Chapter 2 Quiz.

Q1.

Auditor has several roles when hired: check the annual financial statements; Ensure that
they have been prepared according to US GAAP; Make sure and provide evidence of a
reliability of the information.

Q2.

Depreciation is a non-cash expense, it designed to capture they real value of the asset each
year. In the financial statement, the value of the asset is deducted by the formula. Also,
companies can see how much of an asset’s value has been used up.

Q3.

High debt-to-equity ratio tells us that company has more debts than its oven capital, also it
tells that company is struggling with making sufficient profit in order to cover all the debts
and taxes. Furthermore, a high debt-to-equity ratio is often associated with high risk; it
means that a company has been aggressive in financing its growth with debt.

Q4.

Earnings typically refer to after-tax net income, sometimes known as the bottom line or a

company's profits. Earnings shows actual profitability compared to analyst estimates, own
historical performance, industry’s average and relative competitors. Also, earnings are the
main determinant of a company’s share price.

Q5.

If P/E ratio is higher than company is expected earnings growth, they higher the P/E ratio, the
higher the price relative to growth. It is used to assess whether a share is over- or
undervalued based on the idea that the value of a share should be proportional to the level
of earnings it can generate for its shareholders.

Q6.

Because there are some non-cash expenses, such as amortization and depreciation that are
not reported on the income statement, also some purchases are also not reported on the
income statement.

Q7.

notes show accounting assumptions that were used in preparing the statements. Details of
acquisitions, spin-offs, leases, taxes, and risk management activities are also given.
Q8.

The overall intent of the legislation was to improve the accuracy of information given to
both boards and to shareholders, and increases the penalties against them if their financial
statements later prove to be fraudulent.