Question 1

The formula for interest coverage ratio includes all of the following except ________.

Accepted Answer

The answer of The formula for interest coverage ratio includes...

Question 2

Which of the following adjustments to net income is correct when using the indirect method for computing cash flows from operating activities?

Accepted Answer

Gains from sales of equipment are subtracted from net income because they are non-operating gains that are included in net income but do not affect cash flow from operating activities.

Question 3

Liquidity measures a company's ability to meet its long-term obligations as they become due.

Accepted Answer

Liquidity measures a company's ability to meet its short-term obligations, not long-term obligations.

Question 4

When using the direct method of reporting cash flows from operating activities, increases in accounts receivable are subtracted from revenues to arrive at cash receipts from customers.

Accepted Answer

In the direct method, increases in accounts receivable indicate that not all sales have been collected in cash, so they are subtracted from revenues to calculate cash receipts.

Question 5

Williams Corporation reported Cost of Goods Sold of $910,000 for December 31, 2019. Accounts payable on the balance sheet were $65,000 for December 31, 2018 and $54,000 for December 31, 2019. Merchandise Inventory was $81,000 for December 31, 2018 and $99,000 for December 31, 2019. Cash paid for merchandise during 2019 was ________.

Accepted Answer

To find cash paid for merchandise, adjust COGS for changes in inventory and accounts payable: $910,000 + ($99,000 - $81,000) - ($54,000 - $65,000) = $939,000.

Question 6

There is an inverse relationship between a company's solvency level and risk of default.

Accepted Answer

A higher solvency level indicates a company's better ability to meet its long-term obligations, reducing the risk of default.

Question 7

Presented below are the comparative balance sheets and income statement for Pierce Manufacturing Corporation (in $ millions) for the year ended December 31, Year 2:

$\quad $$\quad $$\quad $$\quad $$\quad $$\text {Pierce Manufacturing Corporation}$
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text {Balance Sheet}$
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text {At December 31, Year 2}$
$\begin{array}{lrr}
&\underline{\text { Year } 2}& \underline{\text { Year } 1}\
\text { Assets }\
\text { Cash } & \$ 330 & \$ 220 \
\text { Accounts Receivable } & 825 & 913 \
\text { Inventory } & 704 & 660 \
\text { Prepaid Insurance } & 55 & 22 \
\text { Property Plant and Equipment } & 2,310 & 1,980 \
\text { Less: Accumulated Depreciation } & \underline{(924)} & \underline{(660)} \
\text { Totals } & \underline{\$ 3,300} & \underline{\$ 3,135}
\end{array}$

$\begin{array}{lrr}
\text { Liabilities and Shareholders' Equity }\
\text { Accounts Payable } & \$ 330 & \$ 396 \
\text { Other Current Liabilities } & 330 & 440 \
\text { Income Taxes Payable } & 220 & 165 \
\text { Notes Payable-long term } & 880 & 660 \
\text { Common Stock } & 990 & 880 \
\text { Retained earnings } & \underline{550} & \underline{594} \
\text { Totals } &\underline{ \$ 3,300} & \underline{\$ 3,135}
\end{array}$
$\begin{array}{c}
\text {Pierce Manufacturing Corporation }\
\text {Income Statement }\
\text {For Year Ending December 31, Year 2}\\
\begin{array}{lr}
\text { Sales } && \$ 7,700 \
\text { Cost of Goods Sold } && \underline{3,696} \
\text { Gross Profit } && \$ 4,004\
\text { Expenses } & \
\text { Administrative Expenses } & \$ 1,980 \
\text { Insurance Expense } & 110 \
\text { Depreciation } & \underline{264}&\underline{2,354} \
\text { Income before income taxes } && \$ 1,650 \
\text { Income tax expense } && \underline{660} \
\text { Net income } && \underline{\underline{\$ 990}}
\end{array}\end{array}$

Prepare the operating section of the statement of cash flows using the direct method and a reconciliation using the indirect method.

Accepted Answer

The answer of Presented below are the comparative balance sheets...

Question 8

Hackett Company's prepaid rent was $9,000 at December 31 Year 1 and $12,000 at December 31, Year 2. Hackett reported rent expense of $41,000 on its Year 2 income statement. What would be reported as cash paid for rent on the statement of cash flows?

Accepted Answer

The cash paid for rent is calculated by adjusting the rent expense for the change in prepaid rent: $41,000 (rent expense) + $3,000 (increase in prepaid rent from $9,000 to $12,000) = $44,000.

Question 9

Two components of return on equity are liquidity and solvency.

Accepted Answer

Return on equity is primarily composed of profitability, asset management efficiency, and financial leverage, not liquidity and solvency.

Question 10

The two components of return on equity are return on assets and financial leverage.

Accepted Answer

Return on equity (ROE) is calculated by multiplying return on assets (ROA) by financial leverage, which reflects how much debt is used to finance assets.

Question 11

When using the indirect method of preparing the statement of cash flows, an increase in accounts payable should be treated as ________.

Accepted Answer

An increase in accounts payable indicates that expenses have been incurred but not yet paid, which means cash has been conserved, so it is added back to net income in the operating activities section.

Question 12

Deluxe Hotels reported revenues of $570,000 for the year ended December 31, 2019. Accounts receivable at December 31, 2018 and 2019 were $67,000 and $47,000. If Deluxe uses the direct method of reporting operating cash flows, the company would report cash collected from customers of ________.

Accepted Answer

The cash collected from customers is calculated by adjusting the revenue for the change in accounts receivable. Since accounts receivable decreased by $20,000 ($67,000 - $47,000), it means that more cash was collected than the revenue reported. Therefore, cash collected = $570,000 + $20,000 = $590,000.

Question 13

Under the direct method, calculating cash paid for merchandise includes ________.

Accepted Answer

Under the direct method, an increase in Accounts Payable is subtracted from purchases to calculate cash paid for merchandise, as it represents purchases not yet paid in cash.

Question 14

When using the direct method, losses on the sale of long-term assets are added to net income in the operating activities section.

Accepted Answer

In the direct method, operating activities are reported by showing cash receipts and payments, not adjustments to net income. Adjustments like losses on asset sales are part of the indirect method.

Question 15

Solvency measures a company's ability to meet its long-term obligations as they become due.

Accepted Answer

Solvency refers to a company's capacity to meet its long-term financial commitments and obligations, indicating its financial health and stability over the long term.

Question 16

Which of the following adjustments to net income is incorrect when using the indirect method for computing cash flows from operating activities?

Accepted Answer

Depreciation expense is a non-cash charge and should be added back to net income, not deducted, when using the indirect method for computing cash flows from operating activities.

Question 17

Hackett, Inc. had property tax payable of $940,000 and $100,000 at the end of 2018 and 2019 respectively. During 2019, Hackett recorded $790,000 in property tax expense on its income statement. Cash outflows for property tax during 2019 were ________.

Accepted Answer

The answer of Hackett, Inc. had property tax payable of...

Question 18

There is a direct relationship between a company's interest coverage ratio and degree of solvency.

Accepted Answer

The interest coverage ratio measures a company's ability to pay interest on its debt, which is a key aspect of solvency. A higher ratio indicates better solvency.

Question 19

The formula for working capital is ________.

Accepted Answer

Working capital is calculated as current assets minus current liabilities, which measures a company's short-term financial health and operational efficiency.

Question 20

The formula for the current ratio is ________.

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities, measuring a company's ability to pay short-term obligations.

Quiz 6: Statements of Financial Position and Cash Flows and the Annual Report