Question 1

The management of public companies are not legally required to disclose any off balance sheet transactions.

Accepted Answer

The management of public companies are required to disclose significant off balance sheet transactions in their financial statements according to accounting standards and securities laws.

Question 2

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet?
A)It subtracts all expenses and costs related to the firm's operating activities.
B)It adds all non-cash entries related to the firm's operating activities.
C)It adds the cash that flows from investors to the firm.
D)It removes the cash used for investment purposes.

Accepted Answer

The Operating Activity section of the statement of cash flows adjusts Net Income by adding all non-cash entries related to the firm's operating activities, such as depreciation and amortization expenses. It does not subtract all expenses and costs related to the firm's operating activities or include cash flows from investors or investments.

Question 3

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts,if true,in the firm's management discussion and analysis (MD&A)?
A)that a large number of funds were allocated to advertising to increase awareness of the firm's brand in new areas it had expanded into this year
B)that some senior members of the management team have retired in this financial year
C)that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
D)that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers

Accepted Answer

The fact that the company has lost a class action suit is relevant to the firm's financial performance and should be included in the MD&A as it may have material impact on the company's financial statements. The other options, such as advertising expenses, changes in the management team, and future plans for expansion, may be included but are not as financially significant as the outcome of a legal case.

Question 4

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
A)It includes entries for the depreciation of assets.
B)It does not include entries for expenditures on inventory.
C)It does not include entries for collection of money from account receivables.
D)It includes cash inflows from services rendered.

Accepted Answer

The income statement includes both cash and non-cash items, affecting its reflection of actual cash flow. Depreciation (A) is a non-cash expense, inventory purchases (B) are not directly shown but affect cost of goods sold, and collections from accounts receivable (C) affect revenue recognition but are not cash transactions. However, cash inflows from services rendered (D) are part of the income statement's depiction of revenue, making it not a reason the statement fails to indicate actual cash earned.

Question 5

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

Accepted Answer

The answer of What will be the effect on the...

Question 6

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Accepted Answer

This statement is true. The statement of cash flows shows the inflows and outflows of cash during a given period and is prepared using information from both the balance sheet and the income statement.

Question 7

Why must care be taken when comparing a firm's share price to its operating income?
A)Both share price and operating income are related to the whole firm.
B)Share price is a quantity related to the entire firm,while operating income is an amount that is related solely to equity holders.
C)Both share price and operating income are related solely to equity holders.
D)Share price is a quantity related to equity holders,while operating income is an amount that is related to the whole firm.

Accepted Answer

Share price reflects the market's valuation of the equity portion of the firm, representing what equity holders own. Operating income, on the other hand, is a measure of the firm's earnings before interest and taxes, which is relevant to both debt and equity holders. This distinction is crucial for accurate financial analysis and comparison.

Question 8

Use the table for the question(s)below.
AOS Industries Statement of Cash Flows for 2008 
-Consider the above statement of cash flows.If all amounts shown above are in millions of dollars,what were AOS Industries' retained earnings for 2008?
A)$1.3 million
B)$1.7 million
C)$2.1 million
D)$5.4 million

Accepted Answer

Retained earnings are calculated by adding net income to the beginning retained earnings and subtracting any dividends paid. The statement of cash flows would provide information on net income and dividends, allowing for the calculation of retained earnings.

Question 9

A printing company prints a brochure for a client,and then bills them for this service.At the time the printing company's financial disclosure statements are prepared,the client has not yet paid the bill for this service.How will this transaction be recorded?
A)The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows.
B)The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
C)The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows.
D)The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.

Accepted Answer

The sale will be added to Net Income on the income statement as it represents revenue earned by the company. However, since the client has not yet paid for the service, the amount will be deducted from Net Income on the statement of cash flows as it does not represent a cash inflow for the company. This is done to ensure that the statement of cash flows reflects the actual cash flows in and out of the company.

Question 10

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant.How will the cost to the company of this piece of equipment be recorded?
A)It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.
B)It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows.
C)It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows.
D)It will be subtracted from Gross Profit on the income statement and therefore not be recorded separately on the statement of cash flows.

Accepted Answer

The cost of the new compression blow molder is a capital expenditure and it will be depreciated over time on the income statement. This means that the cost will be recorded as an expense over several years on the income statement. On the statement of cash flows, the cost will be subtracted as a capital expenditure. This is because the cost of the new equipment does not directly impact cash flow for the year in which it was purchased. Instead, the cost is spread out over multiple years through depreciation expenses.

Question 11

A software company acquires a smaller company in order to acquire the patents that it holds.Where will the cost of this acquisition be recorded on the statement of cash flows?
A)as an outflow under Operating Activities
B)as an outflow under Investment Activities
C)as an outflow under Financial Activities
D)The acquisition would not be recorded on the statement of cash flows.

Accepted Answer

The cost of acquiring another company is typically classified as an investing activity on the statement of cash flows. Investing activities are cash outflows related to the purchase or sale of long-term assets, such as property, plant, and equipment or investments in other companies. In this case, the acquisition of the smaller company and its patents would be considered a long-term investment by the software company.

Question 12

How can we cross check the statement of cash flows?

Accepted Answer

The answer of How can we cross check the statement...

Question 13

Manufacturer A has a profit margin of 2.0%,an asset turnover of 1.7 and an equity multiplier of 4.9.
Manufacturer B has a profit margin of 2.3%,an asset turnover of 1.1 and an equity multiplier of 4.7.
How much asset turnover should manufacturer B have to match manufacturer A's ROE?
A)1.54%
B)3.00%
C)3.09%
D)4.77%

Accepted Answer

The answer of Manufacturer A has a profit margin of...

Question 14

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?
A)a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
B)a low-end retailer that has a low mark-up on all items it sells
C)a brokerage firm that has high levels of leverage
D)a grocery store chain that has very high turnover,selling many multiples of their assets per year

Accepted Answer

A high-priced medical supply company that provides precise instruments is likely to have a high-profit margin, which contributes to a high ROE.

Question 15

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel.Where would this purchase be reflected on the Statement of Cash Flows?
A)It would be an expense on the income statement,so it would be reflected in operating cash flows.
B)It would be an addition to property,plant and equipment,so it would be an investing activity.
C)It would be an addition to cash,so would be reflected in the change in cash.
D)None of the above answers is correct.

Accepted Answer

This purchase of a new copy machine is an addition to property, plant and equipment, which is an investing activity that would be reflected in the investing section of the Statement of Cash Flows.

Question 16

Use the table for the question(s)below.
AOS Industries Statement of Cash Flows for 2008 
-Consider the above statement of cash flows.What were AOS Industries' major means of raising money in 2008?
A)from investment activities
B)by sale of stock
C)from its operations
D)by issuing debt

Accepted Answer

The answer of Use the table for the question(s)below.
AOS Industries...

Question 17

The notes to the financial statements would be LEAST likely to be used for which of the following purposes?
A)to provide information regarding the context in which these financial numbers were generated
B)to disclose the financial implications of any off balance sheet transactions
C)to show how the value of assets listed in the financial statements were arrived at
D)to explain the method of accounting that was used in the preparation of the financial statements

Accepted Answer

The answer of The notes to the financial statements would...

Question 18

Use the table for the question(s)below.
AOS Industries Statement of Cash Flows for 2008 
-Consider the above statement of cash flows.Which of the following is true of AOS Industries' operating cash flows?
A)It collected more cash from its customers than they charged.
B)It sold more inventory than it bought.
C)It charged more on its accounts payable back than it paid back.
D)All of the above are true.

Accepted Answer

AOS Industries' operating cash flows increased by $100 million, which means that it collected more cash from its customers than it charged, sold more inventory than it bought, and charged more on its accounts payable back than it paid back.

Question 19

Use the table for the question(s)below.
AOS Industries Statement of Cash Flows for 2008 
-Consider the above statement of cash flows.In 2008,AOS Industries had contemplated buying a new warehouse for $2 million,the cost of which would be depreciated over 10 years.If AOS Industries has a tax rate of 25%,what would be the impact for the amount of cash held by AOS at the end of the 2008?
A)It would have $2,000,000 less cash at the end of 2008.
B)It would have $1,950,000 less cash at the end of 2008.
C)it would have $150,000 less cash at the end of 2008.
D)it would have an additional $50,000 in cash at the end of 2008.

Accepted Answer

The answer of Use the table for the question(s)below.
AOS Industries...

Question 20

The above data is for four regional trucking firms.Based on price-earnings ratios,which firm's stock is the best value?
A)Firm A
B)Firm B
C)Firm C
D)Firm D

Accepted Answer

The answer of 
The above data is for four regional...

Quiz 2: Introduction to Financial Statement Analysis

The management of public companies are not legally required to disclose any off balance sheet transactions.

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet?

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts,if true,in the firm's management discussion and analysis (MD&A) ?

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

Why must care be taken when comparing a firm's share price to its operating income?

Use the table for the question(s) below. AOS Industries Statement of Cash Flows for 2008 -Consider the above statement of cash flows.If all amounts shown above are in millions of dollars,what were AOS Industries' retained earnings for 2008?

A printing company prints a brochure for a client,and then bills them for this service.At the time the printing company's financial disclosure statements are prepared,the client has not yet paid the bill for this service.How will this transaction be recorded?

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant.How will the cost to the company of this piece of equipment be recorded?

A software company acquires a smaller company in order to acquire the patents that it holds.Where will the cost of this acquisition be recorded on the statement of cash flows?

How can we cross check the statement of cash flows?

Manufacturer A has a profit margin of 2.0%,an asset turnover of 1.7 and an equity multiplier of 4.9. Manufacturer B has a profit margin of 2.3%,an asset turnover of 1.1 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE?

Which of the following firms would be expected to have a high ROE based on that firm's high profitability?

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel.Where would this purchase be reflected on the Statement of Cash Flows?

Use the table for the question(s) below. AOS Industries Statement of Cash Flows for 2008 -Consider the above statement of cash flows.What were AOS Industries' major means of raising money in 2008?

The notes to the financial statements would be LEAST likely to be used for which of the following purposes?

Use the table for the question(s) below. AOS Industries Statement of Cash Flows for 2008 -Consider the above statement of cash flows.Which of the following is true of AOS Industries' operating cash flows?

The above data is for four regional trucking firms.Based on price-earnings ratios,which firm's stock is the best value?