Deck 8: Accounting Records and Financial Statements

Question 1

Double-entry accounting systems revolve around all but which of the following types of accounts?

A) asset
B) liabilities
C) owner's equity
D) expense

Answer 1

D

Question 2

A summary book for recording all transactions and account balances is referred to as a/an ______.

A) general ledger
B) balance sheet
C) journal
D) income statement

Answer 2

A

Question 3

The accounting standards that have been established so all businesses produce comparable financial statements are known as which of the following?

A) GAAP
B) FASB
C) GANTT
D) GAT

Answer 3

A

Question 4

Single-entry accounting systems record the flow of income and expenses in a running log and allow the small business owner to produce ______.

A) an income statement
B) a balance sheet
C) a statement of cash flows
D) monthly statements

Question 5

Most of the mismanagement decisions that cause small businesses to fail are related to ______.

A) inventory
B) personnel
C) finance
D) sales

Question 6

An accounting system in which every business transaction is recorded in an asset account, a liability account, or an owner's equity account in order for the system to balance is known as which of the following?

A) double-entry accounting
B) open-book accounting
C) managerial accounting
D) cost accounting

Question 7

In the accounting equation, Cash Flow = Receipts − ______.

A) Revenue
B) Expenses
C) Equity
D) Disbursements

Question 8

A small business owner should not use the cash basis if ______.

A) the business extends credit
B) the business has high debt
C) the business has low sales
D) the business has increasing expenses

Question 9

"Profit = Revenue − Expenses" represents the activity described in the ______.

A) income statement
B) balance sheet
C) cash flow statement
D) quick ratio

Question 10

The financial record that summarizes the income and expenses of the business over time is the ______.

A) income statement
B) balance sheet
C) statement of retained earnings
D) statement of cash flows

Question 11

______ refers to what the business owner has invested in the business.

A) Debit
B) Asset
C) Equity
D) Liability

Question 12

______ refers to what the business owes.

A) Debit
B) Asset
C) Owner's equity
D) Liability

Question 13

In double-entry accounting systems, debits must always equal ______.

A) assets
B) liabilities
C) credits
D) owner's equity

Question 14

A financial statement that includes a percentage breakdown of each item is known as which of the following?

A) income statement
B) common-size financial statement
C) statement of retained earnings
D) statement of cash flows

Question 15

At Wilson's Wash and Go, business managers ensure that all financial transactions are recorded in chronological order. These transactions are then classified by type. This example specifically involves which two areas of the accounting process?

A) journals and ratios
B) ledgers and financial statements
C) ratios and financial statements
D) journals and ledgers

Question 16

A method of accounting in which income or expenses are recorded at the time they are incurred, rather than when they are paid, is called ______.

A) accrual basis
B) cash basis
C) time basis
D) expense basis

Question 17

The current ratio ______.

A) shows the current level of profits
B) shows the current ratio of sales to profits
C) shows the ratio of debt to profits
D) shows the firm's ability to cover its current liabilities with its current assets

Question 18

The system within a business for converting raw data from source documents (like invoices, sales receipts, bills, and checks) into information that will help a manager make business decisions is known as a/an ______.

A) computer system
B) accounting system
C) record system
D) data system

Question 19

At Fran's Floral, Fran records transactions when cash is actually received and when expenses are actually paid. This is referred to as the ______ method of accounting.

A) accrual-basis
B) cash-basis
C) liquidity-basis
D) profit-basis

Question 20

In the accounting equation, Assets = Liabilities + ______.

A) Revenue
B) Expenses
C) Equity
D) Cash flow

Question 21

The ratio that measures how quickly goods are sold and replenished is called ______.

A) average collection period
B) inventory turnover
C) quick ratio
D) current ratio

Question 22

Which of the following ratios measures the number of times the firm can cover its current liabilities with its current assets?

A) current ratio
B) quick ratio
C) debt ratio
D) return on assets

Question 23

A financial statement that shows the cash inflows and outflows of a business is called a/an ______.

A) income statement
B) common-size financial statement
C) balance sheet
D) statement of cash flows

Question 24

Harry's Home Services has current liabilities of $450,000, current assets of $500,000, and profits of $80,000. Which of the following is the current ratio for Harry's business?

A) 0.17
B) 0.9
C) 1.11
D) 16

Question 25

Which of the following is not a major category of financial ratios?

A) equity
B) leverage
C) activity
D) profitability

Question 26

When more cash is going out of a business than is coming in, this is referred to as ______.

A) cash turnover ratio
B) profit
C) negative cash flow
D) being "in-the-black"

Question 27

If Tim's Tools & Tunes has current assets of $500, inventory of $45, current liabilities of $425, and profit of $250, which of the following is the quick ratio for the business?

A) 1.07
B) 1.28
C) 1.7
D) 2.18

Question 28

______ analysis involves comparing firms' financial ratios to the industry averages.

A) Industry average
B) Benchmarking
C) Competitive average
D) Trend

Question 29

______ are either full or partial estimates, since projections are being made as opposed to recording actual transactions.

A) Income statements
B) Common-size financial statements
C) Pro forma financial statements
D) Statements of cash flows

Question 30

Calculations that compare the important financial aspects of a business are called ______.

A) financial ratios
B) overview ratios
C) accounting ratios
D) analytical thinking ratios

Question 31

Current ratios of 1.0 or less are considered ______.

A) to show excessive liquidity
B) low and indicative of potential financial problems
C) average
D) very positive

Question 32

Benchmark analysis compares firms to ______.

A) industry averages
B) lagging competitors
C) industry leaders
D) their own past performance

Question 33

Which of the following financial actions should be made on a monthly basis by a small business manager?

A) check your cash balance on hand
B) note especially slow-paying accounts
C) calculate payroll
D) review your income statement

Question 34

The ratios used to measure a firm's ability to meet its short-term obligations to creditors as they come due are called ______.

A) liquidity ratios
B) activity ratios
C) leverage ratios
D) profitability ratios

Question 35

Elvira is considering purchasing a new truck for her distribution company. To better evaluate such a financial risk, she makes projections about what her company's financial condition will be like in the future if a new truck is purchased. This is referred to as a/an ______.

A) business cycle balance sheet
B) common-size financial statement
C) statement of current cash flow
D) pro forma financial statement

Question 36

Each year, managers at Super Socks compare their current financial ratios with the numbers from the previous two years. This is referred to as what kind of analysis?

A) industry average analysis
B) benchmarking analysis
C) time continuum analysis
D) trend analysis

Question 37

Financial statements that project what a firm's financial condition will be in the future are known as ______.

A) pro forma financial statements
B) common-size financial statements
C) balance sheets
D) statements of cash flows

Question 38

The ratios that measure the speed with which various accounts are converted into sales or cash and that are used to measure the efficiency of asset usage are known as ______.

A) liquidity ratios
B) activity ratios
C) leverage ratios
D) profitability ratios

Question 39

A financial statement that shows a firm's assets, liabilities, and owner's equity is called a/an ______.

A) income statement
B) common-size financial statement
C) balance sheet
D) statement of cash flows

Question 40

Which of the following financial actions should be made on a weekly basis by a small business manager?

A) check your cash balance on hand
B) note especially slow-paying accounts
C) record any money paid out
D) review federal tax requirements

Question 41

Sally's Shoe Service has accounts receivables of $35,335, average sales per day of $500,000, and a cost of goods sold of $45,000. What is her average collection period?

A) 7.0 days
B) 7.8 days
C) 14.15 days
D) 25.79 days

Question 42

Which of the following ratios measures the extent to which a firm uses debt as a source of financing and its ability to service that debt?

A) liquidity ratios
B) activity ratios
C) leverage ratios
D) profitability ratios

Question 43

Becky's Bovine Specials has a net income of $345, operating income of $305, sales of $678, and total assets of $245. Which of the following is the net profit margin for her business?

A) 0.361
B) 0.450
C) 0.508
D) 0.884

Question 44

Bill's Bolo business has a cost of goods sold of $45,000, an inventory of $20,000, and current assets of $50,000. Which of the following is the inventory turnover for the business?

A) 0.9
B) 1.3
C) 2.25
D) 2.5

Question 45

A low fixed asset turnover ratio often indicates that ______.

A) the firm is efficiently using its current assets
B) the firm is efficiently using its total assets
C) the firm is keeping expenses low
D) marketing efforts are ineffective

Question 46

Which of the following ratios measures the return the firm earned on its owner's investment in the firm?

A) times interest earned
B) net profit margin
C) return on assets
D) return on equity

Question 47

Which of the following ratios shows how far operating income can decline before the firm will have difficulties servicing its debt obligation?

A) fixed asset turnover
B) total asset turnover
C) debt ratio
D) times interest earned ratio

Question 48

Shelli's Ski Super has sales of $670, net fixed assets of $210, total assets of $305, and current assets of $25. Which of the following is the total asset turnover ratio for the business?

A) 0.46 times
B) 2.2 times
C) 3.19 times
D) 26.8 times

Question 49

Which of the following ratios measures how efficiently the firm is using its assets to generate sales?

A) current ratio
B) total asset turnover ratio
C) fixed asset turnover
D) debt ratio

Question 50

Which of the following ratios measures the proportion of a firm's total assets that have been acquired with borrowed funds?

A) fixed asset turnover
B) total asset turnover
C) debt ratio
D) times interest earned ratio

Question 51

High average collection periods usually indicate ______.

A) sales that are increasing
B) accounts receivable that are all being collected
C) many uncollected accounts receivable
D) overly restrictive credit policies

Question 52

Which of the following ratios is widely used as an indication of management efficiency and measures the percentage of each sales dollar that remains as profit after all expenses have been paid.

A) times interest earned
B) net profit margin
C) return on assets
D) return on equity

Question 53

Which of the following ratios shows effective management and the firm's effectiveness in generating profits from the available assets?

A) times interest earned
B) net profit margin
C) return on assets
D) return on equity

Question 54

Danny's Dog Delivery has total assets of $975, sales of $989, net profit after taxes of $56, and operating income of $576. Which of the following is the return on assets ratio for this business?

A) 0.057
B) 0.591
C) 0.986
D) 1.01

Question 55

Larry's Lab has sales of $35,750, net fixed assets of $14,500, current assets of $12,300, and cost of goods sold of $30,000. Which of the following is the fixed asset turnover ratio for the business?

A) 1.18 times
B) 1.19 times
C) 2.47 times
D) 2.91 times

Question 56

Sandi's Silver Service has operating income of $545, sales of $750, expenses of $245, and interest expense of $198. Which of the following is the times interest earned ratio for the business?

A) 2.22
B) 2.75
C) 4.49
D) 72.6

Question 57

The measure of how long it takes a firm to convert a credit sale into a usable form is known as which of the following?

A) average collection period
B) inventory turnover
C) quick ratio
D) current ratio

Question 58

Kim's Kar Kare Service has total debt of $690, total assets of $1,260, interest expense of $140, and sales of $400. Which of the following is the debt ratio for the business?

A) 11.1 percent
B) 31.7 percent
C) 54.8 percent
D) 58 percent

Question 59

Which of the following ratios measures how efficiently the firm uses all of its assets to generate sales?

A) fixed asset turnover
B) total asset turnover
C) debt ratio
D) times interest earned ratio

Question 60

Ally's Allied Apples has net profit after taxes of $30, total assets of $989, sales of $979, owner's equity of $990, and interest expense of $56. Which of the following is the return on equity for this business?

A) 0.030
B) 0.057
C) 0.989
D) 1.87

Question 61

Scenario 8-1. Dea's Drugstore is currently having cash-flow problems. As the bills come due, Dea is having more difficulty ensuring that there is sufficient cash to pay those bills. It is a relatively new problem for her business, and she is not sure what to do. The only changes that she is aware of are some new requirements in the way insurance companies are reimbursing their customers for prescription drugs. Overall, inventory in the store is moving as usual and expenses have not increased from last year.

-In Scenario 8-1, if Dea declares bankruptcy, she will join ______ other small businesses that declare bankruptcy each day due to poor financial management.

A) six
B) eight
C) ten
D) twelve

Question 62

Tracking and forecasting ______ is often more critical to the survival of a business than is profit.

A) sales
B) revenues
C) expenses
D) cash flows

Question 63

The goal of good cash-flow management is to ______.

A) increase sales and thus increase revenues
B) decrease expenses and thus increase profits
C) have enough cash on hand when it is needed
D) increase asset usage and thus increase revenue

Question 64

A document that allows the firm to plan its short-term cash needs with particular attention to periods of surplus and shortage so that short-term investments can be made during cash surplus times and short-term loans can be taken during cash shortages is called the ______.

A) cash-to-cash cycle
B) cash budget
C) cash planning statement
D) cash-flow statement

Question 65

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$

-In Scenario 8-2, after analyzing the debt ratio, you concluded that ______.

A) Denny has a problem because the number is so low
B) Denny has a higher risk factor than the industry
C) Denny has financed 43 percent of the assets with borrowed funds
D) Denny needs to be concerned about this ratio and increase it in the near future

Question 66

Scenario 8-1. Dea's Drugstore is currently having cash-flow problems. As the bills come due, Dea is having more difficulty ensuring that there is sufficient cash to pay those bills. It is a relatively new problem for her business, and she is not sure what to do. The only changes that she is aware of are some new requirements in the way insurance companies are reimbursing their customers for prescription drugs. Overall, inventory in the store is moving as usual and expenses have not increased from last year.

-In Scenario 8-1, all but which of the following tools may help Dea with her cash flow problem?

A) a cash budget
B) micro-aging schedule
C) macro-aging schedule
D) an income statement

Question 67

Scenario 8-1. Dea's Drugstore is currently having cash-flow problems. As the bills come due, Dea is having more difficulty ensuring that there is sufficient cash to pay those bills. It is a relatively new problem for her business, and she is not sure what to do. The only changes that she is aware of are some new requirements in the way insurance companies are reimbursing their customers for prescription drugs. Overall, inventory in the store is moving as usual and expenses have not increased from last year.

-In Scenario 8-1, as Dea is glancing through her accounts receivables from her pharmacy customers, she notices that many accounts are over 90 days past due. A schedule that would show each customer's account, the amount they owe, and the amount that is past due is called a/an ______.

A) macro-aging schedule
B) past due account schedule
C) micro-aging schedule
D) accounts receivable schedule

Question 68

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$

-In Scenario 8-2, after analyzing the average collection period ratio, you concluded that ______.

A) Denny has a problem since his number is so low
B) Denny may have overly restrictive credit policies
C) Denny has many uncollected accounts receivable
D) Denny's cash flow will soon be affected since his accounts receivables are not being paid.

Question 69

Each business day, 12 small businesses in the United States declare bankruptcy primarily for which of the following?

A) lack of sales
B) inexperienced management
C) poor cash-flow management
D) increasing expenses

Question 70

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$

-In Scenario 8-2, after analyzing the net profit margin, you determined that ______.

A) Denny has a problem because this number is so high
B) Denny is generating 10 cents of after-tax profit per each dollar of sales
C) Denny is generating 10 percent on after-tax profits
D) Denny should be concerned with management efficiency

Question 71

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$

-In Scenario 8-2, after analyzing the inventory turnover ratio, you determined that ______.

A) Denny has a problem because this number is so high
B) Denny is turning his inventory over too much
C) Denny is not turning his inventory over enough to be profitable
D) Denny is keeping his inventory current, which is positive due to the nature of his business

Question 72

The period of time that begins when money is spent on raw materials and does not end until money is collected on the sale of a finished good is known as which of the following?

A) cash-to-cash cycle
B) cash budgets
C) sales-to-cash cycle
D) accounts receivable-to-cash cycle

Question 73

Scenario 8-1. Dea's Drugstore is currently having cash-flow problems. As the bills come due, Dea is having more difficulty ensuring that there is sufficient cash to pay those bills. It is a relatively new problem for her business, and she is not sure what to do. The only changes that she is aware of are some new requirements in the way insurance companies are reimbursing their customers for prescription drugs. Overall, inventory in the store is moving as usual and expenses have not increased from last year.

-In Scenario 8-1, which of the following areas may be contributing heavily to Dea's cash flow problems?

A) sales
B) expenses
C) accounts receivables
D) inventory costs

Question 74

Scenario 8-1. Dea's Drugstore is currently having cash-flow problems. As the bills come due, Dea is having more difficulty ensuring that there is sufficient cash to pay those bills. It is a relatively new problem for her business, and she is not sure what to do. The only changes that she is aware of are some new requirements in the way insurance companies are reimbursing their customers for prescription drugs. Overall, inventory in the store is moving as usual and expenses have not increased from last year.

-In Scenario 8-1, if Dea does not solve her cash-flow problems shortly, ______.

A) she will not make a profit
B) sales will fall
C) expenses will fall
D) she may become insolvent

Question 75

Which of the following is the most likely place to concentrate cash flow management strategies?

A) supplies
B) compensation
C) receivables
D) insurance

Question 76

The cash-to-cash cycle begins with ______.

A) manufacturing
B) using cash to purchase raw materials or inventory
C) generating sales of goods or services
D) collecting accounts receivable

Question 77

The major complication involved in cash-flow management is ______.

A) revenue
B) sales
C) timing
D) expenses

Question 78

The practice of showing everyone involved in a business the numbers that are critical to the performance of the business is called which of the following?

A) democratic management
B) open-book management
C) financial management
D) human resource management

Question 79

An aging schedule that shows only the percentage of receivables for 0-30 days, 31-60 days, 61-90 days, and over 90 days is referred to as a/an ______.

A) macro-aging schedule
B) micro-aging schedule
C) current-aging schedule
D) future-aging schedule

Question 80

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } &\text { Denny's Diner } & \text { Industry } & \\\text { Current Ratio }& 1.51 & 1.62 \\\text { Average Collection Period } & 2.50 & 5.00 \\\text { Inventory Turnover } & 80 & 75 \\\text { Debt Ratio } &43 \% & 52 \% \\\text { Net Profit Margin } & 10.2 & 8.3 \end{array}$$

-In Scenario 8-2, after analyzing the current ratio, you determined that ______.

A) Denny has a problem
B) Denny can cover his current liabilities 1.51 times with his current assets
C) Denny is too far off of the industry average in this case
D) Denny has inventory that cannot easily be converted into cash