Question 1

Below are the year-end balance sheets for Wolken Enterprises: \(\begin{array}{c}
\begin{array}{lll}
 \text {Assets:}\
 \text {Cash}\
 \text {Accounts receivable}\
 \text {Inventories}\
 \text {Total current assets}\
 \text {Net fixed assets}\
 \text {Total assets}\
\
\underline{ \text {Liabilities and equity:}}\
 \text {Accounts payable}\
 \text {Notes payable}\
 \text {Total current liabilities}\
 \text {Long-term debt}\
 \text {Common stock}\
 \text {Retained earnings}\
 \text {Total common equity}\
 \text {Total liabilities and equity}
\end{array}
\begin{array}{r}
2020 \
200,000 \
864,000 \
\underline{2,000,000}\
 \$ 3,064,000 \
6,000,000 \
\underline{\$ 9,064,000 }\
\
\
\$ 1,400,000 \
1,600,000 \
\underline{\$ 3,000,000 }\
 2,400,000 \
3,000,000 \
\underline{664,000} \
 \$ 3,664,000 \
\underline{\$ 9,064,000 }\
\end{array}
\begin{array}{r}
2019 \
\$ 170,00 \
7000,00 \
\underline{1,400,000} \
 \$ 2,270,00 \
5,600,00 \
\underline{\$ 7,870,00}\
\
\
\$ 1,090,00 \
1,800,00 \
\underline{\$ 2,890,000} \
2,400,00 \
2,000,00 \
\underline{580,00 }\
\$ 2,580,00 \
\underline{\$ 7,870,00 }\
\end{array} 
\end{array}\)
 Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2019.As of the end of 2020, none of the principal on this debt had been repaid.Assume that the company's sales in 2019 and 2020 were the same.Which of the following statements must be CORRECT?

Accepted Answer

C

Question 2

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 taxable income (EBT), subtract operating costs, depreciation, and interest from sales: EBT = Sales - Operating Costs - Depreciation - Interest. Interest = $8,000 * 7.5% = $600. EBT = $12,500 - $7,250 - $1,250 - $600 = $3,400.

Question 3

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 4

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 5

Which of the following statements is CORRECT?

Accepted Answer

If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share. This is because investors are willing to pay a premium for the higher earnings growth and returns associated with more profitable firms, which increases the market value of the firm's equity and raises its price per share above its book value per share.

Question 6

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 7

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 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.

Question 8

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 account that appears on the income statement, not a liability account that would appear on the balance sheet. The other options are all current liabilities and would appear on the balance sheet.

Question 9

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 generally includes these four basic financial statements.

Question 10

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 the retained earnings amount did not change from 2019 to 2020, it means that any dividends paid out in 2020 were exactly offset by the earnings for the year, keeping the retained earnings balance constant.

Question 11

Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets: $$\begin{array} { l r r } 
& 2020 & 2019 \
\text { Common stock } & \$ 2,000 & \$ 1,000 \
\text { Retained earnings } & 2,000 & 2,340 \
\text { Total common equity } & \$ 4,000 & \$ 3,340
\end{array}$$ The company has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

Accepted Answer

The increase in common stock from $1,000 million in 2019 to $2,000 million in 2020 indicates the company issued more common stock in 2020. The other statements cannot be directly inferred from the given information.

Question 12

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 but excluding interest and taxes). For Lindley Textiles, EBIT = Sales - Operating Costs - Depreciation = $12,500 - $7,250 - $1,000 = $4,250.

Question 13

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

The statement is true. Reported income and costs may not accurately reflect cash inflows and outflows, leading to a difference between reported profits and actual cash flow.

Question 14

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

Accepted Answer

This is because the accounting equation is Assets = Liabilities + Equity, and this equation must always remain in balance. Therefore, the total of assets must always equal the total of liabilities and equity.

Question 15

Consider the balance sheet of Wilkes Industries as shown below.Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000. $\begin{array}{lcc}
\text { Cash } & \$ 50,000& \text { Accounts payable } & \$ 100,000 \
\text { Inventory } & 200,000& \text { Accruals } & 100,000\
\text { Accounts receivable } & 250,000& \mathrm{Total} \mathrm{CL} & \$ 200,000\
\text { Total CA } & \$ 500,000& \text { Debt } & 200,000 \
\text { Net fixed assets } & \$ 900,000& \text { Common stock } & 200,000 \
&& \text { Retained eamings } & 800,000\
\text { Total assets }&\$1,400,000&\text { Total L \& E }&\$1,400,000
\end{array}$

Accepted Answer

Retained earnings reflect the company's accumulated net income and are not directly indicative of its current cash position. Wilkes Industries has $50,000 in cash, which is insufficient to cover a $200,000 purchase without considering other financing options or liquidating assets.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

The balance sheet is organized by listing assets in order of liquidity, starting with the most liquid assets (those that can be converted to cash the quickest) and moving down to the least liquid, or longest-lived assets.

Question 17

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 annual report provides financial information about the company's performance, financial position, and future prospects, which are key factors for investors to make informed decisions about their investment in the company. Therefore, the annual report is important in finance as it helps investors form expectations about the firm's future earnings and dividends, as well as the riskiness of those cash flows.

Question 18

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

This statement is true. Examples of assets that are expected to produce cash over time include inventory, property, plant, and equipment, and investments. The future cash flows generated by these assets may be more or less than the carrying values recorded on the company's financial statements, which is why companies must regularly review and adjust the carrying values of these assets.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The income statement is designed to show us how much the firm earned during a specific period, usually a year. It includes revenues, expenses, gains, and losses, and ultimately shows the net income or profit of the company for that period.

Question 20

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

Accepted Answer

Bonds are long-term investments and are not considered current assets. Current assets are assets that are expected to be converted into cash within one year or one operating cycle, whichever is longer. The other options listed (A, B, C, and E) are all examples of current assets.

Quiz 2: Financial Statements, Cash Flow, and Taxes

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?

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?

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.

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

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

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?

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

Which of the following statements is CORRECT?

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.

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.

Which of the following statements is CORRECT?

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