Question 1

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
A) income statement
B) balance sheet
C) cash flow statement
D) sources and uses statement
E) market value statement

Accepted Answer

An income statement summarizes a firm's revenue and expenses over a period of time, typically a quarter or a year. The purpose of the income statement is to show the firm's profitability, by calculating the net income or net loss for the period. The balance sheet, cash flow statement, sources and uses statement, and market value statement all provide different types of financial information, but only the income statement focuses specifically on revenue and expenses.

Question 2

Which of the following is NOT a typical reason for differences between profits and cash flow?
A) Goodwill
B) Depreciation expense
C) Changes in accounts receivable
D) Accrual accounting practices

Accepted Answer

Goodwill is an intangible asset that is typically not included in the calculation of profits or cash flow, so it would not be a factor in any differences between the two. However, factors such as depreciation, changes in accounts receivable, and accrual accounting practices are all common reasons for differences between profits and cash flow.

Question 3

Which of the following statements concerning a firm's cash flows and profits is false?
A) Managers must be at least as concerned with cash flows as with profits.
B) A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.
C) The cash flows generated in a given time period can differ from the profits reported.
D) Profits are no assurance that cash flow will be sufficient to maintain solvency.
E) Due to required cash investments in current assets,fast-growing and profitable companies can literally "grow broke".

Accepted Answer

While selling merchandise at a profit may contribute to cash flows, it is not a guarantee that cash will be generated soon enough to replenish cash flows required for continued production. A delay in payment from customers or a slow inventory turnover can cause a cash flow problem even for a profitable company. Therefore, this statement is false.

Question 4

The sources and uses of cash over a stated period of time are reflected on the:
A) income statement.
B) balance sheet.
C) shareholders' equity statement.
D) cash flow statement.
E) statement of operating position.

Accepted Answer

The sources and uses of cash are reflected on the cash flow statement, which shows the inflows and outflows of cash over a specified period of time. The income statement shows a company's revenues and expenses, the balance sheet reflects a company's assets, liabilities, and equity at a specific point in time, the shareholders' equity statement shows changes in the company's equity over time, and the statement of operating position is not a commonly used financial statement.

Question 5

The accrual principle requires that revenue not be recognized until payment from a sale is received.

Accepted Answer

The accrual principle states that revenue should be recognized when earned, regardless of when payment is received. Payment may be received at a later date, but the revenue should still be recorded when it was earned.

Question 6

A balance sheet reports the value of a firm's assets,liabilities,and equity:
A) over an annual period.
B) over any period of time.
C) at any point in time.
D) at the end of the year.

Accepted Answer

A balance sheet provides a snapshot of the firm's financial position at a particular point in time, not just at the end of the year or over an annual period. It can be prepared at any time, such as at the end of a month or quarter, and reflects the values of assets, liabilities, and equity at that particular point.

Question 7

Which of the following would NOT be considered a use of cash?
A) Dividends paid
B) A decrease in accounts payable
C) Depreciation
D) An increase in the cash and marketable securities account

Accepted Answer

Depreciation is a non-cash expense, meaning it is an accounting adjustment that does not involve the actual outflow of cash from the business. A decrease in accounts payable and an increase in the cash and marketable securities account would both involve the use of cash, while dividends paid would be a distribution of cash to shareholders.

Question 8

Current liabilities are defined as liabilities with a maturity of less than a year.

Accepted Answer

Current liabilities are those obligations that are expected to be settled within one year from the balance sheet date, or within the company's normal operating cycle, whichever is longer. Examples of current liabilities include accounts payable, accrued expenses, and short-term loans.

Question 9

A reduction in long-term debt is a use of cash.

Accepted Answer

When a company pays off some of its long-term debt, it is using its cash to do so. Therefore, a reduction in long-term debt is considered a use of cash.

Question 10

Which one of the following is a source of cash?
A) decrease in accounts receivable
B) decrease in common stock
C) decrease in long-term debt
D) decrease in accounts payable
E) increase in inventory

Accepted Answer

A decrease in accounts receivable means that the company has received cash from its customers who previously owed the company money.

Question 11

Which one of the following is a use of cash?
A) increase in notes payable
B) increase in inventory
C) increase in long-term debt
D) decrease in accounts receivable
E) increase in common stock

Accepted Answer

An increase in inventory is a use of cash because purchasing more inventory requires spending cash, thereby reducing the company's cash balance.

Question 12

Accounting rules require U.S.companies to depreciate research and development (R&D)expenditures using the straight-line method.

Accepted Answer

Accounting rules do not require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method. R&D expenditures are expensed as incurred or capitalized if certain criteria are met. However, the straight-line method may be used to depreciate other assets such as property, plant, and equipment.

Question 13

You can construct a sources and uses statement for 2014 if you have a company's year-end balance sheets for 2014 and 2015.

Accepted Answer

The answer of You can construct a sources and uses...

Question 14

Which of the following statements concerning the cash flow-production cycle is true?
A) The profits reported in a given time period equal the cash flows generated.
B) A company's operations and finances are independent of each other.
C) Financial statements have nothing to do with reality.
D) The movement of cash to inventory,to accounts receivable,and back to cash is known as the firm's working capital cycle.
E) A profitable company will always have sufficient cash to meet its obligations.

Accepted Answer

The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. This cycle is a critical aspect of a company's operations and finances, and it affects the cash flow and profitability of the business. However, it is important to note that profits reported in a given time period do not always equal the cash flows generated, and a profitable company may still face cash flow problems if it has insufficient working capital. Financial statements are supposed to reflect the reality of a company's financial situation, but they are subject to interpretation and manipulation by management or other stakeholders.

Question 15

A company purchases a new $10 million building,financed half with cash and half with a bank loan.How would this transaction affect the company's balance sheet?
A) Net plant and equipment rises $10 million;cash falls $10 million;bank debt rises $5 million.
B) Net plant and equipment rises $5 million;cash falls $10 million;bank debt rises $5 million.
C) Net plant and equipment rises $5 million;cash falls $5 million;bank debt rises $5 million.
D) Net plant and equipment rises $10 million;cash falls $5 million;bank debt rises $5 million.

Accepted Answer

The company's net plant and equipment increases by the full value of the building ($10 million). Cash decreases by the amount paid in cash ($5 million), and bank debt increases by the amount of the loan ($5 million).

Question 16

Which one of the following is the financial statement that shows a financial snapshot,taken at a point in time,of all the assets the company owns and all the claims against those assets?
A) income statement
B) creditor's statement
C) balance sheet
D) cash flow statement
E) sources and uses statement

Accepted Answer

The balance sheet shows the financial position of a company at a specific point in time by listing its assets, liabilities, and equity. It provides a snapshot of what a company owns (assets), what it owes (liabilities), and what is left over for its owners (equity). The income statement shows a company's financial performance over a period of time, the cash flow statement shows how cash flows in and out of a company over a period of time, and the creditor's statement and sources and uses statement are not common financial statements.

Question 17

A company sells used equipment with a book value of $100,000 for $250,000 cash.How would this transaction affect the company's balance sheet?
A) Equity rises $250,000;net plant and equipment falls $250,000.
B) Cash rises $250,000;net plant and equipment falls $100,000;equity rises $150,000.
C) Cash rises $250,000;accounts receivable falls $100,000;goodwill rises $150,000.
D) Cash rises $250,000;net plant and equipment falls $250,000.

Accepted Answer

When a company sells used equipment for cash, it will result in a decrease in net plant and equipment on the balance sheet. In this case, the book value of the equipment was $100,000, so the net plant and equipment account will fall by $100,000. The company receives cash of $250,000 for the sale, which increases the cash account on the balance sheet. The difference between the book value of the equipment and the sale price is a gain for the company, which increases the equity account on the balance sheet. The gain is calculated as follows: 
Sale Price - Book Value = Gain on sale 
$250,000 - $100,000 = $150,000 
Therefore, the equity account will rise by $150,000 in addition to the $250,000 increase in cash and $100,000 decrease in net plant and equipment. So, option B is the correct answer.

Question 18

Which one of the following is a source of cash?
A) increase in accounts receivable
B) decrease in notes payable
C) decrease in common stock
D) increase in inventory
E) increase in accounts payable

Accepted Answer

An increase in accounts payable indicates that a company is purchasing goods or services on credit, which increases its cash position because it is using supplier credit instead of immediate cash outflows.

Question 19

When reporting financial performance for tax purposes,U.S.companies prefer to use accelerated depreciation methods over the straight-line method.

Accepted Answer

U.S. companies prefer to use accelerated depreciation methods over the straight-line method as it allows them to reduce their taxable income and pay lower taxes in the short term. However, for financial reporting purposes, they may choose to use the straight-line method to provide a more consistent and conservative view of their financial performance.

Question 20

A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a clear indication that fixed assets were sold during 2014.

Accepted Answer

A decline in the Net fixed assets account could also result from depreciation expenses exceeding the cost of new fixed asset purchases, not necessarily indicating that fixed assets were sold.

Quiz 1: Interpreting Financial Statements

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Which of the following is NOT a typical reason for differences between profits and cash flow?

Which of the following statements concerning a firm's cash flows and profits is false?

The sources and uses of cash over a stated period of time are reflected on the:

The accrual principle requires that revenue not be recognized until payment from a sale is received.

A balance sheet reports the value of a firm's assets,liabilities,and equity:

Which of the following would NOT be considered a use of cash?

Current liabilities are defined as liabilities with a maturity of less than a year.

A reduction in long-term debt is a use of cash.

Which one of the following is a source of cash?

Which one of the following is a use of cash?

Accounting rules require U.S.companies to depreciate research and development (R&D)expenditures using the straight-line method.

You can construct a sources and uses statement for 2014 if you have a company's year-end balance sheets for 2014 and 2015.

Which of the following statements concerning the cash flow-production cycle is true?

A company purchases a new $10 million building,financed half with cash and half with a bank loan.How would this transaction affect the company's balance sheet?

Which one of the following is the financial statement that shows a financial snapshot,taken at a point in time,of all the assets the company owns and all the claims against those assets?

A company sells used equipment with a book value of $100,000 for $250,000 cash.How would this transaction affect the company's balance sheet?

Which one of the following is a source of cash?

When reporting financial performance for tax purposes,U.S.companies prefer to use accelerated depreciation methods over the straight-line method.

A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a clear indication that fixed assets were sold during 2014.