Deck 10: Understanding a Firms Financial Statements

Question 1

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

Answer 1

True

Question 2

The statement of financial position shows a business's assets, liabilities and equity at a specific point in time.

Answer 2

True

Question 3

The cash flow statement answers the questions "From where did the cash come?' and "Where did the cash go?"

Answer 3

True

Question 4

A profitable company will always have positive cash flows.

Question 5

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

Question 6

A new business needs to manage cash flows carefully because if a business runs out of cash, it is out of business.

Question 7

The major difference between cash-basis accounting and accrual-basis accounting is when the business recognises revenue and profits.

Question 8

Depreciation is the cost of a business's land and building allocated over its useful life.

Question 9

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

Question 10

The terms earnings, profits and income refer to different amounts on the statement of profit or loss and other comprehensive income.

Question 11

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

Question 12

Total assets less current liabilities equal ownership equity.

Question 13

Jane is determining the overall financial situation for her business.Since she has to report to a group of investors, she should just give them the statement of profit or loss and other comprehensive income.

Question 14

Jane's bank has asked her to show them how her business's financial position has changed in the past year.She should provide the company's statement of financial position.

Question 15

The statement of profit or loss and other comprehensive income answers the question: "How profitable is the business?"

Question 16

Dividends to a business's owners are not considered an expense in the statement of profit or loss and other comprehensive income.

Question 17

Trade and other payables, accrued expenses, two-year notes payable, and 90-day notes are all current liabilities.

Question 18

The statement of profit or loss and other comprehensive income shows a business's financial position on a specific date.

Question 19

Trade receivables consist of payments due from a business to its suppliers.

Question 20

In order to determine the cash flows from day-to-day operations, the business must convert the company's statement of profit and loss and other comprehensive income from a cash basis to an accrual basis.

Question 21

Marvin is preparing one of the annual financial statements and has asked you which of the following should be included in operating expenses.You tell him it is:

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 22

Kate's banker would like to know the profit of her business from 01 January through to 31 December.She should show him the _______.

A)statement of cash flows.
B)statement of profit and loss and other comprehensive income.
C)statement of financial position.
D)harvest plan.

Question 23

Bernard has just learned that on the statement of financial position, the assets must equal the ___________ plus the _______________.

A)money borrowed from others; money invested by the owners
B)trade receivables; trade and other payables
C)accumulated depreciation; asset value
D)net profit; retained earnings

Question 24

To determine his company's net profits, Edward should:

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

Question 25

To calculate his company's _______________, Edgar will subtract operating expenses from gross profits.

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

Question 26

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

A)total
B)projected
C)net
D)operating

Question 27

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

Question 28

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

A)total
B)projected
C)net
D)operating

Question 29

When Thandile and Rebecca allow a customer to buy on credit, which account increases?

A)Debt
B)Inventory
C)Trade and other payables
D)Trade receivables

Question 30

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:

A)cash flow and statement of financial positions.
B)trade receivables and trade and other payables.
C)assets and liabilities
D)debt and equity.

Question 31

Net profit is used to measure the return on the business's total assets.

Question 32

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 33

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

A)statement of cash flow.
B)statement of profit and loss and other comprehensive income.
C)retained earnings.
D)statement of financial position.

Question 34

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

A)statement of profit and loss and other comprehensive income.
B)statement of financial position.
C)statement of cash flow.
D)statement of financial position.

Question 35

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

Question 36

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

Question 37

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

Question 38

Liquidity represents the degree to which a business can meet maturing current liabilities obligations with available working capital.

Question 39

Thandile and Rebecca bought R600 of "premium ice cream mix" and sugar cones for their ice cream stand.These items are considered:

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

Question 40

Trevor has just opened his business.One of the first things he should learn is:

A)how to prepare the financial statements.
B)which numbers are most important for him to watch and to watch them like a hawk.
C)whether to pay closer attention to monthly sales or to cash flow.
D)when to lease assets and when to buy them.

Question 41

The statement of profit or loss and other comprehensive income answers which question?

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

Question 42

When Donna prepares her company's statement of financial position, she should include ___________ in the list of current assets.

A)equipment.
B)land.
C)leased property.
D)trade receivables.

Question 43

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 44

Buildings and machinery are considered to be:

A)current assets.
B)non-current assets.
C)liabilities.
D)other assets.

Question 45

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)non-current liabilities.
D)equity.

Question 46

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

A)marketing plan.
B)statement of cash flows.
C)statement of financial position.
D)statement of profit and loss and other comprehensive income.

Question 47

A two-year old asset has a depreciable life of 10 years.Its initial purchase cost was R450 000 and it is depreciated by 10 per cent annually.What is the remaining depreciable value of the asset?

A)R 0.00
B)R90 000
C)R200 000
D)R360 000

Question 48

For Winston to understand how his company performed during calendar year 2016, he must begin with the business's financial position on:

A)01 January, 2016.
B)01 July, 2017.
C)30 September, 2010.
D)30 June, 2011.

Question 49

The items on the statement of profit or loss and other comprehensive income are expressed in rands but the corresponding margins are expressed as:

A)incomes.
B)expenses.
C)profits.
D)percentages.

Question 50

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

A)2 years
B)6 months
C)1 quarter
D)12 months

Question 51

Some assets don't seem to fit neatly into any category so accountants created a category called 'other'.Which asset would be considered an 'other' asset?

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

Question 52

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

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

Question 53

XYC Corporation pays its taxes quarterly but withholds payroll taxes from its employees' salaries.Until the taxes are actually paid to SARS, they appear on the statement of financial position as:

A)an asset..
B)a trade receivable.
C)a liability.
D)a non-current debt.

Question 54

Ivan 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)trade and other payable.
B)accrued expense.
C)current liabilities.
D)non-current liabilities.

Question 55

Dan 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)Inventories
C)Equipment
D)Buildings

Question 56

Eugenia's company bought a delivery truck to deliver merchandise to customers.This truck should appear as ___________ on the statement of financial position.

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

Question 57

Anna is using a software application to prepare the statement of financial position.She wasn't sure which of the following should be included in the non-current asset category.What would you tell her?

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

Question 58

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

A)statement of financial position.
B)statement of profit and loss and other comprehensive income.
C)statement of cash flow.
D)asset list.

Question 59

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)trade and other payables.
B)trade receivables.
C)cost of goods.
D)inventories.

Question 60

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)trade receivables.
B)assets.
C)statement of financial position.
D)trade and other payables.

Question 61

The cash flow activities on the cash flow statement are divided into these categories:

A)cash from operations, buying or selling assets and financing the business.
B)payments on trade receivables, payments on trade and other payables and changes in equity.
C)cash from sales, cash from trade receivables and payments on trade and other payables.
D)payment on debt, cash from sales and increases to owner's equity.

Question 62

Nathan reports profits when cash is received and expenses when they are paid.He is using:

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

Question 63

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 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 64

The liquidity of a business is:

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

Question 65

Maria's current ratio is 2.5.This means that:

A)for every rand of current assets, Maria has R2.50 in current liabilities.
B)for every rand of current liabilities, Maria has R2.50 in current assets.
C)Maria has enough cash to pay her debts for the next 2.5 years.
D)Maria can borrow 2.5 times her annual sales.

Question 66

If Thabo's business's current ratio _____, its liquidity _____.

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

Question 67

Comparing this year's results to last year's, Thabo discovered that his business's current ratio improved from 1.5 to 2.0.What has happened?

A)Current liabilities have decreased.
B)Non-current assets have increased.
C)Equity has increased.
D)Non-current liabilities decreased.

Question 68

Carl cannot use the statement of profit or loss and other comprehensive income as a measure of cash flows because it is calculated on a(n) _______ rather than a(n) _______ basis.

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

Question 69

Sipho 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)operating profit margin.
C)total asset turnover.
D)return on assets.

Question 70

It is important for Heather to monitor her cash flow because:

A)if she borrowed money to finance her business, the lenders will want to make sure she used the money wisely.
B)her investors will want to make sure they get their money back.
C)cash flow is a measure of her success.
D)a business can go bankrupt with negative cash flows even though the statement of profit or loss and other comprehensive income shows a profit.

Question 71

In order to derive a statement of cash flows, the owner must add back the _____ to the statement of profit or loss and other comprehensive income.

A)depreciation expense
B)increase in trade receivables
C)increases in inventory
D)decrease in trade and other payables

Question 72

To determine how much Harry sold to cash customers, he must:

A)add the increase in trade receivables to total sales.
B)subtract the increase in trade receivables from total sales.
C)add the increase in trade and other payables to total cash.
D)subtract the increase in liabilities from equity.

Question 73

Kenzi calculated his total asset turnover to be 1.13.This tells Kenzi that:

A)every rand of assets generates R1.13 in sales.
B)every rand of sales costs Kenzi R1.13 to generate.
C)every year he turns his inventory 1.13 times.
D)every rand of assets generates R1.13 in profits.

Question 74

Lucy is preparing the _____, which shows all cash receipts and payments involved in operating the business and managing its financial activities.

A)statement of profit and loss and other comprehensive income
B)statement of financial position
C)statement of cash flows
D)statement of financial position

Question 75

Jenny bought merchandise for her retail business on credit and sold some of it for cash.To record her purchases on her cash flow statement, Jenny will:

A)subtract the cash sales of this new inventory from total inventory purchased.
B)subtract the increase in trade and other payables from the increase in inventory.
C)subtract the increase in inventory from the increase in trade and other payables.
D)subtract the decrease in trade receivables from the increase in inventory.

Question 76

For any business, both the _______ and ________ are needed to determine a business's financial position.

A)statement of profit and loss and other comprehensive income; statement of financial position
B)statement of profit and loss and other comprehensive income; statement of cash flows
C)statement of financial position; line of credit
D)statement of cash flows; statement of financial position

Question 77

The cash flow statement measures cash flows on

A)an annual basis.
B)an accrual basis.
C)a cash basis.
D)a normalised basis.

Question 78

To determine her company's return on assets, Margaret should divide the business's operating profits by _____.

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

Question 79

The statement of financial position and statement of profit and loss and other comprehensive income are separate reports, but actually:

A)complement each other.
B)contradict each other.
C)display information for the same time duration.
D)display vision and mission statements for the company.

Question 80

Depreciation is added back on the cash flow statement in which activity section?

A)Financing
B)Income
C)Investment
D)Operating