Question 1

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 ________.
A) compare a firm's financial ratios against its primary competitors and industry norms to fairly assess how well a firm is performing financially
B) income statements are more effective in assessing how well a firm is performing financially than are balance sheets and statements of cash flow
C) the most powerful instrument for understanding how well a firm is performing financially is the statement of cash flows
D) ratio analysis is ineffective
E) look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially

Accepted Answer

The lesson learned from the 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. This is emphasized in the scenario as the prospective CEO compares the income statements of New Venture Fitness Drinks with the previous years' statements to determine the company's financial health.

Question 2

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

Accepted Answer

Current assets include cash, accounts receivable, and inventory; fixed assets include property, plant, and equipment; and other assets include intangible assets like patents and investments.

Question 3

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

This statement is true - the income statement is a financial statement that calculates the company's net income by subtracting all expenses from all revenues during a specific reporting period. The resulting net income or loss indicates the financial performance of the company during that period.

Question 4

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?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of ratio analysis
E) Statement of owners' equity

Accepted Answer

The statement of cash flows shows the inflows and outflows of cash during a specific period, similar to an individual's bank statement at the end of the month that shows the cash transactions during that month. The income statement shows the company's revenue and expenses, the balance sheet shows the company's assets, liabilities, and equity at a specific point in time, the statement of owners' equity shows the changes in owners' equity, and the statement of ratio analysis shows the financial ratios calculated using information from other financial statements.

Question 5

When evaluating a balance sheet, the two primary questions are ________.
A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is profitable
B) whether a firm is profitable and whether a firm is financially sound
C) whether a firm's cost of sales is going up and whether it is generating excess cash that could be used to pay down debt or pay dividends
D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is financially sound
E) whether a firm is profitable and whether it is generating excess cash that could be used to pay down debt or pay dividends

Accepted Answer

Evaluating a balance sheet primarily involves assessing whether a firm has sufficient current assets to cover its current liabilities (which evaluates short-term liquidity) and whether it is financially sound (which evaluates the longer-term financial health of the firm). Evaluating profitability and excess cash flow are important aspects of financial analysis, but they are not the primary focus when evaluating a balance sheet. Choice A is partially correct, but profitability alone does not provide a complete assessment of a firm's financial health.

Question 6

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

Accepted Answer

This is true. Profit margin is calculated by dividing net income by net sales to show what percentage of sales is the company earning as profit.

Question 7

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 inflows and outflows of cash during a specific period and explains why the cash balance changed, making it a summary of a firm's cash position changes.

Question 8

A firm's ________ is its current assets divided by its current debt.
A) working share
B) present share
C) working capital
D) owners' equity
E) current ratio

Accepted Answer

The current ratio is a measure of a firm's liquidity and is calculated by dividing its current assets by its current debt. It helps to determine if a company has enough short-term assets to cover its short-term liabilities. A ratio above 1 means that the company has more current assets than current debt, indicating that it can pay off its short-term obligations.

Question 9

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.
A) other
B) intermediate term
C) temporary
D) current
E) fixed

Accepted Answer

Current assets are assets that are expected to be converted into cash or used up within one year or less. Examples include cash, marketable securities, accounts receivable, and inventories. These assets are readily convertible to cash, making them more liquid than fixed assets which are held for a longer period of time.

Question 10

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).
A) operating
B) investing
C) capital
D) financing
E) liquidity

Accepted Answer

Investing activities refer to the purchase or sale of long-term assets such as property, plant, and equipment, and investments in other companies.

Question 11

A firm's working capital is its ________.
A) inventory and accounts receivable minus its current liabilities
B) current assets minus its current liabilities
C) total assets minus its total liabilities
D) cash and cash equivalents minus its current liabilities
E) accounts receivable minus its total accounts payable

Accepted Answer

Working capital is defined as current assets minus current liabilities. This is the amount of money that a firm has available to cover its short-term obligations and daily operations. Option A is incorrect because it only includes inventory and accounts receivable, whereas working capital includes all current assets. Option C is incorrect because it includes long-term assets and liabilities, which are not relevant to working capital. Option D is incorrect because it only includes cash and cash equivalents, whereas working capital includes all current assets. Option E is incorrect because it only takes into account accounts receivable and accounts payable, whereas working capital includes all current assets and liabilities.

Question 12

The statement of cash flows is divided into three separate activities ________.
A) profitability activities, stability activities, and investing activities
B) stability activities, earning activities, and financing activities
C) operating activities, capital activities, and liquidity activities
D) spending activities, earning activities, and capital activities
E) operating activities, investing activities, and financing activities

Accepted Answer

The statement of cash flows is divided into three separate activities: operating activities, investing activities, and financing activities. These activities provide information about the cash inflows and outflows of a company from its core operations, investments, and financing transactions.

Question 13

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

Accepted Answer

The income statement reflects the results of the operations of a firm over a specified period of time. The balance sheet represents the financial position of the company at a specific point in time, showing the assets, liabilities, and equity of the firm.

Question 14

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.
A) investing
B) financing
C) operating
D) liquidity
E) capital

Accepted Answer

Financing activities refer to cash inflows and outflows related to the firm's financing structure, such as borrowing money, issuing stock, and paying dividends or buying back outstanding securities.

Question 15

According to the textbook, the most practical way to interpret or make sense of a firm's historical financial statements is through ________.
A) profit analysis
B) regression analysis
C) the preparation of pro forma financial statements
D) ratio analysis
E) percentage analysis

Accepted Answer

Ratio analysis is the most practical way to interpret or make sense of a firm's historical financial statements. It involves calculating and analyzing various financial ratios such as liquidity ratios, profitability ratios, and solvency ratios to gain insights into the firm's financial performance and position. Ratio analysis helps stakeholders, including investors and creditors, to evaluate a firm's past, present, and future financial health and make informed decisions.

Question 16

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 firm's statement of cash flows include transactions related to the primary business operations of the firm, such as revenue and expenses. The purchase, sale, or investment in fixed assets is reflected under investing activities.

Question 17

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

Accepted Answer

A firm's working capital is defined as its current assets minus its current liabilities, not fixed assets minus long-term liabilities.

Question 18

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 inflows and outflows of cash during a specific period of time, not just at one point in time. It does not show a snapshot of a company's assets, liabilities, and owners' equity.

Question 19

Which of the following is an example of a long-term liability?
A) Accounts payable
B) Real estate mortgage
C) Accrued expenses
D) Current portion of real estate mortgage
E) Owners' equity

Accepted Answer

A real estate mortgage is a type of loan or liability that is typically repaid over a long period of time, often 10-30 years. This makes it a long-term liability. The other options listed are either current liabilities (accounts payable, accrued expenses, current portion of real estate mortgage) or owners' equity, which is not a liability at all.

Question 20

Real estate, buildings, equipment and furniture are classified as ________ assets on a company's balance sheet.
A) intermediate term
B) fixed
C) other
D) permanent
E) current

Accepted Answer

Real estate, buildings, equipment and furniture are long-term assets of a company and are classified as fixed assets on the balance sheet. These assets are not intended for sale and are used for the long-term operations of the company.

Quiz 8: Assessing a New Venture's Financial Strength and Viability

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 ________.

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

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.

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?

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

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

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.

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

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.

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) .

A firm's working capital is its ________.

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

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

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.

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

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).

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

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

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

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