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EXAM Bank REVIEW —
ACCOUNTING & FINANCIAL
STATEMENT ANALYSIS
1. Which of the following statements is true regarding the Sarbanes-Oxley Act?
A. All private and foreign companies must issue an internal control report evaluated by an
outside auditor.
B. Individuals committing securities fraud receive a mandatory 10-year prison sentence.
C. Accounting firms may provide auditing and full consulting services to the same public
clients.
D. The Public Company Accounting Oversight Board oversees auditors of public companies.
ANS: D
Rationale: The Sarbanes-Oxley Act established the Public Company Accounting Oversight
Board (PCAOB) to oversee audits of public companies and improve accountability.
2. Which situation best illustrates separation of duties as an internal control procedure?
A. Invoices are prenumbered.
B. Cashiers do not have access to accounting records.
C. Electronic devices are installed to reduce theft.
D. External auditors monitor internal controls.
ANS: B
Rationale: Separation of duties reduces fraud risk by ensuring employees handling cash are
not responsible for maintaining accounting records.
3. Which measure discourages theft in a retail store accepting over-the-counter cash
receipts?
A. The store clerk deposits cash in the bank.
B. The sales clerk records journal entries from machine tapes.
C. A receipt is issued for every transaction.
D. The sales clerk compares drawer cash with machine records.
ANS: C
Rationale: Issuing receipts ensures each sale is recorded and reduces opportunities for
theft.
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4. In a large company, who is typically responsible for comparing cash records with the
bank balance?
A. Treasurer
B. Cashier
C. Controller
D. Accounts payable clerk
ANS: C
Rationale: The controller oversees accounting operations and performs bank
reconciliations.
5. Before signing a check, which document should the controller or treasurer examine?
A. Sales invoice
B. Deposit slip
C. Purchase order
D. Inventory report
ANS: C
Rationale: Purchase orders verify authorization and legitimacy of expenditures before
payment.
6. Which asset is considered the most liquid?
A. Inventory
B. Equipment
C. Accounts receivable
D. Cash
ANS: D
Rationale: Cash is immediately available for use and therefore is the most liquid asset.
7. What entry is included when replenishing a petty cash fund?
A. Debit to Cash
B. Credit to Cash
C. Debit to Petty Cash
D. Credit to Supplies Expense
ANS: B
Rationale: Replenishing petty cash decreases the company’s cash account.
8. When a check is issued, the person receiving payment is called the:
A. Drawer
B. Payor
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C. Payee
D. Depositor
ANS: C
Rationale: The payee is the person or business receiving payment from the check.
9. Which is an advantage of online banking for businesses?
A. Internal controls may be reduced.
B. Book balances always equal bank balances.
C. Bank reconciliations are unnecessary.
D. Businesses can reconcile balances at any time.
ANS: D
Rationale: Online banking allows immediate access to account information for faster
reconciliation.
10. A check for $507 was mistakenly recorded as $705. How is this corrected on the
bank reconciliation?
A. Deduction on the bank side
B. Addition on the bank side
C. Deduction on the book side
D. Addition on the book side
ANS: D
Rationale: The business overstated the cash reduction, so the book balance must be
increased.
11. Which method does NOT accurately evaluate financial performance?
A. Comparing with industry averages
B. Comparing results from year to year
C. Examining only one year’s data
D. Comparing with competitors
ANS: C
Rationale: Trend analysis requires comparisons across multiple periods and benchmarks.
12. Which of the following is NOT one of the three primary methods of financial
statement analysis?
A. Ratio analysis
B. Vertical analysis
C. Financial statement analysis
D. Horizontal analysis
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ANS: C
Rationale: The primary methods are ratio analysis, horizontal analysis, and vertical analysis.
13. Which statement best describes horizontal analysis?
A. Calculating key ratios to evaluate performance
B. Comparing a company with competitors
C. Comparing financial statement amounts from year to year for the same company
D. Expressing amounts as percentages of budgeted amounts
ANS: C
Rationale: Horizontal analysis evaluates trends by comparing financial data over multiple
periods.
14. When performing vertical analysis of a balance sheet, the base amount is:
A. Net income
B. Current assets
C. Total liabilities
D. Total assets
ANS: D
Rationale: In vertical analysis, each balance sheet item is expressed as a percentage of
total assets.
15. Which analysis method shows how operating expenses as a percentage of net sales
change over time?
A. Ratio analysis
B. Horizontal analysis
C. Vertical analysis
D. Industry analysis
ANS: C
Rationale: Vertical analysis expresses each income statement item as a percentage of net
sales.
16. A common-size statement reports percentages used in:
A. Horizontal analysis
B. Vertical analysis
C. Ratio analysis
D. Trend analysis
ANS: B
Rationale: Common-size statements are created using vertical analysis.
EXAM Bank REVIEW —
ACCOUNTING & FINANCIAL
STATEMENT ANALYSIS
1. Which of the following statements is true regarding the Sarbanes-Oxley Act?
A. All private and foreign companies must issue an internal control report evaluated by an
outside auditor.
B. Individuals committing securities fraud receive a mandatory 10-year prison sentence.
C. Accounting firms may provide auditing and full consulting services to the same public
clients.
D. The Public Company Accounting Oversight Board oversees auditors of public companies.
ANS: D
Rationale: The Sarbanes-Oxley Act established the Public Company Accounting Oversight
Board (PCAOB) to oversee audits of public companies and improve accountability.
2. Which situation best illustrates separation of duties as an internal control procedure?
A. Invoices are prenumbered.
B. Cashiers do not have access to accounting records.
C. Electronic devices are installed to reduce theft.
D. External auditors monitor internal controls.
ANS: B
Rationale: Separation of duties reduces fraud risk by ensuring employees handling cash are
not responsible for maintaining accounting records.
3. Which measure discourages theft in a retail store accepting over-the-counter cash
receipts?
A. The store clerk deposits cash in the bank.
B. The sales clerk records journal entries from machine tapes.
C. A receipt is issued for every transaction.
D. The sales clerk compares drawer cash with machine records.
ANS: C
Rationale: Issuing receipts ensures each sale is recorded and reduces opportunities for
theft.
, LATEST EXAM GUIDE BANK
4. In a large company, who is typically responsible for comparing cash records with the
bank balance?
A. Treasurer
B. Cashier
C. Controller
D. Accounts payable clerk
ANS: C
Rationale: The controller oversees accounting operations and performs bank
reconciliations.
5. Before signing a check, which document should the controller or treasurer examine?
A. Sales invoice
B. Deposit slip
C. Purchase order
D. Inventory report
ANS: C
Rationale: Purchase orders verify authorization and legitimacy of expenditures before
payment.
6. Which asset is considered the most liquid?
A. Inventory
B. Equipment
C. Accounts receivable
D. Cash
ANS: D
Rationale: Cash is immediately available for use and therefore is the most liquid asset.
7. What entry is included when replenishing a petty cash fund?
A. Debit to Cash
B. Credit to Cash
C. Debit to Petty Cash
D. Credit to Supplies Expense
ANS: B
Rationale: Replenishing petty cash decreases the company’s cash account.
8. When a check is issued, the person receiving payment is called the:
A. Drawer
B. Payor
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C. Payee
D. Depositor
ANS: C
Rationale: The payee is the person or business receiving payment from the check.
9. Which is an advantage of online banking for businesses?
A. Internal controls may be reduced.
B. Book balances always equal bank balances.
C. Bank reconciliations are unnecessary.
D. Businesses can reconcile balances at any time.
ANS: D
Rationale: Online banking allows immediate access to account information for faster
reconciliation.
10. A check for $507 was mistakenly recorded as $705. How is this corrected on the
bank reconciliation?
A. Deduction on the bank side
B. Addition on the bank side
C. Deduction on the book side
D. Addition on the book side
ANS: D
Rationale: The business overstated the cash reduction, so the book balance must be
increased.
11. Which method does NOT accurately evaluate financial performance?
A. Comparing with industry averages
B. Comparing results from year to year
C. Examining only one year’s data
D. Comparing with competitors
ANS: C
Rationale: Trend analysis requires comparisons across multiple periods and benchmarks.
12. Which of the following is NOT one of the three primary methods of financial
statement analysis?
A. Ratio analysis
B. Vertical analysis
C. Financial statement analysis
D. Horizontal analysis
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ANS: C
Rationale: The primary methods are ratio analysis, horizontal analysis, and vertical analysis.
13. Which statement best describes horizontal analysis?
A. Calculating key ratios to evaluate performance
B. Comparing a company with competitors
C. Comparing financial statement amounts from year to year for the same company
D. Expressing amounts as percentages of budgeted amounts
ANS: C
Rationale: Horizontal analysis evaluates trends by comparing financial data over multiple
periods.
14. When performing vertical analysis of a balance sheet, the base amount is:
A. Net income
B. Current assets
C. Total liabilities
D. Total assets
ANS: D
Rationale: In vertical analysis, each balance sheet item is expressed as a percentage of
total assets.
15. Which analysis method shows how operating expenses as a percentage of net sales
change over time?
A. Ratio analysis
B. Horizontal analysis
C. Vertical analysis
D. Industry analysis
ANS: C
Rationale: Vertical analysis expresses each income statement item as a percentage of net
sales.
16. A common-size statement reports percentages used in:
A. Horizontal analysis
B. Vertical analysis
C. Ratio analysis
D. Trend analysis
ANS: B
Rationale: Common-size statements are created using vertical analysis.
