Deck 4: Preparing and Using Financial Statements

Question 1

The reduction in value of a fixed asset over its expected life intended to reflect the usage or wearing out of the asset is called depreciation.

Answer 1

True

Question 2

During the development stage in a new venture's life cycle, the income statement typically shows no sales and shows expenses such as rent, utilities, and a subsistence salary for the entrepreneur.

Answer 2

True

Question 3

Cash or other assets that are expected to be converted into cash in less than one year are known as current liabilities.

Answer 3

False

Question 4

Making sales usually begins during the development stage in a venture's life cycle.

Question 5

On the balance sheet, total liabilities equals total assets minus owners' equity.

Question 6

GAAP stands for "generally accepted accounting principles."

Question 7

The acquisition of production assets (e.g., inventories and equipment to produce products and give credit to customers)usually occurs during the development stage in a new venture's life cycle.

Question 8

The practice of recording economic activity when realized is known as accrual accounting.

Question 9

The balance sheet equation is: Total Assets = Total Liabilities + Net Income.

Question 10

Long-term, noncancelable leases whereby the owner receives payments that cover the cost of the equipment plus a return on investment in the equipment are known as capital leases.

Question 11

Seed financing (e.g., financing from the entrepreneur's assets, family, and friends)usually occurs during the development stage in a new venture's life cycle.

Question 12

Accrual accounting is the practice of recording economic activity when recognized rather than waiting until realized.

Question 13

GAAP stands for "general American accounting principles."

Question 14

During the development stage in a new venture's life cycle, the balance sheet reflects the acquisition of initial assets and the obtaining of seed financing.

Question 15

Assets are financial and physical items controlled or owned by the business.

Question 16

During the startup stage in a new venture's life cycle, the income statement typically shows no sales and shows expenses for the production and marketing of products or services.

Question 17

Startup financing (e.g., financing from business angels and venture capitalists)usually occurs during the development stage in a new venture's life cycle.

Question 18

Amounts owed to another for purchases made on credit which come due in less than one year are known as receivables.

Question 19

During the startup stage in a venture's life cycle, financing may be obtained from business angels and venture capitalists in addition to seed financing sources.

Question 20

How quickly an asset can be converted into cash is called liability.

Question 21

Gross earnings are net sales minus net income.

Question 22

The income statement is a financial statement that reports the revenues generated and expenses incurred over an accounting period.

Question 23

The production and inventories schedules are two internal operating schedules needed to prepare a venture's financial statements.

Question 24

Contribution profit margin is the portion of the sale of a product that contributes to covering the cash variable costs.

Question 25

Survival revenues is the amount of revenues just offsetting variable and cash fixed costs.

Question 26

Net cash build occurs when the sum of cash flows from operations and investing is positive.

Question 27

The statement of cash flows is a financial statement that shows how cash, as reflected in accrual accounting, flowed into and out of a company during a specific period of operation.

Question 28

Economic value added (EVA) is a measure of a firm's economic profit over a specified time period.

Question 29

Economic value added (EVA) measures a firm's market value added over a specified time period.

Question 30

Net cash burn occurs when the sum of cash flows from operations and investing is positive.

Question 31

Fixed expenses are costs that are expected to remain constant over a range of revenues for a specific time period.

Question 32

EBDAT is "earnings before depreciation, assets, and taxes."

Question 33

EBITDA is "earnings before interest, taxes, depreciation, and amortization."

Question 34

Net income, or profit, is the bottom-line measure of what's left from the firm's net sales after operating expenses, financing costs, and taxes have been deducted.

Question 35

Operating income, or earnings before interest and taxes, reflects the firm's profit after all operating expenses, excluding financing costs, have been deducted from net sales.

Question 36

EBIT is "equity before interest and taxes."

Question 37

Cost of goods sold is the cost of materials, labor, and advertising incurred to produce the products that were sold.

Question 38

Variable expenses are costs that are expected to remain constant over a range of revenues for a specific time period.

Question 39

Variable expenses are costs or expenses that vary directly with revenues.

Question 40

Cash fixed costs equals survival revenues minus variable cost revenue ratio multiplied by survival revenues.

Question 41

Retained earnings is:

A)a corporate asset
B)part of owners' equity
C)a corporate asset minus current liabilities
D)long-term debts plus current assets

Question 42

A financial statement that shows how cash, as reflected in accrual accounting, flows into and out of a company during a specific period of operation is called the:

A)income statement
B)balance sheet
C)statement of retained earnings
D)statement of cash flows

Question 43

Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme's net income?

A)$2,920
B)$680
C)$2,000
D)$1,320

Question 44

A financial statement that reports the revenues generated and expenses incurred over an accounting period is called the:

A)income statement
B)balance sheet
C)statement of retained earnings
D)statement of cash flows

Question 45

Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme's taxable income and tax expense?

A)$6,000; $2,040
B)$2,000; $1,320
C)$4,000; $1,360
D)$2,000; $680

Question 46

Which of the following is not a characteristic of inventories?

A)raw materials
B)finished products
C)goods sold but not yet shipped
D)work-in-process

Question 47

NOPAT equals net sales multiplied by one minus the tax rate.

Question 48

Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme's operating income?

A)$4,000
B)$2,000
C)$9,500
D)$6,000

Question 49

Internal operating schedules include all of the following except:

A)cost of production schedules
B)inventories schedules
C)balance sheets
D)cost of goods sold schedules

Question 50

The balance sheet equation states that total assets equals:

A)total liabilities plus depreciation
B)total liabilities plus owners' equity
C)owners' equity plus net income
D)owners' equity plus current liabilities

Question 51

Which of the following is not considered to be a current asset?

A)cash
B)receivables
C)inventories
D)fixed assets

Question 52

The practice of recording economic activity when it is recognized rather than waiting until it is realized is called:

A)GAAP accounting
B)accrual accounting
C)forward-looking accounting
D)management accounting

Question 53

Which of the following is depreciated?

A)inventory
B)machinery
C)land
D)cash

Question 54

Cash includes all of the following except :

A)coins
B)currency
C)checking accounts
D)certificates of deposit

Question 55

When EBIT is zero, a firm's net operating profit after taxes (NOPAT) is also zero because no taxes are payable.

Question 56

A financial statement that provides a snapshot of a business's financial position as of a specific date is called the:

A)income statement
B)balance sheet
C)statement of retained earnings
D)statement of cash flows

Question 57

Which of the following is not a likely source of financing available during a venture's startup stage?

A)the entrepreneur's assets, family, and friends
B)business angels
C)bank loans
D)venture capitalists

Question 58

Which of the following is not a characteristic of marketable securities?

A)short term
B)illiquid
C)high quality
D)interest bearing

Question 59

Which of the following is not considered to be an internal operating schedule?

A)income statement
B)cost of production schedule
C)cost of goods sold schedule
D)inventories schedule

Question 60

Which of the following is a use of cash?

A)a decrease in inventory
B)an increase in accrued liabilities
C)the sale of an asset for a gain
D)a decrease in the amount owed on a bond

Question 61

Use the following information to determine the cash fixed costs: administrative expenses = $200,000; marketing expenses = $180,000; depreciation expenses = $100,000; and interest expenses = $20,000.

A)$380,000
B)$400,000
C)$480,000
D)$500,000

Question 62

In breakeven analysis, solving for when EBITDA is equal to zero gives breakeven in terms of:

A)economic revenues
B)variable costs
C)survival revenues
D)fixed costs

Question 63

Find the NOPAT given the following information: sales = $520,000; earnings before interest = $100,000; interest = $20,000; and the tax rate = 30%.

A)$70,000
B)$56,000
C)$30,000
D)$24,000

Question 64

Use the following information to compute the survival revenues breakeven: cash fixed costs = $400,000 and a variable cost revenue ratio = 0.65.

A)$460,500
B)$615,385
C)$1,142,857
D)$2,000,334

Question 65

Which of the following shows the calculation for economic value added (EVA)?]

A)EVA = NOPAT + After-Tax Dollar Cost of Financial Capital Used
B)EVA = ROE - Percentage Cost of Financial Capital
C)EVA = NOPAT - After-Tax Dollar Cost of Financial Capital Used
D)EVA = ROE + Percentage Cost of Financial Capital

Question 66

Your venture has total assets of $690, net fixed assets of $500, long term debt of $80, and stockholders' equity of $400. What is the amount of your venture's current liabilities?

A)-$120
B)$100
C)$210
D)$290

Question 67

A lease that provides maintenance in addition to financing and is also usually cancelable is called a(n):

A)capital lease
B)operating lease
C)asset lease
D)equity lease

Question 68

Which of the following is not a category on the statement of cash flows?

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

Question 69

What is the survival revenues breakeven based on the following information: administrative expenses = $200,000; marketing expenses = $180,000; depreciation expenses = $100,000; interest expenses = $20,000; and a variable cost revenue ratio = 0.50?

A)$600,000
B)$800,000
C)$1,000,000
D)$1,200,000

Question 70

Which of the following is a source of cash?

A)an increase in accounts receivable
B)the acquisition of land
C)an increase in the amount owed on a note payable
D)the repurchase of outstanding shares of stock

Question 71

Net cash burn occurs when the sum of which of the following items is negative?

A)cash flows from operations and financing
B)cash flows from investing and financing
C)cash flows from operations and investing
D)cash flows from net income and depreciation

Question 72

Which of the following is the correct formula for computing NOPAT?

A)NOPAT = Revenues × (1 + Tax Rate)
B)NOPAT = Revenues × (1 - Tax Rate)
C)NOPAT = EBITDA × (1 - Tax Rate)
D)NOPAT = EBIT × (1 - Tax Rate)

Question 73

Last year, Beth's Baked Goods exactly broke even with cash fixed costs of $63,000. If its breakeven survival revenues level was $94,000, what was its variable cost revenue ratio (VCRR)?

A)0.27
B)0.30
C)0.33
D)0.67

Question 74

In its first year, Joe's Startup Company had revenues of $125,000 and cost of goods sold of $81,250, which was the only variable cost. Depreciation was $20,000. Cash fixed costs were $100,000, consisting of $5,000 in financing costs, $50,000 in administrative expenses, and $45,000 in marketing expenses. What is the survival breakeven revenues?

A)$342,857
B)$285,714
C)$271,429
D)$184,615

Question 75

Find the contribution profit margin based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.

A)70%
B)60%
C)30%
D)40%

Question 76

Which of the following is the equation for EBDAT?

A)EBDAT = Revenues - Variable Costs - Cash Fixed Costs
B)EBDAT = Revenues + Variable Costs + Cash Fixed Costs
C)EBDAT = Revenues - Variable Costs - Total Fixed Costs
D)EBDAT = Revenues + Variable Costs - Cash Fixed Costs

Question 77

Which of the following is the computation for gross earnings?

A)Gross Earnings = Revenue - After-Tax Cost of Financial Capital Used
B)Gross Earnings = Net Income ÷ Sales
C)Gross Earnings = (Net Sales - Cost of Production)× Tax Rate
D)Gross Earnings = Net Sales - Cost of Production

Question 78

Find the survival revenues (SR), also known as the EBDAT breakeven, based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.

A)$100,000
B)$116,667
C)$200,000
D)$300,000

Question 79

Expenses or costs that vary directly with revenues are said to be:

A)fixed expenses
B)semifixed expenses
C)semivariable expenses
D)variable expenses

Question 80

A firm with constant variable costs has a survival revenues breakeven of $375,000. This year, it had $250,000 in sales, $100,000 of which was a fixed cost. What are the firm's cash fixed costs?

A)$150,000
B)$225,000
C)$625,000
D)$937,500