Question 1

EBITDA stands for "earnings before interest,taxes,debt,and assets."

Accepted Answer

EBITDA stands for "earnings before interest, taxes, depreciation, and amortization."

Question 2

The balance sheet 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 statement is incorrect. The balance sheet provides a snapshot of the firm's financial position at a point in time, while the income statement measures the performance of the firm over a specific period, usually a year or a quarter.

Question 3

Typically,the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year,adds net income,subtracts dividends paid,and ends with total stockholders' equity at the end of the year.Over time,a profitable company will have earnings in excess of the dividends it pays out,resulting in a substantial amount of retained earnings shown on the balance sheet.

Accepted Answer

This statement is accurate and describes how stockholders' equity is typically presented on financial statements. Retained earnings represent the accumulated profits that have not been paid out as dividends and are a key component of stockholders' equity.

Question 4

EBIT,often referred to as operating income,stands for "earnings before interest and taxes."

Accepted Answer

EBIT is the abbreviation for "earnings before interest and taxes." It is used to measure a company's profitability before deducting interest and taxes. It is often referred to as operating income because it only takes into account the revenue and expenses associated with the company's operations.

Question 5

The balance sheet represents a snapshot in time,whereas the income statement reports on operations over a period of time.

Accepted Answer

The balance sheet shows the financial position of a company at a specific point in time, whereas the income statement covers a period of time and shows the company's revenue, expenses, and net income or loss over that period.

Question 6

The amount shown on the December 31,2018 balance sheet as "retained earnings" is equal to the firm's net income for 2018 minus any dividends it paid

Accepted Answer

Retained earnings is the accumulation of a company's profits that have not been distributed as dividends. While net income for 2018 is a component of the calculation of retained earnings, it is not equal to the amount shown on the balance sheet as retained earnings. Other adjustments, such as earnings from prior years and additional capital contributions, can also impact the balance of retained earnings.

Question 7

Consider the following balance sheet for Games Inc.Because Games has $800,000 of retained earnings,we know that the company would be able to pay cash to buy an asset with a cost of $200,000. $\begin{array}{llll}
\text { Cash } & \$ 50,000 & \text { Accounts payable } & \$ 100,000 \
\text { Inventory } & \$ 200,000 & \text { Accruals } & \$ 100,000 \
\text { Accounts receivable } & \$ 250,000 & \text { Total CL } & \$ 200,000\
\text { Total CA } & \$ 50,000 & \text { Long-term debt } & \$ 200,000 \
\text { Net fixed assets } & \$ 900,000 & \text { Common stock } & \$ 200,000 \
& & \text { Retained earnings } & \$ 800,000\
\text { Total assets }&\$1,400,000&\text { Total L \& E }&\$1,400,000
\end{array}$ 
?

Accepted Answer

Retained earnings indicate the cumulative net income of a company that has been retained rather than distributed to shareholders as dividends. It does not directly indicate the company's current cash position or its ability to purchase assets with cash.

Question 8

The value of any asset is the present value of the cash flows the asset is expected to provide.The cash flows a business is able to provide to its investors is its free cash flow.This is the reason that FCF is so important in finance.

Accepted Answer

This statement is true and highlights the importance of free cash flow in determining the value of an asset or a business.

Question 9

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 of cash,and reported costs likewise may not be consistent with 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 accurately describes the concept of cash flow versus reported profits on the income statement.

Question 10

The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Accepted Answer

The answer of The fact that 70% of the interest...

Question 11

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

Accepted Answer

This is the fundamental principle of accounting known as the accounting equation or balance sheet equation. It states that the assets of a company must always equal the sum of its liabilities and equity. This ensures that the financial records of a company are accurate and balanced.

Question 12

?Assume that two firms are both following generally accepted accounting principles.Both firms commenced operations two years ago with $1 million of identical fixed assets,and neither firm sold any of those assets or purchased any new fixed assets.The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

Accepted Answer

One firm might choose to use straight-line depreciation,the other an accelerated method,and this would lead to differences in reported depreciation and therefore reported net fixed assets.

Question 13

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 is an important source of information for investors when they are making decisions about whether to invest in a company. By providing detailed information about the company's financial performance, its management, and its future prospects, the annual report can help investors make more informed decisions about the risk and return characteristics of the company's stock or bonds. This is why the annual report is considered a key document in finance, and why companies are required to provide it to their shareholders and other stakeholders every year.

Question 14

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

There is no reason to think that net income would be equal to FCF.For example,a company that is not growing might report zero net income yet have high FCF because of depreciation.

Question 15

Both interest and dividends paid by a corporation are deductible operating expenses,hence they decrease the firm's taxes.

Accepted Answer

Interest paid by a corporation is a deductible expense which can decrease the firm's taxable income and thus its taxes, but dividends paid are not deductible and do not affect the firm's taxes.

Question 16

Net operating working capital is equal to current assets less excess cash minus the difference between current liabilities and notes payable.

Accepted Answer

Net operating working capital (NOWC) is calculated as current assets minus excess cash minus current liabilities. Notes payable is not included in the calculation of NOWC. Therefore, the statement is true.

Question 17

Companies typically provide four basic financial statements: the fixed income statement,the current income statement,the balance sheet,and the cash flow statement.

Accepted Answer

Companies typically provide four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of shareholders' equity, not the fixed and current income statements.

Question 18

Free cash flow (FCF)is,essentially,the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Accepted Answer

Free cash flow is the cash flow that remains after a company has made necessary investments to sustain ongoing operations, and is available for interest and dividends.

Question 19

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 amounts at which the assets are carried on the books.

Accepted Answer

This is true as assets such as property, plant, and equipment, investments, and inventory are expected to generate cash flows over time, but the actual amount of cash generated may differ from the original value at which the assets were recorded on the company's books. This is because of factors such as depreciation, market fluctuations, and changes in demand.

Question 20

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

Accepted Answer

The annual report usually includes the income statement, balance sheet, cash flow statement, and statement of stockholders' equity. These four statements provide a comprehensive view of a company's financial performance and position.

Quiz 3: Financial Statements,cash Flow and Taxes