Deck 13: Understanding Financial Statements and Forecasting

Question 1

Accounts payable consist of payments due from a firm's customers.

Answer 1

False

Question 2

The balance sheet shows a firm's assets,liabilities,and owners' equity at a specific point in time.

Answer 2

True

Question 3

Liquidity is the ability of a firm to meet maturing debt obligations by having adequate working capital available.

Answer 3

True

Question 4

A mortgage is a long-term loan from a creditor for which real estate is pledged as collateral.

Question 5

Financial leverage decreases a firm's return on equity.

Question 6

Financial management becomes important once a business is established and showing signs of growth.

Question 7

Debt ratio is the ratio of total debt to total assets.

Question 8

A firm that has positive profits can still be running out of cash.

Question 9

The income statement is divided into three areas: cash flows from operations,investments made by the firm,and financing transactions.

Question 10

Financial projections are guarantees of a firm's future profitability.

Question 11

A firm's cash flows can be projected from the pro forma income statement and balance sheet.

Question 12

Operating profits is earnings after interest and taxes are paid.

Question 13

To see the firm's financial position over a period of time,people should look at its balance sheet.

Question 14

The income statement shows a firm's financial position on a specific date.

Question 15

The amounts and types of assets required are roughly the same for all new ventures.

Question 16

Total asset turnover is the ratio of sales to total assets,showing the efficiency with which a firm's assets are used to generate sales.

Question 17

Cost of goods sold is the cost of producing or acquiring goods or services to be sold by a firm.

Question 18

The income statement shows the profit or loss from a firm's operations over a given period of time.

Question 19

Accrued expenses are operating expenses that have been incurred but not yet paid.

Question 20

The accrual method of accounting is a method of accounting in which revenues,when they are earned,are matched against the expenses associated with those revenues.

Question 21

One approach to measuring liquidity is to use the current ratio.

Question 22

Cindy is a college student working in the accounting department of a company for a co-op program.She is learning about accounting and asks her supervisor how she should classify the salaries paid to employees.What will the supervisor tell Cindy?

A) Salaries paid are an operating expense.
B) Salaries paid are assets.
C) Salaries paid are liabilities.
D) Salaries paid are dividends.

Question 23

Accounts receivable consist of payments due from a company's customers from previous credit sales.

Question 24

Carefully maintained cash records showing all receipts and disbursements are necessary to safeguard cash.

Question 25

A financial manager is evaluating the sources of cash for the company as part of cash budget analysis.Which of the following would she include as a source of cash?

A) delivery of inventory
B) borrowed funds
C) payment of accounts payable
D) all sales made to customers

Question 26

A cash budget that compares actual expenditures with budgeted expenditures is a feature that is available on most computer software packages.

Question 27

Accounts receivable records are vital in order to maintain good customer relations.

Question 28

Current ratio is a measure of the company's relative debt,determined by multiplying current assets by current liabilities.

Question 29

The cash flow statement covers a specific period of time.

Question 30

Inventory is a relatively permanent asset that is intended for use in the business rather than for sale.

Question 31

A company's president arranges a business loan with the bank to help the company expand into overseas markets rather than selling common shares.Which term applies to the arrangement made with the bank?

A) financial leverage
B) equity leverage
C) market expansion
D) debt consolidation

Question 32

Operating expenses are costs related to administrative expenses.

Question 33

Financial statements provide fairly good estimates of a company's financial performance.

Question 34

The major difference between cash-basis accounting and accrual-basis accounting lies in when the firm reports revenue and expenses.

Question 35

Gross profit is the sales less the cost of goods sold

Question 36

One of the owners of a sports bar franchise wants to take extra money out of the business,given the organization's successful year.What accounting figure should he look at to determine how much money can be distributed to himself and the other owners?

A) gross profit
B) net profit
C) gross revenue
D) net revenue

Question 37

Entrepreneurs should aim to minimize and control,rather than maximize and own,resources.

Question 38

An investor is inquiring about purchasing a company and wants to determine the total amount invested in the business by the owner plus the accumulation of profits in the business.What will provide this information?

A) debt capital
B) accrued expenses
C) owners' long-term debt
D) owners' equity

Question 39

An owner of an antique shop sold a dining room set from the 1800s.He is not quite sure if he made a profit.What accounting information does he need to verify to determine if a profit was made?

A) supplier information
B) sales records
C) depreciation on assets
D) cost of goods sold

Question 40

A partner who handles the financial side of the business estimates that a new machine will useful for 10 years before it will have to be replaced.He plans to allocate one-tenth of the cost to each year that the machine is in use.What is the proper accounting term for this cost?

A) allocation
B) asset usage
C) depreciation
D) appropriation

Question 41

Which factor affects the operating profit margin?

A) number of units or product or services sold
B) number of units or product or services bought
C) relationships with suppliers
D) potential customers identified by sales people

Question 42

An owner of an archery shooting gallery calculates he has invested $450,000 into the business.He wants to determine if his investment has been worthwhile.What financial ratio should he review?

A) total asset turnover
B) return on equity
C) operating profit margin
D) financial leverage

Question 43

A company has current assets of $250,000,current liabilities of $180,000,cash of $70,000,and a mortgage at the bank for $150,000 cash.What is the company's current ratio?

A) 0.47 3.57
B) 1.39
C) 1.67
D) 3.57

Question 44

The board of directors for a corporation votes that a portion of the year's profits should be distributed to the owners of the company.What is this payment to the owners called?

A) investment
B) capital
C) salaries
D) dividends

Question 45

A financial manager is projecting the firm's cash inflows and outflows to determine if the company will need to increase the loan it has with its bank.What is the manager working on?

A) capital budgeting
B) cash budgeting
C) debt budgeting
D) growth budgeting

Question 46

A business owner is reviewing her company's cash balance to determine if she has enough to pay the outstanding past three months' rent.What is the accounting term for this unpaid rent?

A) accrued expense
B) mortgage
C) short term note
D) line of credit

Question 47

An accountant of a clothing distributor calculates the sales of summer clothes less the amount owed the manufacturer of the summer clothes.What did the accountant calculate?

A) gross profit
B) net profit
C) net assets
D) gross revenue

Question 48

A company's controller is reviewing the firm's total revenues less total costs between Jan.1 and June 30.Which financial statement is the controller reviewing?

A) income statement
B) balance sheet
C) statement of cash flow
D) statement of financial position

Question 49

Douglas is preparing financial information and is making sure that total assets equal outstanding debt plus owner's equity.What financial statement is Douglas working on?

A) statement of owner's equity
B) statement of cash flows
C) income statement
D) balance sheet

Question 50

Janice owns a decorative tile business that services the construction industry.In October her company sold 800 boxes of tiles at a price of $150 per box that cost her $70 per box.Her rent,utilities,and salaries for the month totaled $3,000.Her company's tax rate is 22%.What amount of sales did Janice have in October?

A) $41,340
B) $53,000
C) $64,000
D) $120,000

Question 51

Which of the following immediately affects cash flow?

A) selling a product
B) hiring a new employee
C) issuing a cheque for rent
D) negotiating price with a supplier

Question 52

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's operating profit margin?

A) 0.04
B) 0.18
C) 0.21
D) 0.50

Question 53

Jim is a refrigeration electrician.He has a large contract starting soon and knows he will run short of cash in purchasing supplies.However,he expects the client to begin making payments for his work two weeks after he begins.What financing arrangement would be best for Jim to arrange with his bank?

A) open a line of credit
B) increase his mortgage
C) issue a credit card
D) take out an operating loan

Question 54

What structures the flow of financial information to provide a complete picture of a firm's financial activities?

A) accounting system
B) company budget
C) profit forecast
D) cash flow statement

Question 55

Which of the following is a fixed asset?

A) a delivery truck for sale by an automotive dealer
B) the money owed to the company by customers
C) a delivery truck used by a grocer to deliver merchandise to customers
D) short-term investments in stock

Question 56

What objective should an accounting system provide?

A) a detailed analysis of employee productivity
B) an accurate and thorough picture of operating results
C) current profit comparisons with competition
D) up-to-date contact information of every shareholder

Question 57

The controller of garden supply distribution company is concerned about the increase in the number of different products the company now re-sells.He wants to determine how well costs are being managed because the workers seem less efficient.What financial ratio should he review?

A) total asset turnover
B) return on equity
C) operating profit margin
D) financial leverage

Question 58

What is directly involved in a firm's management of its working capital?

A) long-term debt
B) fixed assets
C) accounts receivable
D) owner's equity

Question 59

During the month of January,a company had sales of $70,000,received $50,000 in cash,incurred expenses of $55,000,and paid out $40,000 in cash.What is the company's net cash flow?

A) -$5,00
B) $10,000
C) $15,000
D) $20,000

Question 60

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's return on assets?

A) 0.0375
B) 0.1750
C) 0.1833
D) 0.5000

Question 61

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's financial leverage?

A) 0.0375
B) 0.0175
C) 0.1833
D) 0.2813

Question 62

A company's manager of finance and administration is sorting assets to create a category of those that will be consumed or used up within one year.Which of the following will be part of this category?

A) land
B) inventories
C) equipment
D) buildings

Question 63

A company's president identifies an opportunity to expand globally but will require cash flow on short notice.He requests a list of assets that can be converted into cash in less than one year.Which category provides this information?

A) current assets
B) fixed assets
C) short-term assets
D) other assets

Question 64

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's total asset turnover?

A) 0.1750
B) 0.1833
C) 0.2143
D) 0.3750

Question 65

A company has cash of $350,000,common shares of $500,000,net income of $125,000,and sales of $400,000.What is the company's return on equity?

A) 0.25
B) 0.31
C) 0.70
D) 0.80

Question 66

A company has revenues of $700,000; invested capital of $3,000,000; total debt of $ 1,500,000 of which it pays 2.5% interest; current,long-term,and other assets totalling $4,000,000; and total expenses of $550,000.What is the company's debt ratio?

A) 0.1750
B) 0.1833
C) 0.2143
D) 0.3750

Question 67

A financial manager reviews the firm's cash statement and realizes the company's current account at the bank does not go below a balance of $125,000.What should the financial manager do?

A) use any excess cash to pay creditors in advance
B) leave any excess cash in a chequing account for unforeseen needs
C) invest any excess cash
D) pay any excess cash to investors

Question 68

Which statement best describes cash budgets?

A) They treat income and expenses the same as they are treated on an income statement.
B) They treat income and expenses differently than they are treated on an income statement.
C) They are relatively unimportant in the life of a small business.
D) They are tools for managing revenue.

Question 69

Michael's company purchases special equipment from Switzerland that can produce very thin plastic parts with very low rejections.Michael forecasts a continual increase in sales.According to the Asset-to-Sales Financing Relationship,what will be the result of Michael's forecast?

A) investment from owners will be required
B) dividend distributions will increases
C) more equipment will have to be purchased
D) labour costs per unit of product will decrease

Question 70

What does working capital include?

A) accounts receivable
B) leased property
C) shareholders' equity
D) equipment

Question 71

Carol underestimated how many roses she would sell on Mother's Day.She was able to find a local grower willing to open his greenhouse and she arranged with the bank to increase her credit limit to purchase more roses.What is this an example of?

A) spontaneous cost of goods sold
B) spontaneous cost allocation
C) spontaneous credit approval
D) spontaneous debt financing

Question 72

A company's bank would like information about the amount of money owed to creditors.Which financial statement will the company give to the bank?

A) balance sheet
B) income statement
C) statement of cash flow
D) operating income

Question 73

Which of the following is an intangible asset?

A) land
B) machinery
C) contingency funds
D) goodwill

Question 74

Which of the following is a current asset?

A) equipment
B) land
C) leased property
D) accounts receivable

Question 75

What is included on a cash flow statement?

A) collections from customers
B) current assets
C) owner's equity
D) owner's capital

Question 76

Which statement best describes a firm's liquidity?

A) It is often measured by a ratio of current assets to current liabilities.
B) It is not important to a company's life.
C) It is the ability of the firm to sell its products quickly.
D) It is a measurement of spontaneous financing.

Question 77

Diana is a painter.She finishes work for a client in May.The client pays Diana for the job in August and that is when Diana records the sale.Which method of accounting is Diana using?

A) matching basis
B) revenue recognition basis
C) accrual basis
D) cash basis

Question 78

What does working-capital management focus on?

A) cash,accounts receivable,and inventory
B) cash,accounts receivable,and fixed assets
C) cash,fixed assets,and inventory
D) accounts receivable,accounts payable,and long-term investments

Question 79

What is return on equity?

A) the ratio of total debt to total assets
B) the rate of interest on an outstanding loan
C) the rate of return that owners earn on their investment
D) the relationship of sales to fixed assets

Question 80

An entrepreneur of a custom sign company is reviewing reports showing the cost of printing machines,supplies,and labour so that she can make comparisons to the revenue being generated.What reports are being reviewed?

A) customer records
B) financial statements
C) asset reports
D) operation schedules