Question 1

The balance sheet reflects the results of the operations of a firm over a specified period of time.

Accepted Answer

The balance sheet is a snapshot of a firm's financial position at a specific point in time, and does not reflect the results of operations over a specified period of time. The income statement, on the other hand, reflects a firm's financial performance over a specified period of time (usually a quarter or a year).

Question 2

In the context of a firm's statement of cash flows, operating activities include the purchase, sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).

Accepted Answer

Operating activities in a statement of cash flows relate to the day-to-day operations of the business, such as revenue generation, expenses, and working capital management. Purchases, sales, or investments in fixed assets would be classified under investing activities.

Question 3

A firm's working capital is its ________.

Accepted Answer

Working capital is the difference between a firm's current assets and its current liabilities, representing the funds available for day-to-day operations. Option B) represents the correct formula for calculating working capital.

Question 4

The major categories of assets listed on a balance sheet include current, fixed, and other assets.

Accepted Answer

The major categories of assets listed on a balance sheet are current assets, fixed assets, and other assets, which may include intangible assets like patents and goodwill.

Question 5

Which of the financial statements used by businesses to keep track of their financial affairs is the most similar to an ordinary person's end-of-the month bank statement?

Accepted Answer

The statement of cash flows is the most similar to an ordinary person's end-of-month bank statement because it shows cash inflows and outflows from operating, investing, and financing activities. This is similar to a bank statement which shows deposits, withdrawals, and transfers during a certain period. The income statement and balance sheet provide different information about a company’s financial performance and position, while the statement of owners’ equity and statement of ratio analysis focus on specific aspects of the business.

Question 6

A firm's profit margin, or return on sales, is computed by dividing net income by net sales.

Accepted Answer

This is the correct formula for calculating a firm's profit margin.

Question 7

The Savvy Entrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the selection of a new CEO for New Venture Fitness Drinks. The lesson learned from the feature was ________.

Accepted Answer

The lesson learned from the Savvy Entrepreneurial Firm feature is to look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially.

Question 8

When evaluating a balance sheet, the two primary questions are ________.

Accepted Answer

The two primary questions when evaluating a balance sheet are whether a firm has sufficient short-term assets to cover its short-term debts (liquidity) and whether it is financially sound (solvency). Profitability and generating excess cash are important considerations, but they are not the primary focus when evaluating a balance sheet. Therefore, options A, B, and E are not the best choices. Option C is also not the best choice as it only focuses on cost of sales and generating excess cash, which are important but not the primary concerns when evaluating a balance sheet.

Question 9

Which of the following is an example of a long-term liability?

Accepted Answer

A real estate mortgage is a long-term liability because the payment schedule extends beyond one year, typically up to thirty years. Accounts payable, accrued expenses, and the current portion of a real estate mortgage are all short-term liabilities. Owners' equity is not a liability at all, but rather represents the residual value of assets after liabilities are subtracted.

Question 10

According to the textbook, the most practical way to interpret or make sense of a firm's historical financial statements is through ________.

Accepted Answer

Ratio analysis is the most practical way to interpret a firm's historical financial statements as it involves analyzing the relationship between different financial figures to gain insights into a firm's financial health and performance. Other methods like profit analysis, regression analysis, and percentage analysis do not provide a comprehensive picture of a firm's financial performance. Pro forma financial statements can be useful in making future projections but are not helpful in interpreting past financial statements.

Question 11

Cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories are classified as ________ assets on a firm's balance sheet.

Accepted Answer

Current assets include cash and assets that are expected to be converted to cash or used up within one year or the operating cycle, whichever is longer. This includes accounts receivable, marketable securities, and inventories, which are all assets that can be readily converted to cash within one year. Choice D, "current," best describes this category of assets.

Question 12

The statement of cash flows summarizes the changes in a firm's cash position for a specified period of time and details why the change occurred.

Accepted Answer

The statement of cash flows provides information about the inflow and outflow of cash for a specific time period and explains the reasons for the changes in the cash balances. It helps in evaluating the liquidity position of the company, its ability to meet short-term obligations, and how it manages its cash resources.

Question 13

A firm's ________ is its current assets divided by its current debt.

Accepted Answer

The question is asking for the ratio of a firm's current assets to its current debt, which is commonly known as the current ratio. Option E is the only choice that mentions the current ratio, making it the correct answer. The other options do not accurately describe the ratio being asked for in the question.

Question 14

A firm's working capital is defined as its fixed assets minus its long-term liabilities.

Accepted Answer

Working capital is defined as the difference between a firm's current assets and its current liabilities, not fixed assets minus long-term liabilities.

Question 15

A statement of cash flows is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.

Accepted Answer

A statement of cash flows shows the sources and uses of cash during a specific period of time, not a specific point in time.

Question 16

In the context of a firm's statement of cash flows, ________ activities include cash raised during the period by borrowing money or selling stock and/or cash used during the period by paying dividends, buying back outstanding stock, or buying back outstanding bonds.

Accepted Answer

Financing activities involve cash flows related to the firm's financing, such as issuing stock, borrowing, paying dividends, or buying back stock or bonds. Investing activities relate to the purchase or sale of long-term assets, while operating activities involve the daily operations of the business. Neither liquidity nor capital are categories of activities in the statement of cash flows.

Question 17

In the context of a firm's statement of cash flows, ________ activities include the purchase, sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).

Accepted Answer

Investing activities refer to the purchase or sale of long-term assets, such as property, plant, and equipment or investments in other companies. This is separate from operating activities, which involve day-to-day business operations, and financing activities, which relate to raising capital through borrowing or issuing stock. Capital activities are not a recognized category of cash flows in financial reporting. Liquidity is a separate measure of a company's ability to meet short-term obligations.

Question 18

The income statement records all the revenues and expenses for a given period and shows whether the firm is making a profit or is experiencing a loss.

Accepted Answer

The statement is true.

Question 19

Real estate, buildings, equipment and furniture are classified as ________ assets on a company's balance sheet.

Accepted Answer

Fixed assets are long-term assets used for production or rental purposes, not for sale. Real estate, buildings, equipment and furniture are all examples of fixed assets. Intermediate term assets are not fixed assets, but are assets expected to convert to cash or be used within 1-5 years. Other and permanent assets are not commonly used classifications on balance sheets. Current assets are assets that can be easily converted to cash within one year, such as inventory or accounts receivable.

Question 20

The statement of cash flows is divided into three separate activities - ________.

Accepted Answer

The statement of cash flows is divided into three separate activities which are operating, investing, and financing. Operating activities include cash inflows and outflows from primary business operations, investing activities include cash inflows and outflows from the purchase and sale of long-term assets, and financing activities include cash inflows and outflows related to funding the business, such as issuing or repaying debt or issuing or buying back stock.

Quiz 8: Assessing a New Ventures Financial Strength and Viability