Question 1

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

Accepted Answer

The annual report provides important financial information and performance metrics that investors use to evaluate a company's financial health and potential for growth. This information can help investors make informed decisions about buying or selling a company's stock, as well as form expectations about future earnings and dividends.

Question 2

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

Accepted Answer

These are all factors that can impact the timing and amount of cash inflows and outflows, which can differ from the recognition of revenues and expenses on the income statement.

Question 3

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyse the financial position and strength of a firm.

Accepted Answer

Ratio analysis is a tool used for comparing relationships between financial statement accounts in order to evaluate the financial position and performance of a company.

Question 4

A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows.

Accepted Answer

This statement summarizes the changes in cash and cash equivalents of a company over a period of time, categorized into operating, investing, and financing activities.

Question 5

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements.Trend analysis is one method of measuring a firm's performance over time.

Accepted Answer

Trend analysis involves analyzing a firm's financial performance over multiple periods to identify patterns and trends. Therefore, it is one method of determining whether a firm's financial position is improving or deteriorating over time.

Question 6

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

Accepted Answer

A decline in inventory turnover ratio means that inventory is being held for a longer period of time, which can tie up cash and reduce liquidity. Therefore, a higher inventory turnover ratio signals better liquidity.

Question 7

On the statement of financial position, total assets must equal total liabilities plus shareholders equity.

Accepted Answer

This is also known as the accounting equation and it must always balance. If the statement of financial position does not balance, it means that there is an error in the financial statements.

Question 8

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Accepted Answer

High current and quick ratios indicate that a firm has more short-term assets relative to its short-term liabilities, which suggests good liquidity. However, excessively high ratios may also indicate that the firm is not using its assets efficiently or is under-leveraged, which could be a sign of poor financial management.

Question 9

Depreciation, as shown on the statement of comprehensive income, is regarded as a use of cash because it is an expense.

Accepted Answer

Depreciation is a non-cash expense, meaning that it does not involve an actual outflow of cash from the business. Therefore, it is not considered a use of cash and would not be shown as such on the statement of cash flows.

Question 10

Non-cash assets 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 the assets are carried on the books.

Accepted Answer

Non-cash assets such as property, plant, and equipment or investments are expected to generate cash flows over time. However, the actual amount of cash generated may be different from the values at which these assets are recorded on the balance sheet due to factors such as depreciation, impairment, changes in market conditions, and other factors that can impact their value.

Question 11

An increase in an asset account is a source of cash, whereas an increase in a liability account is a use of cash.

Accepted Answer

An increase in an asset account (other than cash) typically represents a use of cash, whereas an increase in a liability account is considered a source of cash because it often means the company has borrowed money or incurred obligations that increase its cash flow.

Question 12

The statement of financial position is a financial statement measuring the flow of funds into and out of various accounts over time while the statement of comprehensive income measures the progress of the firm at a point in time.

Accepted Answer

The statement of financial position (also known as the balance sheet) shows the financial position of a company at a specific point in time, while the statement of comprehensive income (also known as the income statement) shows the financial performance of a company over a specific period of time.

Question 13

The statement of financial position presents a summary of the firm's revenues and expenses over an accounting period.

Accepted Answer

The statement of financial position (also known as balance sheet) presents a summary of the firm's assets, liabilities, and equity at a specific point in time, not a summary of revenues and expenses over an accounting period. The summary of revenues and expenses over an accounting period is presented in the income statement.

Question 14

The statement of comprehensive income measures the flow of funds into (i.e.revenue) and out of (i.e.expenses) the firm over a certain time period.It is always based on accounting data.

Accepted Answer

The statement of comprehensive income, also known as the income statement, reports the revenue earned and expenses incurred by a company during a specific period of time. It is based on accounting data and provides information about the financial performance of the company.

Question 15

One of the biggest noncash items on the statement of comprehensive income is depreciation which needs to be subtracted from net income to determine cash flows for the firm.

Accepted Answer

Depreciation is a noncash expense that is added back to net income when calculating cash flows from operating activities, not subtracted.

Question 16

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Accepted Answer

Profitability ratios take into account factors such as revenue generation, cost management, and efficient use of assets and debt to assess a company's ability to generate profits over time. Therefore, they provide a comprehensive view of a company's financial health, incorporating the impact of liquidity, asset management, and debt management on overall operations.

Question 17

A firm's net income reported on its statement of comprehensive income must equal the operating cash flows on the statement of cash flows.

Accepted Answer

The net income reported on the statement of comprehensive income does not necessarily equal the operating cash flows on the statement of cash flows. This is because there may be non-cash items included in net income, such as depreciation and amortization, that are added back to calculate operating cash flows. Additionally, changes in working capital and other adjustments can also impact the operating cash flows reported on the statement of cash flows.

Question 18

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Accepted Answer

This statement is correct. When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Question 19

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

Debt management ratios, such as debt-to-equity and interest coverage ratios, are used to measure how much a company is relying on debt financing to generate returns for its shareholders. Therefore, A is correct as it describes the relationship between financial leverage and debt management ratios.

Question 20

The current ratio and inventory turnover ratio measure the liquidity of a firm.The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

Accepted Answer

The answer of The current ratio and inventory turnover ratio...

Quiz 2: Analysis of Financial Statements