Chapter 2 Financial Statements, Taxes, and Cash Flow

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Operating cash flow is defined as:

the cash that a firm generates from its normal business activities.

Shareholders' equity is best defined as:

the residual value of a firm.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

Given a profitable firm, depreciation:

lowers taxes.

All else held constant, the book value of owners' equity will decrease when:

dividends exceed net income for a period.

Which one of these is correct?

Net income is distributed either to dividends or retained earnings.

A firm's liquidity level decreases when:

inventory is purchased with cash.

Which one of the following is included in the market value of a firm but not in the book value?

Reputation of the firm

Production equipment is classified as:

a tangible fixed asset.

Net working capital is defined as:

current assets minus current liabilities.

Financial leverage:

increases the potential return to the stockholders.

Paid-in surplus is classified as:

owners' equity.

An income statement prepared according to GAAP:

records expenses based on the matching principle.

Net working capital includes:

an invoice from a supplier.

Mahalo Tours currently has $10,500 in cash. The company owes $26,900 to suppliers for merchandise and $47,500 to the bank for a long-term loan. Customers owe the company $33,000 for their purchases. The inventory has a book value of $62,400 and an estimated market value of $65,600. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

$105,900

Michael's Bakery had $236,400 in net fixed assets at the beginning of the year. During the year, the company purchased $53,200 in new equipment. It also sold, at a price of $22,000, some old equipment that had a book value of $5,900. The depreciation expense for the year was $13,400. What is the net fixed asset balance at the end of the year?

$270,300

Marenelle Construction has beginning retained earnings of $284,300. For the year, the company earned net income of $13,700 and paid dividends of $9,000. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

$289,000

Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm's assets?

$293,200

Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year, the company earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased $3,500 of stock from one of its shareholders. What is the value of the owners' equity at year end?

$61,100

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

$63,300

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

$783,400

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

$9,324

Based on the recognition principle, revenue is recorded on the financial statements when the: I. payment is collected for the sale of a good or service. II. earnings process is virtually complete. III. value of a sale can be reliably determined. IV. product is physically delivered to the buyer.

II and III only

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

Highly liquid assets:

can be sold quickly at close to full value.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement.

The market value:

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Net income increases when:

revenue increases.