Question 1

An increase in an asset account is a source of cash, whereas an increase in a liability account is a use of cash.

Accepted Answer

An increase in an asset account (other than cash) typically represents a use of cash, whereas an increase in a liability account is considered a source of cash because it often means the company has borrowed money or incurred obligations that increase its cash flow.

Question 2

A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows.

Accepted Answer

The statement of cash flows reports how a company's operating, investing, and financing activities have impacted its cash flow for a given period.

Question 3

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

Accepted Answer

The annual report provides information about the company's financial performance and future plans, which investors use to make informed decisions about investing in the company. This information can help them form expectations about future earnings and dividends.

Question 4

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

Accepted Answer

Operating cash flows and accounting profits are measured using different methods, which may result in differences due to various factors such as taxes, payment patterns, reporting considerations, credit sales, and non-cash costs. Therefore, it is true that operating cash flows can differ from accounting profits.

Question 5

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

Accepted Answer

High current and quick ratios indicate that a firm has more short-term assets relative to its short-term liabilities, which suggests good liquidity. However, excessively high ratios may also indicate that the firm is not using its assets efficiently or is under-leveraged, which could be a sign of poor financial management.

Question 6

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Accepted Answer

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Question 7

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Accepted Answer

Non-cash assets such as property, plant and equipment, and intangible assets are expected to generate cash flows over their useful lives. However, the actual amount of cash generated may differ from the values at which these assets are recorded on a company's balance sheet, as they are subject to depreciation, impairment or changes in market conditions. Therefore, non-cash assets are evaluated for their fair value, which may differ from their carrying values, to reflect their actual value at a certain point in time.

Question 8

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

Accepted Answer

A firm's net income reported on its income statement does not necessarily equal the operating cash flows on the statement of cash flows. There are several non-cash items included in the calculation of net income, such as depreciation and amortization, which do not affect cash flows. Additionally, changes in working capital items such as accounts receivable, accounts payable, and inventory can also impact operating cash flows independent of net income. Therefore, the net income and operating cash flows may not always be equal.

Question 9

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

Accepted Answer

Debt management ratios, also known as leverage ratios, measure the extent to which a company uses debt to finance its operations and investments. Therefore, they reflect the degree to which managers attempt to boost returns to owners' capital through financial leverage.

Question 10

The balance sheet presents a summary of the firm's revenues and expenses over an accounting period.

Accepted Answer

The balance sheet displays the firm's assets, liabilities, and equity at a specific point in time, and does not summarize revenues and expenses. The income statement is the financial statement that presents a summary of the firm's revenues and expenses over an accounting period.

Question 11

The current ratio and inventory turnover ratio measure the liquidity of a firm.The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

Accepted Answer

The answer of The current ratio and inventory turnover ratio...

Question 12

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements.Trend analysis is one method of measuring a firm's performance over time.

Accepted Answer

Trend analysis involves comparing financial data over multiple periods to identify patterns and changes in a firm's performance, making it a useful tool for evaluating whether its financial position is improving or deteriorating.

Question 13

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

Accepted Answer

Depreciation is a non-cash expense, meaning it does not involve an actual outflow of cash. It is added back to net income when calculating cash flow from operating activities on the statement of cash flows. Therefore, depreciation is not regarded as a use of cash on the income statement.

Question 14

One of the biggest noncash items on the income statement is depreciation which needs to be subtracted from net income to determine cash flows for the firm.

Accepted Answer

Depreciation is a noncash expense that is added back to net income when calculating cash flows, not subtracted.

Question 15

On the balance sheet, total assets must equal total liabilities plus stockholders equity.

Accepted Answer

This is the fundamental accounting equation and is always true, as assets are financed either by liabilities or equity.

Question 16

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Accepted Answer

Profitability ratios such as return on assets (ROA) and return on equity (ROE) take into account the efficiency of asset management, the level of debt used in operations, and the liquidity of the company to measure the overall profitability of the business.

Question 17

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

Accepted Answer

Ratio analysis involves comparing different financial statement accounts to evaluate a company's financial performance, strengths, and weaknesses. It is a useful tool for investors, creditors, and analysts to assess a company's profitability, liquidity, solvency, and operational efficiency.

Question 18

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

Accepted Answer

A decline in the inventory turnover ratio means that the firm is taking longer to sell its inventory, which can indicate poor sales or overstocking. This can lead to lower cash flow and potentially lower liquidity. Therefore, a decrease in inventory turnover ratio does not suggest an improvement in the firm's liquidity position.

Question 19

The income statement measures the flow of funds into (i.e.revenue) and out of (i.e.expenses) the firm over a certain time period.It is always based on accounting data.

Accepted Answer

The income statement is a financial statement that reports a company's financial performance over a specific accounting period. It includes revenue and expenses and is based on accounting data.

Question 20

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

Accepted Answer

The balance sheet is a snapshot of the firm's financial position at a point in time, while the income statement measures the firm's profitability over a period of time.

Quiz 2: Analysis of Financial Statements

An increase in an asset account is a source of cash, whereas an increase in a liability account is a use of cash.

A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows.

The information contained in the annual report is used by investors to form expectations about future earnings and dividends.

Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits.

If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well.

When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt.

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows.

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

The balance sheet presents a summary of the firm's revenues and expenses over an accounting period.

The current ratio and inventory turnover ratio measure the liquidity of a firm.The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash.

Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements.Trend analysis is one method of measuring a firm's performance over time.

Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense.

One of the biggest noncash items on the income statement is depreciation which needs to be subtracted from net income to determine cash flows for the firm.

On the balance sheet, total assets must equal total liabilities plus stockholders equity.

Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations.

Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm.

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.

The income statement measures the flow of funds into (i.e.revenue) and out of (i.e.expenses) the firm over a certain time period.It is always based on accounting data.

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.