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Under accrual accounting, a company recognizes revenue when: a . A customer delivers cash payment. b . The company receives cash payment. c . The company has earned it.

A company recognizes revenue when it is earned, determined by when a company sells its goods or provides its services. Under accrual accounting, revenue is not necessarily recognized when cash is received.

Under accrual accounting, a company records an expense when: a . The company delivers cash payment to a supplier. b . The supplier receives cash payment from a company. c . The company has incurred it.

A company records an expense when it is incurred. Under accrual accounting, expenses are not necessarily incurred when cash is spent.

The total amount of shares issued or repurchased is found in which of the following sections of the statement of cash flows? a . Cash flows from operating activities. b . Cash flows from investing activities. c . Cash flows from financing activities.

Any transactions involving a company's owners or creditors--in this case stock--are found in the "cash flows from financing activities" section.

You would especially want to pay attention to short-term borrowing if: a . A company is in distress. b . A company generates decent cash flow. c . A company pays no dividend.

Because the entire amount of short-term debt must be paid back relatively quickly, a firm may have to cut its dividend or could face insolvency if it can't repay due to financial distress. so the company is in distress.

Which of the following will decrease a company's net cash provided by operating activities (operating cash flow)? a . A decrease in inventories. b . A decrease in accounts receivable. c . A decrease in accounts payable.

Decreases in the balance of current liabilities (accounts payable) will decrease a company's operating cash flow. Conversely, decreases in the balance of current assets (inventories and accounts receivable) will increase a company's operating cash flow.

All else being equal, when a company's capital expenditures increase: a . Net income decreases by the amount of the expenditures. b . Free cash flow decreases. c . Free cash flow increases.

Free cash flow is defined as operating cash flow minus capital expenditures. Thus, higher capital expenditures will decrease free cash flow. Answer "A" is incorrect because capital expenditures do not directly affect a company's net income when they occur. They only affect net income over time, through depreciation expense that is recorded on the assets a company acquires.

Goodwill: a . Is a type of intangible asset. b . Is a type of intangible liability. c . Is a type of current asset.

Goodwill is an intangible asset. It represents the amount of money an acquiring firm paid over and above the net worth (equity) of the target company.

A company's sales, minus its cost of sales, is known as: a . Revenue. b . Gross profit. c . Net income.

Gross profit is defined as sales (or revenue) minus cost of sales.

If a company's inventories are rising relative to sales: a . It's a sign that the company is becoming more profitable. b . It's a sign that the company may be in danger of becoming less profitable. c . It's a sign that the company is downsizing.

If inventories rise much faster than sales, it may be a sign that the company is having trouble selling its inventories. As a result, the company may have to lower its sales prices to spur demand or lower the value of its inventories. In either case, the firm's profitability would suffer.

Which of the following is not true about operating cash flow? a . It is always greater than net income. b . It's a useful measure for companies with lots of depreciation and other noncash items. c . It doesn't include cash flows from buying or selling investments.

Operating cash flow is not always greater than net income. Answer "B" is true because noncash items affect net income, but not cash flows. Answer "C" is also true because cash flows from buying and selling investments are found in the "cash flows from investing activities" section of the statement of cash flows.

Which of the following best measures the results of a company's primary business? a . Gross profit. b . Operating income. c . Net income.

Operating income measures the results of a company's main operations or lines of business. Gross profit measures the markup of a company's goods or services but does not include certain overhead expenses. Net income often includes other items, such as interest expense, interest income, and one-time charges.

Which of the following expenses is subtracted from sales when calculating operating profit? a . Interest. b . SG&A. c . Taxes.

Operating profit is sometimes called EBIT, or earnings before interest and taxes. Cost of goods sold and SG&A are two of the main expenses subtracted from revenue in calculating operating profit.

Prepaid expenses: a . Are found on the income statement. b . Are likely to be converted to cash within the next quarter. c . Are found on the balance sheet because they represent an asset (money paid up-front for future benefits).

Prepaid expenses are paid up-front, but the benefits occur later. These are considered assets and are included on the balance sheet because the money will provide benefits to the firm in the future.

Retained earnings represent: a . The amount of money shareholders have paid for the company's stock. b . The total profits a firm has earned over time, minus whatever has been paid as dividends. c . The amount of its own stock that a company has repurchased.

Retained earnings include all the cumulative profits a firm has made since its inception, minus any dividends it has paid to shareholders. If a firm has not earned profits since inception, this account is known as "accumulated deficit."

Which of the following is not one of the three major sections of the statement of cash flows? a . Cash flows from operating activities. b . Cash flows from acquisition activities. c . Cash flows from financing activities.

The three major sections of the statement of cash flows are: "cash flows from operating activities," "cash flows from investing activities," and "cash flows from financing activities."