Deck 3: Understanding Financial Statements, Taxes and Cash Flows

Question 1

An analyst performs a financial statement analysis so that he or she can see the firm's financial performance from the perspective of the [blank].

A)outside investor
B)auditor
C)accounting director
D)manager

Answer 1

A

Question 2

Financial planning models are typically built using financial statements as a prototype.This helps the manager with the task of financial [blank].

A)control
B)statement analysis
C)language
D)forecasting and planning

Answer 2

D

Question 3

A snapshot of a firm's assets, liabilities and owners' equity for a particular date is known as a(n)[blank].

A)income statement
B)balance sheet
C)cash flow statement
D)statement of changes in equity

Answer 3

B

Question 4

The chapter looks at the firm from the perspective of a(n)[blank].

A)regulatory authority
B)financial analyst
C)investor
D)broker

Question 5

Which financial statement is best used to answer the question, 'How profitable is the business?'

A)Balance sheet
B)Statement of shareholder's equity
C)Income statement
D)Accounts receivable aging schedule

Question 6

Based on the information contained in Table 3, what is Invocare's gross profit margin in 2017?

A)5.6%
B)4.5%
C)29.7%
D)2.2%

Question 7

Your firm has the following income statement items: sales of $50 250 000; income tax of $1 744 000; operating expenses of $10 115 000; cost of goods sold of $35 025 000; and interest expense of $750 000.What is the amount of the firm's gross profit?

A)$18 000 000
B)$15 225 000
C)$5 000 110
D)$6 632 000

Question 8

Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?

A)Balance sheet
B)Cash flow statement
C)Income statement
D)Statement of changes in equity

Question 9

The revenue recognition principle requires that only the amount of revenue for which cash will be received in the current fiscal year be recognised in the current year.

Question 10

A depreciation expense is a [blank] expense used to allocate the cost of the firm's long-lived assets (such as its plant and equipment)over the useful lives of the assets.

A)basic
B)cash
C)visual
D)non-cash

Question 11

Bushway Ltd.has the following income statement items: sales of $50 250 000; income tax of $1 744 000; operating expenses of $10 115 000; cost of goods sold of $35 025 000; and interest expense of $750 000.What is the amount of the firm's income before tax?

A)$4 360 000
B)$750 000
C)$10 865 000
D)$25 115 000

Question 12

On the income statement, sales revenue, minus cost of goods sold and operating expenses, equal which of the following?

A)Net profit
B)Retained earnings
C)Net profit available to preference shareholders
D)EBIT

Question 13

Your firm has the following income statement items: sales of $52 000 000; income tax of $1 880 000; operating expenses of $9 000 000; cost of goods sold of $36 000 000; and interest expense of $800 000.Calculate the firm's gross profit margin.

A)13.5%
B)8.3%
C)30.8%
D)69.2%

Question 14

Differentiate between the study of accounting and the study of finance.Why is it important for a financial analyst to have a basic understanding of accounting principles?

Question 15

Which of the following is not included in computing EBT (earnings before taxes)?

A)Marketing expenses
B)Depreciation expense
C)Cost of goods sold
D)Dividends

Question 16

Your firm has the following income statement items: sales of $50 250 000; income tax of $1 744 000; operating expenses of $10 115 000; cost of goods sold of $35 025 000; and interest expense of $750 000.What is the amount of the firm's EBIT?

A)$15 552 000
B)$58 000 000
C)$5 110 000
D)$4 630 000

Question 17

Which stream of income is not affected by how a firm is financed (whether with debt or equity)?

A)Net profit after tax but before dividends
B)Net working capital
C)Operating profit
D)Income before tax

Question 18

International Financial Reporting Standards (IFRS)[blank].

A)are not acceptable for use by US companies
B)are growing in acceptance for use by US companies
C)have completely replaced GAAP since 2007
D)are far more complicated and rigid than GAAP

Question 19

Which financial statement is best used to answer the questions, 'What does the company own and how is it financed?'

A)Balance sheet
B)Statement of shareholder's equity
C)Income statement
D)Cash flow statement

Question 20

The historical cost principle requires that assets be valued at their cost when they were acquired.

Question 21

Grass Gadgets had sales of $30 million and net profit of $2 million in 2012.Grass paid a dividend of $1.5 million.Assuming that their beginning balance for retained earnings was $3 million, calculate their ending balance for retained earnings.

A)$2.5 million
B)$3 million
C)$3.5 million
D)$4 million

Question 22

A corporation's average tax rate will always be lower than or equal to its marginal tax rate.

Question 23

The income statement describes the financial performance of a firm over a fixed period such as a quarter or a year.

Question 24

Genova had sales in 2017 of $2.1 million.The ordinary shareholders received $600 000 in cash dividends.Interest totaling $150,000 was paid on outstanding debts.Operating expenses totalled $300 000, and cost of goods sold was $500 000.What was the tax liability of Genova?

Question 25

Varamax Pty Ltd.purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as [blank].

A)an expense on the balance sheet
B)an expense on the income statement
C)an asset on the balance sheet
D)both an expense and an asset

Question 26

Corporate income statements are usually compiled on an accrual, rather than cash, basis.

Question 27

The income statement represents a snapshot of account balances at one point in time.

Question 28

The practice of shifting income from good years to poor years in order to show a record of steady growth is [blank].

A)known as earnings management and may be considered unethical
B)highly recommended, but not required by IFRS
C)a basic requirement of accrual accounting
D)a requirement of IFRS

Question 29

On an accrual basis income statement, revenues and expenses always match the firm's cash flow.

Question 30

Which of the following best represents operating profit?

A)Income after financing activities
B)Earnings before interest and taxes
C)Income from capital gains
D)Income from discontinued operations

Question 31

All of the following are included in operating profit except [blank].

A)cost of goods sold
B)sales
C)taxes
D)operating expenses

Question 32

The IFRS arose from an attempt to harmonise accounting standards in different countries.

Question 33

The interest payments on corporate bonds are tax-deductible.

Question 34

Which of the following best represents the stream of income that is available to shareholders?

A)Net profit after tax
B)Earnings before interest, taxes and dividends
C)Gross profit
D)Operating profit

Question 35

Firms should compare their gross, operating and net profit margins to past years and other companies in order to [blank].

A)evaluate the firm's performance
B)identify expenses that are illegal
C)better manage the reporting of the firm's earnings
D)ensure that income statements are compiled on a cash basis

Question 36

Total equity on the balance sheet increases as dividends paid increases.

Question 37

In Australia, ordinary shareholder tax rates may be above or below the company tax rate.

Question 38

In Australia, a company's income is usually taxed at a rate of 35%.

Question 39

When a company pays a dividend on ordinary shares, it appears as [blank].

A)an expense on the income statement
B)a reduction in the amount of retained earnings
C)a current liability on the balance sheet
D)dividend payments have no effect on the financial statements

Question 40

On a balance sheet, equity equals [blank].

A)total assets minus total liabilities
B)current assets plus fixed assets
C)fixed assets minus long-term debt
D)long-term debt plus preferred stock plus common stock plus retained earnings

Question 41

An advantage of balance sheet numbers is that assets reflect current market values.

Question 42

How may reported earnings be a misleading indicator of firm performance? Include one way this problem is addressed.

Question 43

Reducing a firm's debt will increase its cash flow.

Question 44

A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities and equity.

Question 45

Which of the following represents a source of cash?

A)A decrease in accounts payable
B)A decrease in accounts receivable
C)Payment of dividends
D)An increase in inventories

Question 46

Under current accounting rules, plant and equipment appear on a company's balance sheet valued at replacement value.

Question 47

The ratio of [blank] to [blank] is an indicator of the quality of a firm's earnings.

A)cash flow from operations; net profit
B)liabilities; assets
C)dividends; interest expense
D)cash flow from operations; capital expenditures

Question 48

Beginning cash balance plus cash flow from operations plus cash flow from investing activities plus cash flow from financing activities equals ending cash balance.

Question 49

In a growing business, negative cash flow from investing activities is normal.

Question 50

When a corporation sells ordinary shares to investors, the amount is added to revenue on the income statement.

Question 51

The change between a firm's beginning cash balance and ending cash balance would equal [blank].

A)cash flow from operations plus cash flow from investing activities plus cash flow from financing activities
B)the change in current assets minus the change in current liabilities
C)net profit plus new borrowing minus asset purchases
D)total assets minus total liabilities minus total shareholders' equity

Question 52

Which of the following does not represent cash outflows to a firm?

A)Taxes
B)Interest payments
C)Dividends
D)Depreciation

Question 53

A firm's balance sheet provides a representation of the current market value of the company.

Question 54

Operating cash flow will increase with a decrease in [blank].

A)inventories
B)current liabilities
C)depreciation expense
D)capital expenditures