Question 1

Which of the following is more likely to be correct if market value of equity is less than book value of equity?

Accepted Answer

The answer of Which of the following is more likely...

Question 2

Which of the following statements about depreciation is correct?

Accepted Answer

Depreciation reduces the book value of assets, which is the original cost of the asset minus any accumulated depreciation. It does not affect cash balances, since it is a non-cash expense. It is also not subtracted from cost of goods sold, but rather from the income statement as a separate expense item. However, it does reduce net income, since it is a deductible expense that lowers taxable income.

Question 3

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

Accepted Answer

Paying cash dividends will result in cash outflow from the company and therefore, decrease cash flows from financing activities.

Question 4

Net earnings result from:

Accepted Answer

Net earnings, also known as retained earnings, result from income that is not distributed to shareholders as dividends but is instead retained in the company for reinvestment or to pay down debt.

Question 5

What is the most likely conclusion for a firm whose statement of cash flows shows an increase in cash balances and has negative cash flows from both operations and financing?

Accepted Answer

The increase in cash balances indicates that the firm has received more cash than it has spent. The negative cash flows from both operations and financing suggest that the firm is not generating positive cash flows from its core business activities and is not obtaining much financing from external sources. Therefore, the most likely explanation for the increase in cash balances is that the firm sold more equipment than it purchased, resulting in a positive cash flow from investing activities.

Question 6

Current period depreciation expense is listed on:

Accepted Answer

Current period depreciation expense is a part of operating expenses and is listed on the income statement.

Question 7

Which of the following changes in working capital will result in an increase in cash flows?

Accepted Answer

The answer of Which of the following changes in working...

Question 8

According to accrual accounting, when goods are not sold until the period after they were produced, then the cost of goods sold:

Accepted Answer

According to accrual accounting, the cost of goods sold (COGS) is recognized in the period in which the sale occurs, regardless of when the goods were produced. If the goods are not sold until the period after they were produced, the COGS will be recognized in the second period. This reflects the matching principle in accounting, which requires expenses to be recognized in the same period as the related revenues.

Question 9

If a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period, then, based on these two categories, cash flow will increase by:

Accepted Answer

The answer of If a firm generates $2,000 in sales...

Question 10

Market-value balance sheets differ from book-value balance sheets in that market values:

Accepted Answer

Market-value balance sheets reflect the current market prices of assets and liabilities, aligning with investors' expectations, rather than historical costs as in book-value balance sheets.

Question 11

The Net Income figure on an income statement is calculated before deducting:

Accepted Answer

Cash dividends are not deducted when calculating net income; they are distributions of profit after net income is determined.

Question 12

Which of the following is not a typical reason for differences between profit and cash flow?

Accepted Answer

Income taxes are included in both profit and cash flow. The other factors listed can impact profit and cash flow differently. Depreciation expense reduces profit but does not impact cash flow, while changing levels of accounts receivable and accrual accounting practices can impact cash flow but may not necessarily impact profit.

Question 13

Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock?

Accepted Answer

The market value of liabilities is calculated as the market value of assets minus the market value of equity, which is $2 million - $1 million = $1 million.

Question 14

In a statement of cash flows, which category includes depreciation expense?

Accepted Answer

Depreciation is a non-cash expense that reduces the carrying amount of an asset over time. It is included in the operating activities section of the statement of cash flows because it is a result of the company's day-to-day operations.

Question 15

An increase in depreciation expense will (other things equal):

Accepted Answer

Depreciation expense is a non-cash expense that reduces net income. Therefore, an increase in depreciation expense will decrease net income (other things equal).

Question 16

Which of the following best explains the combination of a high level of sales combined with a low cash flow during an accounting period?

Accepted Answer

The answer of Which of the following best explains the...

Question 17

If a firm's net income is positive and its non-cash expenses are positive, which of the following could account for a negative amount of cash provided by operations?

Accepted Answer

The answer of If a firm's net income is positive...

Question 18

Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.

Accepted Answer

EBIT = $4,000,000 − 3,500,000 − 500,000 = $0

Question 19

Which of the following statements is more likely if cash and marketable securities increase by $5,000 during a period in which cash provided by operations increases by $1,000 and cash used by investments decreases by $500?

Accepted Answer

The answer of Which of the following statements is more...

Question 20

The gathering of related revenues and expenses into the same period, regardless of when they were incurred, is:

Accepted Answer

Accrual accounting is the method of accounting that involves the matching of related revenues and expenses in the same period, regardless of when they were incurred. This method recognizes revenues when they are earned and expenses when they are incurred, even if the actual cash transactions occur at a different time. This approach is widely used in financial reporting as it provides a more accurate picture of a company's financial performance over a given period.

Quiz 3: Accounting and Finance