Deck 9: Accounting and Cash Flow

Question 1

Small businesses require accounting capabilities which must be done only through an external service.

Answer 1

False

Question 2

The balance sheet shows what a business owns and what claims are on the business.

Answer 2

True

Question 3

The cash-based accounting approach can be used to affect taxable income, which can be done by deferring billing so that payments are received in the next year.

Answer 3

True

Question 4

Selling expenses would include a business's advertising expenses, and other sales expenditures, but not the salaries and commissions paid to the business's sales staff and the cost of promotions.

Question 5

The cash basis accounting approach is complex and generally requires greater bookkeeping with a sophisticated approach to accounting.

Question 6

The accumulated depreciation simply sums up the prior years' depreciation for that particular asset.

Question 7

The balance sheet is also known as a profit and loss statement.

Question 8

Generally accepted accounting principles (GAAP) require that a business value its inventory on either the cost price or the market price-whichever is highest.

Question 9

The manner in which we record transactions defines the difference between a cash basis accounting system or an accrual accounting system.

Question 10

Although the accrual basis accounting system may require additional analysis to determine a business's actual cash position, it provides a more accurate measure of profitability.

Question 11

Owner's equity is sometimes referred to as net worth.

Question 12

There can be a significant difference between positive cash flow and profit.

Question 13

Generally, businesses must use the accrual basis accounting method if they have inventory of any component of items that they sell to the public and if the sales are more than $5 million per year.

Question 14

Privately held businesses would not use the term shareholders' equity but rather use owner's equity in their balance sheet, and they would not list dividends.

Question 15

In a managerial accounting role, an accountant can help develop appropriate policies with respect to cash control and inventory control.

Question 16

The major benefit of accrual basis accounting is its simplicity; it greatly reduces the demand on bookkeeping.

Question 17

Depreciation is a noncash expense.

Question 18

Paid in capital is the amount of money provided by investors through the issuance of common or preferred stock.

Question 19

Financial ratios enable external constituencies to evaluate the performance of a firm with respect to other firms in a particular industry.

Question 20

Operating profit is sometimes referred to as earnings before interest and taxes (EBIT).

Question 21

The desired trend for the days-in-receivables ratio is a reduction, indicating that a firm is being paid more quickly by its customers.

Question 22

Which of the following is a disadvantage of using a cash-based accounting system?

A) It may be misleading with respect to understanding a company's actual cash position.
B) It can distort measure of the profitability of a business.
C) It needs greater bookkeeping requirements.
D) It is a more sophisticated approach to accounting.
E) It provides an accurate indication of the profitability of a business.

Question 23

The easier the credit, the more likely a business will be able to generate a sale; however, credit terms generally mean that it will take a longer period of time for the business to receive the total cash payment from a sale.

Question 24

Liquidity ratios provide insight into a firm's ability to meet its short-term debt obligations. It draws information from a business's current assets and current liabilities that are found on the balance sheet.

Question 25

Which of the following is a benefit of using an accrual accounting system?

A) It accurately specifies a company's current cash position.
B) It is only appropriate for cash-based businesses.
C) It greatly reduces the demand on bookkeeping.
D) It can be used to affect tax bills.
E) It provides a more accurate indication of the profitability of a business.

Question 26

The sales-to-fixed-asset ratio should be a larger value than the industry average because this would indicate that a business is more efficient in using its fixed assets.

Question 27

The ability to tailor a business's operations to better meet customer needs is the key to providing value.

Question 28

The times interest earned ratio is a highly effective measure to determine a business's ability to meet its debt obligations.

Question 29

Which of the following is an advantage of using a cash-based accounting system?

A) It accurately specifies a company's current cash position.
B) It is in compliance with GAAP standards.
C) It needs greater bookkeeping requirements.
D) It is a more sophisticated approach to accounting.
E) It provides a more accurate indication of the profitability of a business.

Question 30

Which of the following defines managerial accounting system?

A) Measures the cost of replacing an employee.
B) Provides the appropriate information to the external community.
C) Records transactions when money is either received or spent.
D) Provides information to the management of a business and aids in internal controls.
E) Records transactions when they occur.

Question 31

Which of the following defines cash-based accounting system?

A) Measures the cost of replacing an employee.
B) Provides the appropriate information to the external community.
C) Records transactions when money is either received or spent.
D) Provides information to the management of a business and aids in internal controls.
E) Records transactions when they occur.

Question 32

A balance sheet:

A) examines a business's assets, liabilities, and owner's equity at some particular point in time.
B) attempts to identify cash flows into a firm and cash flows from a firm for some future period.
C) examines the reinvested income in a business and which has not been paid out to shareholders as dividends.
D) examines the overall profitability of a firm over a particular period of time.
E) examines cash inflows and cash outflows for a business during a specified period of time.

Question 33

The greater the current ratio is above one, the greater its ability to meet short-term obligations.

Question 34

Which of the following defines accrual accounting system?

A) Measures the cost of replacing an employee.
B) Provides the appropriate information to the external community.
C) Records transactions when money is either received or spent.
D) Provides information to the management of a business and aids in internal controls.
E) Records transactions when they occur.

Question 35

Which of the following is the equation form of assets?

A) income − COGS
B) gross profit − operating expenses
C) liabilities + owner's equity
D) operating profit − other revenues and expenses
E) EBT − taxes

Question 36

Which of the following defines financial accounting system?

A) Measures the cost of replacing an employee.
B) Provides the appropriate information to the external community.
C) Records transactions when money is either received or spent.
D) Provides information to the management of a business and aids in internal controls.
E) Records transactions when they occur.

Question 37

Which of the following is a drawback of using an accrual accounting system?

A) It greatly reduces the demand on bookkeeping.
B) It is only appropriate for cash-based businesses.
C) It may be misleading with respect to understanding a company's actual cash position.
D) It can be used to affect tax bills.
E) It can distort measure of the profitability of a business.

Question 38

Financial leverage ratios provide information on a firm's ability to meet its short-term debt obligations.

Question 39

The three measures of profit-gross profit, operating profit, and net profit-give the same insight into the overall efficiency of a firm in generating profit.

Question 40

The median value for the debt-to-equity ratio stays constant across different industries.

Question 41

Which of the following defines notes payable?

A) The amount of money due to a business from prior credit sales.
B) Money, such as short-term bank loans or mortgage obligations, that is owed and must be repaid within a year.
C) An accrual accounting term that represents payments in advance of their actual occurrence.
D) Short-term obligations that a business owes to suppliers, vendors, and other creditors.
E) A formal debt instrument that will be paid to the company within a year.

Question 42

Which of the following is the equation form of operating profit (EBIT)?

A) income − COGS
B) gross profit − operating expenses
C) liabilities + owner's equity
D) operating profit − other revenues and expenses
E) EBT − taxes

Question 43

Which of the following defines marketable securities?

A) Stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
B) The amount of money due to a business from prior credit sales.
C) A formal debt instrument that will be paid to the company within a year.
D) An accrual accounting term that represents payments made in advance of their actual occurrence.
E) Tangible goods held by a business for the production of goods and services.

Question 44

Which of the following is the equation form of gross profit?

A) income − COGS
B) gross profit − operating expenses
C) liabilities + owner's equity
D) operating profit − other revenues and expenses
E) EBT − taxes

Question 45

Which of the following defines prepaid expenses?

A) Stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
B) The amount of money due to a business from prior credit sales.
C) A formal debt instrument that will be paid to the company within a year.
D) An accrual accounting term that represents payments made in advance of their actual occurrence.
E) Tangible goods held by a business for the production of goods and services.

Question 46

Which of the following is the equation form of current liabilities?

A) cash + marketable securities + accounts receivable + prepaid expenses + inventory
B) cash + marketable securities + accounts receivable − prepaid expenses + inventory
C) investments + fixed assets − accumulated depreciation + intangible assets
D) notes payable + accounts payable + other items payable + dividends payable + the current portion of long-term debt
E) long-term debt + pension fund liabilities + long-term lease obligations

Question 47

Which of the following is the equation form of earnings before taxes (EBT)?

A) liabilities + owner's equity
B) gross profit − operating expenses
C) operating profit − other revenues and expenses
D) variable cost per unit × sales quantity
E) income − COGS

Question 48

Which of the following is the equation form of total current assets?

A) cash + marketable securities + accounts receivable + prepaid expenses + inventory
B) investments + fixed assets − accumulated depreciation + intangible assets
C) notes payable + accounts payable + other items payable + dividends payable + the current portion of long-term debt
D) notes payable + accounts payable + other items payable − dividends payable + the current portion of long-term debt
E) long-term debt + pension fund liabilities + long-term lease obligations

Question 49

Which of the following is the most liquid of all current assets?

A) Marketable security
B) Accounts receivables
C) Cash
D) Notes receivable
E) Prepaid expense

Question 50

Which of the following is a cash outflow from operating activities?

A) Purchase of debt or equity
B) Payment of dividends
C) Payments for taxes
D) Purchase of plant, property, and equipment
E) Redemption of capital stock

Question 51

Which of the following defines accounts receivables?

A) Stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
B) The amount of money due to a business from prior credit sales.
C) A formal debt instrument that will be paid to the company within a year.
D) An accrual accounting term that represents payments made in advance of their actual occurrence.
E) Tangible goods held by a business for the production of goods and services.

Question 52

Which of the following is a cash inflow from operating activities?

A) Interest from securities
B) Sale of debt or equity
C) Collection of the principle of loans
D) Sale of securities
E) Issue debt instruments

Question 53

Which of the following defines notes receivable?

A) Stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
B) The amount of money due to a business from prior credit sales.
C) A formal debt instrument that will be paid to the company within a year.
D) An accrual accounting term that represents payments made in advance of their actual occurrence.
E) Tangible goods held by a business for the production of goods and services.

Question 54

Current liabilities can be defined as:

A) debts and obligations that are to be paid within a year.
B) stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
C) the amount of money due to a business from prior credit sales.
D) formal debts that will be paid to the company within a year.
E) tangible goods held by a business for the production of goods and services.

Question 55

Which of the following is a cash outflow from operating activities?

A) Purchase of debt or equity
B) Payment of dividends
C) Payments to suppliers
D) Purchase of plant, property, and equipment
E) Redemption of capital stock

Question 56

Which of the following is the equation form of long-term liabilities?

A) cash + marketable securities + accounts receivable + prepaid expenses + inventory
B) cash + marketable securities + accounts receivable − prepaid expenses + inventory
C) investments + fixed assets − accumulated depreciation + intangible assets
D) notes payable + accounts payable + other items payable + dividends payable + the current portion of long-term debt
E) long-term debt + pension fund liabilities + long-term lease obligations

Question 57

Which of the following is the equation form of net profit?

A) income − COGS
B) gross profit − operating expenses
C) liabilities + owner's equity
D) operating profit − other revenues and expenses
E) EBT − taxes

Question 58

Inventory embodies:

A) stocks and bonds that a business may hold in the hope that they would provide a greater return to the business rather than just letting cash "sit" in a bank account.
B) the amount of money due to a business from prior credit sales.
C) formal debts that will be paid to the company within a year.
D) payments made in advance of their actual occurrence.
E) tangible goods held by a business for the production of goods and services.

Question 59

An income statement:

A) examines a business's assets, liabilities, and owner's equity at some particular point in time.
B) attempts to identify cash flows into a firm and cash flows from a firm for some future period.
C) examines the reinvested income in a business and which has not been paid out to shareholders as dividends.
D) examines the overall profitability of a firm over a particular period of time.
E) examines cash inflows and cash outflows for a business during a specified period of time.

Question 60

Which of the following is the equation form of long-term assets?

A) cash + marketable securities + accounts receivable + prepaid expenses + inventory
B) investments + fixed assets − accumulated depreciation + intangible assets
C) notes payable + accounts payable + other items payable + dividends payable + the current portion of long-term debt
D) notes payable + accounts payable + other items payable − dividends payable + the current portion of long-term debt
E) long-term debt + pension fund liabilities + long-term lease obligations

Question 61

Profitability ratios are:

A) ratios drawn from a business's current assets and current liabilities on the balance sheet that provide insight on its ability to meet short-term debt obligations.
B) ratios that look at the amount of profit that is being generated by each dollar of sales (revenue).
C) ratios that provide information on a firm's ability to meet its total and long-term debt obligations.
D) ratios that are designed to show how well a business is using its assets.
E) ratios that measure the performance of the stock of publicly held companies.

Question 62

Which of the following defines financial leverage ratios?

A) Ratios drawn from a business's current assets and current liabilities on the balance sheet that provide insight on its ability to meet short-term debt obligations.
B) Ratios that look at the amount of profit that is being generated by each dollar of sales (revenue).
C) Ratios that are designed to show how well a business is using its assets.
D) Ratios that provide information on a firm's ability to meet its total and long-term debt obligations.
E) Ratios that measure the performance of the stock of publicly held companies.

Question 63

Which of the following is a cash inflow from financing activities?

A) Sale of securities
B) Interest from securities
C) Sale of debt or equity
D) Revenue from sale of goods and services
E) Sales of plant, property, and equipment

Question 64

The _____ statement is broken into three major categories: operations, financing, and investing.

Question 65

All costs associated with the direct production of goods and services that were sold during a stipulated time period are known as _____.

Question 66

_____ measures the ease in which an asset can be converted into cash.

Question 67

Which of the following is a cash inflow from investing activities?

A) Revenue from sale of good and services
B) Collection of the principle on loans
C) Sale of securities
D) Dividends from other companies
E) Issue debt instruments

Question 68

Market value ratios are:

A) ratios drawn from a business's current assets and current liabilities on the balance sheet that provide insight on its ability to meet short-term debt obligations.
B) ratios that look at the amount of profit that is being generated by each dollar of sales (revenue).
C) ratios that provide information on a firm's ability to meet its total and long-term debt obligations.
D) ratios that are designed to show how well a business is using its assets.
E) ratios that measure the performance of the stock of publicly held companies.

Question 69

_____ can fall into three categories: raw materials, work-in-process (WIP), and finished goods.

Question 70

_____ assets are those assets that provide economic value to a business but do not have a physical presence.

Question 71

_____ systems may be divided into two major types: cash basis and accrual basis.

Question 72

Which of the following is a cash outflow from investing activities?

A) Payments to suppliers
B) Payment of dividends
C) Payments to lenders
D) Purchase of plant, property, and equipment
E) Redemption of long-term debt

Question 73

_____ basis accounting is in conformance with IRS and generally accepted accounting principles (GAAP) regulations.

Question 74

A(n) _____ is an accountant who has passed a tax test from the Internal Revenue Service.

Question 75

Which of the following is a cash outflow from financing activities?

A) Payments for taxes
B) Purchase of debt or equity
C) Purchase of plant, property, and equipment
D) Payments to employees
E) Payment of dividends

Question 76

Liquidity ratios are:

A) ratios drawn from a business's current assets and current liabilities on the balance sheet that provide insight on its ability to meet short-term debt obligations.
B) ratios that provide information on a firm's ability to meet its total and long-term debt obligations.
C) ratios that look at the amount of profit that is being generated by each dollar of sales (revenue).
D) ratios that are designed to show how well a business is using its assets.
E) ratios that measure the performance of the stock of publicly held companies.

Question 77

_____ is the cumulative net income that has been reinvested in a business and which has not been paid out to shareholders as dividends.

Question 78

Which of the following defines efficiency ratios?

A) Ratios drawn from a business's current assets and current liabilities on the balance sheet that provide insight on its ability to meet short-term debt obligations.
B) Ratios that look at the amount of profit that is being generated by each dollar of sales (revenue).
C) Ratios that are designed to show how well a business is using its assets.
D) Ratios that provide information on a firm's ability to meet its total and long-term debt obligations.
E) Ratios that measure the performance of the stock of publicly held companies.

Question 79

_____ is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof."

Question 80

A(n) _____ cash flow is quite common in start-up operations and high-growth businesses where there is a pressing need for capital expenditures, research and development expenditures, and other significant cash outflows.