Question 1

Dividends to a firm's owners are not considered an expense in the income statement.

Accepted Answer

Dividends are not considered as expenses because they are paid out of net income after all the expenses have been deducted from the revenue.

Question 2

A new business needs to manage cash flows carefully because if a firm runs out of cash,it is out of business.

Accepted Answer

Cash flow management is crucial for a new business to survive. If a firm runs out of cash, it won't be able to pay its expenses, employees, suppliers, and other bills. In such a scenario, it will eventually have to close its doors. Therefore, managing cash flows is essential to ensure that a business has enough cash to operate and grow.

Question 3

The balance sheet shows a firm's assets,liabilities,and owners' equity at a specific point in time.

Accepted Answer

This is a correct statement. A balance sheet is a financial statement that presents a snapshot of a company's financial position at a specific point in time, typically the end of a fiscal quarter or year. It shows the company's assets, liabilities, and owners' equity, and can be helpful in analyzing a company's financial health, liquidity, and solvency.

Question 4

In order to determine the cash flows from day-to-day operations,the firm must convert the company's income statement from a cash basis to an accrual basis.

Accepted Answer

The income statement is already prepared on the accrual basis. The company's cash flow statement is prepared separately to determine the cash flows from day-to-day operations.

Question 5

A profitable company will always have positive cash flows.

Accepted Answer

A profitable company may have negative cash flows if it is reinvesting its profits back into the business for growth or paying off debt. Cash flow is a separate concept from profitability and is a measure of the amount of cash a company generates or spends during a specific period of time.

Question 6

Jan's bank has asked her to show them how her firm's financial position has changed in the past year.She should provide the company's balance sheet.

Accepted Answer

To show how her firm's financial position has changed over the past year, Jan should provide the company's income statement and statement of cash flows, in addition to the balance sheet. The balance sheet shows the company's financial position at a specific point in time, while the income statement and statement of cash flows show changes over a period.

Question 7

Depreciation is the cost of a firm's land and building allocated over its useful life.

Accepted Answer

Depreciation applies to tangible assets like buildings and equipment, but not land, as land does not lose value over time.

Question 8

Total assets less short-term debt equals ownership equity.

Accepted Answer

Ownership equity is calculated as total assets minus total liabilities, not just short-term debt.

Question 9

Profits reward owners for investing in a company,but they do little to promote future growth.

Accepted Answer

Profits can be reinvested back into a company to promote future growth, such as investing in research and development, expanding operations, or increasing marketing efforts. Therefore, profits can play an important role in promoting future growth.

Question 10

The cash flow statement answers the questions "From where did the cash come?' and "Where did the cash go?"

Accepted Answer

The cash flow statement tracks the flow of cash in and out of a business, and provides information on the sources and uses of cash during a specific period. Therefore, it answers the questions of where the cash came from (inflows) and where the cash went (outflows).

Question 11

Accounts receivable consist of payments due from a firm to its suppliers.

Accepted Answer

Accounts receivable represent payments that are due to a firm from its customers, not its suppliers.

Question 12

The income statement shows a firm's financial position on a specific date.

Accepted Answer

The income statement shows a firm's financial performance over a specific period of time, typically one year or one quarter. It does not show the firm's financial position on a specific date, which is shown on the balance sheet.

Question 13

Ownership equity represents the owner's investment in the company,which can be either his/her cash invested in the company or money borrowed from a bank to purchase fixed assets.

Accepted Answer

Ownership equity represents the owner's investment in the company, typically through cash or other assets contributed by the owner, not money borrowed from a bank. Borrowed funds are considered liabilities, not equity.

Question 14

Accounts payable,accrued expenses,2-year notes payable,and 90-day notes are all short-term liabilities.

Accepted Answer

Accounts payable, accrued expenses, and 90-day notes are short-term liabilities, but 2-year notes payable are considered long-term liabilities.

Question 15

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

Accepted Answer

Earnings, profits, and income are often used interchangeably to refer to the net amount of money a company makes after expenses are subtracted from revenues.

Question 16

The three activities that explain the cash inflows and outflows of a business are the operating,selling,and financing activities.

Accepted Answer

The three activities that explain the cash inflows and outflows of a business are the operating, investing, and financing activities.

Question 17

The major difference between cash-basis accounting and accrual-basis accounting is when the firm recognizes revenue and profits.

Accepted Answer

Cash-basis accounting recognizes revenue and profits when cash is received, while accrual-basis accounting recognizes revenue and profits when they are earned, regardless of when cash is received.

Question 18

The income statement answers the question: "How profitable is the business?"

Accepted Answer

The income statement shows the revenue (income) generated by the business and subtracts the expenses incurred to calculate the net income (profit or loss). Therefore, it provides information on the profitability of the business.

Question 19

Jane is determining the overall financial situation for her business.Since she has to report to a group of investors,she should just give them the income statement.

Accepted Answer

Jane should not only provide the income statement, but also other financial statements such as the balance sheet and cash flow statement to give a complete picture of the business's financial situation.

Question 20

Assets that can be converted to cash relatively quickly are said to be liquid.

Accepted Answer

This is true. Liquid assets are those that can be easily converted to cash without significant loss in value. Examples include cash, stocks, and certain types of bonds.

Quiz 10: Understanding a Firms Financial Statements