Question 1

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable.This definition assumes that the firm has no "excess" cash.

Accepted Answer

The formula for net operating working capital does not include excess cash, therefore the assumption in the statement is correct.

Question 2

EBIT stands for earnings before interest and taxes,and it is often called "operating income."

Accepted Answer

EBIT stands for earnings before interest and taxes, which is a measure of a company's earnings from operating activities. It is often referred to as "operating income" because it represents the income generated by a company's core business operations before taking into account interest expenses and taxes.

Question 3

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

False

Question 4

If we were describing the income statement and the balance sheet,it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

Accepted Answer

The income statement presents financial performance over a period of time, similar to a video that shows changes over time. The balance sheet, on the other hand, provides a snapshot of the company's financial position at a specific point in time, like a photograph.

Question 5

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

Accepted Answer

This is the fundamental equation of accounting and is known as the accounting equation or balance sheet equation. It represents the idea that a company's assets are financed by either liabilities (debts) or equity (ownership stake). Therefore, the total assets must always balance with the total liabilities and equity.

Question 6

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 explains that there may be a difference between reported profits and actual cash flow, which is true.

Question 7

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

Accepted Answer

The annual report typically includes these four financial statements.

Question 8

The amount shown on the December 31,2015,balance sheet as "retained earnings" is equal to the firm's net income for 2015 minus any dividends it paid.

Accepted Answer

The amount shown on the December 31, 2015 balance sheet as "retained earnings" is equal to the firm's accumulated net income minus any dividends it paid historically, not just for the current year.

Question 9

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 (FCF) is the cash flow that remains after the company has made capital expenditures required to maintain existing assets and operations. It is the cash flow that can be used for discretionary purposes, such as paying dividends or buying back stock.

Question 10

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. The value of an asset is indeed based on the present value of its expected future cash flows, and a company's ability to generate free cash flow (FCF) is a crucial factor in determining its overall valuation and attractiveness to investors.

Question 11

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 up 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,and will result in a substantial amount of retained earnings shown on the balance sheet.

Accepted Answer

This is a correct statement describing how the statement of stockholders' equity is typically prepared and how a profitable company can accumulate retained earnings over time.

Question 12

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

Accepted Answer

EBITDA stands for earnings before interest, taxes, depreciation, and amortization, not debt and assets.

Question 13

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 balance sheet measures the firm's financial position at a point in time, while the income statement measures the flow of funds into and out of various accounts over time.

Question 14

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.
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Accepted Answer

The answer of Consider the following balance sheet,for Games Inc.Because...

Question 15

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

Net income and free cash flow are different measures. Net income is based on accrual accounting principles, which may not reflect actual cash flows. Free cash flow, on the other hand, is a measure of the cash a company generates after accounting for capital expenditures. While there may be some overlap between net income and free cash flow, they are not the same thing and may not be equal in all cases.

Question 16

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

Accepted Answer

The answer of Both interest and dividends paid by a...

Question 17

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

Assets such as property, plant, and equipment, as well as investments in securities, are expected to generate cash flows over time through operational activities, sale, or liquidation. However, the amount of cash expected to be generated may be different from the amounts at which the assets are recorded on the company's balance sheet due to various factors such as market conditions, changes in demand, technological advancements, and inflation. Therefore, asset values should be periodically reviewed for impairment or appreciation to reflect their true value.

Question 18

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

The answer of Companies typically provide four basic financial statements:
...

Question 19

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

The answer of Assume that two firms are both following...

Question 20

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 a key source of information for investors when making decisions about investing in a company. It provides information about the company's financial performance, future plans, and risks. This information is used by investors to form expectations about the company's future earnings and dividends, as well as the riskiness of those cash flows. Therefore, the annual report is an important tool for investors in finance.

Quiz 3: Financial Statements, cash Flow, and Taxes