1. ___ evaluates the ability to repay loans?
A. Financial Statements
B. Balance Sheet
C. Income Statement Correct
D. Cash Flow Statement
Explanation
The correct answer is 'Income Statement.' While financial statements as a whole provide insight into a business, the specific ability to repay loans is best evaluated through profitability and cash flows. The income statement shows revenues, expenses, and net income, which reflect a firm’s operating performance and ability to generate earnings to service debt. The balance sheet only shows assets and liabilities at a point in time, not repayment ability. The cash flow statement shows liquidity, but not repayment capacity tied to ongoing earnings. Thus, income statements are the primary tool for assessing whether a business can consistently meet its loan obligations.
2. What information does a balance sheet provide about a company?
A. Revenues and expenses for a period of time
B. Assets and liabilities at a specific point in time Correct
C. Cash collections and expenditures at a specific point in time
D. Cash collections and expenditures for a period of time
Explanation
The correct answer is 'Assets and liabilities at a specific point in time.' A balance sheet is a financial statement that summarizes a company's assets, liabilities, and equity on a specific date. Unlike the income statement, which covers a time period, the balance sheet is a snapshot, showing financial position rather than performance. Options A and D describe the income statement and statement of cash flows, while option C is inaccurate since cash flows are reported over a period of time, not at a point in time. Thus, the balance sheet provides point-in-time financial position data.
3. Which statement best describes financial information recorded in the accounting system of a business?
A. Events likely to occur in the future
B. Events that have already occurred Correct
C. Personal transactions of owners
D. Predicted cash flows
Explanation
The correct answer is 'Events that have already occurred.' Accounting systems are based on the historical cost principle, recording economic transactions that have actually taken place. This ensures reliability and verifiability of financial data. Predictions or future expectations may be part of managerial forecasts, but they are not part of the financial records. Personal transactions of owners are excluded unless directly tied to business operations. Thus, accounting focuses on past, objective, and verifiable events that have already occurred.
4. Which body oversees a certified public accounting firm's audit practices when the firm is auditing large, public companies?
A. The Public Company Accounting Oversight Board (PCAOB) Correct
B. The Internal Revenue Service (IRS)
C. The Financial Accounting Standards Advisory Council (FASAC)
D. The Financial Accounting Standards Board (FASB)
Explanation
The correct answer is 'PCAOB.' The Public Company Accounting Oversight Board is the regulator established by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies in order to protect investors. The IRS is concerned with taxation, not auditing oversight. The FASAC and FASB set accounting standards but do not supervise auditing practices. Therefore, the PCAOB is the governing body responsible for ensuring audit quality and compliance when it comes to publicly traded entities.
5. Which organization establishes the rules US companies use to record and report accounting information?
A. The Financial Accounting Standards Board (FASB) Correct
B. The International Accounting Standards Board (IASB)
C. The Securities and Exchange Commission (SEC)
D. The Internal Revenue Service (IRS)
Explanation
The correct answer is 'FASB.' In the United States, the Financial Accounting Standards Board develops and issues Generally Accepted Accounting Principles (GAAP), which dictate how companies record and report their financial information. The SEC has oversight authority but does not create GAAP. The IRS deals with tax regulations, not financial accounting standards. The IASB sets international standards (IFRS), but US companies follow GAAP. Thus, the FASB is the primary body responsible for establishing accounting rules in the US.