Deck 3: Accounting and Finance

Question 1

An increase in inventories uses cash,reducing the firm's net cash balance.

Answer 1

True

Question 2

Fixed assets can be either tangible or intangible.

Answer 2

True

Question 3

If the market value of assets is high,then the market value of liabilities must be high also.

Answer 3

False

Question 4

The statement of cash flows shows the firm's cash inflows and outflows from operations as well as from its investments and financing activities.

Question 5

The income statement resembles a snapshot of the firm at a specific time.

Question 6

An asset's liquidity is determined by how readily the asset can be converted to an appropriate amount of cash.

Question 7

Accrual accounting aims to provide a fairer measure of the firm's profitability.

Question 8

Advocates of mark-to-market accounting believe that this method works best during periods of great market uncertainty.

Question 9

Depreciation charge is a cash payment.

Question 10

Purchases of marketable securities are not considered to be cash used by investments on the statement of cash flows.

Question 11

The difference between the market values of assets and liabilities is the market value of the shareholders' equity claim.

Question 12

Expenditure on new capital equipment is a cash payment.

Question 13

The principal reason for excluding many intangible assets from the balance sheet is that they are difficult to value.

Question 14

Balance sheets have traditionally recorded amounts in terms of market values.

Question 15

Businesses that aggressively exploit any means to increase current earnings may cross over into fraudulent account practices.

Question 16

A reduction in accounts payable uses cash,reducing the firm's net cash balance.

Question 17

All items in the common-size balance sheet are expressed as a percentage of total assets.

Question 18

The balance sheet presents a snapshot of the firm's assets and liabilities at one particular moment.

Question 19

Accounting practices are not standardized across countries.

Question 20

The payment of interest expense is considered cash flow from financing on the statement of cash flows.

Question 21

To calculate the cash produced by the business it is necessary to add back the depreciation charge and to subtract the expenditure on new capital equipment.

Question 22

Both the dividends and interest payments that companies make to individuals are subject to personal tax.

Question 23

What balancing entry is most likely to be called for if previously excluded intangible assets were added to a firm's balance sheet?

A) Increase accumulated depreciation
B) Decrease long-term debt
C) Increase shareholders' equity
D)Decrease current assets

Question 24

In general,what is changing as you read down the left-hand side of a balance sheet?

A) The assets are more fully depreciated.
B) The assets are growing in value.
C) The assets are increasing in maturity.
D)The assets are becoming less liquid.

Question 25

Book values are "forward-looking" measures of value.

Question 26

Which of the following terms is out of place as a typical form of inventory?

A) Raw materials inventory
B) Current goods inventory
C) Finished goods inventory
D)Work in process

Question 27

A balance sheet portrays the value of a firm's assets and liabilities:

A) over an annual period.
B) over any stated period of time.
C) at any stated point in time.
D)only at the end of the calendar year

Question 28

The purchase of new equipment is a use of cash,and it reduces the firm's net cash balance.

Question 29

Which of the following assets is likely to be considered the most liquid?

A) Marketable securities
B) Net fixed assets
C) Accounts payable
D)Inventories

Question 30

If a payment of principal is due in 13 months on a long-term liability,that payment will now appear as:

A) a current liability.
B) long-term debt.
C) cash.
D)interest expense

Question 31

Net working capital is calculated by taking the difference between:

A) total assets and total liabilities.
B) inventory and accounts payable.
C) current assets and current liabilities.
D)cash and long-term debt

Question 32

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity,then the firm has:

A) no retained earnings.
B) long-term debt.
C) no accumulated depreciation.
D)current assets.

Question 33

What happens to a firm's net worth as it uses cash to repay accounts payable?

A) Net worth increases.
B) Net worth decreases.
C) Net worth remains constant.
D)Net worth decreases temporarily, until cash is replenished.

Question 34

Which of the following items should not be included in a listing of current assets?

A) Marketable securities
B) Accounts payable
C) Accounts receivable
D)Inventories

Question 35

An increase in accounts receivable balance provides an increase in cash flow.

Question 36

A company may deduct the interest paid to debtholders and the dividends paid to shareholders when calculating its taxable income.

Question 37

One reason for the difference between profits and cash is that the cost of capital equipment is spread over the forecast life.

Question 38

Net working capital is a measure of the company's:

A) goodwill.
B) short-term liabilities.
C) estimated liquidity.
D)shareholders' equity.

Question 39

If net income is positive,then cash flow from operations is positive also for that period.

Question 40

If the value of a firm's net fixed assets equals the value of the accumulated depreciation,from an accounting context the fixed assets are:

A) new.
B) fully depreciated.
C) one-half depreciated.
D)equal in value to the firm's current assets

Question 41

Which of the following statements is true for a corporation with $1 million market value of equity,$2 million market value of assets,and 1,000 shares of outstanding stock?

A) Market value of liabilities exceeds book value of liabilities.
B) Market value of liabilities equals $1 million.
C) Book value per share equals $1,000.
D)Market value per share equals $2,000.

Question 42

The gathering of related revenues and expenses into the same period,regardless of when cash is actually received or paid,is:

A) cash-basis accounting.
B) market-value accounting.
C) book-value accounting.
D)accrual accounting.

Question 43

When subtracting an asset's accumulated depreciation from its historic cost,the resulting value is termed the:

A) book value of the asset.
B) market value of the asset.
C) depreciation expense.
D)current asset value.

Question 44

According to accrual accounting,when goods are not sold until the period after they were produced,then the cost of goods sold:

A) will be recognized in the first period.
B) will be recognized in the second period.
C) will be recognized when payment is received.
D)will be split between both periods

Question 45

Which of the firm's financial statements most clearly recognizes the payment for new equipment?

A) Balance sheet
B) Income statement
C) Statement of cash flows
D)Statement of condition

Question 46

The existence of goodwill on a corporate balance sheet indicates that the corporation has:

A) been profitable in the past.
B) depreciated its tangible assets.
C) intangible assets from past acquisitions.
D)retained earnings resulting from past income

Question 47

ABC Corp.'s balance sheet shows its long-term debt to be $20 million.The debt was issued with a 10% interest rate,and the current interest rate is 7%.Based on this information alone,the market value of this debt is most likely:

A) less than $20 million.
B) more than $20 million.
C) equal to $20 million.
D)unknown without knowing the maturity of the debt

Question 48

In a statement of cash flows,which category includes depreciation expense?

A) Operations.
B) Investments.
C) Financing.
D)None of these; depreciation is a noncash expense.

Question 49

Which of the following statements about depreciation is correct?

A) Depreciation is subtracted from cost of goods sold to calculate net income.
B) When depreciation expense is incurred, cash balances are reduced.
C) Depreciation expense does not affect net income.
D)Depreciation reduces the book value of assets

Question 50

A balance sheet may be considered backward-looking from the perspective that:

A) it works backward, starting with net income.
B) it records historic, not current values.
C) it cannot forecast the future.
D)it records costs over many previous periods

Question 51

Depreciation expense is used to:

A) allocate costs to all departments of the firm.
B) determine when an asset is fully paid off.
C) allocate historical cost over the life of an asset.
D)equate the historical cost and market values of an asset.

Question 52

According to GAAP,assets and liabilities are typically recorded on the balance sheet at:

A) historical cost plus depreciation.
B) market value.
C) salvage value.
D)historical cost less depreciation.

Question 53

Accrual accounting,which attempts to match sales revenues and the expenses associated with the production of the goods,is conducted in an attempt to:

A) reduce income-tax liability.
B) reduce bias in reported profitability measures.
C) speed up the receipt of accounts receivable.
D)reduce the time necessary to depreciate assets

Question 54

Which of the following is correct for a fully depreciated asset?

A) Market value is zero.
B) Market value is greater than book value.
C) Book value is greater than market value.
D)The relationship between market and book values is indeterminable

Question 55

What occurs when the value of a firm's debt exceeds the value of shareholders' equity?

A) The firm is bankrupt.
B) The firm's assets have no value.
C) A high rate of interest is being paid on the debt.
D)The firm is financed more through debt than through equity

Question 56

Which of the following statements about net working capital (NWC)is correct?

A) NWC is positive for all firms.
B) As NWC decreases, potential liquidity increases.
C) NWC excludes inventory, which is deemed illiquid.
D)Decreases in NWC can increase the firm's risk

Question 57

Which of the following expense categories is subtracted from total revenues to help arrive at a firm's EBIT?

A) Cash dividends
B) Depreciation expense
C) Interest expense
D)Tax liability

Question 58

Calculate the EBIT for a firm with $4 million total revenues,$3.5 million cost of goods sold,$500,000 depreciation expense,and $120,000 interest expense.

A) $500,000
B) $380,000
C) $0
D)($120,000)00

Question 59

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

A) Cash flows from operations will increase.
B) Cash flows from investments will decrease.
C) Cash flows from financing will decrease.
D)Cash balances will not be affected.

Question 60

Retained earnings result from:

A) the sale of additional shares of stock to investors.
B) income not paid to shareholders.
C) an excess of assets over liabilities.
D)market values that exceed book values

Question 61

The fundamental difference between IFRS and GAAP is:

A) GAAP rely more on general principles but ignores the spirit of those principles.
B) GAAP rely more on specific rules and the spirit of the rules.
C) GAAP rely more on specific rules but not the spirit of the rules.
D)GAAP rely more on general principles as well as the spirit of those rules.

Question 62

An increase in depreciation expense will (other things equal):

A) increase net income.
B) decrease net income.
C) increase taxable income.
D)decrease the market value of assets.

Question 63

If a firm's cash-flow statement shows that cash was used for investments,which of the following would seem most likely?

A) The inventory balance increased.
B) Common stock was repurchased.
C) New machines were acquired.
D)Cash dividends were paid.

Question 64

The net income figure on an income statement is calculated before deducting:

A) interest expense.
B) depreciation expense.
C) cash dividends.
D)tax liability.

Question 65

In which of the following asset accounts are you least likely to find a difference between market value and book value?

A) Cash
B) Inventory
C) Land
D)Shareholders' equity

Question 66

Which of the following statements correctly compares international accounting standards?

A) The standards are becoming less similar over time.
B) The standards are typically more lenient in the United States.
C) The standards are stricter in the United States in some regards.
D)Balance sheets differ, but income statements are similar in all countries

Question 67

Perhaps the best method for estimating the market value of shareholders' equity is to:

A) read from the firm's balance sheet.
B) read from the firm's income statement.
C) multiply number of shares outstanding by the price of each share.
D)add the retained earnings plus total liabilities

Question 68

Which of the following changes in working capital will result in an increase in cash flows?

A) Increase in accounts payable
B) Increase in inventories
C) Increase in accounts receivable
D)Decrease in other current liabilities

Question 69

Which of the following cash outflows does not reduce a firm's net income?

A) Income taxes
B) Interest expense
C) Dividends
D)Depreciation expense

Question 70

Interest expense appears in the operations section of the cash-flow statement because:

A) firms cannot operate without incurring interest expense.
B) its payment is not within managerial discretion.
C) it is paid to finance a firm's inventory.
D)none of these; interest expense appears in the financing section of the cash-flow statement

Question 71

If market interest rates have increased since a company last borrowed long-term funds,the market value of these long-term funds will likely be:

A) greater than their book value.
B) less than their book value.
C) equal to their book value.
D)unknown without knowing the maturity of the debt.

Question 72

What happens to the market value of a firm's equity as the book value of the firm's equity increases?

A) It increases by the same amount.
B) It decreases by the same amount.
C) It remains constant.
D)There is no set relationship to determine this outcome.

Question 73

Current period depreciation expense is listed:

A) on the balance sheet.
B) in the investment section of the cash flow statement.
C) on the income statement.
D)on neither the balance sheet nor the income statement; it is a noncash expense

Question 74

Market-value balance sheets differ from book-value balance sheets in that market values:

A) are higher than book values.
B) are lower than book values.
C) conform more to GAAP accounting.
D)conform to investors' expectations

Question 75

When an accountant does not report all of the potentially relevant financial information on the firm's financial statements,the accountant is most likely:

A) hiding transactions from the shareholders.
B) using the discretion that is built into GAAP.
C) not following GAAP.
D)not licensed to practice accounting.

Question 76

Which of the following is not a typical reason for differences between profit and cash flow?

A) Depreciation expense
B) Income taxes
C) Changing levels of accounts receivable
D)Accrual accounting practices

Question 77

Which of the following may not show up as an expense in the financial statements?

A) Cash bonus for employees
B) Value of options given to employees to buy the firm's stock
C) Allowance for bad debts
D)All of these

Question 78

Which of the following is more likely to be correct if market value of equity is less than book value of equity?

A) Investors anticipate excellent earning potential.
B) Investors anticipate low earning potential.
C) Assets have been fully depreciated.
D)The company is bankrupt.

Question 79

If market values of equity exceed book values of equity,then:

A) equity has been depreciated too rapidly.
B) the firm uses accrual-based accounting.
C) profit potential is expected to be attractive.
D)the firm is holding too much cash

Question 80

Which of the following values would most likely interest a shareholder?

A) Book value of equity
B) Market value of equity
C) Historical cost of equity
D)none of these