Question 1

Costs directly related to the production of goods for sale that vary directly with the production level are called

Accepted Answer

Costs that vary directly with the production level are called variable costs, and are directly related to the cost of goods sold (COGS). Therefore, the best choice is E - Cost of goods sold. Goodwill (A) is an intangible asset and not directly related to production costs. Fixed costs (B) are costs that do not vary with production levels, and operating costs (C) include both fixed and variable costs. Tangible costs (D) is not a commonly used term.

Question 2

The _________ approach is a method of projecting future values with the assumption that many financial statement accounts will vary in direct relation to a firm's predicted total revenue.

Accepted Answer

The percentage of sales approach assumes that certain financial statement items will change in proportion to sales, making it a common method for forecasting future financial statements based on projected sales growth.

Question 3

Operating income is equal to total revenue minus

Accepted Answer

Operating income is calculated by subtracting the cost of goods sold, depreciation, operating, and general expenses from total revenue. This measure reflects the profit a company makes from its core operations, excluding non-operating income and expenses.

Question 4

Operating expenses are:

Accepted Answer

Operating expenses refer to the indirect costs of administration and marketing that are necessary to run a business, but are not directly related to the production of goods or services. These expenses include salaries, advertising, rent, utilities, and other expenses that are incurred in the normal course of business operations.

Question 5

Financial statements that are compiled based on expected future values are called _______ statements.

Accepted Answer

Pro forma statements are compiled based on expected future values. They are typically used for financial forecasting and planning purposes, as well as in advance of mergers, acquisitions, or other significant business transactions that may impact financial performance.

Question 6

Which of the following is a tangible fixed asset?

Accepted Answer

Tangible fixed assets are physical assets such as equipment, buildings, and land. Out of the given options, only equipment is a tangible fixed asset. Goodwill and patents are intangible assets, inventory is a current asset, and accounts receivable is a current asset that represents money owed to a company for goods or services already provided.

Question 7

ABC Inc. recently purchased XYZ Inc. XYZ had a total market value of $6.2 million. However, ABC actually paid $6.4 million for the acquisition. This acquisition created an asset called _________ of an amount of $0.2 million.

Accepted Answer

Goodwill is created when the purchase price of an acquisition exceeds the fair market value of the assets and liabilities acquired. In this case, ABC paid $6.4 million for XYZ, which was more than its market value of $6.2 million. Therefore, the $0.2 million difference represents goodwill.

Question 8

A key reason why firms must file financial reports with various prudential regulators and also meet the fair disclosure requirements is the need to

Accepted Answer

The key reason why firms must file financial reports with various prudential regulators and meet the fair disclosure requirements is to provide information to the general public in a fair, timely, and accurate manner. This is crucial for transparency and to ensure that investors have access to reliable information to make informed decisions. The other options, such as minimizing the amount of information or limiting the release of information, go against the principles of transparency and fair disclosure.

Question 9

_________ is the market value of all a firm's outstanding equity and debt securities divided by the replacement cost of all the firm's assets.

Accepted Answer

Tobin's q ratio is a measure of the market value of a company relative to the replacement cost of its assets. It is calculated as the market value of a firm's outstanding equity and debt securities divided by the replacement cost of all the firm's assets. A higher q ratio indicates that investors have faith in the company's ability to generate profits with its assets, while a lower q ratio may indicate that the company needs to invest in more productive assets or make changes to its operations to increase profitability.

Question 10

The amount of assets that a firm must control to generate one dollar in sales is called the

Accepted Answer

The capital intensity ratio measures the amount of assets a firm needs to control to generate one dollar in sales. Therefore, B is the correct choice.

Question 11

What does a Tobin's Q ratio of greater than 1 indicate?

Accepted Answer

A Tobin's Q ratio of greater than 1 indicates that the market value of the company's assets is greater than their replacement cost, meaning that the company is creating value for shareholders and is well managed.

Question 12

Which of the following is a current asset?

Accepted Answer

Inventory is a current asset as it is something that is expected to be converted into cash within a year or less. The other options listed are all fixed assets, which are expected to be held for longer than a year.

Question 13

_________ measures the premium paid by a firm over market value to acquire an asset.

Accepted Answer

Goodwill is the measure of the premium paid by a firm over market value to acquire an asset. It represents the intangible value of an acquired asset such as a brand name, customer base, or proprietary technology that is not reflected in the actual market value of the asset. Goodwill is an important concept in mergers and acquisitions as it reflects the excess amount paid by the acquiring company over the tangible asset value of the target company.

Question 14

The ratio of operating cash flow to the number of shares of stock outstanding is _________ per share.

Accepted Answer

The ratio of operating cash flow to the number of shares of stock outstanding is a measure of cash flow per share. This ratio helps to show how much cash flow is available to each share of stock.

Question 15

Which of the following would not appear on a balance sheet?

Accepted Answer

Gross profit is a measure of profitability and appears on the income statement, not the balance sheet. The other options (A, B, D, and E) are all balance sheet items.

Question 16

Net income of a firm dividend by the total value of the firm to its shareholder is known as

Accepted Answer

Return on equity (ROE) measures the net income of a firm divided by the total value of the firm to its shareholder. Choices A, B, D, and E may be related to financial performance, but do not specifically address the relationship between net income and value to shareholders.

Question 17

Return on assets is defined as the _________ of a firm expressed as a percentage of the firm's _________.

Accepted Answer

Return on assets (ROA) is essentially the net income divided by the total assets of a firm. Therefore, the correct answer is A, where net income is the numerator and total assets are the denominator.

Question 18

Gross profit is equal to

Accepted Answer

Gross profit is equal to sales minus cost of goods sold.

Question 19

Which of the following would not appear on an income statement?

Accepted Answer

Prepaid expenses are assets recorded on the balance sheet, and therefore would not appear on an income statement. The other choices are all common items that would appear on an income statement.

Question 20

ABC Inc. has a note payable to a bank that is due 9 months from today. This note is a

Accepted Answer

A note payable is a liability, and if it is due within the next year, it is classified as a current liability. Therefore, the correct choice is B.

Quiz 17: Projecting Cash Flow and Earnings