FIN300 CH2
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. A firm's net income as reported on its income statement is also known as the firm's _____.
Accounting Profit
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following transactions will not affect the quick ratio of a company?
Accounts payable paid
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. A source of cash when preparing a statement of cash flow would be which of the following? (Think increase or decrease in assets or liability/equity accounts)
An decrease property, plant, and equipment
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. A comparison of a firm's ratios with those of other firms in the same industry at the same point in time is called:
Cash flow analysis
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is the most appropriate measure to examine whether management of a firm is pursuing the goal of maximizing the firm's stock price?
Cash flows
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is an example of a firm's long-term debt?
Corporate bonds
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Noncash assets are expected to produce cash over time. The amount of cash they eventually produce should be lower lower than the values at which the assets are carried on the books.
False
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The amount of retained earnings as reported on the balance sheet represents cash and is available for the payment of dividends or anything else.
False
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The book values of shares of stock are always equal to their market values.
False
02.04 The balance sheet includes only market values that can impact the validity of a firm's financial ratios.
False
A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving.
False
Which of the following statements is true regarding debt ratios?
Firms with relatively high debt ratios have higher expected returns when business is good.
Which of the following ratios recognizes that many firms lease rather than buy a long-term asset?
Fixed charge coverage ratio
Which of the following accounting principles does the Securities and Exchange Commission (SEC) require U.S. firms to use when filing their financial statements?
Generally Accepted Accounting Principles (GAAP)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following financial statements summarizes the revenue generated and the expenses incurred by a firm during the accounting period?
Income statement
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following actions can be considered a source of cash when constructing a statement of cash flows?
Increase in liabilities
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is an example of a current asset?
Inventory
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following ratios shows the relationship between a firm's current assets and its current liabilities?
Liquidity ratios
Which of the following mathematical expressions is used to compute the net working capital of a firm?
Net working capital = Current assets − Current liabilities
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following mathematical expressions computes the net worth of a firm?
Net worth = Total assets minus total liabilities
02.01 - Describe the basic financial information that is produced by corporations and explain how the firm's stakeholders use such information. Which of the following provides information about a firm's performance during the past year and also provides information regarding new developments that will affect the future performance of the firm?
None of the above (A company's annual report provides two types of information. The section that discusses the operations describes the firm's operating results during the past year and discusses new developments that will affect future operations.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is an example of a noncash item reported in the income statement of a firm?
None of the above (The asset is used to generate revenues and its life extends for more than one year. Depreciation is the method that is used to match the expense associated with the decrease in the value of an asset to the years in which revenues are generated by its use.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides.Which of the following mathematical expressions is used to compute the book value per share?
None of the above (The book value of a stock is calculated by dividing common equity by the total number of shares outstanding. S)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The equity section of a firm's balance sheet contains _____.
None of the above (The equity section of a firm's balance sheet contains two accounts: common stock and retained earnings. The amount shown in the retained earnings account represents the total amount of income that was saved and reinvested in assets—that is, the amount that was not paid out as dividends—since the corporation started business.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors.
None of the above (The inventory turnover ratio of 8.5 times suggests that the inventory of the firm is sold and restocked, or turned over, 8.5 times per year or every 42.35 days = (360 days)/8.5.)
02.01 - Describe the basic financial information that is produced by corporations and explain how the firm's stakeholders use such information. Which of the following statements is true about the annual report of a company?
None of the above (The investors are quite interested in a company's annual report. They use the information contained in an annual report to form expectations about future earnings and dividends.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following mathematical expressions calculates a firm's retained earnings at the end of a year?
None of the above (The retained earnings of a firm at the end of a year is calculated by adding the net income of the current year and subtracting the dividends paid to the stockholders in the current year from the beginning balance of retained earnings.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following mathematical expressions calculates the net cash flow if depreciation is the only noncash item in a firm's income statement?
None of the above (When a firm sells all of its products for cash and pays cash for all of the expenses reported on its income statement except depreciation and amortization, its net cash flow can be computed by adding net income to depreciation and amortization.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following financial statements includes information about a firm's assets, equity, and liabilities at a specific point in time?
None of the answers (A balance sheet is a statement that shows the firm's financial position—assets, liabilities, and equity—at a specific point in time.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. A firm obtains the funds needed to pay its current bills primarily from its:
None of the answers (A liquid asset is one that can be easily converted to cash without significant loss of its original value. Converting assets—especially current assets such as inventory and receivables—to cash is the primary means by which a firm obtains the funds needed to pay its current bills.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following ratios is calculated to help determine the liquidity of a firm?
None of the answers (A quick ratio is an indicator of the extent to which the claims of short-term creditors are covered by assets that can be converted to cash fairly quickly.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. An analysis of a firm's financial ratios over time used to determine the improvement or deterioration in its financial situation is called _____.
None of the answers (An evaluation of changes (trends) in a firm's financial position over a period of time, perhaps years, is called trend analysis.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is considered a use of cash in a cash flow statement?
None of the answers (An increase in a liability or equity account and a decrease in an asset are sources of cash; a decrease in a liability or equity and an increase in an asset are uses of cash. Thus, an increase in fixed assets is considered as a use of cash in a statement of cash flows.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would he or she examine?
None of the answers (Asset management ratios measure how effectively the firm is managing its assets. These ratios include inventory turnover ratio, days sales outstanding ratio, fixed assets turnover ratio, and total assets turnover ratio.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors.
None of the answers (Correct. The days sales outstanding (DSO) ratio of a firm is used to evaluate the firm's ability to collect its credit sales in a timely manner.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. The extent to which the operating income can decline before a firm is unable to meet its annual interest costs can be found in:
None of the answers (Correct. The times interest earned ratio measures the extent to which a firm's earnings before interest and taxes (EBIT), also called net operating income (NOI), can decline before these earnings are no longer sufficient to cover the annual interest costs.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is considered a part of cash flow from a financing activity in a statement of cash flows?
None of the answers (Financing cash inflows result when the firm issues debt or common stock; financing cash outflows occur when the firm pays dividends, repays debt (loans), or repurchases stock.)
2.04 A limitation of ratio analysis is that:
None of the answers (Firms can employ window-dressing techniques to make their financial statements look stronger. This improvement will only be for some time, and the financial statements will be back to their original position after the analysis of the financial statements.)
02.04 All firms that are publicly traded in the United States will be required to adopt the _____ in the near future.
None of the answers (IFRS)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Assuming that other things are constant, the price earnings (P/E) ratio:
None of the answers (If other things hold constant, P/E ratios are higher for firms with high growth prospects and lower for riskier firms.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Other things held constant, which of the following will not affect the current ratio, assuming an initial current ratio greater than 1.0?
None of the answers (If the accounts receivables are collected, the balance in the accounts receivables account will fall and the balance in the cash account will increase. So, there is no change in the current assets balance and thus, the current ratio will not be affected.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. In which order will assets be listed in a balance sheet?
None of the answers (In a balance sheet, the assets are listed in order of their liquidity, or the length of time it typically takes to convert them to cash. The claims (liabilities and equity) are listed in the order in which they must be paid.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Market value ratios indicate:
None of the answers (Market value ratios relate the firm's stock price to its earnings and book value per share. These ratios give management an indication of what investors think of the company's future prospects based on its past performance.)
02.04 - Discuss potential problems (caveats) associated with financial statement analysis. Which of the following was originally created to develop and approve a set of common International Financial Reporting Standards (IFRS)?
None of the answers (The International Accounting Standards Board (IASB) was created to develop and approve a set of common international accounting rules that are referred to as the International Financial Reporting Standards (IFRS).)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Retained earnings is the total amount of:
None of the answers (The amount shown in the retained earnings account represents the total amount of income that was saved and reinvested in assets—that is, the amount that was not paid out as dividends since the corporation started business)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is true about a common size balance sheet?
None of the answers (The assets, liabilities, and equity are reported both in dollars and as percentages of total assets in a common size balance sheet.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors.
None of the answers (The current ratio is an indicator of the extent to which the claims of short-term creditors are covered by assets that can be converted to cash fairly quickly. Thus, an increase in current ratio would indicate that the liquidity position of the firm has improved.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is true about the book value and market value of a firm's debt?
None of the answers (The debt of a firm represents a contractual obligation to pay a certain amount at a specific time. Thus, the book values of a firm's debt are generally either equal to or very close to the market values of the firm's liabilities.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is considered as a liability in the balance sheet of a firm?
None of the answers (The debt of a firm represents the loans the firm has outstanding and corporate bonds are recorded as a liability in the balance sheet of a firm.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:
None of the answers (The ending balance of retained earnings of Helium Brands is $218 million. It is calculated by adding $185 million to $48 million in net income, and subtracting $15 million in dividends.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following mathematical expressions calculates the debt ratio?
None of the answers (The formula to calculate debt ratio is total liabilities divided by total assets.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following is the formula to calculate a firm's inventory turnover ratio?
None of the answers (The formula to calculate the inventory turnover ratio of a firm is cost of goods sold divided by inventory.)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors.
None of the answers (The inventory turnover ratio is an asset management ratio that provides an indication of how well a firm is managing its inventory.)
02.04 A company has a current ratio of 2. The company wants to window dress its financial statements. Which of the following transactions will increase their current ratio assuming all other variables remain constant?
None of the answers (The repayment of a short-term loan will decrease the value of current assets as well as the value of current liabilities with the same value. However, it will increase the current ratio of the firm. For example, suppose that current assets equal $200 and its current liabilities equal $100 prior to repayment of the short-term loan. If the firm repays $50 of the short-term loan, both current assets and current liabilities will decrease by $50, and the resulting current ratio will be 3.0 = ($200 - $50)/($100 - $50).)
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. The proportion of a firm's funds that is provided by shareholders is equal to:
None of the answers (The total liabilities (debt) in a debt ratio includes both the current liabilities and the long-term debt. Thus, (1 - Debt ratio) represents the proportion of the firm's funds that is provided by stockholders equity.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following statements is true about net worth?
None of the answers (Total equity is the amount that would be paid to stockholders if the firm's assets could be sold at the values reported on the balance sheet and its debt could be paid off in the amounts reported on the balance sheet. Thus, the firm's stockholders' equity, or net worth, equals total assets minus total liabilities.)
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?
None of the answers (When comparing the operations of two firms, analysts often examine the net operating income (NOI), also known as the earnings before interest and taxes (EBIT), because this figure represents the result of normal operations before considering the effects of the firm's financing choices.)
02.04 Techniques employed by firms to make their financial statements look better than they actually are, are called:
None of the answers (Window-dressing techniques)
02.04 - Discuss potential problems (caveats) associated with financial statement analysis. Ruby Corporation's current ratio is 0.5, while Emerald (Ruby's competitor) Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions?
Only Ruby Corporation's current ratio will be increased.
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. Which of the following ratios indicate how much investors are willing to pay for a firm's stock for each dollar of reported profits?
Price/Earnings ratio
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. _____ is an example of a long-term investment of a firm.
Property
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. _____ is an example of cash flow from an investing activity in a cash flow statement.
Purchase of equipment
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time?
Statement of cash flows
02.01 - Describe the basic financial information that is produced by corporations and explain how the firm's stakeholders use such information. Which of the following financial statements is not included in the annual reports of a company?
Statement of changes in long-term financing
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following financial statements is prepared to show the changes in the common equity accounts between balance sheet dates?
Statement of retained earnings
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. Which of the following statements is true about the values recorded in the balance sheet of a firm?
The equity section of a firm's balance sheet represents the difference between the total assets and the total liabilities.
02.03 - Describe how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors. A company has a current ratio of 4.5. After a few weeks, they purchased (and received) raw materials on credit from its supplier. Assuming all other things are equal, how will this transaction affect the current ratio?
The value of the current ratio will decrease.
02.01 - Describe the basic financial information that is produced by corporations and explain how the firm's stakeholders use such information.The information contained in the annual report is used by investors to form expectations about future earnings and dividends.
True
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. A firm's cash flow, not net income, is the most appropriate measure to determine whether the management is maximizing the firm's stock price.
True
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. A firm's net income reported on its income statement might not equal the operating cash flows on the statement of cash flows.
True
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The book values are the same as the accounting numbers that are reported on the balance sheet and are not the same as the market values of the assets.
True
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The statement of cash flows is a financial statement that measures the flow of funds into and out of various accounts over time, whereas the balance sheet measures the financial position of the firm at a specific point in time.
True
02.04 Different accounting practices will have an impact on the comparative ratio analyses of different firms.
True
02.04 In 2010, the Securities and Exchange Commission (SEC) announced its support for International Financial Reporting Standards (IFRS)
True
02.04 The International Accounting Standards Board (IASB) was created to develop and approve a set of common international accounting rules.
True
The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.
True
When generating financial statements, the Securities and Exchange Commission (SEC) allows publicly traded foreign companies to use the International Financial Reporting Standards (IFRS) rather than the Generally Accepted Accounting Principles (GAAP) if IFRS is the accounting system used in their home country.
True
02.02 - Describe the financial statements that corporations publish and the information that each statement provides. The firm's statement of retained earnings reports changes in:
between the balance sheet dates as show in the the common equity accounts
02.04 If a firm's existing quick ratio is 1.2, and all other variables remain unchanged, the quick ratio can be increased by:
selling products on account
A low inventory turnover ratio might indicate that:
the firm is holding excess stocks of inventory.
