Question 1

Accrual accounting,which attempts to match sales revenues and the expenses associated with the production of the goods,is conducted in an attempt to:

Accepted Answer

Accrual accounting aims to provide a more accurate picture of a company's financial position and performance by matching revenues with expenses. This helps reduce bias in reported profitability measures and provides a more realistic view of the company's overall financial health. It may also help in reducing income-tax liability, but that is not the primary objective of accrual accounting. It does not directly impact the speed of accounts receivable or the time necessary to depreciate assets.

Question 2

If a firm pays taxes,which one of these will reduce net income but increase cash flow?

Accepted Answer

Depreciation expense is a non-cash charge that reduces net income but does not affect cash flow, as it is added back in the cash flow statement.

Question 3

Current period depreciation expense is listed:

Accepted Answer

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

Question 4

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

Accepted Answer

An increase in depreciation expense is a non-cash expense that reduces net income. Other things being equal, it will decrease net income.

Question 5

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

Accepted Answer

Accrual accounting recognizes revenue and expenses when they are earned and incurred, regardless of when cash is received or paid. In this case, the cost of goods sold will be recognized when the goods are sold, as that is when the revenue is earned.

Question 6

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

If a firm has negative cash flows from both operations and financing, but still shows an increase in cash balances, it is likely that the firm sold more equipment than it purchased. Selling equipment provides an inflow of cash, which can increase the cash balance even if the firm is experiencing negative cash flows. The other choices are less likely to result in an increase in cash balances in this scenario.

Question 7

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

Accepted Answer

Paying cash dividends is a cash outflow from financing activities, which decreases the cash flows from financing section of the statement of cash flows.

Question 8

The net income figure on an income statement is calculated before deducting the:

Accepted Answer

Cash dividends are not deducted on the income statement; they are distributions of profit to shareholders and are recorded on the statement of retained earnings.

Question 9

Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period.Based solely on this information,cash flow will increase by:

Accepted Answer

The increase in accounts receivable means that the firm has made sales but has not yet received payment for them. Therefore, cash flow has not increased by the full $2,000 in sales. The increase in accounts receivable represents a decrease in cash flow because the firm has an obligation to collect payment from its customers in the future. Therefore, the cash flow increase is equal to the difference between sales and the increase in accounts receivable, or $2,000 - $500 = $1,500.

Question 10

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

Cash provided by financing increased. This could occur by increasing debt by a larger amount than the amount paid out in dividends.

Question 11

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

Accepted Answer

Depreciation expense is a non-cash expense that is added back to net income when calculating cash provided by operations in the statement of cash flows. Therefore, the correct category is Cash provided by operations.

Question 12

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

Accepted Answer

An increase in accounts payable means the company is delaying payments to suppliers, which retains cash within the business, thus increasing cash flows.

Question 13

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 14

Which one of the following will reduce the cash flow during an accounting period?

Accepted Answer

Acquisition of equipment involves spending cash, which reduces cash flow during the accounting period.

Question 15

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 recognizing revenues and expenses when they are earned or incurred, regardless of when the money is actually received or paid. This ensures that financial statements accurately reflect the company's financial position and performance for a given period. Cash-basis accounting, on the other hand, records revenues and expenses only when cash is exchanged, which may not provide an accurate picture of a company's financial health. Market-value and book-value accounting are not related to the timing of revenue and expense recognition.

Question 16

Which of the firm's financial statements most clearly recognizes the payment for new equipment?

Accepted Answer

The statement of cash flows most clearly recognizes the payment for new equipment as it records cash inflows and outflows, including capital expenditures.

Question 17

Retained earnings result from:

Accepted Answer

Retained earnings are the portion of a company's profit that is not paid out as dividends to shareholders but instead kept for reinvestment in the business or to pay off debts. Therefore, they result from income not paid to shareholders.

Question 18

Johnson's Nursery has net income of $42,500,depreciation expense of $1,800,interest expense of $900,taxes of $1,600,additions to net working capital of $2,300,and capital expenditures of $11,700.What is the amount of the free cash flow?

Accepted Answer

Free cash flow = $42,500 + 900 + 1,800 − 2,300 − 11,700 = $31,200

Question 19

Which one of the following does not reduce a firm's net income?

Accepted Answer

Income taxes, interest expense, and depreciation expense all reduce net income. However, dividends are paid out of after-tax profits and do not directly affect net income.

Question 20

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

Accepted Answer

If current assets increase more than current liabilities increase, it means more cash is tied up in assets, reducing cash flow from operations despite positive net income and noncash expenses.

Quiz 3: Accounting and Finance