Deck 1: Interpreting Financial Statements

Question 1

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

A) income statement
B) balance sheet
C) cash flow statement
D) sources and uses statement
E) market value statement

Answer 1

income statement

Question 2

Which of the following is NOT a typical reason for differences between profits and cash flow?

A) Goodwill
B) Depreciation expense
C) Changes in accounts receivable
D) Accrual accounting practices

Answer 2

Goodwill

Question 3

Which of the following statements concerning a firm's cash flows and profits is false?

A) Managers must be at least as concerned with cash flows as with profits.
B) A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.
C) The cash flows generated in a given time period can differ from the profits reported.
D) Profits are no assurance that cash flow will be sufficient to maintain solvency.
E) Due to required cash investments in current assets,fast-growing and profitable companies can literally "grow broke".

Answer 3

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

Question 4

The sources and uses of cash over a stated period of time are reflected on the:

A) income statement.
B) balance sheet.
C) shareholders' equity statement.
D) cash flow statement.
E) statement of operating position.

Question 5

The accrual principle requires that revenue not be recognized until payment from a sale is received.

Question 6

A balance sheet reports the value of a firm's assets,liabilities,and equity:

A) over an annual period.
B) over any period of time.
C) at any point in time.
D) at the end of the year.

Question 7

Which of the following would NOT be considered a use of cash?

A) Dividends paid
B) A decrease in accounts payable
C) Depreciation
D) An increase in the cash and marketable securities account

Question 8

Current liabilities are defined as liabilities with a maturity of less than a year.

Question 9

A reduction in long-term debt is a use of cash.

Question 10

Which one of the following is a source of cash?

A) decrease in accounts receivable
B) decrease in common stock
C) decrease in long-term debt
D) decrease in accounts payable
E) increase in inventory

Question 11

Which one of the following is a use of cash?

A) increase in notes payable
B) increase in inventory
C) increase in long-term debt
D) decrease in accounts receivable
E) increase in common stock

Question 12

Accounting rules require U.S.companies to depreciate research and development (R&D)expenditures using the straight-line method.

Question 13

You can construct a sources and uses statement for 2014 if you have a company's year-end balance sheets for 2014 and 2015.

Question 14

Which of the following statements concerning the cash flow-production cycle is true?

A) The profits reported in a given time period equal the cash flows generated.
B) A company's operations and finances are independent of each other.
C) Financial statements have nothing to do with reality.
D) The movement of cash to inventory,to accounts receivable,and back to cash is known as the firm's working capital cycle.
E) A profitable company will always have sufficient cash to meet its obligations.

Question 15

A company purchases a new $10 million building,financed half with cash and half with a bank loan.How would this transaction affect the company's balance sheet?

A) Net plant and equipment rises $10 million;cash falls $10 million;bank debt rises $5 million.
B) Net plant and equipment rises $5 million;cash falls $10 million;bank debt rises $5 million.
C) Net plant and equipment rises $5 million;cash falls $5 million;bank debt rises $5 million.
D) Net plant and equipment rises $10 million;cash falls $5 million;bank debt rises $5 million.

Question 16

Which one of the following is the financial statement that shows a financial snapshot,taken at a point in time,of all the assets the company owns and all the claims against those assets?

A) income statement
B) creditor's statement
C) balance sheet
D) cash flow statement
E) sources and uses statement

Question 17

A company sells used equipment with a book value of $100,000 for $250,000 cash.How would this transaction affect the company's balance sheet?

A) Equity rises $250,000;net plant and equipment falls $250,000.
B) Cash rises $250,000;net plant and equipment falls $100,000;equity rises $150,000.
C) Cash rises $250,000;accounts receivable falls $100,000;goodwill rises $150,000.
D) Cash rises $250,000;net plant and equipment falls $250,000.

Question 18

Which one of the following is a source of cash?

A) increase in accounts receivable
B) decrease in notes payable
C) decrease in common stock
D) increase in inventory
E) increase in accounts payable

Question 19

When reporting financial performance for tax purposes,U.S.companies prefer to use accelerated depreciation methods over the straight-line method.

Question 20

A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a clear indication that fixed assets were sold during 2014.

Question 21

$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Foodtek, Inc.
$\quad$ $\quad$ $\quad$ $\quad$ Selected financial information ($ millions)
$\begin{array}{lrr} &\underline{ 2013} &\underline{ 2014} \\ \text { Net sales } & \$ 296 & \$ 364 \\\text { Cost of goods sold } & 168 & 223 \\\text { Depreciation } & 51 & 65 \\\text { Net income } & 32 & 45 \\\text { Finished goods inventory } & 34 & 29 \\\text { Accounts receivable } & 47 & 87 \\\text { Accounts payable } & 39 & 44 \\\text { Net fixed assets } & 310 & 415 \\\text { Year-end cash balance } & \$ 186 & \$ 123 \\\hline\end{array}$

-Please refer to the financial information for Foodtek,Inc.above.Assuming that there were no financing cash flows during 2014 and basing your answer solely on the information provided,what were Foodtek's cash flows from operations (in $ millions)for 2014?

A) 45
B) 110
C) 70
D) 80
E) 35

Question 22

$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Foodtek, Inc.
$\quad$ $\quad$ $\quad$ $\quad$ Selected financial information ($ millions)
$\begin{array}{lrr} &\underline{ 2013} &\underline{ 2014} \\ \text { Net sales } & \$ 296 & \$ 364 \\\text { Cost of goods sold } & 168 & 223 \\\text { Depreciation } & 51 & 65 \\\text { Net income } & 32 & 45 \\\text { Finished goods inventory } & 34 & 29 \\\text { Accounts receivable } & 47 & 87 \\\text { Accounts payable } & 39 & 44 \\\text { Net fixed assets } & 310 & 415 \\\text { Year-end cash balance } & \$ 186 & \$ 123 \\\hline\end{array}$

-Please refer to the financial information for Foodtek,Inc.above.During 2014,what was the cost of merchandise (in $ millions)produced by Foodtek?

A) 223
B) 194
C) 252
D) 228
E) 218

Question 23

JM Case Inc.has a market value of $5 million with 500,000 shares outstanding.The book value of its equity is $1,750,000.What is JM Case's price per share?

A) $3.50
B) $5
C) $10
D) $25
E) $50

Question 24

Playdough Products earned net income of $500,000 in 2011.The firm increased its accounts receivable during the year by $220,000.The book value of its assets declined by the year's depreciation charge,which was $140,000,and the market value of its assets increased by $50,000.Based only on this information,how much cash did Playdough Products generate during the year? Please ignore taxes for this problem.

Question 25

JM Case Inc.has a market value of $5 million with 500,000 shares outstanding.The book value of its equity is $1,750,000.If the company repurchases 20 percent of its shares in the stock market and there are no taxes or transactions costs and all else remains the same,what should the market value of the firm be after the repurchase?

A) $1,000,000
B) $1,750,000
C) $3,250,000
D) $4,000,000
E) $5,000,000

Question 26

The book value of a firm is:

A) equivalent to the firm's market value provided that the firm has some fixed assets.
B) based on historical cost.
C) generally greater than the market value when fixed assets are included.
D) more of a financial than an accounting valuation.
E) adjusted to the market value whenever the market value exceeds the stated book valuE.

Question 27

$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Foodtek, Inc.
$\quad$ $\quad$ $\quad$ $\quad$ Selected financial information ($ millions)
$\begin{array}{lrr} &\underline{ 2013} &\underline{ 2014} \\ \text { Net sales } & \$ 296 & \$ 364 \\\text { Cost of goods sold } & 168 & 223 \\\text { Depreciation } & 51 & 65 \\\text { Net income } & 32 & 45 \\\text { Finished goods inventory } & 34 & 29 \\\text { Accounts receivable } & 47 & 87 \\\text { Accounts payable } & 39 & 44 \\\text { Net fixed assets } & 310 & 415 \\\text { Year-end cash balance } & \$ 186 & \$ 123 \\\hline\end{array}$

-Please refer to the financial information for Foodtek,Inc.above.Assuming the company neither sold nor salvaged any assets during the year,what were Foodtek's capital expenditures (in $ millions)during 2014?

A) 415
B) 105
C) 310
D) 40
E) 170

Question 28

Which of the following is NOT a major category on the cash flow statement?

A) Cash flows from selling activities
B) Cash flows from operating activities
C) Cash flows from financing activities
D) Cash flows from investing activities

Question 29

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2014.At the end of 2013,ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million.At the end of 2014 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million.What were ZZZ's taxes paid in 2014?

A) $61 million
B) $63 million
C) $65 million
D) $67 million
E) $69 million

Question 30

$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Foodtek, Inc.
$\quad$ $\quad$ $\quad$ $\quad$ Selected financial information ($ millions)
$\begin{array}{lrr} &\underline{ 2013} &\underline{ 2014} \\ \text { Net sales } & \$ 296 & \$ 364 \\\text { Cost of goods sold } & 168 & 223 \\\text { Depreciation } & 51 & 65 \\\text { Net income } & 32 & 45 \\\text { Finished goods inventory } & 34 & 29 \\\text { Accounts receivable } & 47 & 87 \\\text { Accounts payable } & 39 & 44 \\\text { Net fixed assets } & 310 & 415 \\\text { Year-end cash balance } & \$ 186 & \$ 123 \\\hline\end{array}$

-Please refer to the financial information for Foodtek,Inc.above.During 2014,how much cash (in $ millions)did Foodtek collect from sales?

A) 364
B) 277
C) 404
D) 324
E) 451

Question 31

Depreciation expense:

A) reduces both taxes and net income.
B) increases net fixed assets as shown on the balance sheet.
C) is a noncash item that increases net income.
D) decreases current assets,net income,and operating cash flows.

Question 32

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

A) income statement
B) balance sheet
C) cash flow statement
D) shareholders' equity statement
E) market value statement

Question 33

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

A) Shareholders are keenly aware of book values,but have little interest in market values.
B) Accountants' charges for the cost of equity are often higher than they should be.
C) Fair value accounting is becoming more widely used.
D) Values of assets on the balance sheet typically reflect historical cost,adjusted for appropriate depreciation.

Question 34

Identify the sources and uses of cash for Blackhurst Corporation for 2014 based on the following year-end balance sheets.

Question 35

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million.What amount would be allocated to the acquiring firm's goodwill account?

A) $0 million
B) $20 million
C) $30 million
D) $70 million
E) $80 million

Question 36

JM Case Inc.has a market value of $5 million with 500,000 shares outstanding.The book value of its equity is $1,750,000.If the company repurchases 20 percent of its shares in the stock market,what will be the book value of equity if all else remains the same?

A) $750,000
B) $1,250,000
C) $1,000,000
D) $1,400,000
E) $4,000,000

Question 37

The book value of Little Statistic's total assets is $400,000.Suppose Number Crunching Inc.acquires Little Statistic's assets for $1 million and finances the purchase by selling $600,000 in new stock,$300,000 in new debt,and reducing cash by $100,000.Describe how the acquisition affects Number Crunching's balance sheet.

Question 38

During 2011,Lele Design earned net income of $250,000.The firm neither bought nor sold any capital assets.The book value of its assets declined by the year's depreciation charge of $200,000.The firm's operating cash flow for the year was $450,000.The market value of its assets increased by $300,000.Based only on this information,what was Lele Design's economic income for the year? Why is this figure different from its accounting income? Please ignore taxes for this problem.

Question 39

JM Case Inc.has a market value of $5 million with 500,000 shares outstanding.The book value of its equity is $1,750,000.What is JM Case's book value per share?

A) $3.50
B) $5
C) $10
D) $25
E) $50