ACT210 EXAM 4

The balance of cash at the beginning of the year was $120,000, and at the end of the year was $140,000. Assuming operating cash flows equal $90,000 and investing cash flows equal $(40,000), calculate financing cash flows for the year.

$(30,000).

Norbert Company reports the following net cash in its statement of cash flows: net inflow from operating activities: $200; net outflow from investing activities: $220; net inflow from financing activities: $130. The current year beginning balance of cash was $80. The cash balance at the end of the year will be

$190. Reason: 80 + 200 - 220 + 130

The Sports Addition reports net sales of $2 million, cost of goods sold of $1 million, operating expenses of $500,000, and other expenses of $100,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by:

$2,000,000.

During the current period, Kunze Corp. disposed of old equipment for $2,000, purchased new equipment for $20,000, collected an accounts receivable balance of $2,500, and purchased an investment for $3,000. Net cash from investing activities is

$21,000 net outflow. Reason: 2,000 - 20,000 - 3,000

During the current period, Schmidt Corp. sold equipment for $1,000, purchased new equipment for $10,000, paid an accounts payable balance of $2,500, and sold an investment costing $2,000 for $2,800. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow)

$6,200 net outflow. Reason: 1,000 - 10,000 + 2,800

Berta's total assets are $100,000; its total liabilities are $40,000; total equity is $60,000; current liabilities are $10,000. If the company prepares a common-size balance sheet, its current liabilities would be expressed as:

10% Reason: 10,000/100,000

Ace Electric's income statement reports Sales of $100,000; Cost of goods sold of $46,000, Operating expenses of $34,000, Interest expense of $15,000, Income tax expense of $2,000, and Net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by

100,000 Reason: When performing a vertical analysis, divide each item by sales.

Meadows Inc. reports operating cash flows of $100,000 for the year ended 12/31/18. Total assets were $800,000 on 12/31/17 and $900,000 on 12/31/18. The company earned a cash return on asset of: (round the tenth of percent)

11.8%

Wiese reports net income of $100,000 for the year ended 12/31/18. Total assets were $800,000 on 12/31/17 and $900,000 on 12/31/18. The company earned a return on assets of: (round the tenth of percent)

11.8% Reason: $100k/((800k+900k)/2)

Roberts Inc. sells common stock for $10 million and pays dividends of $1 million. Net cash inflows from financing activities will be:

9 mil

Compute the average days in inventory ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $80,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Receivables for both years are $40,000. Inventory changed from $30,000 last year to $10,000 this year. Multiple choice question.

91.25 days Reason: Average days in inventory is 365/inventory turnover ratio = 365/4. Inventory turnover is calculated as cost of goods sold/average inventory = $80,000/[($30,000 + 10,000)/2] = 4.

Which of the following is a positive sign that a company can quickly turn its receivables into cash?

A high receivables turnover ratio. A low average collection period.

Which of the following are significant noncash activities?

Acquiring land by issuing common stock. Acquiring equipment by issuing a long-term note.

In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported or included as a(n):

Addition to net income in the operating activities section.

The matching principle states that:

All costs that are used to generate revenue are recorded in the same period the revenue is recognized.

Which of the following factors external to the company will usually decrease a company's gross profit ratio?

An increase in competition

A company provides services on account. How does this transaction affect the following three financial statement items?

Assets: Increase Liabilities: No Change Equity: Increase

Which of the following are cash inflows from financing activities?

Borrowing from bank Issuance of common stock to investors

Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true?

Company B collects its receivables faster than Company A.

Which of the following is an example of vertical analysis?

Comparing income statement items as a percentage of sales.

We can identify operating activities from income statement information and changes in:

Current asset and current liability accounts.

Which of these are liquidity ratios?

Current ratio Receivables turnover Average collection period

Which of the following ratios are used to evaluate a company's ability to pay long-term debts?

Debt to equity ratio Times interest earned ratio

Which of the following statements best describes the reason depreciation expense is added to net income when preparing the statement of cash flows?

Depreciation expense originally reduced net income, but it is a noncash expense.

The issuance of a note payable is classified in the statement of cash flows as a(n):

Financing activity.

Growth stocks tend to have relatively

High P/E ratios.

If a company's sales revenue and cost of goods sold increase by a higher percentage than its inventory balances, inventory turnover will:

Increase.

Which of the following accounts results in adjustments to net income under the indirect method of preparing the statement of cash flows if their balances change during the year?

Inventory Accounts payable Accounts receivable

Which of the following are cash inflows from financing activities? Multiple select question.

Issuance of bonds Issuing stock to investors for cash

Which of the following would improve a current ratio that is now 1.2?

Issuing stock for cash Selling long-term assets for cash

Which statement below best describes the balance sheet?

It shows that the resources of the company equals the creditors' and owners' claims to those resources.

Which information regarding the receivables turnover ratio is true?

It shows the number of times during a period that the average accounts receivable balance is collected. It provides an indication of a company's efficiency in collecting receivables.

We can identify investing activities from additional information and changes in:

Long-term asset accounts.

We can identify financing activities from additional information and changes in:

Long-term liability and stockholders' equity accounts.

What does the inventory turnover ratio measure?

Measures how many times, on average, a company sells its entire inventory during the year. The average number of times inventory is sold during a period.

what affect does the declaration of dividends have on net income and stockholder's equity?

NI: no change SE: decrease

What effect does the declaration of a dividend have on net income and total stockholders' equity?

Net Income: No Change Equity: Decrease

Which of the following best describes the indirect method of preparing the operating activities section of the statement of cash flows?

Net income reconciled from accrual basis to cash basis.

Which of the following are classified as cash inflows from investing activities?

Sale of equipment Sale of land

Which is a significant noncash activity?

Signing a note payable in exchange for land.

Which of these is a solvency ratio?

Times interest earned

Common-size analysis is another term used for ____ analysis

Vertical

When preparing a statement of cash flows using the indirect format, amortization expense must be:

added back to net income

When reporting cash flows from operating activities using the indirect method, an increase in accounts payable is ______ net income because payments to suppliers are ______ than new purchases. Multiple choice question.

added to; less

Cost of goods sold is

an expense account.

The receivables turnover ratio offers an indication of how quickly a company is able to

collect its accounts receivable.

One of the purposes of adjusting net income for changes to certain balance sheet accounts is to

convert items included in net income to cash.

A ratio used to measure liquidity is the

current ratio.

When cash flows from operating activities are reported using the indirect method, a(n) in accounts payable will be subtracted from net income.

decrease

Select the items that would be subtracted from net income in order to prepare the operating activities section of a statement of cash flows - indirect method. Multiple select question.

decrease in current liability gain on sale of land

The "asset turnover" measures the sales revenue generated per of assets.

dollar

A company borrows money by signing a 10-year note payable. This is an example of a(n)

financing activity

Analyzing trends of financial statement data over time by looking at the percent change from year to year is referred to as ________ analysis.

horizontal

The type of analysis used to analyze trends in financial statement data over time is called

horizontal analysis.

a _______- in accrued liabilities, such as interest payable, will be added to net income when determining net cash flow from operating activities using the indirect method.

increase

Which of the following reflect the risk-return trade-off arising from additional debt?

increased risk of bankruptcy potential for earning a return in excess of the cost of borrowing

The balance of retained earnings:

increases with net income decreases with dividends declared

A higher Price-Earnings Ratio:

indicates more earnings growth potential

The __________ method of reporting cash flows from operating activities begins with net income.

indirect

Which of the following methods for reporting cash flows from operating activities begins with net income and works backward to calculate net cash flow from operating activities? Multiple choice question.

indirect method

A decrease in prepaid insurance is added to net income because

insurance expense decreased net income; however, cash was not paid. The prepaid insurance account was decreased rather than cash.

The purchase and sale of long-term assets and current investments are classified as

investing activities

___________ refers to a company having enough cash or convertible assets to pay its current liabilities.

liquidity

Select the items that would be added to net income in order to prepare the operating activities section of a statement of cash flows - indirect method.

loss on sale of land depreciation expense decrease in current asset

Which of the following are nonoperating items that require adjustments under the indirect method?

losses and gains on the sale of long term assets

increasing current ratio means what

more able to meet short term debt obligations

Cash flow ratios substitute cash flow from operations in place of _____ to provide additional insight into a company's financial strength.

net income

Depreciation expense and amortization expense represent _______ items requiring adjustments to net income under the indirect method.

noncash

Depreciation expense is added back to net income when preparing the cash flow from operating activities section because depreciation represents a(n) ______ reduction to net income.

noncash

ains and losses on the sale of long-term assets represent common _____ items needing adjustment under the indirect method.

nonoperating

activities include cash receipts and cash payments for transactions relating to revenue and expense activities.

operating

Some analysts supplement accrual-based ratio analysis with cash flow-based ratio analysis because cash flow-based ratios:

provide additional tools for evaluating the company's financial strength and profitability

Changes to current assets and current liabilities require adjustment of net income under the indirect method because Multiple choice question.

related cash may be higher or lower than the accrued amount included in net income

The basic purpose of the statement of cash flows is to

report the activities that changed the cash balance during the year

Noncash investing and financing activities are either

reported in the notes to the financial statements reported directly after the statement of cash flows

The ratio that is calculated by dividing net income by average total assets is referred to as:

return on assets

To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______.

sales

______ refers to a company's ability to pay its long-term liabilities.

solvency

The financial statement that provides information about cash receipts and cash disbursements for the period is the

statement of cash flows.

In a statement of cash flows, the sum of cash inflows and outflows is equal to

the change in the cash balance.

The solvency ratio that assesses a company's ability to pay its interest is referred to as the:

times interest earned ratio

True or False: Collection on account and sale of services for cash are considered cash inflows, while payment on account and payment of salaries are considered cash outflows from operating activities.

true

True or false: Amortization of intangible assets is treated the same way as depreciation of tangible assets on the statement of cash flows using the indirect method.

true

Under the indirect method of preparing the statement of cash flows, depreciation expense is added back to net income because it

was subtracted in deriving net income. did not require an outflow of cash.

Carola Inc. issues common stock for $20 million and pays dividends of $2 million. Net cash inflows from financing activities will be

18 mil

Which two ratios when multiplied with each other will yield the return on assets?

Profit margin; Asset turnover

Cash inflows and outflows involving stockholders and creditors are classified on the statement of cash flows as ____ activities.

financing

Milken Inc. currently has a current ratio of 1.5. If Milken pays off an accounts payable balance, its current ratio will

increase

Cash flows from _______ activities are both outflows and inflows of cash related to the acquisition and disposal of long-term assets.

investing

Profit

is the amount of net income reported in the income statement

The starting point for preparing the operating activities section using the indirect method is:

net income

A decrease in accounts payable represents a cash ______ from operating activities, whereas a decrease in accounts receivable represents a cash _____ from operating activities.

outflow; inflow

The __________ margin measures the income earned on each dollar of sales.

profit

The group of ratios that measure the earnings or operating effectiveness of a company are referred to as ____ ratios.

profit

Which of the following are profitability ratios?

return on assets price-earnings ratio gross profit ratio

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

Which of the following provides an indication of a higher quality of net income?

Operating cash flows that are highly correlated with net income

Which of the following items would not be classified as a financing activity?

Repayments of accounts payable

Which of the following transactions increases total assets?

Taking out a loan to purchase equipment

Indigo, Inc.'s stock price was $60 last year and is now $70. Given that Indigo's earnings per share was $3 last year and is now $4, which of the following are true?

The PE ratio was higher last year. The stock price is more reasonable now.

Using the indirect method to report cash flows from operating activities, how is the change in retained earnings accounted for in the statement of cash flows?

The change is accounted for by the addition of net income in operating activities and the subtraction of dividends in financing activities.

If a company has a current ratio of 1.2, which of the following is true?

The company has $1.20 in current assets for each dollar of current liabilities.

Which of the following scenarios is consistent with a high current ratio?

a high level of inventory

Which is typically preferable for a company?

a short average collection period

Cash return on assets can be calculated as cash flows to sales multiplied by

asset turnover

Which of the following ratios measures the revenue generated per dollar of assets?

asset turnover

Profit margin multiplied by asset turnover equals return on ___

assets

Joann is preparing a statement of cash flows as part of a homework assignment. She hopes to find a check figure that will help her assess the accuracy of her results. What should Joann do to quickly find a check figure?

calculate the change in the beginning and ending balance of cash

Which of the following ratios measures the operating cash flows generated for each dollar of sales?

cash flow to sales

True or false: Every time land is sold, the line item for the sale of land in the investing activities section of the Statement of Cash Flows will equal the change in the asset account on the balance sheet.

false

Dividends______ are classified as operating activities cash flows, while dividends _______ are classified as financing activities cash flows.

received, paid

Using the indirect method to report cash flows from operating activities, an increase in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities. Multiple choice question.

subtracted from

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income?

2.4

Using the indirect method to report cash flows from operating activities, decrease in the inventory account will be ______ net income to arrive at net cash flow provided by operating activities.

added back to

Grant's income statement reveals a loss from the sale of land. In preparing the operating activities section of the statement of cash flows using the indirect format, the loss should be

added to the net income

You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0

company D

Michaela is comparing two companies using three years of financial statement data. Company A's net income for the three years was $200 million and its operating cash flows $80 million. Company B's net income for the three years was $120 million and its operating cash flows $110 million. Which company appears to have a higher quality net income?

company b

The payment of dividends is classified as a(n). _______________ activities.

financing

In preparing the operating activities section of a statement of cash flows using the indirect method, net income should be adjusted for

gain from sale of asset. depreciation expense. loss from sale of asset.

Issuing stock to owners is classified as a(n) ___________ activity.

financing

Repayments of formal, long-term debt contracts are classified as ______ activities.

financing

Noncash items, nonoperating items, and changes in current assets and liabilities are necessary adjustments to __________________- to prepare the operating section for the indirect format of the statement of cash flows.

net income

Neue Inc. reports sales revenue of $200,000; in addition, its accounts receivable balance decreased by $15,000. Neue's cash flows from sales were:

215,000

Which of the following statements is correct regarding the information content of the income statement and the balance sheet?

Both provide information that help determine cash flows.

Which of the following cash transactions are classified as cash inflows from investing activities?

Sale of building Sale of investments Sale of equipment

An increase in prepaid insurance is subtracted from net income because

the company paid additional premiums this period in excess of the insurance expense recorded on the income statement.

Lein's net income is $200,000 and its operating cash flows are $240,000. The company reports total assets of $1.6 million and $1.8 million at the end of the prior and current year, respectively. Cash return on assets (rounded to one-tenth of a percent) is:

14.1% Reason: Cash return on assets = operating cash flows/average total assets $240k/((1.6mill+1.8mill)/2)

Which statements about the inventory turnover ratio are correct?

It indicates how quickly inventory is sold. It shows the number of times the average inventory balance is sold during a reporting period.

What information does the times interest earned ratio provide to investors or creditors?

It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.

Adjustments to net income in calculating operating cash flows include: Multiple select question.

Nonoperating items Changes in current assets and current liabilities Noncash items

Which of the following statements is not true relating to cash flow analysis?

Positive cash flow from operations is not important to a company's survival in the long-run.

Which of the following are cash outflows from investing activities?

Purchase of investment Purchase of land

Which of the following are classified as cash outflows from investing activities?

Purchase of land Purchase of an investment

Which of the following financial statements provide(s) useful information to prepare the statement of cash flows? Multiple select question.

The balance sheet The income statement

An increase in the current ratio generally indicates that:

The company will be better able to meet short-term debt obligations.

Which ratio indicates the portion of each sales dollar above its cost of goods sold?

The gross profit ratio

Which of the following typically is true for profitability ratios?

The gross profit ratio declines as competition increases.

Which of the following statement is true? Multiple Choice The cash-basis of accounting is allowed under U.S. GAAP, but the accrual-basis of accounting is not. The primary difference between the cash-basis of accounting and the accrual-basis of accounting relates to the timing of when revenues and expenses are recorded. Accrual accounting violates the revenue recognition and matching principles. Adjusting entries are only necessary if the company uses the cash-basis of accounting.

The primary difference between the cash-basis of accounting and the accrual-basis of accounting relates to the timing of when revenues and expenses are recorded.

When preparing the statement of cash flows using the indirect method, depreciation expense is ______ ______ net income.

added to

Which of the following are common noncash items requiring adjustment to net income under the indirect method?

amortization expense depreciation expense

When cash from operating activities is presented using the indirect method, net income must be adjusted for increases and decreases in balance sheet accounts that relate to

amounts presented in the income statement.

Operating cash flows divided by average total assets will calculate the:

cash return on assets

Which of the following represents the final step in preparing a statement of cash flows in the correct order?

combine operating, investing, and financing activities

Based on their respective debt to equity ratios, which of the following companies will tend to have the highest risk of bankruptcy. Assume that the companies are otherwise very similar: Company A: 120%; Company B: 90%; Company C: 100%.

company A; high debt to equity---> high risk of bankruptcy

When the indirect method is used to report cash flows from operating activities, a decrease in accrued liabilities, such as wages payable, is subtracted from net income to include the effects of transactions that ______ cash, but ______ net income.

decrease; do not affect

True or false: A high current ratio is always a positive sign that the company has sufficient cash to meet its short-term obligations.

false Reason: This is not always true; a company may have difficulties collecting its receivables and still have a high current ratio.

An increase in accounts receivable indicates that the company collected _____ cash than the amount of ______.

less; sales revenue

Diamond Company's land account decreased by 10 million. Cash received from sale of land

may be higher or lower than $10 million.

Dividends received are classified as operating activities cash flows, while dividends paid are classified as financing activities cash flows because dividends received increase _____, and dividends paid decrease ____.

net income; retained earnings

Transactions reported on the statement of cash flows that do not increase or decrease cash, but that result in significant investing and financing activities are referred to as ___________ activities.

noncash

The profit margin measures the income earned

on each dollar of sales.

Many investors view this type of indicator as the number one measure of a company's success.

profitability

Which of the following would result in a cash inflow from investing activities?

sale of a machine for cash

To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100.

the prior year's amount

Albert's total assets are $250,000; its total liabilities are $100,000; its total equity is $150,000; its long-term assets are $80,000; and its property, plant, and equipment is $50,000. If the company prepares a common-size balance sheet, its property, plant, and equipment would be expressed as:

20% Reason: $50,000/$250,000

Kat Company reported current assets in year 1 of $20,000 and in year 2 of $24,000. When performing horizontal analysis, the percentage change in current assets would be expressed as:

20%Reason: (24k-20k)/20k

Pferd Company reported total assets in year 1 of $200,000 and in year 2 of $250,000. When performing horizontal analysis, the percentage change in total assets would be expressed as:

25% Reason: (250k-200k)/200

Below are the account balances for a company at the end of 2019. All amounts represent normal balances. AccountBalanceAccounts payable$100,000Service revenue$180,000Common stock$56,000Deferred revenue$8,000Salaries expense$124,000Equipment$104,000Land$72,000Rent expense$12,000Cash$32,000 What is the company's net income for 2019?

44,000 NI: R-E

Acme, Inc. had net income of $120,000 in 2018 and net income of $126,000 in 2019. The percentage increase in net income was ______.

5%Reason: Percentage increase=(($126,000-120,000)/$120,000) x 100=5%.

Arlington Inc.'s income statement showed net income of $57,600 and depreciation expense of $9,200. Accounts receivable increased $3,750, Inventory increased $3,200, Supplies decreased $500, Accounts payable increased $2,700 and Salaries payable decreased $1,900. Arlington's net cash flows from operating activities was $

61150

Western Inc.'s income statement showed net income of $60,000 and depreciation expense of $10,000. Accounts receivable decreased $3,000, Inventory increased $4,000, Supplies increased $1,000, and Accounts payable increased $3,000. Western's net cash flows from operating activities was ______. Multiple choice question.

71,000

Which of the following is an example of a noncash activity?

Purchase of land by issuing common stock to the seller.

True or false: Gross profit ratios normally increase as competition increases.

Reason: Increased competition drives selling prices down resulting in lower gross profit ratios.

Ace Electronics had sales of $1,000,000 in 2018 and sales of $1,040,000 in 2019. The percentage increase in sales was ______.

Reason: Percentage increase = (($1,040,000 - 1,000,000)/$1,000,000) x 100 = 4%

Compute the return on equity ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $40,000, net income is $60,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Shareholders' equity changed from $300,000 last year to $400,000 this year.

Reason: Return on equity is net income divided by average total equity. $60,000/[($300,000 + $400,000)/2] = 17.1%

The two types of adjustments to net income for the indirect method are adjustments for

components of net income that do not affect cash. changes in operating assets and liabilities during the period that affected cash and were not in net income.

The statement of cash flows classifies items as

operating, investing, and financing.