FIN445 Ch. 1-5

The________method of inventory generally results in the matching of current costs with current revenues and therefore produces higher-quality earnings.

LIFO

The _____ assumption is the assumed unit of measurement when preparing financial statements.

Monetary unit

The _____ was passed in 2002 and was one of the most sweeping corporate reforms since the Securities Act of 1934.

Sarbanes Oxley Act

How are sales reported on the income statement? a. Sales are shown for three years net of returns and allowances. b. Sales amounts are inflation-adjusted. c. Sales are shown for two years and are reported in nominal terms. d. Sales are shown at gross amounts, adjusted for inflation.

a

How does the equity method distort earnings? a. Income is recognized even though cash may never be received. b. Equity earnings are recorded even if the investor cannot exercise influence over the investee's policies. c. Equity earnings are only recorded on a cash basis of accounting. d. Equity earnings are recorded when investment ownership is 100%.

a

In what industry would it be expected that companies would spend a significant amount on research and development activities? a. Pharmaceutical. b. Clothes retailer. c. Groceries. d. Wholesale distributor of computer parts.

a

What organization has the authority to register, inspect, and discipline auditors of all publicly owned companies? a. Public Company Accounting Oversight Board. b. SOX. c. Congress. d. FASB.

a

Which item would not be classified as an operating expense? a. Interest expense. b. Rent expense. c. Depreciation. d. Repairs and maintenance.

a

Which of the following statements is false? a. The Sarbanes-Oxley Act of 2002 was the cause of the demise of Enron. b. The Norwalk Agreement in 2002 was a result of the FASB and IASB agreeing to work toward a convergence of standards. c. The Public Company Accounting Oversight Board is responsible for monitoring auditors of all publicly owned companies. d. The Sarbanes-Oxley Act of 2002 requires the chief executive officer and the chief financial officer of a publicly traded company to certify the accuracy of the financial statements.

a

Why should an individual learn to read and interpret financial statements? a. Individuals cannot necessarily rely on auditors and management of firms to offer honest information about the financial well-being of firms. b. An individual need not learn to read and interpret financial statements because auditors offer a report indicating whether the company is financially sound or not. c. Learning to read and interpret financial statements will enable individuals to gain employment. d. Understanding financial statements will guarantee at least a 20% return on investments.

a

Which information is hard to find or missing from the financial statements? a. Net income. b. Total long-term debt. c. Reputation of the firm with its customers. d. Five-year summary of selected financial data.

c

Which item is not a special item that must be disclosed separately on the income statement? a. Extraordinary gain. b. Extraordinary loss. c. Foreign currency translation adjustments. d. Discontinued operations.

c

Which of the following items is a discretionary expenditure? a. Union wages. b. Factory building to produce inventory. c. Advertising. d. Taxes.

c

Which of the following statements is incorrect with regard to gross profit or gross profit margin? a. The gross profit margin tends to be more stable in industries such as groceries. b. The gross profit margin and cost of goods sold percentage are complements of each other. c. When cost of goods sold increases, most firms do not raise prices. d. Generally, firms want to maintain the relationship between gross profit and sales, or, if possible, increase gross profit margin.

c

Which of the following statements is true? a. In stable industries, such as retailers, the gross profit margin is generally volatile from year to year. b. Gross profit margin and operating profit margin are complements of each other and the two percentages add up to 100%. c. Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity. d. In capital intensive industries sales volume changes result in a stable gross profit margin.

c

What does Section 404 of the Sarbanes-Oxley Act of 2002 require? a. Rotation of audit partners every five years. b. A ten-year jail sentence and $1 million fine for violations of the act. c. Auditor independence, which prohibits audit firms from offering any services other than audit services. d. A statement by the company regarding the effectiveness of internal controls and a disclosure of any material weaknesses in a firm's internal control system.

d

What information can be found in a proxy statement? a. Information on the breakdown of audit and nonaudit fees paid to the audit form. b. Information on voting procedures. c. Information on executive compensation. d. All of the above.

d

What is the goal of the IASB? a. To work with the SEC to create a set of accounting rules for publicly held companies. b. To create a set of accounting rules that Europe and the United States will follow. c. To create a set of accounting rules for countries other than the United States. d. To have worldwide acceptance of a set of international financial reporting standards.

d

What items are included in the notes to the financial statements? a. Detail about particular accounts. b. Summary of accounting policies. c. Changes in accounting policies, if any. d. All of the above.

d

Which financial statement shows the assets, liabilities and stockholders' equity of the firm on a particular date? a. Statement of stockholders' equity. b. Statement of cash flows. c. Earnings statement. d. Balance sheet.

d

Which of the following are methods by which management can manipulate earnings and possibly lower the quality of reported earnings? a. Refusing to take a loss on inventory in an accounting period when the inventory is known to be obsolete. b. Changing an accounting policy to increase earnings. c. Decreasing discretionary expenses. d. All of the above.

d

Which of the following assets will not be depreciated over its service life? a. Furniture b. Equipment c. Buildings d. Land

d

Which of the following is an acceptable method to report total comprehensive income? a. On the face of the balance sheet. b. Total comprehensive income does not have to be reported. c. In the operating section of the cash flow statement. d. In the statement of stockholders' equity

d

Which of the following is an internal source of liquidity? a. Borrowing. b. Sales of stock. c. Gifts and donations. d. Sales of products or services

d

______ ratios measure the liquidity of specific assets and the efficiency of managing assets.

Activity

________ costs are or should be a major expense in the budgets of companies for which marketing is an important element of success.

Advertising

The net realizable value of accounts receivable is the actual amount of the account less an ________.

Allowance for doubtful accounts

A ________ lease affects both the balance sheet and the income statement

Capital

The ______ cycle or ______ cycle is the normal operating cycle of a firm that consists of buying or manufacturing inventory, selling inventory and paying accounts payable and collecting accounts receivable

Cash conversion, net trade

Many companies list an account titled ________ on the balance sheet even though no dollar amount will appear.

Commitments and contingencies

A ________ expresses each item on the balance sheet as a percentage of total assets.

Common-size balance sheet

________ are those assets expected to be converted into cash within one year or operating cycle, whichever is longer.

Current assets

Management exercises control over the budget level and timing of _____ expenditures.

Discretionary

The ______ shows the relationship between cash dividends and market price.

Dividend Yield

The ______ helps the analyst see how the firm's decisions and activities over the course of an accounting period interact to produce an overall return to the firm's shareholders, the return on equity.

Du Pont System

What is a Form 10-K? a. A document filed with the SEC by companies selling securities to the public, containing much of the same information as the annual report as well as additional detail. b. A document filed with the SEC containing nonpublic information. c. A document filed with the American Institute of Certified Public Accountants (AICPA) containing supplementary schedules showing management remuneration and elaborations of financial statement disclosures. d. A document filed with the SEC containing key business ratios and forecasts of earnings.

a

What is an investor's objective in financial statement analysis? a. To determine whether an investment is warranted by estimating a company's future earnings stream. b. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. c. To determine the company's taxes for the current year. d. To determine if the firm would be a good place to obtain employment.

a

What is the first step in an analysis of financial statements? a. Specify the objectives of the analysis. b. Do a common-size analysis. c. Check the auditor's report. d. Check references containing financial information.

a

When will a firm regard goodwill on its books? a. When one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired. b. When the firm donates property to charities. c. When it is determined that there has been a loss of value of long-term assets. d. When fixed assets are impaired.

a

Which category of ratios is useful in assessing the capital structure and long-term solvency of a firm? a. Leverage ratios b. Activity ratios c. Profitability ratios d. Liquidity ratios

a

Which format of the income statement should be used for analysis purposes? a. Multiple-step. b. Cash basis. c. Single-step. d. Accrual basis.

a

Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, noncash, and nonoperating expenses? a. The indirect method. b. The direct method. c. The inflow method. d. The outflow method.

a

Which method of inventory assumes the last units purchased will remain in ending inventory on the balance sheet? a. FIFO. b. LIFO. c. Average cost. d. LIFO and FIFO.

a

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due? a. Notes payable and deferred taxes. b. Accounts payable and current portion of long-term debt. c. Deferred taxes and mortgages due in 30 years. d. Long-term warranties and accounts payable.

a

Which of the following accounts would be classified as current assets on the balance sheet? a. Accounts receivable, inventory, cash equivalents. b. Marketable securities, accounts payable, property, plant and equipment. c. Prepaid expenses, goodwill, long-term investments. d. Property, plant and equipment, inventory, goodwill.

a

Which of the following assets would be classified as current assets on the balance sheet? a. Cash equivalents, inventory, prepaid expenses. b. Cash, accounts payable, deferred income taxes. c. Accounts receivable; prepaid expenses; property, plant and equipment. d. Inventory, goodwill, unearned revenue.

a

Which of the following is not a tool or technique used by a financial statement analyst? a. Random sampling analysis b. Trend analysis c. Industry comparisons d. Common-size financial statement

a

Which of the following items could be found on a statement of shareholders' equity? a. Reasons for retained earnings increases or decreases. b. A reconciliation of beginning to ending cash. c. The market value of the firm's common stock. d. Assets = Liabilities + Stockholders' Equity.

a

Which of the following ratios would not be used to measure the extent of a firm's debt financing? a. Times interest earned b. Debt to equity c. Long-term debt to total capitalization d. Debt ratio

a

Which of the following statements about inventory turnover is false? a. A low inventory turnover is generally a sign of efficient inventory management. b. Inventory turnover is calculated with cost of goods sold in the numerator. c. Inventory turnover is a gauge of the liquidity of a firm's inventory. d. Inventory turnover measures the efficiency of the firm in managing and selling inventory.

a

Which of the following statements is false? a. An increase in accounts payable represents accounts not yet collected in cash. b. To obtain cash flow from operations, the reported net income must be adjusted. c. A negative cash flow can occur in a year in which net income is positive. d. An increase in accounts receivable represents accounts not yet collected in cash.

a

Which of the following statements is true? a. Foreign firms registered with the SEC may file reports based on IFRS. b. U.S. firms registered with the SEC may file reports based on IFRS. c. The European Union requires firms to report based on GAAP. d. Foreign firms registered with the SEC may file reports based on IFRS only if they reconcile all amounts to GAAP.

a

Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders? a. Return on investment and return on equity. b. Gross profit margin and net profit margin. c. Return on investment. d. Total asset turnover and operating profit margin.

a

Which ratios help assess the firm's ability to meet cash needs as they arise? a. Current ratio and cash flow liquidity ratio. b. Average collection period and net profit margin. c. Debt ratio and dividend payout. d. Operating profit margin and return on equity.

a

Why can the equity method of accounting for investments in the voting stock of other companies cause distortions in net earnings? a. Income is recognized where no cash may ever be received. b. Income is recognized only to the extent of cash dividends received. c. Significant influence may exist even if the ownership of voting stock is less than 20%. d. Income should be recognized in accordance with the accrual method of accounting.

a

Why is the figure for operating profit important? a. The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status. b. The operating profit figure includes all operating revenues and expenses as well as interest and taxes related to operations. c. This is the figure used for calculating federal income tax expense. d. The figure for operating profit provides a basis for assessing the wealth of a firm.

a

Why is the fixed charge coverage ratio a broader measure of a firm's coverage capabilities than the times interest earned ratio? a. The fixed charge ratio includes lease payments as well as interest payments. b. The fixed charge ratio includes both operating and capital leases whereas the times interest earned ratio includes only operating leases. c. The fixed charge ratio indicates how many times the firm can cover interest payments. d. The times interest earned ratio does not consider the possibility of higher interest rates.

a

Why is the method of valuing inventory important? a. The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company. b. Inventories always account for more than 50% of total assets and therefore have a considerable impact on a company's financial position. c. Companies desire to use the inventory valuation method that minimizes the cost of goods sold expense. d. Inventory valuation is based on the actual flow of goods.

a

Why is the quick ratio a more rigorous test of short-run solvency than the current ratio? a. The quick ratio eliminates inventories from the numerator. b. The quick ratio eliminates prepaid expenses for the numerator. c. The quick ratio considers only cash and marketable securities as current assets. d. The quick ratio eliminates prepaid expenses for the denominator.

a

A decrease in accounts receivable should be _____ to convert net income to cash flow from operating activities.

added

An increase in accounts payable should be _____ to convert net income to cash flow from operating activities.

added

Depreciation and amortization should be _____ to convert net income to cash flow from operating activities.

added

Allocation of costs of intangible assets

amortization

All of the following are steps of a financial statement analysis except: a. Establish objectives of the analysis. b. Prepare pro forma statements. c. Study the industry in which the firm operates. d. Develop knowledge of the firm and the quality of management.

b

How is it possible for a firm to be profitable and still go bankrupt? a. Earnings have increased more rapidly than sales. b. The firm has positive net income but has failed to generate cash from operations. c. Sales have not improved even though credit policies have been eased. d. Net income has been adjusted for inflation.

b

The following item would be classified as a financing activity on the statement of cash flows: a. Payments for inventory. b. Payment of dividends. c. Acquisition of land. d. Sales of goods.

b

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC sells two items and uses the FIFO method of inventory valuation. What amount would appear in ending inventory on the balance sheet? a. $22 b. $46 c. $45 d. $31

b

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC uses the average cost method of inventory valuation. What unit cost would be used to determine the amount in ending inventory or cost of goods sold? a. $12.67 b. $13.60 c. $15.00 d. $13.00

b

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash from investing activities for Felix Company? a. $5 b. $40 c. $75 d. $10

b

What are internal sources of cash? a. Cash inflows from investing activities. b. Cash inflows from operating activities. c. Cash inflows from financing activities. d. All of the above.

b

What do current liabilities and current assets have in common? a. Current assets are claims against current liabilities. b. Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer. c. If current assets increase, then there will be a corresponding increase in current liabilities. d. Current liabilities and current assets are converted into cash.

b

What do the asset turnover ratios measure? a. The liquidity of the firm's current assets. b. Management's effectiveness in generating sales from investments in assets. c. The distribution of assets in which funds are invested. d. The overall efficiency and profitability of the firm.

b

What does a financial leverage index greater than one indicate about a firm? a. Return on assets exceeds the return on equity. b. Return on equity exceeds the return on assets. c. The firm is not employing debt successfully. d. The firm does not generate enough funds to cover interest payments

b

What does the additional paid-in capital account represent? a. The difference between the par and the stated value of common stock. b. The amount by which the original sales price of stock exceeds the par value. c. The market price of all common stock issued. d. The price changes that result for stock trading subsequent to its original issue.

b

What is a creditor's objective in performing an analysis of financial statements? a. To determine whether an investment is warranted by estimating a company's future earnings stream. b. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. c. To determine the company's taxes for the current year. d. To determine if the firm would be a good place to obtain employment.

b

What is a limitation common to both the current and quick ratio? a. Prepaid expenses are potential sources of cash. b. Accounts receivable may not be truly liquid. c. Inventories may not be truly liquid. d. Marketable securities are not liquid.

b

What is a serious limitation of financial ratios? a. Ratios indicate weaknesses only. b. Ratios are not predictive. c. Ratios are screening devices. d. Ratios can be used only by themselves.

b

What is the balancing equation for the balance sheet? a. Revenues - Expenses = Net income. b. Assets = Liabilities + Stockholders' equity. c. Assets + Liabilities = Stockholders' equity. d. Assets + Stockholders' equity = Liabilities.

b

What type of firm generally has the highest proportion of fixed assets to total assets? a. Wholesalers b. Manufacturers c. Retailers and wholesalers d. Retailers

b

Where can one most typically find the cost flow assumption used for inventory valuation for a specific company? a. On the face of the balance sheet with the total current asset amount. b. In the notes to the financial statements. c. In the statement of retained earnings. d. In The Risk Management Association, Annual Statement Studies.

b

Which financial statement provides information about operating, financing and investing activities? a. Statement of financial position. b. Statement of cash flows. c. Statement of stockholders' equity. d. Income statement.

b

Which group of people would be the most concerned about the operating areas that have contributed to the success of the firm and which have not? a. Customers. b. Management. c. Auditors. d. Creditors.

b

Which item below would not be a quality of financial reporting issue related to the balance sheet? a. Mismatching the type of debt (short or long-term) used to finance assets. b. Discretionary expenses. c. Overvaluation of assets. d. Off-balance sheet financing.

b

Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? a. Accounts receivable. b. Depreciation. c. Accounts payable. d. Inventory.

b

Which item may be of concern when analyzing cash flow from financing activities? a. Increasing inventories. b. Borrowing each year to repay debt from prior years. c. Repayment of debt. d. Payments of dividends.

b

Which method of inventory would be least likely to be used by a European firm? a. FIFO. b. LIFO. c. Average cost. d. LIFO and FIFO

b

Which of the following items needs to be disclosed separately in the income statement? a. Warranty expense b. Discontinued operations c. Salary expense d. Bad debt expense

b

Which of the following items should be recorded as other comprehensive income? a. Realized gains and losses b. Foreign currency translation effects c. Extraordinary gains and losses d. All of the above.

b

Which of the following items would cause the cash conversion cycle to decrease? a. Increasing the days inventory held. b. Increasing days payable outstanding. c. Increasing the average collection period. d. None of the above.

b

Which of the following items would not be classified as cash equivalents? a. U.S. Treasury bills. b. Trading securities. c. Commercial paper. d. Money market funds.

b

Which of the following liabilities would be included in the current liabilities section on the balance sheet? a. Current maturities of long-term debt, additional paid-in capital, pension obligations. b. Accounts payable, short-term debt, unearned revenues. c. Capital lease obligations, notes payable, common stock. d. Accrued liabilities, deferred credits, retained earnings.

b

Which of the following marketable securities are reported at fair value? a. Held to maturity and trading securities. b. Trading securities and securities available for sale. c. Held to maturity and securities available for sale. d. Corporate bonds and convertible debt.

b

Which of the following organizations write accounting rules? a. SOX, SEC, and IASB. b. FASB, SEC, and IASB. c. FASB and Congress. d. EDGAR and IASB.

b

T/F: A creditor is ultimately concerned with the ability of a firm to generate profits.

F

T/F: A firm's annual report contains only two pieces of information: the financial statements and the notes to the financial statements.

F

T/F: Accounts receivable are recorded on the balance sheet at gross realizable value.

F

T/F: An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities.

F

T/F: Articles from current business periodicals should not be used in financial statement analysis as journalists are often biased.

F

T/F: Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement.

F

T/F: Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

F

T/F: Financial ratios are powerful tools due to the fact that standard definitions exist and there is a set standard that should be met for each ratio.

F

T/F: Form 10-Ks and Form 10-Qs can be located through the Dun & Bradstreet Information services.

F

T/F: Gross profit is the difference between sales and all operating expenses.

F

T/F: Proceeds from borrowing are a financing cash outflow.

F

T/F: Repurchase of a firm's own shares is an investing cash outflow.

F

T/F: Retained earnings is the unused stash of cash that a firm has accumulated since inception.

F

T/F: The European Union began requiring publicly traded companies to use U.S. GAAP in 2005.

F

T/F: The FASB has congressional authority to set accounting policies.

F

T/F: The amounts on a cash flow statement cannot be manipulated

F

T/F: The balance sheet is prepared for a period of time, generally a year.

F

T/F: The common size income statement expresses each income statement item as a percentage of total assets.

F

T/F: The debt ratio considers the proportion of all stockholders' equity that is financed with debt

F

T/F: The income statement comes in two basic formats, the multiple-step and the single-step versions; however, for analysis purposes the single-step version should be used.

F

T/F: The income statement presents cash revenues, cash expenses, net income, and earnings per share for an accounting period.

F

T/F: Working capital refers to the investment in property, plant and equipment.

F

The three cost flow assumptions most frequently used in the U.S. are _______ , _______ , and _______.

FIFO, LIFO, average cost

The ______ ratio is a broader measure of coverage capability than the times interest earned ratio because it includes the fixed payments associated with leasing

Fixed charge coverage

A corporate annual report contains _____ financial statements.

Four

________ arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets.

Goodwill

______ ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and other fixed charges

Leverage

______ ratios measure a firm's ability to meet cash needs as they arise

Liquidity

______ is responsible for the preparation of the financial statements, including the notes, and the _____ attests to the fairness of the presentation.

Management, auditor's report

______ ratios measure returns to stockholders and the value the marketplace puts on a company's stock.

Market

________ are also referred to as short-term investments.

Marketable securities

One of the generally accepted accounting principles that provide the foundation for preparing financial statements is the _____ principle.

Matching

______ financial statements are projections of financial statements based on a set of assumptions regarding future revenues, expenses, level of investments in assets, financing methods and costs, and working capital management.

Pro Forma

A ______ statement contains useful information about the board of directors and executive compensation, option grants, audit-related matters, related party transactions and proposals to be voted on by shareholders.

Proxy

The _____ is a document used to solicit shareholder votes.

Proxy statement

The sharper and clearer the picture presented through the financial data and the closer that picture is to financial reality, the higher the _____ financial statements and reported earnings.

Quality

The cash basis of accounting recognizes _____ when cash is received and recognizes _____ when cash is paid.

Revenues, expenses

The _____ requires all public companies to file a Form 10-K report annually.

SEC

T/F: A classified balance sheet means that the asset and liability sections are categorized into key areas.

T

T/F: A common-size balance sheet is useful to the analyst because it facilitates the structural analysis of the firm.

T

T/F: Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.

T

T/F: Cash flow from operations represents the "cash" income from the company's business operations.

T

T/F: Cash outflows result from increases in asset accounts and decreases in liability and equity accounts.

T

T/F: Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting scandals and renewing investor confidence in the marketplace

T

T/F: Supplementary schedules, such as data related to the breakdown of key financial figures by operating segment, are helpful to financial statement analysts.

T

T/F: The Management Discussion and Analysis is of potential interest to the analyst because it contains information that cannot be found in the financial data.

T

T/F: The SEC regulates U.S. companies that issue securities to the public and requires the issuance of a prospectus for any new security offering

T

T/F: The accounts receivable turnover, inventory turnover and accounts payable turnover ratios are mathematical complements to the ratios that make up the cash conversion cycle.

T

T/F: The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness.

T

T/F: The balance sheet is also called the statement of condition or statement of financial position.

T

T/F: The objectives of a financial statement analysis will vary depending on the perspective of the financial statement user.

T

T/F: The statement of cash flows shows the changes in the balance sheet accounts between periods

T

T/F: The valuation of marketable securities on the balance sheet requires the separation of investment securities into three categories: held to maturity, trading securities, and securities available for sale.

T

T/F: Three ratios that help the financial analyst assess short-term solvency are the current ratio, the quick ratio and the cash flow liquidity ratio

T

T/F: Tools used in a financial statement analysis should generally include common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors.

T

T/F:Companies that use IFRS may switch the order of presentation of assets and liabilities, listing noncurrent items before current items.

T

Companies that are paid in advance for services or products record a liability on the receipt of cash in an account titled ________ or ________.

Unearned revenue; deferred credits

Additional information helpful to the analysis of accounts receivable and the allowance account is provided in the schedule of ________.

Valuation and qualifying accounts

. What is the preferred method to generate cash in a firm? a. Operating activities. b. Investing activities. c. Financing activities. d. Investing and financing activities

a

Assuming a period of inflation, which statement is true? a. The FIFO method understates cost of goods sold on the income statement. b. The FIFO method understates balance sheet inventory. c. The LIFO method overstates balance sheet inventory. d. The LIFO method understates cost of goods sold on the income statement.

a

How would the repayment of debt principal be classified? a. Financing outflow. b. Operating inflow. c. Investing inflow. d. Operating outflow.

a

The change in retained earnings is affected by which of the following? a. Net income and payment of dividends. b. Net income and common stock. c. Net income and paid-in capital. d. Payment of dividends and common stock.

a

The following item would be classified as an operating activity on the statement of cash flows: a. Payments for inventory. b. Acquisitions of equipment. c. Proceeds from borrowing. d. Payments on loans

a

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash flow from operating activities for Felix Company? a. $240 b. $70 c. $320 d. $250

a

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash flow from operating activities for Armstrong Company? a. $505 b. $495 c. $335 d. $55

a

What basic financial statements can be found in a corporate annual report? a. Balance sheet, income statement, statement of shareholders' equity, and statement of cash flows. b. Balance sheet, auditor's report and income statement. c. Earnings statement and statement of retained earnings. d. Statement of cash flows and five-year summary of key financial data

a

What do liquidity ratios measure? a. A firm's ability to meet cash needs as they arise. b. The extent of a firm's financing with debt relative to equity. c. The overall performance of a firm. d. The liquidity of fixed assets.

a

What does a low asset turnover compared to the industry imply? a. The investment in assets may be too high. b. Sales are higher than average. c. The investment in assets is too low. d. Net income is low relative to the investment in assets.

a

What does the balance sheet summarize for a business enterprise? a. Financial position at a point in time. b. Operating results for a period. c. Financing and investment activities for a period. d. Profit or loss at a point in time.

a

What information does the auditor's report contain? a. An opinion as to the fairness of the financial statements. b. A detailed coverage of the firm's liquidity, capital resources, and operations. c. An unqualified opinion. d. The results of operations.

a

All of the following are reasons that the statement of cash flows is useful to the analyst except: a. The statement of cash flows shows how cash is generated during an accounting period and how it has been used. b. A positive net income figure on the income statement is ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statements for learning about cash generation is the statement of cash flows. c. The statement of cash flows shows the adjustments made to net income in order to calculate cash flow from operations; those should be examined to determine why cash flow from operations is negative or positive. d. The statement of cash flows is the only financial statement that cannot be manipulated.

d

An inflow of cash would result from which of the following? a. The increase in an asset account other than cash. b. The decrease in a liability account. c. The decrease in an equity account. d. The decrease in an asset account other than cash.

d

How are companies required to report total comprehensive income? a. In the statement of stockholders' equity. b. In a separate statement of comprehensive income. c. On the face of the income statement. d. All of the above.

d

How are deferred taxes recorded on the balance sheet? a. As current or noncurrent liabilities. b. As stockholders' equity. c. As noncurrent assets or noncurrent liabilities. d. As current or noncurrent assets or liabilities.

d

How are revenues and expenses recognized under the accrual basis of accounting? a. Revenues are recognized when cash is received and expenses are recognized when cash is paid. b. Revenues and expenses are recognized equally over a twelve month period. c. Revenues and expenses are recognized based on the choices of management. d. Revenues are recognized in the accounting period when the sale is made and expenses are recognized in the period in which they relate to the sale of the product.

d

How is earnings per common share calculated? a. Operating profit divided by the average number of common stock shares outstanding. b. Net profit divided by the average number of common and preferred stock shares outstanding. c. Operating profit divided by the average number of repurchased common stock shares. d. Net profit divided by the average number of common stock shares outstanding.

d

How is the cash conversion cycle calculated? a. Average collection period + days inventory held + Days payable outstanding. b. Average collection period - days inventory held + Days payable outstanding. c. Average collection period - days inventory held - Days payable outstanding. d. Average collection period + days inventory held - Days payable outstanding.

d

Which of the following statements is false with regard to quality of financial reporting? a. Financial statements should reflect an accurate picture of a company's financial condition and performance. b. It is unlikely that management can manipulate the bottom line due to the regulations in place to enforce GAAP. c. Financial information should be useful both to assess the past and predict the future. d. The closer that the picture presented through the financial data is to reality, the higher the quality of financial reporting.

b

Which of the following statements is false? a. The statement of cash flows shows how cash has been generated and how it has been used for an accounting period. b. Firms only have financial difficulties when both the net income and cash flow from operations are negative. c. The statement of cash flows is prepared by calculating changes in all balance sheet accounts. d. Understanding how to prepare a statement of cash flows helps the analyst to better understand and analyze the cash flow statement.

b

Which of the following statements is true? a. The shareholders' letter should be ignored. b. Public relations material should be used cautiously. c. Annual reports only contain glossy pictures. d. Market data refers to the advertising budget of a firm.

b

Which of the items below would be included under "Other income and expense"? a. Salaries, interest expense, equity losses. b. Equity earnings, gains from sale of assets, interest income. c. Research and development, dividend income, interest expense. d. Advertising, cost of goods sold, selling and administrative expenses.

b

Which profit margin measures the overall operating efficiency of the firm? a. Return on equity b. Operating profit margin c. Net profit margin d. Gross profit margin

b

Which ratios measure the extent of a firm's financing with debt relative to equity and its ability to cover interest and fixed charges? a. Debt ratio and price-to-earnings ratio. b. Cash flow adequacy and fixed charge coverage. c. Days payable outstanding and gross profit margin. d. Cash interest coverage and average collection period.

b

Which statement is true for gains and losses from capital asset sales? a. They are included in cash flows from financing activities. b. They are included in cash flows from investing activities. c. They are included in cash flows from operating activities. d. They do not affect cash and are excluded from the statement of cash flows.

b

Which type of firm would most likely carry the most finished goods inventory? a. A manufacturing firm. b. A retail firm. c. A service firm. d. A wholesale firm.

b

Why is it important to assess operating profit? a. Operating profit represents the firm's profits after consideration of all revenues, expenses and comprehensive income. b. The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations. c. Operating profit represents the firm's profits after consideration of all revenues and expenses. d. Operating profit represents the firm's profits after consideration of all revenues and expenses, except for taxes.

b

Why is it important to evaluate increases and decreases in operating expenses? a. It is important to determine whether companies are spending at least 10 cents of every sales dollar on advertising expenses. b. Increases in operating expenses may indicate inefficiencies, and decreases in operating expenses may be detrimental to long-term sales growth. c. Increases in operating expenses are always an indication that a firm will increase sales in the future. d. None of the above.

b

Why should the effective tax rate be evaluated when assessing earnings? a. Effective tax rates do not include the effects of foreign taxes. b. It is important to understand whether earnings have increased because of tax techniques rather than from positive changes in core operations. c. Net operating losses allow a firm to change its effective tax rates for each of the five years prior to the loss. d. Effective tax rates are irrelevant because they are mandated by law.

b

Earnings per share figure calculated by dividing the average number of common stock shares outstanding into the net earnings available to common stockholders.

basic earnings per share

An outflow of cash would result from which of the following? a. The decrease in an asset account other than cash. b. The increase in an equity account. c. The decrease in a liability account. d. The increase in a liability account.

c

How is goodwill evaluated? a. Goodwill must be amortized over a 40-year period. b. Goodwill should be written up each year. c. Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense. d. Goodwill is to be written off at the end of the tenth year.

c

How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate? a. The firm has expenses that are not deductible for tax purposes. b. Tax rates in foreign countries where the firm operates are higher. c. Tax rates in foreign countries where the firm operates are lower. d. It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.

c

How should companies with more than one revenue source report revenue and cost of goods sold? a. Each revenue source should be reported separately, but all cost of goods sold should be added together and reported as a single amount. b. The revenues and cost of goods sold should be netted together and reported as a single line item. c. All revenue sources should be added together and shown as one line item and all cost of goods sold should be added together and shown as one line item. d. Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

d

How is the statement of cash flows connected to the balance sheet? a. The statement of cash flows shows changes in the asset and liability accounts to explain cash from operating activities. b. The changes in all revenue and expense accounts are calculated and then listed as cash inflows or outflows. c. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash. d. Changes in asset accounts are recorded as operating activities, changes in liability accounts are recorded as financing activities and changes in equity accounts are recorded as investing activities.

c

How would payments for taxes be classified? a. Operating inflow. b. Financing inflow. c. Operating outflow. d. Investing inflow.

c

How would the sale of a building be classified? a. Operating inflow. b. Financing inflow. c. Investing inflow. d. Operating outflow.

c

The Du Pont System shows which of the following series of relationships? a. Net profit margin x total asset turnover = Return on investment. b. Net profit margin x financial leverage = Return on equity. c. Net profit margin x total asset turnover = Return on investment and Return on investment x financial leverage = Return on equity. d. Net profit margin x total asset turnover = Return on equity and Return on equity x financial leverage = Return on investment.

c

The following item would be classified as an investing activity on the statement of cash flows: a. Proceeds from borrowing. b. Sale of goods. c. Sale of property. d. Payment to lenders.

c

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is cash from financing activities for Felix Company? a. $50 b. $65 c. ($50) d. $60

c

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash from financing activities for Armstrong Company? a. $70 b. $60 c. $90 d. ($110)

c

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is the change in cash for Armstrong Company? a. $315 b. $565 c. $425 d. $215

c

What accounts are most likely to be found in the stockholders' equity section of the balance sheet? a. Common stock, retained earnings, dividends payable b. Common stock, additional paid-in capital, liabilities c. Common stock, additional paid-in capital, retained earnings d. Common stock, long-term debt, preferred stock

c

What are three major cost flow assumptions used by U.S. companies in valuing inventory? a. LIFO, FIFO, actual cost b. LIFO, FIFO, average market c. LIFO, FIFO, average cost d. LIFO, FIFO, double-declining balance

c

What are three profit measures calculated from the income statement? a. Gross profit margin, cost of goods sold percentage, EBIT b. Operating profit margin, net profit margin, repairs and maintenance to fixed assets c. Gross profit margin, operating profit margin, net profit margin d. None of the above.

c

How would revenue from sales of goods and services be classified? a. Investing inflow. b. Operating outflow. c. Financing outflow. d. Operating inflow.

d

What does a financial level index greater than one indicate about a firm? a. More debt financing than equity financing. b. An increased level of borrowing. c. Operating returns more than sufficient to cover interest payments on borrowed funds. d. The unsuccessful use of financial level.

c

What does the price to earnings ratio measure? a. The earnings for one common share of stock. b. The relationship between dividends and market prices. c. The "multiple" that the stock market places on a firm's earnings. d. The percentage of dividends paid to net earnings of the firm.

c

What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, and Industry Surveys? a. Forecasts of earnings b. The general economic condition c. A company's relative position within its industry d. Elaborations of financial statement disclosures

c

What is a common-size balance sheet? a. A statement that is common to an industry. b. A statement that expresses each asset account on the balance sheet as a percentage of total assets and each liability account on the balance sheet as a percentage of total liabilities. c. A statement that expresses each account on the balance sheet as a percentage of total assets. d. A statement that expresses each account on the balance sheet as a percentage of net income.

c

The balancing equation is expressed as: a. Assets + Liabilities = Stockholders' Equity. b. Revenues - Expenses = Net Income. c. Sales - Costs = Net Profit. d. Assets = Liabilities + Stockholders' Equity

d

The statement of cash flows segregates cash inflows and outflows by: a. Financing and investing activities. b. Operating and financing activities. c. Operating and investing activities. d. Operating, financing, and investing activities

d

Unit Cost per Unit 1 $10 2 $12 3 $15 4 $18 5 $13 Assume ABC sells two items and uses the LIFO method of inventory valuation. What amount would appear for cost of goods sold on the income statement? a. $37 b. $41 c. $22 d. $31

d

What is a common-size income statement? a. An income statement that provides intermediate profit measures. b. An income statement that includes all changes of equity during a period. c. A statement that expresses each item on an income statement as a percentage of net sales. d. An income statement that groups all items of revenue together, then deducts all categories of expense.

c

What is a qualified report? a. A report stating that the auditors are not qualified to report on a firm. b. A report that states the financial statements are in violation of GAAP. c. A report that states that departures from GAAP exist in the firm's financial statements. d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

c

What is amortization? a. The process used to allocate the cost of natural resources. b. The process used to allocate the cost of tangible fixed assets. c. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets. d. The process used to allocate the cost of oil, gas, minerals and standing timber.

c

What is implied if the inventory account has increased? a. Cash flow from financing activities has decreased relative to net income. b. Cash flow from operating activities has increased relative to net income. c. Cash flow from operating activities has decreased relative to net income. d. Cash flow from financing activities has increased relative to net income.

c

What is the most widely used liquidity ratio? a. Quick ratio b. Debt ratio c. Current ratio d. Inventory turnover

c

When is a dual presentation of basic and diluted earnings per share required? a. When a company has a simple capital structure. b. When convertible securities are in fact converted. c. When a company has a complex capital structure. d. When a company has pension liabilities.

c

Which agency requires the filing of Form 10-Ks, Form 10-Qs and Form 8-Ks? a. FASB. b. IASB. c. SEC. d. GAAP.

c

Which equation represents an income statement? a. Assets = liabilities + stockholders' equity. b. Cash in - cash out = net income. c. Revenues - expenses = net income. d. Beginning retained earnings + revenues - expenses = ending retained earnings.

c

Which financial statement presents the results of operations? a. Balance sheet. b. Statement of financial position. c. Income statement. d. Statement of cash flows.

c

Which group of people would be the most concerned about the ability of a firm to make interest and principal payments? a. Auditors. b. Customers. c. Creditors. d. Investors.

c

Which items would be classified as long-term debt? a. Accounts payable, unearned revenue, pension liabilities. b. Common stock, retained earnings, bonds payable. c. Mortgages, convertible debentures, bonds payable. d. Deferred taxes, accrued expenses, treasury stock.

c

Which of the following could lead to cash flow problems? a. Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers. b. Obsolete inventory, increasing notes payable, easing of credit by suppliers. c. Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers d. Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.

c

Which of the following is an external source of liquidity? a. Sales of services. b. Repurchase of stock. c. Borrowing. d. Sales of products

c

Which of the following is not a condition that must be met for an item to be recorded as revenue? a. Revenues must be earned. b. The amount of the revenue must be measurable. c. The revenue must be received in cash. d. The costs of generating the revenue can be determined.

c

Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations? a. Operations b. Capital resources c. Earnings projections d. Liquidity

c

Which of the following items should alert the analyst to the potential for manipulation when analyzing accounts receivable and the allowance for doubtful accounts? a. Sales, accounts receivable and the allowance for doubtful accounts are all growing at approximately the same rate. b. A company lowers its credit standards and also increases the balance in the allowance for doubtful accounts. c. Accounts receivable is growing at a large rate and the allowance for doubtful accounts is decreasing. d. An analysis of the "Valuation and Qualifying Accounts" schedule required in the Form 10-K reveals that the amounts recorded for bad debt expense are close in amount to the actual amounts written off each year.

c

Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows? a. Adding depreciation back to net income to determine cash flow from operating activities. b. Including interest expense and tax expense in the calculation of cash flow from operating activities. c. Recording an item that should be recorded as an operating activity as an investing activity. d. The cash flow statement cannot be manipulated.

c

Which of the following statements is false? a. Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator. b. The common-size balance sheet reveals the composition of assets within major categories. c. Each item on a common-size balance sheet is expressed as a percentage of sales. d. The common-size balance sheet reveals the capital and the debt structure of the firm.

c

Use the indirect method to answer questions 11-14. The following information is available for Felix Company: Net income $300 Decrease in plant and equip. $40 Depreciation expense 20 Increase in deferred tax asset 5 Gain on sale of assets 35 Decrease in long-term debt 50 Increase in inventories 25 Decrease in accounts payable 15 What is the change in cash for Felix Company? a. $310 b. $205 c. $330 d. $230

d

Which of the following statements is true? a. The straight-line method of depreciation allocates a decreasing amount of depreciation expense each year. b. Straight-line depreciation is the least used method for financial reporting purposes. c. Fixed assets are reported at historical cost less accumulated depreciation on the balance sheet. d. The total amount of depreciation over the asset's life is larger when using an accelerated method of depreciation.

c

Which of the following would be classified as long-term debt? a. Accounts payable, bonds, obligations under leases b. Mortgages, current maturities of long-term debt, bonds c. Mortgages, long-term notes payable, bonds due in 10 years d. Accounts payable, long-term notes payable, long-term warranties

c

Which stockholders' equity account represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends? a. Treasury stock. b. Accumulated other comprehensive income c. Retained earnings. d. Preferred stock.

c

Why is the amount of debt in a company's capital structure important to the financial analyst? a. Debt is less costly than equity. b. Equity is riskier than debt. c. Debt implies risk. d. Debt is equal to total assets.

c

Use the indirect method to answer questions 7-10. The following information is available for Armstrong Company: Net income $450 Increase in plant and equip. $170 Depreciation expense 80 Payment of dividends 10 Decrease in accts. receiv. 20 Increase in long-term debt 100 Increase in inventories 15 Decrease in accounts payable 30 What is cash from investing activities for Armstrong Company? a. ($160) b. $160 c. $170 d. ($170)

d

What does an increasing collection period for accounts receivable suggest about a firm's credit policy? a. The credit policy is too restrictive. b. The collection period has no relationship to a firm's credit policy. c. The firm is probably losing qualified customers. d. The credit policy may be too lenient.

d

What does the income statement measure for a firm? a. The financial position of a firm for a period. b. The financing and investment activities for a period c. The changes in assets and liabilities that occurred during the period. d. The results of operations for a period.

d

What does the retained earnings account measure? a. Cash held by the company since its inception. b. Payments made to shareholders in the form of cash or stock dividends. c. Financial resources currently available to satisfy financial obligations. d. All undistributed earnings.

d

What is a statement of stockholders' equity? a. It is the same as a retained earnings statement. b. It is a statement reconciling the difference between stock issued at par value and stock issued at market value. c. It is a statement that reconciles only the treasury stock account. d. It is a statement that summarizes changes in the entire stockholders' equity section of the balance sheet.

d

What is an unqualified audit report? a. A report stating that the auditors are not qualified to report on a firm. b. A report that states the financial statements are in violation of GAAP. c. A report that states that departures from GAAP exist in the firm's financial statements. d. A report that states the financial statements are presented fairly, in all material respects, and are in conformity with GAAP.

d

What is important to understand about the label "pro forma"? a. Pro forma refers to GAAP-based financial statements. b. Pro forma requires firms to present two distinct net profit amounts in their Form 10-Ks. c. Pro forma relates to the amount of debt in a firm's capital structure. d. Pro forma earnings or financial statements are sometimes based on a firm's own definition which is not technically a correct definition.

d

What is the accrual basis of accounting? a. Recognition of revenue when it is received in cash. b. Recognition of revenue in the accounting period when the sale is made rather than when cash is received. c. Matching expenses with revenue in the appropriate accounting period. d. Both (b) and (c).

d

What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts? a. The growth rates of all assets and liabilities. b. The growth rates of sales and inventories. c. The common-size balance sheet. d. The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.

d

What subject(s) should the management discussion and analysis section discuss? a. Commitments for capital expenditures. b. A breakdown of sales increases into price and volume components. c. Liquidity. d. All of the above.

d

What type of accounts are accounts receivable and inventory? a. Cash accounts. b. Investing accounts. c. Financing accounts. d. Operating accounts.

d

What type of accounts are notes payable and current maturities of long-term debt? a. Cash accounts. b. Operating accounts. c. Investing accounts. d. Financing accounts.

d

What type of firm generally has the highest proportion of inventory to total assets? a. Wholesalers b. Manufacturers c. Service-oriented firms d. Retailers

d

What type of information found in supplementary schedules is required for inclusion in an annual report? a. Inflation data b. Management remuneration and segmental data c. Material litigation and management photographs d. Segmental data

d

Which of the following cause(s) a change in the retained earnings account balance? a. Prior period adjustment b. Payment of dividends c. Net profit or loss d. All of the above.

d

Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities? a. Inventory. b. Prepaid expenses. c. Accounts receivable. d. All of the above.

d

Which of the following items could cause the recognition of accrued liabilities? a. Salaries, interest expense, interest income b. Sales, taxes, interest income c. Sales, interest expense, rent d. Salaries, rent, insurance

d

Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities? a. The amount by which equity income recognized exceeds cash received. b. Depreciation expense for the period. c. The change in deferred taxes. d. All of the above.

d

Which of the following statements is false? a. Companies are allowed to use more than one inventory valuation method. b. LIFO is an income tax concept. c. Using FIFO for high-technology products makes sense if the firm is trying to reduce taxes because the technology industry is generally deflationary. d. Companies using IFRS may not reverse entries for inventory write-downs if the market recovers.

d

Why should the expenditures for repairs and maintenance correspond to the level of investment in capital equipment and to the age and condition of that requirement? a. Repairs and maintenance are depreciated over the remaining life of the assets involved. b. It is a generally accepted accounting principle that repairs and maintenance expense is generally between 5% and 10% of fixed assets. c. Inadequate repairs of equipment can impair the operating success of a business enterprise. d. Repairs and maintenance expense is calculated in the same manner as depreciation expense.

c

Which of the following statements is true? a. It is unnecessary to analyze operating expenses over which management exercises discretion. b. Impairment charges do not need to be analyzed since they are generally a non-recurring expense. c. A good way to improve operating profit is to cut repairs and maintenance costs as much as possible. d. Operating expenses can be easily analyzed by preparing a common-size income statement.

d

Why would a company switch to the LIFO method of inventory valuation? a. By switching to LIFO, reported earnings will be higher. b. A new tax law requires companies using LIFO for reporting purposes also to use LIFO for figuring taxable income. c. LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes. d. A survey by Accounting Trends and Techniques revealed that the switch to LIFO is a current accounting "fad."

c

Foreign currency translation effects, unrealized gains and losses, additional pension liabilities and cash flow hedges are items that may comprise a company's other ________income.

comprehensive

________ income is the change in equity of a company during a period from transactions, other events, and circumstances relating to nonowner sources.

comprehensive

recognition of income from investments in voting stock other companies to the extent of cash dividend received.

cost method

The gross profit margin and ________ are complements of each other and the two percentages always add up to 100%.

cost of goods sold percentage

According to Section 302 of the Sarbanes-Oxley Act, who must certify the accuracy of the financial statements of a public company? a. Public Company Accounting Oversight Board. b. SEC. c. External auditor. d. CEO and CFO.

d

Which of the following would be helpful to an analyst evaluating the performance of a firm? a. Reviewing the annual reports of a company's suppliers, customers, and competitors. b. Understanding the economic and political environment in which the company operates. c. Preparing common-size financial statements and calculating key financial ratios for the company being evaluated. d. All of the above.

d

Which of the following would increase cash from operating activities? a. Increasing accounts receivable. b. Increasing inventories. c. Decreasing accounts payable. d. Decreasing accounts receivable.

d

Which statement is false? a. Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements. b. Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income. c. Temporary differences causing the recognition of deferred taxes may arise from the methods used to account for items such as depreciation, installment sales, leases, and pensions. d. Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.

d

Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities? a. Selling assets is a noncash item. b. Gains and losses from asset sales are a financing activity. c. Gains and losses are not removed from net income when calculating the cash flows from operating activities d. The entire proceeds from sales of long-lived assets are included in investing activities.

d

Why has cash flow from operations become increasingly important as an analytical tool? a. Inflation has distorted the meaningfulness of net income. b. Firms may have uncollected accounts receivable and unsalable inventory on the books. c. High interest rates can put the cost of borrowing to cover short-term cash needs out of reach for many firms. d. All of the above.

d

Allocation of costs of acquiring and developing natural resources

depletion

allocation of costs of tangible fixed assets

depreciation

_______ and _____ represent the cost of assets other than land that will benefit a business enterprise for more than a year.

depreciation and amortization

Earnings per share figure based on the assumption that all potentially dilutive securities have been converted to common stock

diluted earnings per share

Per FASB rules, firms may use the _____ method or the _____ method to calculate and present cash flow from operating activities.

direct, indirect

operations that will not continue in the future because the firm sold a major portion of its business

discontinued operations

Stock _____and stock _____ result in the issuance of additional shares of stock to existing shareholders.

dividends, splits

Two other terms used interchangeably with income are ____ and profit

earnings

Two other terms used interchangeably with income are_______ and_______

earnings, profit

The ______method of accounting for investments should be used when the investor can exercise significant influence over the investee's operating and financing policies.

equity

proportionate recognition of investee's net income for investments in voting stock of other companies

equity method

Presentation of income statement that groups all revenue items, then deducts all expenses, to arrive at net income

single step format

A decrease in accrued liabilities should be _____ to convert net income to cash flow from operating activities

subtracted

A gain on sale of asset should be _____ to convert net income to cash flow from operating activities.

subtracted

An increase in inventory should be _____ to convert net income to cash flow from operating activities.

subtracted

The _____ _____ is one way to common size the cash flow statement.

summary analysis

unusual events not expected to recur in the foreseeable future

extraordinary events

Difference between net sales and cost of goods sold

gross profit

________charges are the expenses recognized to record a decline in value of a long-term asset.

impairmente

presentation of income statement that provides several intermediate profit measures

multiple-step format

A change in the retained earnings account is the result of the _____ for the period and the payment of_____ .

net income, dividends

difference between all revenues and expenses

net profit

difference between sales revenue and expenses associated with generating sales

operating profit

Cash flows are segregated on a statement of cash flows by _____ activities, _____ activities, and _____ activities.

operating, investing, financing

T/F: GAAP-based financial statements are prepared according to the accrual basis of accounting.

T

T/F: If the cost of goods sold percentage increases or decreases, this does not necessarily mean that costs have increased or decreased

T

T/F: In volatile industries, such as high technology, gross profit margin may increase or decrease significantly each year

T

T/F: The statement of stockholders' equity is an important link between the balance sheet and the income statement.

T

T/F: Two special items, discontinued operations and extraordinary items, must be disclosed separately on the income statement

T

T/F: Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions

T

What information would not be found in a firm's annual report? a. Notes to the financial statements. b. Financial Reporting Rulings. c. Auditor's report. d. High and low stock prices.

b

T/F: Information that is significant enough to make a difference in a decision is considered to be immaterial.

F

T/F: Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.

F

T/F:The time period assumption assumes a two year time frame with interim reporting occurring daily and weekly.

F

T/F: External auditors are required to audit the internal control assessment of the company as well as the financial statements.

T

All of the following items should be discussed in the management discussion and analysis except for: a. Anticipated changes in the mix and cost of financing resources. b. The market value of all assets. c. The internal and external sources of liquidity. d. Unusual or infrequent transactions that affect income from continuing operations.

b

How is a common-size income statement prepared? a. Each income statement item is expressed as a percentage of total assets. b. Each income statement item is expressed as a percentage of net sales. c. Each income statement item is expressed as a percentage of net income. d. Each income statement item is expressed as a percentage of cash flow.

b

Jett Co.'s average tax rates for 2015 and 2014 are: a. 15.5% and 10.0% b. 20.0% and 35.0% c. 25.8% and 35.4%. d. 31.4% and 36.8%.

b

Jett Co.'s gross profit, operating profit and net profit margins for 2015 are: a. 50.0%, 32.5%, 22.5% respectively. b. 29.2%, 12.5%, 10.0%, respectively. c. 27.0%, 11.0%, 10.5%, respectively. d. 21.5%, 17.5%, 12.0%, respectively.

b

Selling and administrative expenses include which of the following income statement items? a. Salaries, insurance, interest. b. Salaries, rent, advertising. c. Rent, interest, cost of goods. d. Advertising, research & development, amortization.

b

What does an unqualified auditor's report indicate? a. Certain managers within the firm are unqualified and, as such, are not fairly or adequately representing the interests of the shareholders. b. The financial statements present fairly the financial position, the results of operations, and the changes in cash flows for the company. c. There are certain factors that might impair the firm's ability to continue as a going concern. d. The financial statements unfairly and inaccurately present the company's financial position for the accounting period.

b

What information can be found on a statement of stockholders' equity? a. A reconciliation of the cash account and the retained earnings account. b. A reconciliation of the beginning and ending balances of all accounts that appears in the stockholders' equity section of the balance sheet. c. A reconciliation of the operating, investing and financing activities of a firm. d. A reconciliation of net profit or loss and the cash account.

b