Deck 2: Financial Statements

Question 1

One of the key components to making financial decisions is to ________.

A) understand the timing and amount of dividends
B) understand the timing and amount of cash flow
C) understand the timing of EBIT
D) understand the amount of net income

Answer 1

B

Question 2

It is important to remember that the fundamental identity of accounting is the debit and credit recording activity where debits ________ equal credits.

A) never
B) seldom
C) sometimes
D) always

Answer 2

D

Question 3

Understanding the sources and uses of cash in the recent past will enable a manager to ________ the cash flow for a potential project of the firm.

A) determine with perfect precision
B) forecast with perfect precision
C) predict more accurately
D) know today

Answer 3

C

Question 4

Which of the statements below is FALSE?

A) The purpose of studying financial statements is to understand those portions of the statements that have relevance for financial decision making.
B) We need to understand how to interpret and use the information presented in financial statements to form a picture of the financial profile of the firm.
C) Accounting, it has been said, looks back to where a company has been - somewhat like looking through a rear view mirror.
D) Accounting and finance view the numbers in the same way.

Question 5

Three fundamental issues separate net income and cash flow. Which of the answers below is NOT one of these three fundamental issues?

A) Accrual accounting
B) Non-cash accounting
C) Non-cash expense items
D) Interest expense

Question 6

Which of the statements below is FALSE?

A) The income statement summaries and categorizes a company's revenues and expenses for that period.
B) Typically, income statements are prepared quarterly and annually for distribution outside the company, but usually monthly for internal managers.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT).
D) The balance sheet reports the performance of the firm over the past period. It summarizes and categorizes a company's revenues and expenses for that period.

Question 7

There are four primary financial statements that are used to measure the performance of a firm. Which of the choices below are included among these four?

A) The balance statement and income statement
B) The income sheet and statement of retained earnings
C) The statement of cash flow and statement of balance
D) The balance sheet and statement of cash flow

Question 8

Net income is ________.

A) not cash flow
B) the cash flow from the operations of the company during the period
C) the increase or decrease in cash flow for the period
D) earnings before interest and taxes

Question 9

It is important to remember that the fundamental ________ of accounting is the debit and credit recording activity where debits always equal credits.

A) effect
B) end product
C) outcome
D) identity

Question 10

Which of the below statements is FALSE?

A) Typically, income statements are prepared quarterly and annually for distribution outside the company, but usually semi-annually for internal managers.
B) Typically, income statements are prepared quarterly and annually for distribution outside the company.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes (EBIT).
D) The income statement reports the performance of the firm over the past period. It summaries and categorizes a company's revenues and expenses for that period.

Question 11

Cash flow is ________.

A) the increase but not decrease in cash for the period
B) the decrease but not increase in cash for the period
C) the increase or decrease in cash for the period
D) the net income for the period

Question 12

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the taxable income for the period. Then the appropriate taxes are calculated and subtracted. We finally arrive at the ________ , the so-called bottom line of the income statement.

A) after-tax income
B) before-tax income
C) net income
D) EBIT

Question 13

The purpose of studying financial statements is ________.

A) to mechanically build portfolio analysis
B) to understand those portions of the statements that have relevance for financial decision making
C) to primarily investigate all portions of the statements that have relevance for dividend policy
D) to mechanically learn how to read and understand footnotes

Question 14

Which of the following statements is true?

A) The finance manager uses the framework of the income statement to find the operating income of the company (an accounting measure), which is also the true cash flow from operations.
B) In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash.
C) Three fundamental issues separate net income and cash flow: accrual accounting, noncash expense items, and interest expense.
D) Generally accepting accounting principles (GAAP) in the United States do not allow the use of accrual accounting to record revenue.

Question 15

Which of the statements below is TRUE?

A) Accounting Identity is: Assets ≡ Liabilities - Owners' Equity.
B) Accounting Identity is: Assets ≡ Liabilities + Owners' Equity.
C) Accounting Identity is: Assets ≡ Owners' Equity - Liabilities.
D) Accounting Identity is: Liabilities ≡ Assets + Owners' Equity.

Question 16

The income statement begins with revenue and subtracts various operating expenses until arriving at Earnings Before Interest and Taxes. Next, interest expense is subtracted to find the ________ for the period.

A) EBIT
B) after-tax income
C) net income
D) taxable income

Question 17

The income statement begins with revenue and subtracts various operating expenses until arriving at ________.

A) earning after taxes
B) net income
C) taxable income
D) EBIT

Question 18

The fundamental starting point of all the accounting statements is the ________.

A) accounting identity
B) computing identity
C) investing identity
D) financing identity

Question 19

Which of the statements below is FALSE?

A) The textbook uses the framework of the income statement to find the operating income of the company (an accounting measure) and then makes adjustments to find the true cash flow from operations.
B) In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash.
C) Three fundamental issues separate net income and cash flow: accrual-based accounting, non-cash expense items, and interest expense.
D) Generally Accepted Accounting Principles (GAAP) in the United States allow the use of accrual accounting to record revenue.

Question 20

Net income is ________.

A) the accounting profit from the operations of the company during the period
B) cash flow
C) the accounting profit from the non-operating assets of the company during the period
D) always the dividends paid shareholders

Question 21

Why is an understanding of cash flow so important in the study of finance?

Question 22

Which of the statements below is TRUE?

A) The ownership accounts or owners' equity section of the balance sheet reflects the owners' stake in the firm.
B) The ownership accounts or owners' equity section of the balance sheet is made up of common stock but not retained earnings.
C) The retained earnings amount on the balance sheet really reflect retained earnings and other stockholder equity, but not treasury stock.
D) The Statement of Retained Earnings is used to show the distribution of the interest paid for the past period.

Question 23

EBIT (earnings before interest and taxes) is obtained by adding together revenue and operating expenses.

Question 24

To find operating cash flow for the business for the year, add depreciation expense to EBIT and then ________.

A) subtract the interest expenses
B) add the taxes
C) subtract the taxes
D) add interest expenses

Question 25

The basic accounting identity that assets equal liabilities plus owners' equity usually, but not always, holds.

Question 26

Which one of the answers below is NOT one of the three components of the "Cash Flow from Assets"?

A) Operating Cash Flow
B) Net Capital Spending
C) Noncash expenses
D) Change in Net Working Capital

Question 27

Which of the following identities is TRUE?

A) Operating Cash Flow = EBIT - Depreciation + Taxes
B) Net Capital Spending = Ending Net Fixed Assets - Depreciation
C) Net Working Capital (NWC) = Current Assets - Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow - Net Capital Spending

Question 28

Which of the following identities is TRUE?

A) Operating Cash Flow = EBIT + Depreciation - Taxes
B) Net Capital Spending = Ending Net Fixed Assets - Depreciation
C) Change in Net Working Capital (NWC) = Current Assets - Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow + Net Capital Spending

Question 29

Debts to be paid more than one year from now are claims against the firm's assets: in other words, they are long-term liabilities. These claims are from ________ who have provided capital to the firm but whose entire repayment is not due during the coming year or operating cycle.

A) banks and bondholders
B) banks and stockholders
C) stockholders and bondholders
D) all long-term lenders

Question 30

Which of the statements below is FALSE?

A) The cash account is much like your individual checkbook, because it tells you how much money you currently have for paying bills or spending on new items.
B) Current assets are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle.
C) The long-term capital asset accounts of the balance sheet represent the capital investment of the company and reflect assets that the company owns and that provide the basis for producing goods and services for sale.
D) The Plant, Property and Equipment account is straightforward in its description, yet it cannot tell you the accumulated depreciation.

Question 31

Net income is not cash flow.

Question 32

In finance, we separate operating decisions from financing decisions and thus exclude ________ as a part of operating income from the income statement.

A) cash flow
B) dividends
C) interest expense
D) earnings

Question 33

Which of the following statements is FALSE?

A) The income statement is put together at a specific point in time (end of a business quarter, or business year) and so the sale could be in one period and the cash received in another period.
B) The income statement contains the set of expenses associated with the products or services sold during the current operating period, with those expenses not associated with current cash flow labeled as non-cash expense items.
C) Depreciation is a current expense of a cash outflow in the current period.
D) Companies depreciate fixed assets (such as office furniture, equipment, machinery, and buildings) over an assigned time period, but the initial cash outlay for the fixed asset typically occurs at the time the asset is acquired by the firm.

Question 34

Which of the statements below is FALSE?

A) The cash account is much like your individual checkbook, because it tells you how much money you currently have for paying bills or spending on new items.
B) Long-term assets are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle.
C) The long-term capital asset accounts of the balance sheet represent the capital investment of the company and reflect assets that the company owns and that provide the basis for producing goods and services for sale.
D) The Plant, Property and Equipment account is straightforward in its description, yet it really contains two pieces: the original value (purchase price) of the equipment and the accumulated depreciation.

Question 35

Equity on the balance sheet refers to what the owners receive after liabilities have been satisfied.

Question 36

Debts to be paid more than one year from now are considered short-term liabilities.

Question 37

Explain the three main areas of the balance sheet.

Question 38

Which of the statements below is FALSE?

A) The cash that the firm generates from its operating decisions (use of its assets) is used to either pay creditors or the owners of the company.
B) Cash flow from assets shows the success or failure of the operating decisions.
C) Cash flow to owners shows cash paid to owners plus any new borrowing from owners.
D) Cash flow to creditors shows a portion of how the firm is financing the operations.

Question 39

From the finance perspective, there are five principal line accounts of particular interest on the balance sheet: the cash account, the working capital accounts, long-term capital assets accounts, long-term debt accounts, and ownership accounts. Briefly explain each.

Question 40

In double-entry bookkeeping, every time an economic transaction is recorded, equal debit and credit amounts must be recorded.

Question 41

Consider the information below from a firm's balance sheet for 2007 and 2008.
Current Assets 2008 2007 Change
Cash and Equivalents $1,561 $1,800 -$ 239
Short-Term Investments $1,052 $3,010 -$1,958
Accounts Receivable $3,616 $3,129 $ 487
Inventories $1,816 $1,543 $ 273
Other Current Assets $ 707 $ 601 $ 106
Total Current Assets $8,752 $10,083 -$1,331
Current Liabilities
Accounts Payable $5,173 $5,111 $ 62
Short-Term Debt $ 288 $ 277 $ 11
Other Current Liabilities $1,401 $1,098 $ 303
Total Current Liabilities $6,862 $6,486 $ 376
What is the Net Working Capital for 2008? What is it for 2007? What is the Change in Net Working Capital (NWC)? Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372, what is the Cash Flow from Assets?

Question 42

Which of the sections below is NOT contained in the annual report?

A) Prediction of competitors' returns
B) Company highlights
C) President's letter to the shareholders
D) Description of the company's activities (usually with pictures and graphs)

Question 43

The change in net working capital subtracts beginning net working capital from ending net working capital.

Question 44

Which of the statements below is FALSE?

A) Officers of a company or others who have a fiduciary responsibility to the owners can trade on their acquired private information about the company prior to the information being made public.
B) One potential problem in the world of finance can arise when some owners or potential owners have access to more information about a company than do others.
C) Regulation Fair Disclosure (or Reg FD) requires companies to release all material information to all investors at the same time.
D) The 10-K must be filed within sixty days after the end of the company's fiscal year.

Question 45

An increase in current assets is a source of cash.

Question 46

The cash flow identity states that the cash flow from the left hand side of the balance sheet is equal to the cash flow on the right hand side of the income statement.

Question 47

Cash and Equivalents are $1,561, Short-Term Investments are $1,052, Accounts Receivables are $3,616, Accounts Payable is $5,173, Short-Term Debt is $288, Inventories are $1,816, Other Current Liabilities are $1,401, and Other Current Assets are $707. What are the Total Current Assets?

A) $8,752
B) $6,936
C) $6,862
D) $5,136

Question 48

Cash flow from assets shows the success or failure of the operating decisions, while cash flow to creditors examines a portion of how the firm is financing the operations.

Question 49

Stimulus Industries Inc has 2011 total current assets of $14,871,000. Last year the total current assets were equal to $12,462,000, The change in total current assets is a ________ of cash in the amount of ________.

A) source; $14,871,000
B) source; $2,409,000
C) use; $2,409,000
D) There is not enough information to answer this question.

Question 50

Cash and Equivalents are $1,561; Short-Term Investments are $1,052; Accounts Receivables are $3,616; Accounts Payable are $5,173; Short-Term Debt is $288; Inventories are $1,816; Other Current Liabilities are $1,401; and Other Current Assets are $707. What is the amount of Total Current Liabilities?

A) $8,752
B) $6,974
C) $6,862
D) $6,574

Question 51

Which of the sections below is NOT contained in the annual report?

A) Notes to financial statements
B) Management's analysis of the company's performance
C) Prediction of gross national product
D) Auditor's Report

Question 52

An increase in borrowing from long-term debt holders is a source of cash.

Question 53

Which of the following identities is FALSE?

A) Change in Equity = Paid-in-Surplus - Net New Borrowing from Creditors
B) Net New Borrowing = Ending Long-term Liabilities - Beginning Long-Term Liabilities
C) Cash Flow to Owners = Dividends - Net New Borrowing from Owners
D) Net New Borrowing from Owners = Change in Equity

Question 54

Which of the following identities is FALSE?

A) Cash Flow to Creditors = Interest Expense - Net New Borrowing from Creditors
B) Net New Borrowing = Ending Long-term Liabilities - Beginning Long-Term Liabilities
C) Cash Flow to Owners = Dividends + Net New Borrowing from Owners
D) Net New Borrowing from Owners = Change in Equity

Question 55

Net Working Capital for 2007 is $3,597 and Net Working Capital for 2008 is $1,890. What is the change in Net Working Capital?

A) $1,707
B) -$1,707
C) -$1,727
D) -$2,527

Question 56

Which of the statements below is FALSE?

A) Understanding the underpinnings of the accounting identity and the relationship across the primary financial statements provides a springboard for projecting cash flow for future periods for both the company in general and for individual projects within a company.
B) The right hand side of the balance sheet represents all the claims to the assets of the company, with these claims representing two types of lenders: creditors and owners.
C) Change in net working capital looks at both long-term assets and long-term liabilities.
D) Cash flow from assets examines the success or failure of the operating decisions, while cash flow to creditors examines a portion of how the firm is financing the operations.

Question 57

Free cash flow is the ________.

A) cash flow from assets.
B) the remaining cash free to distribute to creditors and owners of the firm
C) cash that a a company generates to to operate the company
D) All of the above

Question 58

Cash flow from assets equals cash flow to creditors plus cash flow to stockholders.

Question 59

Which of the statements below is FALSE?

A) The report filed annually with the SEC is known as the 10-K Report.
B) The 10-K Report contains the annual report, as well as additional information about company history, organizational structure, subsidiaries, and equity holdings.
C) Officers of a company or others who have a fiduciary responsibility to the owners can not trade on their acquired private information about the company prior to the information being made public.
D) The 10-K must be filed within one week after the end of the company's fiscal year.

Question 60

Cash flow from assets is derived from ________.

A) cash flow from operating activities and cash flow from investing activities
B) cash flow from operating activities and cash flow from financing activities
C) cash flow from financing activities and cash flow from investing activities
D) cash flow from creditors and cash flow from investing activities

Question 61

In regards to the Cash Flow Statement, assume we want to break down Yahoo! Finance's cost of revenue into its two major components, cost of goods sold (COGS) and depreciation. To do so, we would need to look at ________ for the depreciation amount.

A) the Statement of Cash Flow
B) both the Income Statement and the Statement of Cash Flow
C) both the Balance Sheet and the Statement of Cash Flow
D) the Income Statement

Question 62

Which of the items below may be included on all income statements at yahoo.finance.com, even though they may not be part of an individual company's income statement for that year?

A) Cost of Revenue and Minority Interest
B) Minority Interest and Effect of Accounting Changes
C) Effect of Accounting Changes and Extraordinary Items
D) All of the above

Question 63

The 10-K is a quarterly report that must be filed within 60 days after the end of the company's fiscal year.

Question 64

Which of the following statements is FALSE?

A) Financial data on the Internet or via company annual reports provide a wealth of knowledge about the operations of the firm.
B) Knowing the relationship of the primary financial statements and how to utilize the data in each are important tools for all financial managers.
C) Although the annual report of a company is printed and mailed to owners and the SEC, much of the financial statement information is available at various financial web sites.
D) EDGAR stands for Electronic Data Gathering Analysis and Retribution.

Question 65

The report filed annually with the SEC is known as the 10-K Report. It contains the annual report as well as additional information about company history, organizational structure, subsidiaries, and equity holdings.

Question 66

The annual report is a regular activity of public firms and is sent to current owners (shareholders) and the SEC, and is also made available to prospective owners, financial analysts, and others interested in a company's performance. Name four of the major sections contained.

Question 67

Notes to the financial statements help explain many of the details necessary to gain a more complete picture of the firm's performance. Some of the items often disclosed in the financial notes includes which of the following?

A) How a specific item was computed
B) Additional information on a company's financial condition
C) Methods used to prepare the financial statements
D) All of these items are often included.

Question 68

Which of the following items may be included on all income statements at yahoo.finance.com, even though they may not be part of an individual company's income statement for that year?

A) Cost of Revenue and Extraordinary Items
B) Goodwill and Effect of Accounting Changes
C) Effect of Accounting Changes and Deferred Long-Term Asset Charges
D) Cost of Revenue and Treasury Stock

Question 69

In the years following the global economic recession of 2007 - 2009, the unemployment rate for college graduates is approximately ________ high school graduates.

A) the same as
B) twice as large as
C) half the rate of
D) one-quarter the rate of

Question 70

If you query a company at yahoo.finance.com, you will see a menu that includes a section on financial statements and provides only the past one year of each of the primary financial statements.

Question 71

Additional information on a company's financial condition found in the annual report includes special issues concerning its debt or contingent accounts but not information on the potential impact of a pending lawsuit.

Question 72

Which of the following items may be included on all balance sheets at yahoo! Finance, even though they may not be part of an individual company's balance sheet for that year?

A) Effect of Accounting Changes, Extraordinary Items, and Treasury Stock
B) Deferred Long-Term Asset Charges, Treasury Stock, and Extraordinary Items
C) Goodwill, Deferred Long-Term Asset Charges, and Treasury Stock
D) Cost of Revenue, Goodwill, and Treasury Stock

Question 73

The SEC has a site named EDGAR that ________.

A) provides, at a cost, on-line access to a company's financial reports
B) offers investors free advice on what stocks to pick
C) provides an on-line tutorial on how to understand the government's role in affecting stock prices
D) provides an on-line tutorial that will help new viewers find a company and its financial statements

Question 74

If you query a company at yahoo.finance.com, you will see a menu that includes a section on financial statements and provides ________.

A) the past six years of each of the primary financial statements
B) provides, at a cost, on-line access to limited information on a company's financial reports
C) the past three years of each of the primary financial statements
D) provides an on-line tutorial on how to understand the government's role in affecting stock prices

Question 75

The SEC has a site named EDGAR (Electronic Data Gathering Analysis and Retrieval) that provides free access to annual reports.

Question 76

Describe some of the items often disclosed in the financial notes.

Question 77

Notes to the financial statements help explain many of the details necessary to gain a more complete picture of the firm's ________.

A) capital budget
B) choice of management
C) dividend policy
D) performance

Question 78

The financial statement notes contain both the history of the company's performance and the fundamental relationship between the ways the information is formatted. This information should be made available to all simultaneously.

Question 79

Career advisors unanimously suggest that applicants for professional and managerial jobs learn all they can about a company before going to an interview.

Question 80

The annual report of a company is ________.

A) printed and mailed to owners and the SEC
B) not available online
C) not mailed to owners but only to the SEC
D) always available online in more details