Question 1

A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Accepted Answer

This is a correct statement as the statement of cash flows shows how cash has been generated and used by a company using information from both the balance sheet and the income statement.

Question 2

The management of public companies is not legally required to disclose any off-balance sheet transactions.

Accepted Answer

The management of public companies is legally required to disclose significant off-balance sheet transactions in their financial statements, as per the SEC regulations.

Question 3

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

Accepted Answer

The cost of acquiring another company, including the cost of acquiring patents, is considered an investment activity and therefore will be recorded as an outflow under investment activities on the statement of cash flows.

Question 4

AOS Industries Statement of Cash Flows for 2008  Investment activities
 Financing activities
 Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008?

Accepted Answer

B) $3.2 - $1 = $2.2 million

Question 5

What is the need for the notes to the financial statements when a firm's operations are already documented in the financial statements?

Accepted Answer

The answer of What is the need for the notes...

Question 6

A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

Accepted Answer

The sale will be added to Net Income on the income statement as it represents revenue earned by the company. However, since the client has not yet paid for the service, the amount will be deducted from Net Income on the statement of cash flows as it does not represent a cash inflow for the company. This is done to ensure that the statement of cash flows reflects the actual cash flows in and out of the company.

Question 7

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

Accepted Answer

The answer of What will be the effect on the...

Question 8

In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.

Accepted Answer

B) Quick ratio in 2006 = ($158.9 - $46.5) / $144.1 = 0.78
Quick ratio in 2005 = ($144.0 - $42.9) / 132 = 0.77
So, the quick ratio increased by 0.78 - 0.77 = 0.01.

Question 9

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

Accepted Answer

This purchase is an investment in a long-term asset (copy machine) and therefore is classified as an investing activity on the Statement of Cash Flows.

Question 10

How can we cross check the statement of cash flows?

Accepted Answer

The answer of How can we cross check the statement...

Question 11

The notes to the financial statements would LEAST likely be used for which of the following purposes?

Accepted Answer

The answer of The notes to the financial statements would...

Question 12

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?

Accepted Answer

The operating activity section of the statement of cash flows adjusts net income by adding all non-cash entries related to a firm's operating activities (such as depreciation and amortization) and by subtracting cash flows related to expenses and costs incurred in those activities. The section does not include cash flows from investors or investment purposes, which are accounted for in the financing and investing sections of the statement, respectively.

Question 13

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2008
  Investment activities
  Financing activities
 
-Consider the above statement of cash flows. Which of the following is true of AOS Industries' operating cash flows?

Accepted Answer

The statement of cash flows for AOS Industries indicates that its operating cash flows were positive in several areas: collecting more cash from customers than it charged (indicating efficient accounts receivable management), selling more inventory than it bought (indicating efficient inventory turnover), and charging more on its accounts payable than it paid back (indicating efficient use of credit and cash management). These activities contribute to positive operating cash flow.

Question 14

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)?

Accepted Answer

The fact that the company has lost a class action suit and is expected to pay a large amount of damages is a significant financial event that would impact the company's financial position and results of operations, making it essential to include in the MD&A. The other options are also important, but not as critical. A would be relevant to explain any changes in marketing expenses, B could be relevant to explain any changes in executive management, and D could be relevant for explaining any future expansion plans.

Question 15

Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2008
  Investment activities
  Financing activities
 
-Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008?

Accepted Answer

AOS Industries' major means of raising money in 2008 was by issuing debt, as indicated by the cash inflow from financing activities related to debt issuance.

Question 16

What will be the effect on the income statement if a firm buys a new processing plant through a new loan?

Accepted Answer

The answer of What will be the effect on the...

Question 17

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

Accepted Answer

The income statement includes both cash and non-cash items, affecting its reflection of actual cash flow. Depreciation (A) is a non-cash expense, inventory purchases (B) are not directly shown but affect cost of goods sold, and collections from accounts receivable (C) affect revenue recognition but are not cash transactions. However, cash inflows from services rendered (D) are part of the income statement's depiction of revenue, making it not a reason the statement fails to indicate actual cash earned.

Question 18

How does a firm select the dates for preparation of its income statement?

Accepted Answer

The answer of How does a firm select the dates...

Question 19

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?

Accepted Answer

The cost of the new compression blow molder will be recorded as a capital expenditure on the statement of cash flows and will be depreciated over time on the income statement. This is the generally accepted accounting practice for long-lived assets, such as equipment, and allows for the cost of the equipment to be spread out over its useful life, rather than recorded all at once. Therefore, the correct answer is A.

Question 20

AOS Industries Statement of Cash Flows for 2008  Investment activities
 Financing activities
 Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?

Accepted Answer

B) -$3,000,000 + 300,000 × 25% = -$2,925,000

Quiz 2: Introduction to Financial Statement Analysis