Preview Extract
Chapter 1
Financial Accounting and Its Economic Context
Multiple Choice Questions
1. The balance sheet communicates
a. proof to the investor that the company is profitable.
b. assets, liabilities, and shareholders’ equity with all transactions reflected through the year.
c. assets, liabilities, and shareholders’ equity as of a certain date.
d. operating, investing, and financing activities.
Answer: C
2. The income statement communicates
a. assets, liabilities, and shareholders’ equity as of a certain date.
b. how much cash the owner received during the period.
c. information about dividends the company paid to its owners.
d. revenues less expenses during a period of time.
Answer: D
3. Who prepares financial reports for a particular company?
a. The Securities and Exchange Commission
b. The Board of Directors
c. The company’s management
d. The company’s auditors
Answer: C
4. To run a company effectively, which one of the following might be a source from which
management might acquire capital?
a. Customers
b. FASB
c. Debt and equity investors
d. Auditors
Answer: C
5. Considering and understanding how business decisions affect the financial statements is
a. the sole responsibility of the Securities and Exchange Commission.
b. provided in the auditor’s report.
c. referred to as an economic consequence perspective.
d. interpreted strictly by the company’s suppliers.
Answer: C
6. A Certified Public Accountant
a. reviews every transaction that a company conducts during any given year.
b. performs a company’s audit.
c. is one of the investors of a company.
d. is responsible for the preparation and integrity of a company’s financial statements.
Answer: B
7. Footnotes to financial statements
a. more fully explain certain items in the financial statements.
b. reflect financial notes personalized by the company’s executive team.
c. show the detail of salaries of every employee.
d. justify fraudulent business practices.
Answer: A
8. An internal control system
a. is maintained to ensure that transactions of a company are properly recorded and reported
and the assets are safeguarded.
b. is included in the set of footnotes to the financial statements.
c. is an estimate of the profits a company expects to earn in the future.
d. measures how much control management has over its staff.
Answer: A
9. Where would you find information on the amount of net income for the year?
a. Factory production reports on units produced
b. Auditor’s report
c. Income statement
d. Internal Revenue Service
Answer: C
10. The statement of cash flows communicates
a. assets, liabilities, and owners’ equity at a point of time.
b. operating, investing, and financing activities.
c. beginning balance plus income less dividends.
d. how much cash the company owes its employees.
Answer: B
11. The retained earnings section of the statement of shareholders’ equity communicates
a. beginning balance plus income less dividends.
b. revenues less expenses during a period of time.
c. how much cash that management has paid for bonuses.
d. operating, investing, and financing activities.
Answer: A
12. An investor wants to find the amount of cash and land that a company has. Where will the
investor look?
a. Statement of shareholders’ equity
b. Income statement
c. Balance sheet
d. Statement of cash flows
Answer: C
13. Dividends declared and paid to the owners are found in the
a. management letter.
b. income statement.
c. dividends statement.
d. statement of shareholders’ equity.
Answer: D
14. Cash received by a company from its regular operations during the year is found in its
a. balance sheet.
b. statement of cash flows.
c. statement of shareholders’ equity.
d. auditor’s report.
Answer: B
15. A company’s profits during its most recent year are found in its
a. balance sheet and income statement.
b. statement of cash flows only.
c. statement of shareholders’ equity only.
d. income statement and statement of shareholders’ equity.
Answer: D
16. The cash paid during the year to satisfy a company’s debt is found in its
a. statement of cash flows.
b. income statement.
c. statement of shareholders’ equity.
d. auditor’s report.
Answer: A
17. The amount which a company’s customers owe the company for products delivered or
services rendered is found in the
a. footnotes only.
b. income statement.
c. balance sheet.
d. statement of cash flows.
Answer: C
18. Solvency may be described as
a. an amount owed that must be paid in the future.
b. amounts that can be distributed to owners only.
c. the amount invested in the firm by its owners.
d. the ability to generate enough cash to pay its debt as the amounts become due.
Answer: D
19. Retained earnings may be described as
a. the total past profits retained in the business.
b. a company’s future growth.
c. the amount invested in the firm by its owners.
d. amounts retained for payments to vendors.
Answer: A
20. Liabilities may be described as
a. amounts that will be used for future growth.
b. the amounts owed that must be paid in the future.
c. the total measured past growth of a firm less the amount distributed to the owners.
d. amounts the company paid during the past year.
Answer: B
21. Public stock exchanges
a. are operated by managers of a company.
b. are markets that sell annual reports.
c. provide a forum for buying and selling of equity interests in other companies.
d. are used to evaluate debt and equity investments.
Answer: C
22. A statement that “the financial statements were prepared in accordance with generally
accepted accounting principles” is found in the
a. collateral.
b. stock market.
c. footnotes to the balance sheet.
d. auditor’s report.
Answer: D
23. A statement that financial statement information “is the responsibility of the company”
issuing the statements is found in the
a. footnotes to the financial statements.
b. loan contract.
c. management letter.
d. board of directors’ report.
Answer: C
24. CPA is an abbreviation for
a. Certified Public Accountant.
b. Certified Production Accountant.
c. Consumer Protection Agency.
d. Certified Permissible Accounting.
Answer: A
25. An equity investor is
a. a person who provides money to a company with the expectation that it will be paid back
with interest.
b. a creditor that has a regular trade relationship.
c. a person who provides money to a company as a gift with a stipulation that it will be used
as agreed.
d. a person who provides money to a company, though the original money never has to be
repaid, and who may be entitled to receive periodic cash payments.
Answer: D
26. An explanation about the assumptions, estimates, and choices of alternative accounting
methods used in the financial statements is found in the
a. footnotes to the balance sheet.
b. auditor’s report.
c. statement of shareholders’ equity.
d. president’s letter to the shareholders.
Answer: A
27. A debt investor is
a. a person who provides money to a company with the expectation that it will be paid back
with interest.
b. a person who provides money to a company and expects periodic cash payments in return,
though the original money never has to be repaid.
c. a person who provides money to a company as a gift with a stipulation that it will be used
as agreed.
d. often referred to as a stockholder.
Answer: A
28. The board of directors
a. provides money to a company with the expectation that it will be paid back with interest.
b. makes corporate decisions such as hiring and firing management and setting company
policy.
c. is responsible for the future profits of a company.
d. is in charge of accounting and human resources on a daily basis.
Answer: B
29. As a potential creditor, you are interested in a company’s ability to pay loan interest and
principal as they come due. Which of the following would be of the greatest interest to you in
your analysis?
a. statement of shareholders’ equity.
b. income statement.
c. statement of cash flows.
d. Statement of Financial Accounting Standards.
Answer: C
30. Which one of the following statements is true?
a. Financial accounting is the only accounting used in the United States.
b. Companies that have a profit objective use not-for-profit accounting.
c. Managerial accounting targets operating decisions.
d. Financial and tax accounting are virtually the same.
Answer: C
31. A bank that loans money to a company is called
a. a supplier.
b. a creditor.
c. an equity investor.
d. a shareholder.
Answer: B
32. Which one of the following is an equity investor?
a. A supplier of inventory waiting for payment
b. A person who purchases common stock of a corporation
c. A bank that loans money to a firm
d. A person who has a savings account in a bank
e. An employee that plans on investing in the company 10 years from now
Answer: B
33. As used in accounting, SEC is an abbreviation for
a. Securities and Exchange Commission.
b. South Eccentric Commissioners.
c. Shareholders’ Equity Commission.
d. Southeastern Conference.
Answer: A
34. The independence of the auditor is subject to question when the
a. auditor is paid by the management of the company being audited.
b. auditor is independent.
c. audit firm is also responsible for preparing the tax return.
d. auditor is paid 1% of the company’s profits for the audit services provided.
Answer: D
35. Which of the following statements is true?
a. Shopping for favorable audit opinions is permitted by the SEC.
b. No formal reporting of auditor switches is required by the SEC.
c. The SEC has enacted rules to help ensure financial literacy among audit committee
members.
d. Since management constructs the financial statements, auditors have no legal liability to
those who rely upon these reports.
Answer: C
36. The advantage to the user of financial accounting statements that are audited by
independent certified public accountants is assurance that the
a. statements are produced in accordance with generally accepted accounting principles.
b. company will be solvent for at least one more year.
c. company cannot remain profitable for more than 2 to 3 years.
d. company pays its fair share of income taxes.
Answer: A
37. GAAP is an acronym for
a. General Asset Accounting Procedures.
b. Government Agency Accounting Procedures.
c. Generally Accepted Accounting Principles.
d. Global Accounting Activity Principles.
Answer: C
38. Debt investments
a. require payments to the shareholders for periodic dividends.
b. are found on a company’s income statement.
c. may be secured with collateral.
d. return payments at the discretion of the board of directors.
Answer: C
39. Annual reports of public companies
a. are published once per year.
b. include financial statements adjusted for inflation.
c. are also known as Form 10-K.
d. are published by companies 4 times per year.
Answer: A
40. Equity investments are bought and sold
a. only on the first day of each year.
b. in stock exchanges such as the NASDAQ.
c. by a company’s independent auditors.
d. from and to the SEC.
Answer: B
41. Generally accepted accounting principles are determined by
a. annual voting by all certified public accountants.
b. a privately financed body known as the FASB.
c. the SEC.
d. a congressional committee that passes laws governing accounting practice.
Answer: B
42. Shareholders
a. and employees are the owners of a company.
b. receive repayment of the cash they have invested in a business.
c. receive payment from a company regardless if the company is profitable or not.
d. may benefit from increases in the value of their investment of a company.
Answer: D
43. When management goes beyond ethical boundaries in its attempt to make financial
statements appear attractive, management
a. should be commended for its creativity.
b. will not need an annual audit.
c. should pay its employees larger bonuses.
d. is perpetrating fraud or possible criminal activity.
Answer: D
44. Generally accepted accounting principles
a. are laws created and enacted by Congress.
b. define the standards for internal management reporting.
c. increase the level of credibility in financial statements.
d. are created by the Securities and Exchange Commission.
Answer: C
45. Financial accounting practices and standards used in other countries
a. are the same as practices used by United States companies.
b. have different systems of financial accounting.
c. are more progressive than those used by United States companies.
d. will often have common practices similar to U.S. GAAP.
Answer: D
46. International Financial Reporting Standards (IFRS) are recognized as acceptable by major
stock exchanges throughout the world except in
a. England.
b. Japan.
c. The United States.
d. France.
Answer: C
47. International Financial Reporting Standards (IFRS) are promulgated by
a. the United Nations.
b. the World Bank.
c. the Big Four accounting firms.
d. the IASB.
Answer: D
48. Which one of the following is true concerning the International Accounting Standards
Board?
a. It is the international accounting standards setting body that is attempting to bring greater
uniformity to worldwide accounting practices.
b. It approves all financial statements before they are distributed to users.
c. It consistently disagrees with the FASB on its rulemaking.
d. It requires both national and international companies around the world apply the same
accounting principles.
Answer: A
49. The auditors are charged with responsibility
a. to detect financial fraud committed by employees during the course of their audit
b. to conduct a thorough and independent audit
c. to correct all errors in the financial statements
d. for the accuracy and completeness of the financial statements
Answer: B
50. Select the name that doesn’t fit with the others on the list.
a. PricewaterhouseCoopers
b. Sarbanes-Oxley
c. Deloitte & Touche
d. KPMG Peat Marwick
Answer: B
51. What encourages management to refrain from pressuring auditors too strongly?
a. Possible legal liability
b. Outside investors and creditors
c. Prospects of higher net income
d. Economic incentives from outsiders
Answer: A
52. Which of the following best describes the two perspectives of the financial reporting
process that managers need to understand in investing decisions?
a. Economic consequences and user orientation.
b. Corporate governance and user orientation.
c. User orientation and debt covenants.
d. Economic consequences and corporate governance.
Answer: A
53. All of the following might be found in the auditor's report except:
a. A statement about conformity with GAAP.
b. A statement about the fair presentation of the financial conditions and operations of the
audited company.
c. A statement about the effectiveness of the company's internal control system.
d. A statement about the function of the company's board of directors.
Answer: D
54. Which of the following best describes assets paid to owners of a company as a return for
their initial investment?
a. payables
b. compensation contracts
c. dividends
d. interest
Answer: C
55. Where would you most likely find a detailed explanation about estimates used in the
financial statements of a company?
a. management letter
b. financial footnotes
c. debt restrictions
d. debt contracts
Answer: B
56. All of the following would likely be part of a loan contract except:
a. maturity date
b. earning power
c. collateral
d. annual interest
Answer: B
57. Which of the following statements is true?
a. Dividend payments are determined by management.
b. Dividend payments are specified by a contract.
c. Dividend payments are based on company collateral.
d. Dividend payments are paid at the board of director's discretion.
Answer: D
58. All of the following are functions of the board of directors except:
a. Attending quarterly meetings.
b. Conducting performance review for management.
c. Declaring dividends.
d. Firing staff personnel.
Answer: D
59. Which of the following is a measure of past profits that have been retained in a business?
a. liabilities
b. common stock.
c. retained earnings.
d. assets
Answer: C
60. Which of the following is least likely to be a by-product of ethical business practices?
a. fewer lawsuits.
b. higher profits.
c. higher audit fees.
d. public trust.
Answer: C
61. Which of the following factors is least likely to encourage managers and auditors to act
professionally?
a. professional reputation.
b. tax structure
c. legal liability
d. ethics
Answer: B
62. Ownership of an equity security entitles the holder to which basic right?
a. The right to management outstanding loans.
b. The right to pay dividends.
c. The right to vote for company directors at the annual shareholders' meeting.
d. The right to certify financial report reviews.
Answer: C
63. Which of the following is a public exchange for equity and debt securities?
a. The Federal Trade Commission.
b. The New York Stock Exchange.
c. The Securities and Exchange Commission.
d. The Financial Accounting Standards Board.
Answer: B
64. Which of the following groups make up a company’s audit committee?
a. Auditors.
b. Outside directors from the Board.
c. Company officers.
d. All of the individuals in (a), (b), and (c) are included in the audit committee.
Answer: B
65. Which of the following groups enacted the Sarbanes Oxley Act?
a. FASB
b. AICPA
c. U.S. Congress
d. PCAOB
Answer: C
66. All of the following are false regarding international accounting standards (IAS) except
which of the following?
a. The SEC requires all companies to use IAS.
b. There are no substantive differences between U.S. GAAP and IFRS.
c. The SEC prohibits U.S. stock exchanges from listing non-U.S. companies who follow
IFRS.
d. All public companies in the European Union are required to report using IFRS and IAS.
Answer: D
Matching Questions
1. Identify which of the users of financial statement information listed in A through E would
most likely desire and/or benefit from the economic aspects listed in items 1 through 5 below.
You may use each letter more than once or not at all.
_______ 1. Want to choose a company to earn returns potentially higher than fixed income
instruments
_______ 2. Need to predict future cash flows necessary for repayment
_______ 3. Want to determine how much tax a company must pay
_______ 4. Want the best product possible for the money
_______ 5. Want to maintain a level of compensation
Answer:
1. B
2. A
3. C
4. D
5. E
2. For each description listed in items 1 through 4 below, select the letter of the accounting
term (A through F) it best describes. You may use each letter more than once.
_______ 1. Total measured past growth less the amount distributed to owners
_______ 2. A measure of assets generated from the products and services sold
_______ 3. Owed and must be paid in the future
_______ 4. Amount invested in the firm by its owners
Answer:
1. C
2. D
3. B
4. F
3. For each financial statement listed in 1 through 4 below, place the letter (A through D) of
the best description in the space provided. You may use each letter more than once or not at
all.
_______ 1. Balance sheet
_______ 2. Income statement
_______ 3. The retained earnings section of the statement of shareholders’ equity
_______ 4. Statement of cash flows
Answer:
1. A
2. D
3. B
4. C
4. Identify which accounting document(s) listed in A through D would always provide the
information indicated in items 1 through 5 below. You may use each letter more than once or
not at all. Some items may require more than one answer.
_______ 1. Represents that the financial statements are stated fairly, in all material respects
_______ 2. Indicates that financial statements were prepared in conformity with GAAP
_______ 3. Contains assets, liabilities, and equity, as well as income from operations
_______ 4. Explains certain items on the balance sheet
_______ 5. An acceptance of responsibility of financial information provided
Answer:
1. A
2. A, B, D
3. C
4. D
5. B
Short Answer Questions
1. Which financial statement would you review to determine the amount of cash a company
received from an issue of capital stock during the year?
Answer: statement of cash flows
2. Which financial statement would you review to determine a company’s interest expense?
Answer: income statement
3. What independent party attests that the balance sheet and income statement present fairly
the financial position of the company?
Answer: auditor
4. Identify the financial statement in which revenues less expenses are reported.
Answer: income statement
5. What financial statement communicates profits retained and distributions to shareholders?
Answer: statement of shareholders’ equity
6. What financial statement communicates cash flows from operating activities?
Answer: statement of cash flows
7. What financial statement lists and measures assets, liabilities, and shareholders’ equity at a
certain date?
Answer: balance sheet
8. What financial statement shows where the money came from and where it went?
Answer: statement of cash flows
9. Identify which financial statement you would review to determine the amount of cash a
company paid to retire its debt.
Answer: statement of cash flows
10. Which source would you review to determine that the financial statements are fairly
stated in accordance with GAAP?
Answer: auditor’s report
11. Which financial statement would you review to determine if a company’s operating cash
flow is sufficient to pay day-to-day obligations?
Answer: statement of cash flows
12. Which financial statement would best help you understand the increases and decreases in
cash over a period of time?
Answer: statement of cash flows
13. What financial statement would you review to determine if a company’s payroll exceeds
$1,000,000?
Answer: income statement
14. What financial statement would you review to determine the profitability ratio?
Answer: income statement
15. What financial statement would you review to determine whether or not dividends were
distributed during the year?
Answer: statement of shareholders’ equity and the statement of cash flow
16. On which financial statement would you find the amount invested by a company’s
owners? What is the name of this amount?
Answer: balance sheet; equity investment (stock), also statement of shareholders’ equity
17. On which financial statement(s) would you find the accumulation of total profits and
losses less distributions to owners since the company began operations? What is the name of
this amount?
Answer: balance sheet and statement of shareholders’ equity; retained earnings
18. What accounting name is given to one who provides money to a company with the
expectation that it will be paid back with interest?
Answer: debt investor or creditor and lender
19. What is the name of a person who provides money to a company who never has to be
paid back but expects periodic cash payments?
Answer: equity investor or owner
20. Identify the responsibilities of the board of directors.
Answer: Sets company policies; declares dividends; sets management compensation; hires
and fires management; appoints the audit committee
21. Who assesses whether the financial statements fairly represent the financial position and
results of operations?
Answer: independent auditor
22. Where would you most likely find statements revealing the assumptions, estimates, and
choices of alternative accounting methods used in the balance sheet?
Answer: footnotes to the financial statements
23. List the names of the financial statements that appear in an annual report.
Answer: balance sheet, income statement, statement of cash flows, statement of shareholders’
equity
Short Problems
1. Bricklin Company has $600 in its checking account. A customer owes Bricklin $1,000. The
company has store equipment that cost $1,500 and a truck that cost $5,000. Bricklin
Company owes the bank $3,500 on the truck loan of which one payment of $700 is due in
one week, and owes $4,000 to creditors for its monthly operating expenses, including rent, all
of which is due in the next 30 days.
A. List Bricklin Company’s assets and the dollar amount of each.
B. List Bricklin Company’s liabilities and the dollar amount of each.
C. Is Bricklin Company solvent? Explain.
Answer:
C. Solvency is the ability of a company to generate cash in order to meet its debts as they
come due. While Bricklin Company’s assets exceed its liabilities by $600, the company is not
solvent. A truck payment of $700 is due in one week, but only $600 of cash is available.
Bricklin cannot be sure when the customer will pay the $1,000 amount owed. Bricklin
Company appears to have a cash flow problem.
2. Matura, Inc. reported the following activities for the year:
Borrowed $300,000 from the bank to be repaid in 5 years
Issued stock to investors for $35,000 cash
Paid dividends to shareholders totaling $10,000
Purchased equipment by promising to pay $145,000 to a creditor over the next 3 years
A. Identify which activities are debt investments.
B. Identify which activities are equity investments.
Answer:
3. Sonnan Company showed profits for the last two years totaling $115,000 and $250,000,
respectively. Sonnan Company paid a total of $94,000 to its owners over the two-year period.
A. How much remains in Sonnan Company as retained earnings at the end of the second year
of business?
B. Briefly explain the concept of ‘earning power’ as it pertains to Sonnan Company.
Answer:
B. Earning power is the ability to grow and provide a substantial return to its owners. Sonnan
Company demonstrates earning power given by the fact that it paid a portion of its earnings
to its owners, yet retained a sizable portion to finance the business for future income
production.
Short Essay Questions
1. What is the role of the Securities and Exchange Commission?
Answer: The Securities and Exchange Commission is an agency of the federal government
that was commissioned to implement and enforce the Securities Act of 1933 and the
Securities Exchange Act of 1934.
2. Veronica Ingram is the CEO of a small corporation whose stock is traded on public stock
exchange. She has been concerned with the high cost of producing and distributing annual
financial statements. She has proposed that the corporation stop producing these financial
reports which would save the company $240,000 annually. Briefly explain to Ms. Ingram
why her proposal cannot be adopted.
Answer: Although the $240,000 savings is significant, failure to comply with the Securities
Exchange Act of 1934 is a violation of regulatory practices for publicly held companies. This
Act requires companies with equity securities that are listed on public security markets to (1)
annually file a Form 10-K (audited financial reports), (2) quarterly 10-Qs (unaudited
quarterly financial statements) and (3) annually provide audited financial reports to the
shareholders. Violations lead to being barred from public trading.
3. Why might corporate management want to lobby the FASB?
Answer: Corporate management and other interested parties wish to influence generally
accepted accounting principles (GAAP). Because financial statements are prepared by
management using GAAP, management is very concerned that accounting principles used
provide benefits to investors, creditors, and the others associated with financial reporting.
4. Describe the three components of the statement of cash flows.
Answer: The three components of the statement of cash flows are operating, investing, and
financing activities. Operating activities are associated with the actual products and services
provided by a company. Investing activities include the purchase and sale of assets, such as
equipment and land. Financing activities refer to the collections and payments related to a
company’s capital resources, such as cash borrowings, loan payments, cash from owners, and
payment of dividends to owners.
5. The Sarbanes-Oxley Act was passed by Congress in 2002 in response to a series of
financial and accounting scandals. The purpose of the Act was to bolster corporate
governance and restore confidence in the financial reporting system. Describe one of the new
things that the management of a US public corporation is required to do under this act.
Answer: certification that the financial statements have been reviewed by the CEO and CFO,
or file an annual report on internal controls over financial reporting, or additional
responsibilities to ensure that adequate internal controls and in place, or provide reasonable
assurance that financial records are complete and accurate.
6. Frank Smithson, chief operating officer for Star Master Corporation, has discovered that
two separate and distinct sets of financial statements are being provided—one to the Internal
Revenue Service and the other to its shareholders. He objected to this policy and is insisting
that one set of financial statements be provided to all interested parties. Provide examples of
the needs of the two parties.
Answer: Although one might initially react favorably to Frank’s proposal of one set of
financial statements for all users, it would be impossible. Various rules for determining
income and financial position are specified by each user. These rules reflect different uses of
accounting information. The IRS raises money to support government operations and has
codified rules designed to accomplish this task. The public information provided to
shareholders and other outside parties is governed by generally accepted accounting
principles that are designed to provide the general users with information required for
investment decisions.
7. Describe the two components of the income statement.
Answer: The two components of the income statement are revenues and expenses, the
difference of which represents net income or loss for a period of time. Revenues are a
measure of the assets generated from the products sold and services provided. Expenses are a
measure of the asset outflows or costs associated with selling the products and providing the
services.
8. Why must managers understand financial reporting?
Answer: Managers often use financial statements to assess the financial condition and
performance of their own company, its competitors, and other companies of which
investments in stocks and bonds of other companies might be undertaken. Managers must
understand how business decisions affect the financial statements and how capital providers
and other outsiders use financial statements to evaluate and control their actions.
9. What information is provided in a management letter? Who signs it?
Answer: The CEO and CFO provide a management letter that acknowledges responsibility
for the financial information provided in the financial statements and notes.
10. What powers does the Securities and Exchange Commission have?
Answer: The Securities and Exchange Commission has the power to prescribe the accounting
practices and standards to be employed by companies within its jurisdiction—public
companies. However, the SEC has chosen to delegate the responsibility for establishing
accounting practices and standards to the Financial Accounting Standards Board (FASB). The
SEC also is responsible for ensuring that listed companies prepare and file registration
statements before they issue new securities, and file periodic quarterly and annual reports.
11. What are the two fundamental economic reasons why investors and creditors demand
financial accounting information?
Answer: Creditors need financial information to monitor and enforce the debt and
compensation contracts written with management, and investors need financial information to
help decide where to invest their funds.
12. What methods of controlling the ethical decisions by managers are common? Why are
these methods necessary?
Answer: The methods of controlling the quality of management decisions are financial
statements, debt and compensation contracts, the board of directors, auditors, and the audit
committee. These methods are necessary in order to protect the investments of shareholders
and creditors.
Test Bank for Financial Accounting: In an Economic Context
Jamie Pratt
9780470635292, 9781119537571, 9781119444367
