Question 1

The McGowan Group wants to know the value of its owners' equity. It will total its assets and subtract its liabilities.

Accepted Answer

Owners' equity is equal to assets minus liabilities.

Question 2

One important source of financing for most small businesses is the owner's savings. If the owner contributes money to the business from his/her personal savings, it will be recorded in the owners' equity account on the balance sheet.

Accepted Answer

This statement is true. When the owner contributes personal savings to the business, it increases the owners' equity account on the balance sheet.

Question 3

FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows.

Accepted Answer

FIFO (First-In, First-Out) is actually a method of inventory management, not a method of computing net cash flows.

Question 4

Banks are likely to request a firm's balance sheet when determining whether or not to loan money to the firm. However, banks would have little interest in the firm's income statement since it covers a short period of time.

Accepted Answer

Banks would be interested in both the balance sheet and the income statement when determining whether or not to loan money to a firm. The balance sheet provides information about the firm's overall financial position, while the income statement shows the firm's profitability over a certain period of time.

Question 5

Hendry, Inc., has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.

Accepted Answer

Recording an unpaid bill for supplies under a current liabilities account on the balance sheet means that the payment is due to the supplier in less than a year, which is a characteristic of current liabilities.

Question 6

Luther Landscapes will refer to its income statements to determine whether it was profitable, or whether it lost money over the past year.

Accepted Answer

Income statements show a company's revenue and expenses, allowing it to determine whether it made a profit or incurred a loss in a given period.

Question 7

FIFO and LIFO are two common methods used to compute the depreciation of tangible assets.

Accepted Answer

FIFO and LIFO are methods used for inventory valuation, not for computing depreciation of tangible assets. Depreciation methods for tangible assets include straight-line, declining balance, and units of production.

Question 8

The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows.

Accepted Answer

The issuance of debt or equity capital would result in inflows of cash and would be reported in the financing section of the statement of cash flows.

Question 9

When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it is called depreciation.

Accepted Answer

True, this is the definition of depreciation.

Question 10

Cash flow difficulties are unlikely for a firm that is profitable.

Accepted Answer

Even profitable companies can face cash flow difficulties if they do not manage their inflows and outflows effectively. For example, if a company has high accounts receivable and slow payment from customers, they may struggle to pay vendors and employees even if they are profitable. Similarly, if a company invests heavily in inventory or long-term assets, they may tie up cash and experience short-term cash flow issues.

Question 11

The Barkley Company's balance sheet shows: what the business owns, minus what the business owes, which equals the book value (or net worth) of the business.

Accepted Answer

The balance sheet shows the assets minus the liabilities, which equals the book value of the business.

Question 12

FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first.

Accepted Answer

The answer of FIFO is a method of inventory valuation...

Question 13

The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales.

Accepted Answer

Sustaining rapid growth in sales may help a firm avoid cash flow problems in the short term, but it is not a guarantee. It is important for a firm to also manage its expenses, control inventory levels, and collect payments from customers in a timely manner to maintain a healthy cash flow. Conversely, a firm with slow or flat sales can still avoid cash flow problems by managing its expenses effectively.

Question 14

The LIFO method of inventory valuation assumes the newest items in inventory are sold first.

Accepted Answer

LIFO stands for Last-In-First-Out, wherein the inventory that was last purchased is assumed to be sold first. So, the newest items in inventory are sold first in the LIFO method of inventory valuation.

Question 15

According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory.

Accepted Answer

The answer of According to generally accepted accounting principles (GAAP),...

Question 16

The Montgomery Company balance sheet shows the following items: accounts payable totaling $50,000; salaries payable totaling $65,000; and notes payable totaling $100,000. These are liabilities, or money that the firm owes others.

Accepted Answer

Accounts payable, salaries payable, and notes payable are all types of liabilities, or amounts owed by the company to others.

Question 17

Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold.

Accepted Answer

The answer of Although a firm may use different inventory...

Question 18

Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered and/or from other revenue sources.

Accepted Answer

Revenue is indeed the dollar amount received from goods sold, services rendered, and other revenue sources, and is reported on the income statement.

Question 19

The bottom line of the Collins Corporation's income statement is equal to the net worth of the firm.

Accepted Answer

The bottom line of an income statement represents the net income or profit of a company, which is not necessarily equivalent to its net worth. Net worth takes into account assets, liabilities, and shareholder equity, and is reported on the balance sheet.

Question 20

The income statement computes net income by subtracting liabilities from assets.

Accepted Answer

The income statement calculates net income by subtracting expenses from revenues, not liabilities from assets.

Quiz 17: Understanding Accounting and Financial Information