Deck 8: Accounting Records and Financial Statements

Question 1

According to the chapter opening case, in 2008, Krispy Kreme had posted profits despite the fact that sales were down for the year.

Answer 1

True

Question 2

When preparing common-size statements, full or partial estimates are used since the business owner is making projections rather than recording actual transactions.

Answer 2

False

Question 3

The three most important financial statements for providing financial information about a business are the income statement, the balance sheet, and the statement of retained earnings.

Answer 3

False

Question 4

The expertise with which the small business owner can understand, interpret, and use the information found in the financial statements will determine the soundness of the financial decisions made.

Question 5

When using a double-entry accounting system, debits always equal owner's equity.

Question 6

Ratio analysis is the most common form of financial analysis.

Question 7

Using a single-entry accounting system will allow a small business owner to produce an income statement and a balance sheet.

Question 8

T F On a weekly basis, business managers should record any money that is paid out.

Question 9

Generally Accepted Accounting Principles are intended to create financial statement formats that are unique to each industry.

Question 10

Assets are what your business owes, whereas liabilities are what your business owns.

Question 11

The accounting equation Assets = Liabilities + Equity is illustrated by the profit-and-loss financial statement.

Question 12

Figure 8.1 in the chapter shows that an accounting system works on a cycle to convert raw data into usable information for making decisions about operating a small business.

Question 13

When using the accrual basis method of accounting, transactions are recorded when cash is actually received and expenses are paid.

Question 14

Another name for assets is net worth.

Question 15

Small business owners should always use separate checkbooks for their businesses and their personal lives.

Question 16

According to the text, the accounting process helps the small business owner translate numbers-the language of business-into plain English.

Question 17

In the accounting equation, Assets = Liabilities + Revenue.

Question 18

"Cash flow = Receipts - Disbursements" is the basis of the cash-flow statement.

Question 19

The majority of the mismanagement decisions that cause small businesses to fail are related to finance.

Question 20

The cash-flow statement is a critical financial statement, often more important to the survival of a business than profit as reported on the income statement.

Question 21

The passage of the Sarbanes-Oxley Act of 2002 resulted in which of the following?

A) More relaxed accounting practices in business
B) More stringent accounting practices in business
C) Exemption of smaller businesses from adhering to stringent accounting practices
D) Exemption of larger businesses from adhering to stringent accounting practices

Question 22

The system within a business for converting raw data from source documents (like invoices, sales receipts, bills, and checks) into information that will help a manager make business decisions is known as a/an

A) Computer system
B) Accounting system
C) Record system
D) Data system

Question 23

Aging schedules are listings of a firm's account payables according to the length of time they are outstanding.

Question 24

Benchmarking involves computing financial ratios of an industry leader and comparing those ratios with one's own firm.

Question 25

When Krispy Kreme was founded in 1937 by Vernon Rudolph, according to the chapter opening case, the doughnuts were initially produced to sell to

A) Franchised Krispy Kreme businesses
B) Walk-up customers
C) Local grocery stores
D) International distributors

Question 26

Industry average analysis compares firms to industry leaders.

Question 27

A high fixed asset turnover ratio generally reflects good overall management because it measures how efficiently the firm uses all of its assets to generate sales.

Question 28

Activity ratios are used to measure a firm's ability to meet its short-term obligations to creditors as they come due.

Question 29

Without proactively managing a firm's cash flow, the firm is exposed to many risks, each of which could spell disaster.

Question 30

Low average collection periods usually indicate many uncollectible receivables, while high average collection periods may indicate overly restrictive credit-granting policies.

Question 31

A cash budget typically covers a two-year period that is divided into smaller intervals.

Question 32

Figure 8.5 in the chapter shows that the cash-to-cash cycle is the amount of time that passes between spending money for raw materials to receiving revenue from selling finished products.

Question 33

Most of the mismanagement decisions that cause small businesses to fail are related to

A) Inventory
B) Personnel
C) Finance
D) Sales

Question 34

A low net profit margin ratio indicates that expenses are too high relative to sales.

Question 35

Each business day, 5,000 small businesses in the United States declare bankruptcy primarily because of poor cash flow management.

Question 36

At Wilson's Wash and Go, business managers ensure that all financial transactions are recorded in chronological order. These transactions are then classified by type. This example specifically involves which two areas of the accounting process?

A) Journals and ratios
B) Ledgers and financial statements
C) Ratios and financial statements
D) Journals and ledgers

Question 37

A high return on equity ratio is generally a good indication for a business; however, this ratio is highly affected by debt and may not be an accurate measurement of management effectiveness.

Question 38

Financial ratios by themselves tell the small business owner very little.

Question 39

Computers help us to take financial _______, which is then turned into usable ________.

A) Data; information
B) Research; data
C) Information; data
D) Information; research

Question 40

The primary reason a small business needs adequate cash flow is to pay the bills incurred by the business.

Question 41

At Fran's Floral, Fran records transactions when cash is actually received and when expenses are actually paid. This is referred to as the ________ method of accounting.

A) Accrual-basis
B) Cash-basis
C) Liquidity-basis
D) Profit-basis

Question 42

The accounting standards that have been established so all businesses produce comparable financial statements are known as which of the following?

A) GAAP
B) FASB
C) GANTT
D) GAT

Question 43

In the accounting equation, Assets = Liabilities +

A) Revenue
B) Expenses
C) Equity
D) Cash flow

Question 44

__________ refers to what the business owner has invested in the business.

A) Debit
B) Asset
C) Equity
D) Liability

Question 45

The financial record that summarizes the income and expenses of the business over time is the

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

Question 46

In the accounting equation, Cash Flow = Receipts -

A) Revenue
B) Expenses
C) Equity
D) Disbursements

Question 47

A financial statement that includes a percentage breakdown of each item is known as which of the following?

A) Income statement
B) Common-size financial statement
C) Statement of retained earnings
D) Statement of cash flows

Question 48

_________ refers to what the business owes.

A) Debit
B) Asset
C) Owner's equity
D) Liability

Question 49

A financial statement that shows a firm's assets, liabilities, and owner's equity is called a/an

A) Income statement
B) Common-size financial statement
C) Balance sheet
D) Statement of cash flows

Question 50

Single-entry accounting systems record the flow of income and expenses in a running log and allow the small business owner to produce

A) An income statement
B) A balance sheet
C) A statement of cash flows
D) Monthly statements

Question 51

A method of accounting in which income or expenses are recorded at the time they are incurred, rather than when they are paid, is called

A) Accrual basis
B) Cash basis
C) Time basis
D) Expense basis

Question 52

An account number of 13 would represent which of the following accounts?

A) Accounts payable
B) Accrued taxes
C) Insurance expense
D) Accounts receivable

Question 53

A small business owner should not use the cash basis if

A) The business extends credit
B) The business has high debt
C) The business has low sales
D) The business has increasing expenses

Question 54

All but which of the following sections would be found on an income statement?

A) Net sales
B) Gross margin
C) Investment activities
D) Expenses

Question 55

Double-entry accounting systems revolve around all but which of the following types of accounts?

A) Asset
B) Liabilities
C) Owner's equity
D) Expense

Question 56

A summary book for recording all transactions and account balances is referred to as a/an

A) General ledger
B) Balance sheet
C) Journal
D) Income statement

Question 57

In double-entry accounting systems, debits must always equal

A) Assets
B) Liabilities
C) Credits
D) Owner's equity

Question 58

An accounting system in which every business transaction is recorded in an asset account, a liability account, or an owner's equity account in order for the system to balance is known as which of the following?

A) Double-entry accounting
B) Open book accounting
C) Managerial accounting
D) Cost accounting

Question 59

All but which of the following are the three most important financial statements for providing information about a business?

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

Question 60

"Profit = Revenue - Expenses" represents the activity described in the

A) Income statement
B) Balance sheet
C) Cash flow statement
D) Quick ratio

Question 61

Which of the following financial actions should be made on a monthly basis by a small business manager?

A) Check your cash balance on hand
B) Note especially slow-paying accounts
C) Calculate payroll
D) Review your income statement

Question 62

Which of the following financial actions should be made on a weekly basis by a small business manager?

A) Check your cash balance on hand
B) Note especially slow-paying accounts
C) Record any money paid out
D) Review federal tax requirements

Question 63

In the Reality Check titled "Do You Have a Business or a Hobby?" the primary check to determine which you have is

A) How many employees you have
B) Number of states you operate in
C) Total revenue generated
D) If you make a profit in three of the past five years

Question 64

When more cash is going out of a business than is coming in, this is referred to as

A) cash turnover ratio
B) Profit
C) Negative cash flow
D) Being "in-the-black"

Question 65

A financial statement that shows the cash inflows and outflows of a business is called a(n)

A) Income statement
B) Common-size financial statement
C) Balance sheet
D) Statement of cash flows

Question 66

The ratio that measures how quickly goods are sold and replenished is called

A) Average collection period
B) Inventory turnover
C) Quick ratio
D) Current ratio

Question 67

Which of the following is not a major category of financial ratios?

A) Equity
B) Leverage
C) Activity
D) Profitability

Question 68

Financial statements that project what a firm's financial condition will be in the future are known as

A) Pro forma financial statements
B) Common-size financial statements
C) Balance sheets
D) Statements of cash flows

Question 69

Which of the following ratios measures the number of times the firm can cover its current liabilities with its current assets?

A) Current ratio
B) Quick ratio
C) Debt ratio
D) Return on assets

Question 70

Each year, managers at Super Socks compare their current financial ratios with the numbers from the previous two years. This is referred to as what kind of analysis?

A) Industry average analysis
B) Benchmarking analysis
C) Time-continuum analysis
D) Trend analysis

Question 71

Elvira is considering purchasing a new truck for her distribution company. To better evaluate such a financial risk, she makes projections about what her company's financial condition will be like in the future if a new truck is purchased. This is referred to as a/an

A) Business cycle balance sheet
B) Common-size financial statement
C) Statement of current cash flow
D) Pro forma financial statement

Question 72

Benchmark analysis compares firms to

A) Industry averages
B) Lagging competitors
C) Industry leaders
D) Their own past performance

Question 73

If Tim's Tools & Tunes has current assets of $500, inventory of $45, current liabilities of $425, and profit of $250, which of the following is the quick ratio for the business?

A) 1.07
B) 1.28
C) 1.7
D) 2.18

Question 74

The ratios used to measure a firm's ability to meet its short-term obligations to creditors as they come due are called

A) Liquidity ratios
B) Activity ratios
C) Leverage ratios
D) Profitability ratios

Question 75

Calculations that compare the important financial aspects of a business are called

A) Financial ratios
B) Overview ratios
C) Accounting ratios
D) Analytical ratios

Question 76

Current ratios of 1.0 or less are considered

A) To show excessive liquidity
B) Low and indicative of potential financial problems
C) Average
D) Very positive

Question 77

_____________ are either full or partial estimates, since projections are being made as opposed to recording actual transactions.

A) Income statements
B) Common-size financial statements
C) Pro forma financial statements
D) Statements of cash flows

Question 78

The ratios that measure the speed with which various accounts are converted into sales or cash and that are used to measure the efficiency of asset usage are known as

A) Liquidity ratios
B) Activity ratios
C) Leverage ratios
D) Profitability ratios

Question 79

___________ analysis involves comparing firms' financial ratios to the industry averages.

A) Industry average
B) Benchmarking
C) Competitive average
D) Trend

Question 80

Harry's Home Services has current liabilities of $450,000, current assets of $500,000, and profits of $80,000. Which of the following is the current ratio for Harry's business?

A) 0.17
B) 0.9
C) 1.11
D) 16