Question 1

Which of the following questions does a statement of cash flows answer?

Accepted Answer

A)  How profitable is the business? 
B)  How much debt has the business accumulated? 
C)  What is the degree of liquidity for the business? 
D)  Where did the cash come from? 
A)  How profitable is the business? 
B)  How much debt has the business accumulated? 
C)  What is the degree of liquidity for the business? 
D)  Where did the cash come from? D

Question 2

Match the term with its definition.
-Cumulative net profits retained in a company over the life of the business

Accepted Answer

A) balance sheet 
B) debt 
C) debt ratio 
D) dividends 
E) income statement (profit and loss statement)
F)interest expense
G)mortgage
H)operating expenses
I)owners' equity
J)retained earnings
K)total asset turnover 
A) balance sheet 
B) debt 
C) debt ratio 
D) dividends 
E) income statement (profit and loss statement)
F)interest expense
G)mortgage
H)operating expenses
I)owners' equity
J)retained earnings
K)total asset turnover J

Question 3

Match the term with its definition.
-Assets that can be converted into cash relatively quickly

Accepted Answer

A) accounts payable (trade credit) 
B) accounts receivable 
C) accumulated depreciation 
D) common stock 
E) current assets (working capital)
F)current debt (short-term liabilities)
G)current ratio
H)fixed assets (property, plant, and equipment [PPE])
I)gross fixed assets
J)net fixed assets
K)other assets 
A) accounts payable (trade credit) 
B) accounts receivable 
C) accumulated depreciation 
D) common stock 
E) current assets (working capital)
F)current debt (short-term liabilities)
G)current ratio
H)fixed assets (property, plant, and equipment [PPE])
I)gross fixed assets
J)net fixed assets
K)other assets E

Question 4

Match the term with its definition.
-A distribution of a firm's profits to the owners

Accepted Answer

A) balance sheet 
B) debt 
C) debt ratio 
D) dividends 
E) income statement (profit and loss statement)
F)interest expense
G)mortgage
H)operating expenses
I)owners' equity
J)retained earnings
K)total asset turnover 
A) balance sheet 
B) debt 
C) debt ratio 
D) dividends 
E) income statement (profit and loss statement)
F)interest expense
G)mortgage
H)operating expenses
I)owners' equity
J)retained earnings
K)total asset turnover

Question 5

Match the term with its definition.
-Total (cumulative) depreciation expense taken over an asset's life

Accepted Answer

A) accounts payable (trade credit) 
B) accounts receivable 
C) accumulated depreciation 
D) common stock 
E) current assets (working capital)
F)current debt (short-term liabilities)
G)current ratio
H)fixed assets (property, plant, and equipment [PPE])
I)gross fixed assets
J)net fixed assets
K)other assets 
A) accounts payable (trade credit) 
B) accounts receivable 
C) accumulated depreciation 
D) common stock 
E) current assets (working capital)
F)current debt (short-term liabilities)
G)current ratio
H)fixed assets (property, plant, and equipment [PPE])
I)gross fixed assets
J)net fixed assets
K)other assets

Question 6

Coronado cannot use the income statement as a measure of cash flows because it is calculated on a(n) _____ basis rather than a(n) _____ basis.

Accepted Answer

A)  annual; cash 
B)  annual; accrual 
C)  accrual; cash 
D)  cash; accrual 
A)  annual; cash 
B)  annual; accrual 
C)  accrual; cash 
D)  cash; accrual

Question 7

Match the term with its definition.
-A measure of a firm's profitability relative to the amount of its assets, determined by dividing operating profits by total assets

Accepted Answer

A) accrual-basis accounting 
B) cash 
C) cash-basis accounting 
D) depreciable assets 
E) depreciation expense
F)financial statements
G)inventory
H)liquidity
I)operating profit margin
J)return on assets
K)return on equity 
A) accrual-basis accounting 
B) cash 
C) cash-basis accounting 
D) depreciable assets 
E) depreciation expense
F)financial statements
G)inventory
H)liquidity
I)operating profit margin
J)return on assets
K)return on equity

Question 8

Denver wants to make sure he puts his company's assets in the correct categories. Which of the following is an example of a current asset?

Accepted Answer

A)  Land 
B)  Inventory 
C)  Equipment 
D)  Buildings 
A)  Land 
B)  Inventory 
C)  Equipment 
D)  Buildings

Question 9

Which of the following statements about a firm's financial statements is true?

Accepted Answer

A)  An income statement helps a small business owner know the financial strengths and capabilities of the business-something that cannot be known in any other way. 
B)  Small business owners tend to pay close attention to the firm's income statement, but much less attention to the balance sheet. 
C)  A mistake that many small business owners is viewing the balance sheet and income statement as complements of each other rather than treating them as separate reports. 
D)  None of these are correct. 
A)  An income statement helps a small business owner know the financial strengths and capabilities of the business-something that cannot be known in any other way. 
B)  Small business owners tend to pay close attention to the firm's income statement, but much less attention to the balance sheet. 
C)  A mistake that many small business owners is viewing the balance sheet and income statement as complements of each other rather than treating them as separate reports. 
D)  None of these are correct.

Question 10

The terms earnings, profits, and income refer to different amounts on the income statement.

Accepted Answer

A) True 
 B)False

Question 11

Comparing this year's results to last year's, Hector discovered that his firm's current ratio improved from 1.5 to 2.0. Which of the following has happened?

Accepted Answer

A)  Current liabilities have decreased. 
B)  Fixed assets have increased. 
C)  Owners' equity has increased. 
D)  Long-term debt has decreased. 
A)  Current liabilities have decreased. 
B)  Fixed assets have increased. 
C)  Owners' equity has increased. 
D)  Long-term debt has decreased.

Question 12

Fatima borrowed money from the bank to expand her business. She plans to repay the loan within 12 months. How is this reflected on the statement of cash flows?

Accepted Answer

A)  As an increase in owners' equity and an increase to cash 
B)  As an increase to cash 
C)  As a decrease to cash 
D)  As an increase to current liabilities 
A)  As an increase in owners' equity and an increase to cash 
B)  As an increase to cash 
C)  As a decrease to cash 
D)  As an increase to current liabilities

Question 13

While increasing debt levels can increase the owner's return on equity, it also reduces risk.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following assets would considered an other asset?

Accepted Answer

A)  Land 
B)  Machinery 
C)  Contingency funds 
D)  Goodwill 
A)  Land 
B)  Machinery 
C)  Contingency funds 
D)  Goodwill

Question 15

From her sales income, Barbara has subtracted cost of goods sold, operating expenses, interest expense, and income taxes. What she has left is her company's

Accepted Answer

A)  total profits. 
B)  projected income. 
C)  net profits. 
D)  operating profits. 
A)  total profits. 
B)  projected income. 
C)  net profits. 
D)  operating profits.

Question 16

Kermit calculated his total asset turnover to be 1.13. This tells Kermit that every

Accepted Answer

A)  dollar of assets generates $1.13 in sales. 
B)  dollar of sales costs Kermit $1.13 to generate. 
C)  year he turns his inventory 1.13 times. 
D)  dollar of assets generates $1.13 in profits. 
A)  dollar of assets generates $1.13 in sales. 
B)  dollar of sales costs Kermit $1.13 to generate. 
C)  year he turns his inventory 1.13 times. 
D)  dollar of assets generates $1.13 in profits.

Question 17

Richard has in his warehouse some raw materials and finished goods that he has ready to fill customer orders. These are two types of

Accepted Answer

A)  accounts payable. 
B)  accounts receivable. 
C)  cost of goods. 
D)  inventory. 
A)  accounts payable. 
B)  accounts receivable. 
C)  cost of goods. 
D)  inventory.

Question 18

The debts that Rhonda's company will repay within the next _____ are considered to be current debt.

Accepted Answer

A)  two years 
B)  18 months 
C)  five years 
D)  12 months 
A)  two years 
B)  18 months 
C)  five years 
D)  12 months

Question 19

Kate's banker would like to know the profit of her business from January 1 through December 31. She should show him the

Accepted Answer

A)  statement of cash flows. 
B)  income statement. 
C)  balance sheet. 
D)  harvest plan. 
A)  statement of cash flows. 
B)  income statement. 
C)  balance sheet. 
D)  harvest plan.

Question 20

The liquidity of a firm is

Accepted Answer

A)  measured by a ratio of current assets to current liabilities. 
B)  not important to the company's financial health. 
C)  the ability of the firm to sell its products quickly. 
D)  a measurement of spontaneous financing. 
A)  measured by a ratio of current assets to current liabilities. 
B)  not important to the company's financial health. 
C)  the ability of the firm to sell its products quickly. 
D)  a measurement of spontaneous financing.

Exam 10: Understanding a Firms Financial Statements

Which of the following questions does a statement of cash flows answer?

Match the term with its definition. -Cumulative net profits retained in a company over the life of the business

Match the term with its definition. -Assets that can be converted into cash relatively quickly

Match the term with its definition. -A distribution of a firm's profits to the owners

Match the term with its definition. -Total (cumulative) depreciation expense taken over an asset's life

Coronado cannot use the income statement as a measure of cash flows because it is calculated on a(n) _____ basis rather than a(n) _____ basis.

Match the term with its definition. -A measure of a firm's profitability relative to the amount of its assets, determined by dividing operating profits by total assets

Denver wants to make sure he puts his company's assets in the correct categories. Which of the following is an example of a current asset?

Which of the following statements about a firm's financial statements is true?

The terms earnings, profits, and income refer to different amounts on the income statement.

Comparing this year's results to last year's, Hector discovered that his firm's current ratio improved from 1.5 to 2.0. Which of the following has happened?

Fatima borrowed money from the bank to expand her business. She plans to repay the loan within 12 months. How is this reflected on the statement of cash flows?

While increasing debt levels can increase the owner's return on equity, it also reduces risk.

Which of the following assets would considered an other asset?

From her sales income, Barbara has subtracted cost of goods sold, operating expenses, interest expense, and income taxes. What she has left is her company's

Kermit calculated his total asset turnover to be 1.13. This tells Kermit that every

Richard has in his warehouse some raw materials and finished goods that he has ready to fill customer orders. These are two types of

The debts that Rhonda's company will repay within the next _____ are considered to be current debt.

Kate's banker would like to know the profit of her business from January 1 through December 31. She should show him the

The liquidity of a firm is

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Coronado cannot use the income statement as a measure of cash flows because it is calculated on a(n) _ basis rather than a(n) _ basis.