Deck 3: Understanding Financial Statements,taxes and Cash Flows

Question 1

Which of the basic financial statements 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

Answer 1

C

Question 2

Which of the basic financial statements is best used to answer the questions "Where did the company's money come from and how was it spent over the preceding year?"

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

Answer 2

D

Question 3

Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement?

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

Answer 3

B

Question 4

Which of the following streams 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 income
D)Income before tax

Question 5

The balance sheet includes information about the company's assets and liabilities.

Question 6

Who owns the retained earnings of a public firm?

A)The IRS
B)Ordinary shareholders
C)Bondholders
D)Preference shareholder

Question 7

Which of the following best represents operating income?

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

Question 8

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 9

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

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

Question 10

The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.

Question 11

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 12

Which of the basic financial statements 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 13

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 14

Which one of the following statements provides a snapshot at a point of time rather than flows over time?

A)Income statement
B)Balance sheet
C)Statement of cash flows
D)Sources and uses statement

Question 15

Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $8,750,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's net income?

A)$255,223
B)$4,731,000
C)$2,616,000
D)$7,775,000

Question 16

The cash flow statement is an alternative term for the balance sheet.

Question 17

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)None of the above

Question 18

The income statement shows a company's earnings since it has been in business.

Question 19

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 income before tax?

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

Question 20

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.Compute the firm's gross profit margin.

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

Question 21

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

Question 22

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

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 23

In 2014 the Australian firm Bouffard Co.has local earnings before taxes of $100,000,000.The ordinary shareholders have a marginal tax rate of 45%.The company's tax expense was

A)$75,000,000
B)$45,000,000
C)$15,000,000
D)$30,000,000

Question 24

In 2014 an Australian firm,RJH Inc. ,has local earnings before taxes of $100,000 and its ordinary shareholders have a 37% marginal tax rate.The company's tax expense was

A)$30,000
B)$37,000
C)$67,000
D)$7,000

Question 25

Which of the following is NOT included in operating income?

A)Cost of goods sold
B)Sales
C)Taxes
D)Operating expenses

Question 26

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

Question 27

Tax tables are based on ________ tax rates.

A)marginal
B)average
C)implied
D)investment

Question 28

The company's gross profit margin is EBIT divided by net sales.

Question 29

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

Question 30

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

Question 31

Using the information provided,calculate net income for 2013.Assume a tax rate of 35 percent. Year 2013
Inventory $5,000
Revenues 200,000
Depreciation expense 5,000
Cost of goods sold 100,000
Interest expense 10,000
Operating expenses 30,000

A)$35,750
B)$44,000
C)$50,000
D)$19,250

Question 32

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

Question 33

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 34

A & K Co.expects to have earnings before taxes of $250,000 to $300,000.The company's marginal tax rate is 39% and its average tax rate about 33%.For every additional dollar A & K pays out in common dividends,its income tax liability will

A)increase by 39 cents.
B)fall by 39 cents.
C)be unaffected.
D)fall by about 33 cents.

Question 35

Generally Accepted Accounting Principles (GAAP)require companies to smooth earnings by shifting some profits from good years to bad years.

Question 36

A & K Co.expects to have earnings before taxes of $250,000 to $300,000.The company's marginal tax rate is 39% and its average tax rate about 33%.For every additional dollar of interest expense,A & K's taxes will

A)increase by 39 cents.
B)fall by 39 cents.
C)be unaffected.
D)fall by about 33 cents.

Question 37

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

Question 38

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

A)evaluate the firm's performance.
B)identify expenses that seem to be out-of-line
C)better manage the reporting of the firm's earnings.
D)Both A and B.

Question 39

The interest payments on corporate bonds are tax-deductible.

Question 40

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

Question 41

Your firm has the following balance sheet statement items: total current liabilities of $805,000;total assets of $2,655,000;fixed and other assets of $1,770,000;and long-term debt of $200,000.What is the amount of the firm's total current assets?

A)$885,000
B)$1,550,000
C)$600,000
D)$325,000

Question 42

Which of the following would NOT be included as equity in a corporate balance sheet?

A)Cash
B)Paid in capital
C)Retained earnings
D)Ordinary shares

Question 43

Gross plant and equipment minus accumulated depreciation represents the fair market value of a company's fixed assets.

Question 44

Which of the following would NOT be included as a liability in a corporate balance sheet?

A)Notes payable
B)Accounts payable
C)Bonds
D)Accumulated depreciation

Question 45

Which of the following best describes a balance sheet?

A)Reports cash receipts and cash disbursements for a specific accounting period
B)Reports investment activities for a specified accounting period
C)Reports revenues and expenses for a specific accounting period
D)Reports the amount and composition of assets and liabilities at a specified point in time

Question 46

Which of the following would NOT be included as an asset on a corporate balance sheet?

A)Accounts receivable
B)Ordinary shares
C)Inventory
D)Buildings

Question 47

Grass Gadgets had sales of $30 million and net income of $2 million in 2008.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 48

Your firm has the following balance sheet statement items: total current liabilities of $805,000;total assets of $2,655,000;fixed and other assets of $1,770,000;and long-term debt of $200,000.What is the amount of the firm's net working capital?

A)$25,000
B)$325,000
C)$770,000
D)$80,000

Question 49

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 50

When a company pays a dividend on ordinary shares,it appears as

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 51

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

Question 52

When analyzing the cash flows from a new project proposal,a company should always use its marginal tax rate.

Question 53

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

Question 54

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

Question 55

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 56

Balance sheet and other accounts for GPA are listed below in alphabetical order.Use these accounts to construct GPA's balance sheet for 2013.All balance sheet accounts are shown,but some accounts will not be used.All amounts are in millions of dollars.
Accounts payable $1900
Accounts receivable $661
Cash $1,000
Ordinary shares $2,000
EBIT $1,968
Interest expense $8.00
Inventories $1,620
Long-term debt $890
Net plant & equipment $2,563
Other current assets $645
Other long-term assets $576
Retained earnings $2,080
Short-term debt $195
Taxes $778

Question 57

Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.The purchase of the machinery would be shown as

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 58

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

Question 59

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

Question 60

Net plant and equipment is

A)plant and equipment purchases less amount borrowed to finance purchases.
B)current year plant and equipment purchases less current year's depreciation expense.
C)gross plant and equipment less accumulated depreciation.
D)plant and equipment at current market valuations.

Question 61

Which of the following does NOT represent cash outflows to the firm?

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

Question 62

Beginning cash balance + cash flow from operations + cash flow from investing activities + cash flow from financing activities = ending cash balance.

Question 63

Operating cash flow will increase with a decrease in

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

Question 64

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

Question 65

The change between a firm's beginning cash balance and ending cash balance would equal

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

Question 66

The ratio of ________ to ________ is an indicator of the quality of a firm's earnings.

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

Question 67

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