Deck 10: Understanding a Firm S Financial Statements

Question 1

The income statement answers the question: "How profitable is the business?"

Answer 1

True

Question 2

Jane is determining the overall financial situation for her business.  Since she has to report to a group of investors, she should just give them the income statement.

Answer 2

False

Question 3

Total assets less short-term debt equals ownership equity.

Answer 3

False

Question 4

Jan's bank has asked her to show them how her firm's financial position has changed in the past year.  She should provide the company's balance sheet.

Question 5

Accounts payable, accrued expenses, 2-year notes payable, and 90-day notes are all short-term liabilities.

Question 6

A new business needs to manage cash flows carefully because if a firm runs out of cash, it is out of business.

Question 7

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

Question 8

In order to determine the cash flows from day-to-day operations, the firm must convert the company's income statement from a cash basis to an accrual basis.

Question 9

The major difference between cash-basis accounting and accrual-basis accounting is when the firm recognizes revenue and profits.

Question 10

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

Question 11

Dividends to a firm's owners are not considered an expense in the income statement.

Question 12

Profits reward owners for investing in a company, but they do little to promote future growth.

Question 13

Ownership equity represents the owner's investment in the company, which can be either his/her cash invested in the company or money borrowed from a bank to purchase fixed assets.

Question 14

Accounts receivable consist of payments due from a firm to its suppliers.

Question 15

Assets that can be converted to cash relatively quickly are said to be liquid .

Question 16

The cash flow statement answers the questions "From where did the cash come?' and "Where did the cash go?"

Question 17

Depreciation is the cost of a firm's land and building allocated over its useful life.

Question 18

A profitable company will always have positive cash flows.

Question 19

The three activities that explain the cash inflows and outflows of a business are the operating, selling, and financing activities.

Question 20

The terms earnings, profits and income refer to different amounts on the income statement.

Question 21

When Cameron and Ashley allow a customer to buy on credit, which account increases?

A) debt
B) inventory
C) accounts payable
D) accounts receivable

Question 22

While increasing debt levels can increase the owner's return on equity, it also reduces risk.

Question 23

Bernard has just learned that on the balance sheet, the assets must equal the ___________ plus the _______________.

A) money borrowed from others, money invested by the owners
B) accounts receivable, accounts payable
C) accumulated depreciation, asset value
D) net profit, retained earnings

Question 24

From her sales income, Barbara has subtracted cost of goods sold, operating expenses, interest expense, and taxes. What she has left is her company's _____ income

A) total
B) projected
C) net
D) operating

Question 25

The best financial ratio to determine a company's ability to pay debt is the operating profit margin.

Question 26

Kate's banker would like to know the profit of her business from January 1st through December 31. She should show him the _______.

A) cash flow statement.
B) income statement.
C) balance sheet.
D) harvest plan.

Question 27

To determine her company's profits before taxes, Marilyn will have to deduct the firm's interest expense from its ____ income.

A) total
B) projected
C) net
D) operating

Question 28

Net income is used to measure the return on the firm's total assets.

Question 29

A conventional measure of a firm's liquidity is a comparison of current assets to current liabilities.

Question 30

Regina wants to open her own coffee stand.  To do that she will need equipment and supplies.  The two methods Regina can use to pay for these items are:

A) cash flow and balance sheets.
B) accounts receivable and accounts payable.
C) assets and liabilities
D) debt and equity.

Question 31

To determine his company's net profits, Edward should

A) subtract cost of goods sold from sales.
B) add interest paid and depreciation.
C) subtract taxes from profits before taxes.
D) add taxes paid and income before taxes.

Question 32

Horace is reviewing a document that shows the results of his firm's operations over a period of one year.  Horace is looking at the:

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

Question 33

Ignazio has just opened his business.  One of the first things he should learn is:

A) how to prepare the financial statements.
B) which numbers are most important for him to watch and to watch them like a hawk.
C) whether to pay closer attention to monthly sales or to cash flow.
D) when to lease assets and when to buy them.

Question 34

To determine the debt ratio, the total debt is divided by the total income.

Question 35

Liquidity represents the degree to which a firm can meet maturing short-term debt obligations with available working capital.

Question 36

Marvin is preparing one of the annual financial statements and has asked you which of the following should be inlcuded in operating expenses.  You tell him it is:

A) marketing-related expenses.
B) the cost for independent dealers to prepare for the distribution of the product.
C) interest on all loans.
D) income taxes.

Question 37

The owners of ABC, Inc. may expect to be paid a share of the profits of the company.  These payments to owners are called:

A) return on investment.
B) dividends.
C) current expenses.
D) llong-term debt.

Question 38

To calculate his company's _______________, Edgar will subtract operating expenses from gross profits.

A) cost of goods sold
B) profits before taxes
C) operating income
D) retained earnings

Question 39

Walter knows the result of the equation "Sales-Expenses = Profits" can be found on the:

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

Question 40

Cameron and Ashley bought $40 of "premium pink lemonade mix" and paper cups for their lemonade stand.  These items are considered:

A) cash balance.
B) fixed assets.
C) inventory.
D) cost of goods sold.

Question 41

Richard has in his warehouse some raw materials and finished goods that he has ready to fill customer orders.  These are two types of  _____.

A) accounts payable.
B) accounts receivable.
C) cost of goods.
D) inventories.

Question 42

Martina invested her savings into her business when she started it.  Later she added more capital and she has kept some of her profits.  Together these are known as:

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

Question 43

The debts that Rhonda's company will repay within the next ______________ are considered to be current debt.

A) 2 years
B) 6 months
C) 1 quarter
D) 12 months

Question 44

The items on the income statement are expressed in dollars but the corresponding margins are expressed as:

A) incomes.
B) expenses.
C) profits.
D) percentages.

Question 45

For Webster to understand how his company performed during calendar year 2012, he must begin with firm's financial position on:

A) January 1, 2012.
B) July 1, 2013.
C) September 30, 2010.
D) June 30, 2011.

Question 46

A two year-old asset has a depreciable life of 10 years. Its initial purchase cost was $450,000 and it is depreciated by 10 percent annually. What is the remaining depreciable value of the asset?

A)     $ 0.00
B)   $90,000
C) $200,000
D) $360,000

Question 47

When Darla prepares her company's balance sheet, she should include ___________ in the list of current assets.

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

Question 48

Ignatio applied for a loan for his business that he will repay in 9 months.  The best way to describe this loan is as a(n):

A) account payable.
B) accrued expense.
C) short-term note.
D) long-tern debt.

Question 49

Stephanie ordered merchandise from one of her vendors but she doesn't have to pay for it right away.  The amount of this purchase will increase Stephanie's:

A) accounts receivable
B) assets
C) balance sheet
D) accounts payable

Question 50

Some assets don't seem to fit neatly into any category so accountants created a category called "other."  Which asset would considered an other asset?

A) Land
B) Machinery
C) Contingency funds
D) Goodwill

Question 51

Eugenia's company bought a delivery truck to deliver merchandise to customers.  This truck should appear as ___________ on the balance sheet.

A) a current asset
B) inventory
C) a fixed asset
D) a short-term investment

Question 52

Candace purchased a car for her company's exclusive use.  The value of this car:

A) is constant over time.
B) increases with each use of the asset.
C) decreases over time.
D) increases over time.

Question 53

Denver wants to make sure he puts his company's assets in the correct categories.  Which of the following is an example of a current asset?

A) Land
B) Inventories
C) Equipment
D) Buildings

Question 54

XYC Corporation pays its taxes quarterly but withholds payroll taxes from its employees' paychecks each week.  Until the taxes are actually paid to the IRS, they appear on the balance sheet as:

A) an asset..
B) an account receivable.
C) a liability.
D) a long-term debt.

Question 55

The income statement answers which question?

A) How much cash did the firm generate?
B) How profitable was the business?
C) How much money does the company owe?
D) How much money did the owners invest?

Question 56

Xavier wants to know how much his company owns and how much it owes.  He should look at the:

A) balance sheet.
B) income statement.
C) cash flow statement.
D) asset list.

Question 57

Buildings and machinery are considered to be

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

Question 58

For investment purposes, Wilma needs a snapshot of the firm's financial position at a specific point in time.  She should look at the

A) marketing plan.
B) statement of cash flows.
C) balance sheet.
D) income statement.

Question 59

Raul needed an expensive piece of equipment to expand his business.  He borrowed the money from the bank and pledged the equipment as ___________.  If Raul does not repay the loan, the bank can take his equipment.

A) a promissory note
B) collateral
C) asset in escrow
D) long term debt

Question 60

Astoria is using a software application to prepare the balance sheet.  She wasn't sure which of the following should be included in the fixed asset category.  What would you tell her?

A) Land
B) Copyrights
C) Contingency funds
D) Goodwill

Question 61

To determine his company's return on assets, Harold should divide the firm's operating profits by _____.

A) sales
B) current liabilities
C) total assets
D) current assets

Question 62

Natalya reports profits when cash is received and expenses when they are paid. She is using

A) a cash flow statement.
B) accural-basis accounting.
C) cash-basis accounting.
D) liquid assets.

Question 63

Comparing this year's results to last year's, Hector discovered that his firm's current ratio improved from 1.5 to 2.0.  What has happened?

A) Current liabilities have decreased.
B) Fixed assets have increased.
C) Ownership equity has increased.
D) Long-term debt has decreased.

Question 64

If Hector's firm's current ratio _____, its liquidity _____.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) increases; remains the same

Question 65

Depreciation is added back on the cash flow statement in which activity section?

A) Financing
B) Income
C) Investment
D) Operating

Question 66

Guenther bought merchandise for his retail business on credit and sold some of it for cash.  To record his purchases on his cash flow statement, Guenther will:

A) subtract the cash sales of this new inventory from total inventory purchased.
B) subtract the increase in accounts payable from the increase in inventory.
C) subtract the increase in inventory from the increase in accounts payable.
D) subtract the decrease in accounts receivable from the increase in inventory.

Question 67

Irma's current ratio is 2.5.  This means that:

A) for every dollar of current assets, Irma has $2.50 in current liabilities.
B) for every dollar of current liabilities, Irma has $2.50 in current assets.
C) Irma has enough cash to pay her cebts for the next 2.5 years.
D) Irma can borrow 2.5 times her annual sales.

Question 68

For any business, both the _______ and ________ are needed to determine a firm's financial position.

A) income statement; balance sheet
B) income statement; cash flow
C) balance sheet; line of credit
D) cash flow; balance sheet

Question 69

The cash flow statement measures cash flows on

A) an annual basis.
B) an accrual basis.
C) a cash basis.
D) a normalized basis.

Question 70

To determine how much Harlan sold to cash customers, he must:

A) add the increase in accounts receivable to total sales.
B) subtract the increase in accounts receivable from total sales.
C) add the increase in accounts payable to total cash.
D) subtract the increase in liabilities from owner's equity.

Question 71

In order to derive a cash flow statement, the owner must add back the _____ to the income statement.

A) depreciation expense
B) increase in accounts receivable
C) increases in inventory
D) decrease in accounts payable

Question 72

Fatima borrowed money from the bank to expand her business. She plans to repay the loan within 12 months.  How is this reflected on the cash flow statement?

A) As an increase in owner's equity and an increase to cash.
B) As an increase to cash.
C) As a decrease to cash.
D) As an increase to current liabilities.

Question 73

Lucille is preparing the _____, which shows all cash receipts and payments involved in operating the business and managing its financial activities.

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

Question 74

Jasper bought some new equipment for his business.  Six months later he wants to know whether this was a good idea.  To do that, he can calculate the:

A) current ratio.
B) operatimg profit margin.
C) total asset turnover.
D) return on assets.

Question 75

The balance sheet and income statement are separate reports, but actually

A) complement each other.
B) contradict each other.
C) display information for the same time duration.
D) display vision and mission statements for the company.

Question 76

It is important for Heather to monitor her cash flow because:

A) if she borrowed money to finance her business, the lenders will want to make sure she used the money wisely.
B) her investors will want to make sure they get their money back.
C) cash flow is a measure of her success.
D) a business can go bankrupt with negative cash flows even though the income statement shows a profit.

Question 77

Coronado cannot use the income statement as a measure of cash flows because it is calculated on a(n) _______ rather than a(n) _______ basis.

A) annual; cash
B) annual; accrual
C) accrual; cash
D) cash; accrual

Question 78

The liquidity of a firm is

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

Question 79

The cash flow activities on the cash flow statement are divided into these categories:

A) cash from operations, buying or selling assets, and financing the business.
B) payments on accounts receivable, payments on accounts payable, and changes in owner's equity.
C) cash from sales, cash from accounts receivable, and payments on accounts payable.
D) payment on debt, cash from sales, and increases to owner's equity.

Question 80

Kermit calculated his total asset turnover to be 1.13.  This tells Kermit that:

A) every dollar of assets generates $1.13 in sales.
B) every dollar of sales costs Kermit $1.13 to generate.
C) every year he turns his inventory 1.13 times.
D) every dollar of assets generates $1.13 in profits.