customers for sales made or services rendered on account?
(a) Promissory notes
(b) Accounts receivable
(c) Accruals
(d) Interest receivable
16. Which of the following is not one of the inventory accounts related to the products that the company sells?
(a) Raw materials
(b) Supplies
(c) Work-in-process
(d) Finished goods
17. Which of the following inventory methods would result in maximizing net income during times of rising prices?
(a) Last in, first out
(b) First in, first out
(c) Average cost
(d) Specific identification
18. Which of the following inventory methods would result in minimizing net income during times of rising prices?
(a) Last in, first out
(b) First in, first out
(c) Average cost
(d) Specific identification
19. Which of the following is not a current liability?
(a) Accounts payable
(b) Notes payable (due in six months)
(c) Dividends payable
(d) Bond due in ten years
20. Which of the following long-term liabilities creates a lien on company property?
(a) Bond payable
(b) Mortgage payable
(c) Zero coupon bond
(d) Debenture
21. Which of the following liabilities rarely carries an interest charge?
(a) Accounts payable
(b) Notes payable
(c) Bonds payable
(d) Mortgage payable
22. Which of the following income statement formats shows the most detail?
(a) Single step
(b) Multi-step
(c) Cost-of-goods-sold step
(d) Contribution margin income statement
23. The source of payment of current liabilities usually is derived from ________________ assets.
(a) long-term
(b) net
(c) current
(d) permanent
24. Under accrual accounting rules, generally, a revenue:
(a) is any cash inflow into a business during the accounting period.
(b) is the result of delivering or producing goods and rendering services.
(c) can include an increase in equity from transactions that are not central to the purpose of the firm.
(d) is shown on the statement of cash flows.
25. _________________________ income is a company’s change in total stockholders’ equity from all sources other than the owners of the firm.
(a) Net
(b) Extraordinary
(c) Comprehensive
(d) Interest