Question 1

The statement of earnings provides investors with information about a company's investing activities.

Accepted Answer

The statement of earnings, also known as the income statement or profit and loss statement, provides information about a company's revenues and expenses during a specific period of time, but it does not specifically focus on investing activities. Information about investing activities can be found in the statement of cash flows or the notes to the financial statements.

Question 2

The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

Accepted Answer

The operating cycle refers to the process of purchasing, selling, and collecting cash. It measures the time between when a company starts the production process and when it ultimately collects cash from its customers.

Question 3

If Pizza Pizza reports an asset turnover ratio of 2.34 for 2013 and their competitor Pizza Hut reports 3.79 for their 2013 ratio, it means which of the following?

Accepted Answer

The asset turnover ratio measures a company's ability to generate sales from its assets. A higher ratio indicates more efficiency. Therefore, Pizza Hut's higher ratio suggests Pizza Pizza has been less effective in managing its assets.

Question 4

Revenues are decreases in assets or settlements of liabilities from ongoing operations.

Accepted Answer

Revenues are increases in assets or settlements of liabilities resulting from a company's ongoing operations.

Question 5

It is not optimal to borrow any further funds when

Accepted Answer

When the average borrowing costs start to equal or exceed the ROA, it indicates that the cost of borrowing is not being effectively covered by the returns generated from the assets, making further borrowing suboptimal.

Question 6

A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last year's total assets were $75 million. What is the current year's asset turnover ratio?

Accepted Answer

Calculation: $120/ [($80 + $75) × 0.5].

Question 7

Which of the following would be included in comprehensive income but not in net income?

Accepted Answer

Unrealized gains and losses on certain types of investments are included in comprehensive income but not in net income because they represent changes in the fair value of investments that have not yet been realized through sale. Net income, on the other hand, includes only realized gains and losses.

Question 8

Income tax expense will appear on the statement of ﬁnancial position.

Accepted Answer

Income tax expense is a temporary account that is closed out at the end of the accounting period. It would appear on the income statement but not on the statement of financial position. The statement of financial position reflects the company's assets, liabilities, and equity at a specific point in time.

Question 9

A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.

Accepted Answer

Walmart, being a diversified retailer, sells a wide range of products including perishables, electronics, and clothing, which can have varying operating cycles. Taco Bell, primarily dealing in fast food, typically has a shorter operating cycle due to the quick turnover of inventory and immediate revenue from sales.

Question 10

According to the periodicity assumption, to measure and report ﬁnancial information periodically, we assume the long life of the company can be cut into shorter periods.

Accepted Answer

This is a true statement. The periodicity assumption assumes that the long life of a company can be divided into shorter time periods, such as months or years, for the purpose of measuring and reporting financial information regularly. This allows for comparability and analysis over time.

Question 11

When a growing company ﬁnds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to ﬁnance the inventory purchases.

Accepted Answer

This is a common practice in business, as companies need to maintain inventory levels to meet customer demand, but may not have the cash on hand to purchase the inventory upfront. Using short term credit options such as trade or notes payable allows the company to finance the inventory purchases while waiting for cash to be collected from customers.

Question 12

Which of the following statements about ROA is true?

Accepted Answer

ROA (Return on Assets) is a financial ratio that indicates how profitable a company is relative to its total assets. It is useful for comparing the efficiency of different companies in generating earnings from their assets, regardless of the industry. This makes it a versatile metric for comparison across different sectors.

Question 13

The proﬁt of a business is computed by subtracting revenues from expenses.

Accepted Answer

The profit of a business is computed by subtracting expenses from revenues, not the other way around.

Question 14

What is Other Comprehensive Income?

Accepted Answer

Other Comprehensive Income includes certain gains and losses that are not included in the net income on the income statement, because they have not yet been realized. These are items that bypass the income statement and are recorded directly in equity through comprehensive income.

Question 15

The operating cycle is of a similar duration for most companies.

Accepted Answer

The operating cycle can vary greatly depending on the nature of the company's business and industry. For example, a retail company may have a shorter operating cycle than a manufacturing company that requires a longer production process.

Question 16

Comprehensive income includes all changes in equity during a period except

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. This encompasses all revenues, expenses, gains, and losses, but does not include transactions with owners (such as issuing shares or paying dividends).

Question 17

Operating revenues result from the sale of goods or services.

Accepted Answer

Operating revenues are generated from the sales of goods or services by a business.

Question 18

How is Accumulated Comprehensive Income reported?

Accepted Answer

Accumulated Comprehensive Income is reported in the shareholders' equity section of the balance sheet. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Question 19

The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption.

Accepted Answer

The periodicity assumption refers to the practice of dividing business activities into regular intervals, such as weeks, months, or years, for accounting purposes. This assumption helps businesses measure and report their financial performance over specific time frames, which can be useful for decision-making and analysis.

Question 20

Losses are decreases in assets or increases in liabilities from peripheral activities.

Accepted Answer

Losses are a decrease in assets or an increase in liabilities resulting from peripheral (non-core) activities. These activities might include things like selling off a subsidiary, discontinuing a product line, or settling a legal dispute.

Quiz 3: The Income Statement