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 entity’s financial position and past performance to form opinions about its2. A firm’s financial position at a specific point in time is reported in the:

a. Balance sheetb. Income statementc. Cash flow statement

3. Information about accounting estimates, assumptions, and methods chosen for reporting is most likely found in:a. The auditor’s opinionb. Financial statement notes.c. Management’s Discussion and analysis

4. If auditor finds that a company’s financial statements have a specific exception to applicable accounting principles, she is most likely to issue a:a. Dissenting opinionb. Cautionary notec. 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 company’s securities are suitable for the clientc. 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 Accounts payable

A. Assets LiabilitiesB. Liabilities AssetsC. Revenue 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 Retail Shop

A. Accrued revenue Accrued expenseB. Accrued expense Prepaid expenseC. Unearned revenue 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 owner’s 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, Paul’s 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 Paul’s 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 Paul’s business for Wednesday.

  Statement of cash flows for Monday

                       £

•Opening balance (cash introduced)         40•Cash from sales of wrapping paper                     45•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 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     55Let 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)                      45Cash from sales of wrapping paper                        48Cash paid to buy wrapping paper                                    (20)Closing balance 73The income statement for Tuesday will be as follows:Income statement for Tuesday                                                                                                                     £  Sales revenue 48Cost of goods sold (£20 + £10) (30)Profit                                                                              18The 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 Paul’s 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)                                                59

   Inventories ( 1/2 of £46)                                             23

Total assets                                    82

    Equity                                                                      82