Deck 3: Financial Statements, Cash Flows and Tax

Question 1

The balance sheet identity can be stated as Total assets - Total liabilities = Total shareholders' equity.

Answer 1

True

Question 2

The set of International Financial Reporting Standards has improved the comparability of financial statements around the world.

Answer 2

True

Question 3

The statement of cash flows includes three components: operating, investing and financing.

Answer 3

True

Question 4

Preparing a market-value balance sheet is rather straightforward because it is easy to obtain market values for all assets and liabilities.

Question 5

GAAP represents a set of guidelines that define accounting practice at a particular point in time.

Question 6

The Australian Accounting Standards Board does not contribute to the establishment of international accounting standards.

Question 7

The balance sheet identity can be stated as Total assets = Total liabilities + Total shareholders' equity.

Question 8

The key financial statement that ties the other three statements together is the balance sheet, which summarises the company's investment and financing activities at a point in time.

Question 9

The book value of an asset is the historical cost of the asset less the accumulated depreciation.

Question 10

Depreciation and amortisation are examples of prepaid expenses.

Question 11

The current market value of an asset is the amount that a company would receive for the asset if it was sold on the open market.

Question 12

Cash flows from operating activities relate to the buying and selling of long-term assets.

Question 13

The cost principle assumes that both parties to a transaction are economically rational and are free to act independently of each other.

Question 14

The balance sheet identifies the productive resources (assets) that a company uses to generate income, as well as the sources of funding from creditors (liabilities) and owners (shareholders' equity) that were used to buy the assets.

Question 15

The income statement identifies the major sources of revenues generated by the company and the corresponding expenses that were needed to generate those revenues.

Question 16

Accounting profits include non-cash revenues (e.g., prepaid rent) and non-cash expenses (e.g., depreciation) whereas cash flows do not include these items.

Question 17

Cash flows from operations are the net cash flows that support a company's principal business activities.

Question 18

The net cash flow from operating activities (NCFOA) is another term for profit.

Question 19

Rent and insurance are examples of depletion expenses.

Question 20

Book value is the amount a company paid for its assets at the time of purchase.

Question 21

The assumption of arm's-length transaction states that:

A) both parties to a transaction can act independently of each other and make economically rational decisions.
B) both parties to a transaction must have had previous transactions.
C) one of the parties to the transaction is a bank that has full knowledge of the company's creditworthiness.
D) none of the above

Question 22

Making and collecting loans, issuing and paying out on insurance contracts, and buying and selling debt or equity instruments of other companies are examples of financing activities.

Question 23

The generally accepted accounting principles (GAAP) are:

A) rules that define a company's ethics.
B) rules on how the company will be valued in the event of a merger.
C) rules and procedures that define how companies are to maintain financial records and prepare financial statements.
D) rules for how a company can issue shares to raise money.

Question 24

Trekkers Footwear bought a piece of machinery on January 1, 2010 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2012 is $1.75 million. The company's accountant is preparing its financial statement for the financial year end on December 31, 2012. The asset's value should be recognised on the balance sheet at:

A) $2.3 million.
B) $1.61 million.
C) $230,000.
D) $1.84 million.

Question 25

If a company values its inventory using the FIFO method, when the company makes a sale in a rising price environment, it assumes the sale is from the newest, highest-cost inventory.

Question 26

The matching principle calls for the accountant of a company to:

A) identify an asset with each liability of the company.
B) associate the revenue generated from a sale to the costs incurred to produce the product.
C) match each item of inventory with the historical cost at which it was acquired.
D) none of the above

Question 27

Diaz Manufacturing bought raw materials on April 23, 2013 and also on July 2, 2013. Products produced in the months of May were sold in July. The company uses FIFO to value its inventory. According to the matching principle, the company's accountant should associate:

A) the inventory acquired on July 2 with the products sold.
B) the inventory acquired on April 23 with the products sold.
C) Neither of these dates is valid because the products were sold in July.
D) None of the above.

Question 28

The going concern assumption implies that:

A) the value of the balance sheet is representative.
B) most revenues are recognized at the time of sale.
C) the historical costs represent fair market value.
D) none of the above.

Question 29

The going concern assumption states that a business will be shutting down its operation in the near future.

Question 30

On June 23, 2013, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Company, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The company's accountants should recognise the sale on:

A) June 23, 2013.
B) July 2, 2013.
C) September 20, 2013.
D) none of the above.

Question 31

Accounting standards prescribed by GAAP are important because:

A) they make the financial statements of all companies standardised.
B) they allow one to examine a company's performance over time.
C) they make it possible for management or analysts to compare the company's performance to that of other competitors.
D) all of the above.

Question 32

International accounting standards are said to be principles based, implying that:

A) there are explicit rules to cover virtually every situation a company may encounter.
B) they are no different than the Australian GAAP in the directions provided to accountants.
C) it calls for relying more on general guidelines than on precise rules for how companies must report transactions.
D) All of the above are true.

Question 33

Your uncle, who has a second home in Bondi Beach, Sydney, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of:

A) the cost principle.
B) the assumption of arm's-length transactions.
C) the revenue recognition principle.
D) the going-concern assumption.

Question 34

The cost principle states that an asset should be recognised on the balance sheet at:

A) the market value of the asset.
B) at the market value less the accumulated depreciation on the asset.
C) at its historical cost.
D) at its historical cost less the accumulated depreciation on the asset.

Question 35

Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash buy-backs of ordinary shares.

Question 36

Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The company plans to borrow $2 million for working capital purposes from First National Bank. In evaluating the loan request, the bank should place the most emphasis on:

A) the matching principle.
B) the revenue recognition principle.
C) the going-concern assumption.
D) the assumption of arm's-length transactions.

Question 37

Which of the following sections do annual reports typically contain?

A) financial summary related to the past year's performance
B) information about the company, its products, and its activities
C) audited financial statements, including limited historical financial data
D) All three of the above sections are included in the annual report.

Question 38

According to the realisation principle, revenue from a sale of the company's products is recognised:

A) when the products are shipped to the buyer.
B) when the buyer orders the goods.
C) when cash is realised from the sale of the products.
D) at the time of the sale.

Question 39

Annual reports are prepared by a company's management to:

A) communicate to shareholders the company's failures in the previous year.
B) provide an overview of the company's financial and operating performance.
C) highlight the performance of its chief competitors.
D) provide a forecast of the company's performance in the coming years.

Question 40

Inventory valuation methods can have a significant impact on both the income statement and the balance sheet.

Question 41

Petra Ltd has $400,000 as current assets, $1.225 million as property, plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

A) current assets, goodwill, property, and plant and equipment.
B) current assets, property, plant and equipment, and goodwill.
C) property, plant and equipment, current assets, and goodwill.
D) goodwill is not an asset and is not listed here.

Question 42

Which one of the following does NOT belong on an income statement?

A) depreciation and amortisation
B) goodwill
C) extraordinary items
D) nonrecurring expenses

Question 43

The conventional way of preparing a balance sheet is to list all assets in the order of their:

A) market value.
B) risk.
C) liquidity.
D) historical cost.

Question 44

Which of the following is NOT true about accumulated depreciation?

A) Accountants try to allocate the asset's cost over its useful life.
B) It captures the wear and tear of an intangible asset
C) The matching principle allows depreciation costs to be expensed against the period in which the company benefited from the use of the asset.
D) Tangible assets with unlimited life are not depreciated.

Question 45

An investor has a marginal tax rate of 37 per cent and an average tax rate of 32 per cent this year. The appropriate tax rate to be applied on the dividend income generated from their share investment is:

A) the average tax rate.
B) the marginal tax rate.
C) either one.
D) none of the above.

Question 46

Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?

A) $3,596,632
B) $1,808,505
C) $2,123,612
D) $1,673,421

Question 47

Which one of the following is NOT true for a company?

A) Interest paid on bonds issued last year is tax deductible.
B) Regular dividends to be paid this year are not tax deductible.
C) Regular dividends to be paid this year will be tax deductible if the company has a net loss for the year.
D) Preference share dividends to be paid this year are not tax deductible.

Question 48

Simplex Healthcare had profit of $5,411,623 after paying tax at 30 percent. The company had revenues of $20,433,770. Their interest expense for the year was $1,122,376, while depreciation expense was $2,079,112. What was the company's operating expenses excluding depreciation?

A) $8,199,429
B) $9,501,392
C) $9,321,805
D) none of the above

Question 49

Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. It had repaid existing debt to the tune of $425,110, while raising additional debt capital of $750,000. It also repurchased shares in the open markets for a total of $63,250. It paid $233,144 in dividends to its shareholders. What is the net cash provided by financing activities?

A) $28,496
B) $91,746
C) -$28,496
D) -$91,746

Question 50

Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountants. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The company has long-term debt of $76,445, ordinary share capital of $200,000, and retained earnings of $134,461. What amount of current liabilities does this company have?

A) $94,792
B) $410,906
C) $171,217
D) $76,445

Question 51

Which one of the following is NOT true about goodwill?

A) It is an intangible asset.
B) It represents the value of all unrecorded assets acquired in a merger.
C) It equals the premium paid over the fair market value of the assets acquired in a merger.
D) When goodwill appears on a company's balance sheet, it reduces the company's net worth by that amount.

Question 52

Spartan Ltd is a manufacturer of automobile parts located in Manly, Sydney. At the end of the current financial year, the company had net working capital of $157,903. The company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. What amount of notes payables does the company have?

A) $14,571
B) $26,882
C) $15,471
D) none of the above

Question 53

Maddux Ltd has completed its financial year and reported the following information. The company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of $7,822. The company also has current liabilities worth $65,314, long-term debt of $178,334, and ordinary share capital of $162,000. How much retained earnings does the company have?

A) $ 405,648
B) $233,232
C) $167,918
D) $329,918

Question 54

Cash flows from financing activities include all but one of the following:

A) cash payments on the principal of long-term debt
B) issuing and paying out on insurance contracts
C) buying ordinary shares
D) cash proceeds from a bank loan

Question 55

Which one of the following is NOT a cash flow from operating activities?

A) Cash payments on the principal of long-term debt
B) Payments for utilities and rent
C) Payments to purchase raw materials
D) Cash receipts from selling goods and services

Question 56

During 2012, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities to the tune of $14,215 mature. What is the net cash used in investing activities?

A) $132,085
B) $145,940
C) -$132,085
D) none of the above

Question 57

Trident Company had the following cash flows in the current year. Which one of the following is a financing activity cash flow?

A) Rent on a warehouse amounting to $1.1 million
B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities
C) Preference dividends to the tune of $330,000 paid to shareholders
D) Lease income received on a piece of land

Question 58

Galan Associates prepared its financial statement for 2013 based on the information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables of $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, ordinary share capital of $22,000, and retained earnings of $14,008. How much long-term debt does the company have?

A) $54,342
B) $32,342
C) $12,314
D) $18,334

Question 59

When prices are falling, valuing inventory using the weighted average cost method rather than FIFO gives:

A) inventory a higher value but lowers profit.
B) inventory a lower value and also lowers profit.
C) both inventory and profit a higher value.
D) inventory a lower value and profit a higher value.

Question 60

When prices are rising, valuing ending inventory using the FIFO method rather than weighted average cost gives:

A) inventory a higher value but lowers profit.
B) inventory a lower value and also lowers profit.
C) both inventory and profit a higher value.
D) inventory a lower value and profit a higher value.

Question 61

Explain the following income statement items.
1. Amortisation expense
2. Nonrecurring expense
3. Extraordinary items
4. EBITDA

Question 62

Identify and explain the five fundamental principles that form the basis of accounting standards in Australia.

Question 63

Explain the differences in using FIFO versus weighted average cost in accounting for inventory.

Question 64

Chartworth Associates' financial statements indicated that the company had EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5 percent. Calculate the amount of tax the company is likely to owe. The corporate tax rate is 30%.

A) $1,069,607
B) $1,037,732
C) $725,746
D) none of the above

Question 65

What are the advantages and disadvantages of using market-value accounting?

Question 66

Which one of the following is NOT true regarding income tax and the imputation system?

A) When companies pay Australian federal income tax they receive franking credits
B) Shareholder may use franking credits to reduce the tax they have to pay
C) In the imputation system the effective tax rate is the company tax rate
D) There is only one company tax rate and many different personal tax rates

Question 67

Identify the non-cash items that a company may have on its financial statement and explain their impact on the shareholders of the company.

Question 68

Centennial Brewery produced revenues of $1,145,227 in 2012. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays a company tax rate of 30 percent. What is the company's profit after tax?

A) $120,140
B) $248,475
C) $84,098
D) $40,848

Question 69

Triumph Trading Company provided the following information to its auditors. For the year ended June 30, 2013, the company had revenues of $1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses equal to $87,125. If the company's tax rate was 30 percent, what is its profit after tax?

A) $45,837
B) $65,482
C) $152,607
D) none of the above

Question 70

Trimeton Company announced that in the year ended June 30, 2013, its earnings before tax amounted to $2,367,045. Calculate its tax using the 30% corporate tax rate.

A) $710,114
B) $690,895
C) $713,145
D) none of the above

Question 71

Parrino Company has announced that its profit for the year ended June 30, 2013, is $1,824,214. The company had an EBITDA of $ 5,174,366, and its depreciation and ?mortization expense was equal to $1,241,790. The company's tax rate is 30 percent. What is the amount of interest expense for the company?

A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,326,556