Question 1

Lenders use operating income specifically

Accepted Answer

Lenders use operating income as a measure of how much debt a business can support. This is because operating income represents the amount of revenue that is left after deducting operating expenses such as wages, rent, and utilities. This figure gives lenders an idea of how much cash flow a business has to meet its debt obligations, which is critical in determining whether a borrower is loan-worthy.

Question 2

_____ is an indicator of the business's ability to manage cash flows so that the company has the financial ability to respond appropriately if an unexpected opportunity or problem arises.

Accepted Answer

Financial flexibility refers to a company's ability to manage its cash flows and access capital to respond to unexpected opportunities or problems.

Question 3

Which of these is a statement of what a business owns,what it owes to others,and how much value the owners have invested in it?

Accepted Answer

A balance sheet lists a business's assets (what it owns), liabilities (what it owes to others), and equity (how much value the owners have invested in it). The other options, income statement, cash flow statement, and statement of retained earnings, all provide different information about a business's financial performance but do not include all three of these elements.

Question 4

_____ is a measure of how quickly a company can raise money through internal sources by converting assets to cash.

Accepted Answer

Liquidity is a measure of a company's ability to meet immediate financial obligations by converting assets to cash quickly. It is important for a company to have high liquidity so that it can cover unexpected expenses and continue to operate smoothly. Therefore, the best choice is D.

Question 5

Which statement lists revenues and expenses,and shows the amount of profit a business makes for a specified period of time?

Accepted Answer

The income statement is the financial statement that lists a business's revenue and expenses for a specific period of time, typically a quarter or year. It subtracts the expenses from the revenue to calculate the net income or profit for that period.

Question 6

Which of the following is more indicative of a business's financial strength?

Accepted Answer

Short-term investments are more indicative of a business's financial strength as it signifies that the company has excess cash that it can invest for quick returns. Prepaid expenses may indicate that the business has already paid for expenses but does not necessarily reflect liquidity or financial strength. Accounts payable indicates the amount the company owes to its suppliers, and large inventories may indicate that the business has excess stock that may sit idle, tying up capital.

Question 7

What do you call the acquisition cost of the asset that is listed in a balance sheet?

Accepted Answer

The acquisition cost of an asset listed in a balance sheet is commonly referred to as its historical value or historical cost. This represents the original amount paid to acquire the asset, including any costs incurred in its purchase or installation.

Question 8

There are two difficulties that arise in understanding and interpreting the income statements.One is the disagreements about what exactly should be reported as revenues and the other is

Accepted Answer

Disputes over when to recognize revenues can arise because there are different accounting methods for recognizing revenue, such as the cash basis and accrual basis methods. This can affect the timing of when revenue is reported on an income statement and can create difficulties in comparing financial statements between different companies. The other options (A, B, and D) do not accurately describe the difficulties in interpreting income statements.

Question 9

Which of these is NOT a common financial statement?

Accepted Answer

The statement of depreciation is not a common financial statement. Rather, it is a component of a financial statement (such as the income statement or balance sheet) that shows the decrease in value of assets over time. The three common financial statements are the statement of retained earnings, the cash flow statement, and the balance sheet.

Question 10

The _____ is also called the Statement of Financial Position.

Accepted Answer

The balance sheet is also known as the Statement of Financial Position. It provides information about a company's assets, liabilities, and stockholders' equity at a specific point in time.

Question 11

Which of these refers to the concept that information flows from the income statement through the statement of retained earnings,and of owners' equity to the balance sheet?

Accepted Answer

The concept referred to in the question is articulation, in which the financial statements are connected so that information flows from one statement to the next. Specifically, the income statement shows net income, which flows into the statement of retained earnings, which in turn flows into the balance sheet as part of the shareholders' equity section.

Question 12

The value of current assets divided by current liabilities is called

Accepted Answer

The value of current assets divided by current liabilities is called the current ratio. It is used to measure a company's ability to pay off its short-term debt obligations. The higher the current ratio, the more capable the company is of paying off its debts. The other options (inventory turnover ratio, total asset to total liabilities ratio, and quick ratio) are different ratios used to analyze a company's financial position.

Question 13

_____ is the most used item on the income statement.

Accepted Answer

The answer of _____ is the most used item on...

Question 14

There are two formats for income statements,a(n)

Accepted Answer

The two formats for income statements are the single-step and multiple-step format. This is because these two formats are commonly used in financial reporting to present the revenue, expenses, gains, and losses of a company. The revenue-only and revenue and expense format, owners' equity and balance sheet format, and cash flow and retained earnings format are not formats for income statements but for other financial statements.

Question 15

Which income statement format is preferred by most owners and managers of small businesses?

Accepted Answer

The multiple-step income statement format is preferred by most owners and managers of small businesses because it provides more details and information about the business's financial performance. It allows for the separation of operating and non-operating revenue and expenses, which can help in identifying areas of the business that need improvement or adjustment. The multiple-step format also includes gross profit, operating income, and net income, which are important metrics for evaluating a business's profitability.

Question 16

Which of the following ratios is used to estimate the liquidity of a firm?

Accepted Answer

The answer of Which of the following ratios is used...

Question 17

The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is

Accepted Answer

The commonly acceptable minimum current ratio is 2.0. This indicates that the company has sufficient current assets to cover its current liabilities. However, it is important to note that the acceptable current ratio varies by industry and should be compared to industry standards. A ratio of 1.0 means that the company has exactly enough current assets to cover its current liabilities, which may indicate that there is little room for financial flexibility. A ratio of 3.0 or 4.0 may indicate that the company is keeping excessive amounts of inventory or cash, which can affect its profitability.

Question 18

The sum of all profits and losses,less all dividends paid since the beginning of the business is called

Accepted Answer

The sum of all profits and losses, less all dividends paid, represents the amount of earnings that the company has retained since the beginning (hence the name "retained earnings"). It is an important metric for evaluating a company's financial health and growth potential. Liabilities are debts or obligations that a company owes to others, net income is the profit or loss for a given period of time, and tax liability is the amount of taxes owed to the government.

Question 19

Which of these refers to the ability of a business to survive adverse financial events?

Accepted Answer

The answer of Which of these refers to the ability...

Question 20

The information in the balance sheet is used to determine all of these EXCEPT

Accepted Answer

The balance sheet provides information about a company's assets, liabilities, and equity. This information is primarily used to determine a company's liquidity, financial flexibility, and financial strength. However, profitability is typically determined using information from the income statement and other financial statements. Therefore, choice C, profitability, is not determined using information from the balance sheet.

Quiz 13: Small Business Accounting: Projecting and Evaluating Performance