Deck 10: Understanding a Firms Financial Statements

Question 1

Depreciation expense is the cost of a firm's land and building, allocated over the asset's useful life.

Answer 1

False

Question 2

Profits reward owners for investing in a company, but they do little to promote future growth.

Answer 2

False

Question 3

Owners' equity represents the owner's investment in the business, which can be either his or her cash invested in the business or money borrowed from a bank to purchase fixed assets.

Answer 3

False

Question 4

The income statement answers the question "How profitable is the business?"

Question 5

The three activities that explain the cash inflows and outflows of a business are the operating, selling, and financing activities.

Question 6

The major difference between cash-basis accounting and accrual-basis accounting is when the firm records expenses and profits.

Question 7

The terms earnings, profits, and income refer to different amounts on the income statement.

Question 8

Accounts payable, accrued expenses, 2-year notes payable, and 90-day notes are all short-term liabilities.

Question 9

The purchase of fixed assets, such as equipment and buildings, should be included in both the income statement and the balance sheet.

Question 10

Accounts receivable represent credit extended by suppliers to a firm when it purchases inventory.

Question 11

Jan's bank has asked her to show them how her firm's financial position has changed in the past year. She should provide the company's balance sheet.

Question 12

Assets that can be converted into cash relatively quickly are said to be liquid.

Question 13

Dividends paid to a firm's owners are not considered an expense in the income statement.

Question 14

The income statement provides a snapshot of a business's financial position at a specific point in time.

Question 15

Jane has been asked by a group of investors to give an overall picture of her firm's financial situation. To do so, she should provide them with a copy of the firm's income statement and balance sheet.

Question 16

The statement of cash flows answers the questions "Where did the cash come from?" and "Where did the cash go?"

Question 17

The balance sheet shows a firm's assets, liabilities, and owners' equity at a specific point in time.

Question 18

A profitable company will always have positive cash flows.

Question 19

In order to determine the cash flows from day-to-day operations, the firm must convert the company's income statement from a cash basis to an accrual basis.

Question 20

A company's total assets will always equal total debt minus owners' equity.

Question 21

To calculate his company's _____, Edgar will deduct operating expenses from gross profits.

A) cost of goods sold
B) profits before taxes
C) operating profits
D) retained earnings

Question 22

Walter knows the result of the equation "Sales - Expenses = Profits" can be found on the

A) statement of cash flows.
B) income statement.
C) statement of financial position.
D) balance sheet.

Question 23

A conventional measure of a firm's liquidity is a comparison of current assets to current liabilities.

Question 24

To determine his company's net profits, Edward should

A) deduct cost of goods sold from sales.
B) add interest paid and depreciation expense.
C) deduct income taxes from profits before taxes.
D) add income taxes paid and income before taxes.

Question 25

Cameron and Ashley bought $40 of "premium pink lemonade mix" and paper cups for their lemonade stand. These items are considered

A) equity.
B) fixed assets.
C) inventory.
D) cost of goods sold.

Question 26

From her sales income, Barbara has subtracted cost of goods sold, operating expenses, interest expense, and income taxes. What she has left is her company's

A) total profits.
B) projected income.
C) net profits.
D) operating profits.

Question 27

Money borrowed to pay for assets is called

A) owners' equity.
B) debt.
C) receivables.
D) cash flow.

Question 28

Net income is used to measure the return on the firm's total assets.

Question 29

Bernard has just learned that on the balance sheet, a company's total assets must equal the _____ plus the _____.

A) money borrowed from others; money invested by the owners
B) accounts receivable; accounts payable
C) accumulated depreciation; asset value
D) net profit; retained earnings

Question 30

Marvin is preparing one of the annual financial statements. Which of the following should be included in operating expenses?

A) Marketing-related expenses
B) The cost for independent dealers to prepare for the distribution of the product
C) Interest on all loans
D) Income taxes

Question 31

Horace is reviewing a document that shows the results of his firm's operations over a period of one year. Horace is looking at the

A) income statement.
B) balance sheet.
C) statement of cash flows.
D) statement of financial position.

Question 32

The best financial ratio to determine a company's ability to pay debt is the operating profit margin.

Question 33

Kate's banker would like to know the profit of her business from January 1 through December 31. She should show him the

A) statement of cash flows.
B) income statement.
C) balance sheet.
D) harvest plan.

Question 34

To determine her company's profits before taxes, Marilyn will have to deduct the firm's interest expense from its

A) total profits.
B) projected income.
C) net profits.
D) operating profits.

Question 35

To determine the debt ratio, the total debt is divided by the total income.

Question 36

Regina wants to open her own coffee stand. To do that she will need equipment and supplies. The two methods Regina can use to pay for these items are _____ and _____.

A) cash flow; balance sheets
B) accounts receivable; accounts payable
C) assets; liabilities
D) debt; equity

Question 37

While increasing debt levels can increase the owner's return on equity, it also reduces risk.

Question 38

The owners of ABC, Inc. may expect to be paid a share of the profits of the company. These payments to owners are called

A) return on investment.
B) dividends.
C) current expenses.
D) long-term debt.

Question 39

Liquidity represents the degree to which a firm has cash available to meet maturing debt obligations.

Question 40

If a business allows a customer to buy on credit, which of the following increases?

A) Debt
B) Inventory
C) Accounts Payable
D) Accounts Receivable

Question 41

Xavier wants to know how much his company owns and how much it owes. He should look at the

A) balance sheet.
B) income statement.
C) statement of cash flows.
D) asset list.

Question 42

For Webster to understand how his company performed during calendar year 2018, he must begin with the firm's financial position on

A) January 1, 2018.
B) July 1, 2018.
C) September 30, 2017.
D) June 30, 2017.

Question 43

Buildings and machinery are considered to be _____ assets.

A) current
B) fixed
C) short-term
D) other

Question 44

Candace purchased a car for her company's exclusive use. The value of this car

A) is constant over time.
B) increases with each use of the asset.
C) decreases over time.
D) increases over time.

Question 45

Raul needed an expensive piece of equipment to expand his business. He borrowed the money from the bank and pledged the equipment as _____. If Raul does not repay the loan, the bank can take his equipment.

A) a promissory note
B) collateral
C) a depreciable asset
D) long-term debt

Question 46

When Darla prepares her company's balance sheet, she should include _____ in the list of current assets.

A) equipment
B) land
C) leased property
D) accounts receivable

Question 47

The income statement answers which of the following questions?

A) How much cash did the firm generate?
B) How profitable was the business?
C) How much money does the company owe?
D) How much money did the owners invest?

Question 48

Stephanie ordered merchandise from one of her vendors, but she doesn't have to pay for it right away. The amount of this purchase will increase Stephanie's

A) accounts receivable.
B) assets.
C) balance sheet.
D) accounts payable.

Question 49

Eugenia's company bought a delivery truck to deliver merchandise to customers. This truck should appear as _____ on the balance sheet.

A) a current asset
B) inventory
C) a fixed asset
D) a short-term investment

Question 50

Richard has in his warehouse some raw materials and finished goods that he has ready to fill customer orders. These are two types of

A) accounts payable.
B) accounts receivable.
C) cost of goods.
D) inventory.

Question 51

Denver wants to make sure he puts his company's assets in the correct categories. Which of the following is an example of a current asset?

A) Land
B) Inventory
C) Equipment
D) Buildings

Question 52

Which of the following assets would considered an other asset?

A) Land
B) Machinery
C) Contingency funds
D) Goodwill

Question 53

A two-year-old asset has a useful life of 10 years. Its initial purchase cost was $450,000, and it is depreciated by 10 percent annually. What is the remaining depreciable value of the asset?

A) $0
B) $90,000
C) $200,000
D) $360,000

Question 54

Ignatio applied for a loan for his business that he will repay in nine months. The best way to describe this loan is as a(n)

A) account payable.
B) accrued expense.
C) short-term note.
D) long-term note.

Question 55

For investment purposes, Wilma needs a snapshot of the firm's financial position at a specific point in time. She should look at the

A) marketing plan.
B) statement of cash flows.
C) balance sheet.
D) income statement.

Question 56

Martina invested her savings into her business when she started it. Later she added more capital, and she has kept some of her profits. Together, these are known as

A) debt capital.
B) accrued expenses.
C) owners' long-term debt.
D) owners' equity.

Question 57

The debts that Rhonda's company will repay within the next _____ are considered to be current debt.

A) two years
B) 18 months
C) five years
D) 12 months

Question 58

On the income statement, profit margins are expressed as a percentage of

A) debt.
B) expenses.
C) equity.
D) sales.

Question 59

XYC Corporation pays its income taxes quarterly but withholds payroll taxes from its employees' paychecks each week. Until the taxes are actually paid to the IRS, they appear on the balance sheet as

A) an asset.
B) an account receivable.
C) a liability.
D) long-term debt.

Question 60

Astoria is using a software application to prepare the balance sheet. Which of the following should be included in the fixed assets category?

A) Land
B) Copyrights
C) Contingency funds
D) Goodwill

Question 61

Coronado cannot use the income statement as a measure of cash flows because it is calculated on a(n) _____ basis rather than a(n) _____ basis.

A) annual; cash
B) annual; accrual
C) accrual; cash
D) cash; accrual

Question 62

Kermit calculated his total asset turnover to be 1.13. This tells Kermit that every

A) dollar of assets generates $1.13 in sales.
B) dollar of sales costs Kermit $1.13 to generate.
C) year he turns his inventory 1.13 times.
D) dollar of assets generates $1.13 in profits.

Question 63

To determine his company's return on assets, Harold should divide the firm's operating profits by

A) sales.
B) current liabilities.
C) total assets.
D) current assets.

Question 64

Jasper bought some new equipment for his business. Six months later, he wants to know whether this was a good idea. To do that, he can calculate the

A) current ratio.
B) debt ratio.
C) return on equity.
D) return on assets.

Question 65

Irma's current ratio is 2.5. This means that

A) for every dollar of current assets, Irma has $2.50 in current liabilities.
B) for every dollar of current liabilities, Irma has $2.50 in current assets.
C) Irma has enough cash to pay her debts for the next 2.5 years.
D) Irma can borrow 2.5 times her annual sales.

Question 66

The statement of cash flows measures cash flows on a(n) _____ basis.

A) annual
B) accrual
C) cash
D) normalized

Question 67

If a firm's current ratio _____, its liquidity _____.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) increases; remains the same

Question 68

The payment of dividends to owners of a business would _____ on the statement of cash flows.

A) be recorded in the Operating Activities section
B) be recorded in the Investing Activities section
C) be recorded in the Financing Activities section
D) not be recorded

Question 69

Depreciation is added back on the statement of cash flows in which of the following sections?

A) Financing Activities
B) Purchasing Activities
C) Investment Activities
D) Operating Activities

Question 70

The liquidity of a firm is

A) measured by a ratio of current assets to current liabilities.
B) not important to the company's financial health.
C) the ability of the firm to sell its products quickly.
D) a measurement of spontaneous financing.

Question 71

To understand how his firm performed during the past year, Josh must know

A) the firm's financial position at the beginning of the year.
B) the firm's financial position at the end of the year.
C) the firm's profits during the year.
D) All of these are correct.

Question 72

Fatima borrowed money from the bank to expand her business. She plans to repay the loan within 12 months. How is this reflected on the statement of cash flows?

A) As an increase in owners' equity and an increase to cash
B) As an increase to cash
C) As a decrease to cash
D) As an increase to current liabilities

Question 73

Which of the following is a reason why profits based on an accrual-basis accounting system will differ from the firm's cash flows?

A) Sales reported in an income statement includes only cash sales rather than both cash and credit sales.
B) The depreciation expense shown in an income statement is an expense involving cash.
C) Cash spent for inventory doesn't represent all inventory purchases since some inventory is financed by credit.
D) On an income statement, profits are reported when cash is received, and expenses are recorded when they are paid.

Question 74

Which of the following questions does a statement of cash flows answer?

A) How profitable is the business?
B) How much debt has the business accumulated?
C) What is the degree of liquidity for the business?
D) Where did the cash come from?

Question 75

Comparing this year's results to last year's, Hector discovered that his firm's current ratio improved from 1.5 to 2.0. Which of the following has happened?

A) Current liabilities have decreased.
B) Fixed assets have increased.
C) Owners' equity has increased.
D) Long-term debt has decreased.

Question 76

To determine how much Harlan sold to customers, he must

A) add the increase in accounts receivable to total sales.
B) subtract the increase in accounts receivable from total sales.
C) add the increase in accounts payable to total cash.
D) subtract the increase in liabilities from owners' equity.

Question 77

In order to determine cash flows from operations, the owner must add back the depreciation expense to the net profits and then

A) subtract any decrease in accounts payable.
B) add any increase in accounts receivable.
C) add any increase in inventory.
D) subtract any decrease in inventory.

Question 78

Which of the following statements about a firm's financial statements is true?

A) An income statement helps a small business owner know the financial strengths and capabilities of the business-something that cannot be known in any other way.
B) Small business owners tend to pay close attention to the firm's income statement, but much less attention to the balance sheet.
C) A mistake that many small business owners is viewing the balance sheet and income statement as complements of each other rather than treating them as separate reports.
D) None of these are correct.

Question 79

The cash flow activities on the statement of cash flows are divided into which of the following categories?

A) Operating activities, investing activities, and financing activities
B) Investing activities, purchasing activities, and financing activities
C) Operating activities, investing activities, and equity activities
D) Operating activities, purchasing activities, and financing activities

Question 80

Natalya reports profits when cash is received and records expenses when they are paid. She is using

A) a statement of cash flows.
B) accrual-basis accounting.
C) cash-basis accounting.
D) liquid assets.