Question 1

The income statement shows the difference between a firm's income and its costs⎯i.e., its profits⎯during a specified period of time.However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays.Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

Accepted Answer

This statement is true, as income and costs reported on the income statement may not accurately reflect cash flow.

Question 2

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Accepted Answer

The book value per share is calculated as total common equity divided by the number of shares outstanding, which is $3,125,000 / 125,000 = $25. The market value per share is given as $52.50. The difference between the market value and book value per share is $52.50 - $25 = $27.50.

Question 3

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

Accepted Answer

Assets such as property, plant, and equipment, investments, and inventory are expected to generate cash flows over time. However, the actual amount of cash that these assets will produce might be higher or lower than the carrying values reported on the company's financial statements. This is why companies are required to conduct regular impairment tests to make sure that the recorded values of these assets are accurate and reflective of their true value.

Question 4

Meric Mining Inc.recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation.The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 25%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.

Accepted Answer

The answer of Meric Mining Inc.recently reported $15,000 of sales,...

Question 5

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Accepted Answer

The primary reason for an annual report is to provide financial information to investors to form expectations about the firm's future earnings, dividends, and risk.

Question 6

Which of the following items is NOT included in current assets?

Accepted Answer

Bonds are long-term investments and are therefore not included in current assets, which are intended to represent short-term assets that can easily be converted to cash.

Question 7

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

Issuing new common stock increases a company's cash because it receives money from investors in exchange for shares of its stock. This inflow of cash would be reflected on the company's balance sheet as an increase in cash.

Question 8

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.

Accepted Answer

Retained earnings represent the cumulative amount of net income earned by a company that is retained by the company rather than distributed to its shareholders as dividends. While retained earnings reflect the company's total profits after dividends, they are not necessarily held in cash or near-cash accounts. Companies can use retained earnings for various purposes, such as reinvesting in the business, paying off debt, or acquiring assets, and thus they do not always equal the cash or near-cash accounts.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

The income statement is designed to show a company's earnings for a specific period of time, typically one year. It includes revenues, expenses, gains, and losses, and provides a picture of a company's profitability during that timeframe.

Question 10

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

Cost of goods sold is an expense item and does not belong on the balance sheet. The other options (Accrued payroll taxes, Accounts payable, Short-term notes payable to the bank, and Accrued wages) are all current liabilities and would be found on the balance sheet.

Question 11

On the balance sheet, total assets must always equal total liabilities and equity.

Accepted Answer

This statement is a fundamental accounting equation that states that assets must always equal liabilities and equity, also expressed as Assets = Liabilities + Equity. This equation ensures that the balance sheet always remains balanced.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A typical industrial company's balance sheet lists assets in order of their liquidity, meaning the assets that will be converted to cash first are listed first, followed by assets that will take longer to convert to cash. The longest lived assets are listed last. The balance sheet does not tell us how much money the company earned during that year, as that information is shown on the income statement. The difference between total assets and total debts does give us the stockholders' equity, but it does not necessarily reflect the current market value of the equity. The market value of the stock can be different from the book value reported on the balance sheet.

Question 13

Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%.How much was the firm's taxable income, or earnings before taxes (EBT)?

Accepted Answer

To calculate the firm's taxable income or earnings before taxes (EBT), we start with the sales and subtract operating costs and depreciation. Sales = $12,500, Operating Costs = $7,250, Depreciation = $1,250. So, EBT = Sales - Operating Costs - Depreciation = $12,500 - $7,250 - $1,250 = $4,000. However, we must also subtract interest expenses to find the taxable income. The interest expense on the bonds = 7.5% of $8,000 = $600. Therefore, EBT = $4,000 - $600 = $3,400.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

If a firm is more profitable than average, it is expected to have higher earnings and cash flows, which would lead to a higher stock price. Therefore, it is likely that the stock price of the firm would exceed its book value per share.

Question 15

On its 2019 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2020.Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Accepted Answer

If retained earnings are the same at the end of the year as they were at the beginning, it means that any earnings were exactly offset by dividends. Thus, dividends could have been paid, but they would have had to equal the earnings for the year to keep retained earnings unchanged.

Question 16

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income.Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%.How much was Lindley's operating income, or EBIT?

Accepted Answer

Operating income, or Earnings Before Interest and Taxes (EBIT), is calculated as sales minus operating costs (including depreciation). For Lindley Textiles, EBIT = $12,500 (sales) - $7,250 (operating costs) - $1,000 (depreciation) = $4,250.

Question 17

Hunter Manufacturing Inc.'s December 31, 2019 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.During 2020, Hunter had $250,000 of net income, and it paid out $100,000 as dividends.What was the book value per share at 12/31/2020, assuming that Hunter neither issued nor retired any common stock during 2020?

Accepted Answer

The answer of Hunter Manufacturing Inc.'s December 31, 2019 balance...

Question 18

The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

Accepted Answer

The annual report typically includes these four financial statements, along with other supplementary information and disclosures.

Question 19

The retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

Retained earnings are not cash, but rather represent the portion of a company's profits that have been reinvested back into the company by its shareholders.

Question 20

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Accepted Answer

The reverse is true - the balance sheet measures the firm's financial position at a point in time, while the income statement measures the flow of funds into and out of various accounts over time.

Quiz 2: Financial Statements, Cash Flow, and Taxes

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

Which of the following items is NOT included in current assets?

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Which of the following statements is CORRECT?

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

On the balance sheet, total assets must always equal total liabilities and equity.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

On its 2019 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2020.Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

The retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.