Question 1

What happens to a firm's net worth as it uses cash to repay accounts payable?

Accepted Answer

Repaying accounts payable with cash affects the asset side (decrease in cash) and the liability side (decrease in accounts payable) of the balance sheet equally, leaving the net worth (equity) unchanged.

Question 2

In general, what is changing as you read down the left-hand side of a balance sheet?

Accepted Answer

The assets are listed in order of liquidity on the left-hand side of the balance sheet. Therefore, as you read down the left-hand side, the assets become less liquid or easier to convert into cash.

Question 3

If a payment of principal is due in 13 months on a long-term liability, that payment will now appear on the balance sheet as:

Accepted Answer

Since the payment of principal is due in 13 months, it will be classified as a long-term liability and appear under the long-term debt section of the balance sheet.

Question 4

An expenditure on new capital equipment is a cash payment.

Accepted Answer

An expenditure on new capital equipment is a cash payment as it involves spending money to purchase a physical asset.

Question 5

A reduction in accounts receivable uses cash, reducing the firm's net cash balance.

Accepted Answer

A reduction in accounts receivable typically indicates that customers are paying their invoices, which increases the firm's cash balance, not reducing it.

Question 6

The statement of cash flows shows the firm's cash inflows and outflows from operations as well as from its investments and financing activities.

Accepted Answer

The statement of cash flows is a financial statement that details the cash inflows and outflows from a company's operations, investments, and financing activities. It helps investors and analysts understand the cash position of a company and how it is generating and using cash. Therefore, the statement of cash flows does indeed show the firm's cash inflows and outflows from operations as well as from its investments and financing activities.

Question 7

To calculate free cash flow, you must deduct capital expenditures from the cash flow from operations.

Accepted Answer

Free cash flow is calculated by subtracting capital expenditures from cash flow from operations.

Question 8

If the value of a firm's net fixed assets equals the value of the accumulated depreciation, from an accounting context the fixed assets are:

Accepted Answer

The answer of If the value of a firm's net...

Question 9

The difference between the market values of assets and liabilities is the market value of the shareholders' equity claim.

Accepted Answer

This statement is true. Shareholders' equity represents the residual claim on assets after liabilities have been satisfied, and its value can be calculated as the difference between the market values of assets and liabilities.

Question 10

Net working capital is a measure of a company's:

Accepted Answer

Net working capital is a measure of a company's estimated cash reservoir, indicating the difference between its current assets and current liabilities.

Question 11

The purchase of new equipment is a use of cash, and it reduces the firm's net cash balance.

Accepted Answer

Purchasing new equipment requires cash outflows, which reduces the firm's net cash balance.

Question 12

Net working capital is calculated by taking the difference between:

Accepted Answer

Net working capital is defined as the difference between a company's current assets (cash, accounts receivable, inventory) and its current liabilities (accounts payable, accrued expenses, and short-term borrowings). Therefore, option C, which calculates the difference between current assets and current liabilities, is the correct answer. Options A, B, and D do not accurately calculate net working capital.

Question 13

Which of the following assets is likely to be considered the most liquid?

Accepted Answer

Marketable securities are considered the most liquid asset as they can easily be converted into cash without significant loss of value. Net fixed assets, accounts payable, and inventories are relatively less liquid as they may take time to sell or convert into cash, and may also incur significant cost or loss of value in the process.

Question 14

Which of the following items should not be included in a listing of current assets?

Accepted Answer

Accounts payable is a liability, not a current asset. The other options listed (marketable securities, accounts receivable, and inventories) are current assets.

Question 15

A balance sheet portrays the value of a firm's assets and liabilities:

Accepted Answer

A balance sheet shows the financial position of a firm at a specific point in time, not only at the end of the calendar year. While balance sheets are typically prepared annually, they can be prepared at any point in time to provide a snapshot of a company's assets and liabilities. Therefore, option C is the most accurate.

Question 16

Which one of the following is an intangible asset?

Accepted Answer

Goodwill is an intangible asset as it represents the value of a company's brand, reputation, and customer relationships. Retained earnings, deferred income taxes, and treasury stock are all tangible assets, as they represent actual financial resources or ownership interests in a company.

Question 17

Depreciation charge is a cash payment.

Accepted Answer

Depreciation charge is a non-cash expense that reflects the decrease in the value of an asset over time. It is deducted from the revenue in the income statement but does not involve any actual cash payment.

Question 18

An increase in inventories uses cash, reducing the firm's net cash balance.

Accepted Answer

When a firm increases its inventories, it needs to spend cash to purchase these additional inventory items. Therefore, the increase in inventory will decrease the firm's net cash balance.

Question 19

Suppose Dee's just acquired the assets of Flo's Flowers. The book value of Flo's Flowers assets was $68,000 but Dee's paid a total of $75,000. The additional $7,000 paid by Dee's will be recorded on Dee's balance sheet as:

Accepted Answer

The additional $7,000 paid by Dee's over the book value of the assets represents goodwill, which is an intangible asset that arises when a company acquires another company for more than the fair market value of its net assets. Therefore, the $7,000 will be recorded on Dee's balance sheet as goodwill.

Question 20

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has:

Accepted Answer

The balance sheet equation is Assets = Liabilities + Shareholders' Equity. If total assets exceed current liabilities plus shareholders' equity, it implies the presence of non-current liabilities, such as long-term debt, to balance the equation.

Quiz 3: Accounting and Finance