HIGGINS Chapter 1

Depreciation expense: A. reduces both taxes and net income. B. increases net fixed assets as shown on the balance sheet. C. is a noncash item that increases net income. D. decreases current assets, net income, and operating cash flows.

A. reduces both taxes and net income.

A balance sheet reports the value of a firm's assets, liabilities, and equity: A. over an annual period. B. over any period of time. C. at any point in time. D. at the end of the year.

C. at any point in time.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets? A. income statement B. creditor's statement C. balance sheet D. cash flow statement E. sources and uses statement

C. balance sheet

Which one of the following is a source of cash? A. decrease in accounts receivable B. decrease in common stock C. decrease in long-term debt D. decrease in accounts payable E. increase in inventory

A. decrease in accounts receivable

Which of the following is NOT a major category on the cash flow statement? A. Cash flows from selling activities B. Cash flows from operating activities C. Cash flows from financing activities D. Cash flows from investing activities

A. Cash flows from selling activities

Which of the following is NOT a typical reason for differences between profits and cash flow? A. Goodwill B. Depreciation expense C. Changes in accounts receivable D. Accrual accounting practices

A. Goodwill

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. cash flow statement D. sources and uses statement E. market value statement

A. income statement

Suppose an acquiring firm pays $100 million for a target firm and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account? A. $0 million B. $20 million C. $30 million D. $70 million E. $80 million F. None of the above.

B. $20 million

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet? A. Equity rises $250,000; net plant and equipment falls $250,000. B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000. C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000. D. Cash rises $250,000; net plant and equipment falls $250,000.

B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Which of the following would NOT be considered a use of cash? A. Dividends paid B. A decrease in accounts payable C. Depreciation D. An increase in the cash and marketable securities account

C. Depreciation

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in inventory E. increase in accounts payable

E. increase in accounts payable

Which of the following statements concerning a firm's cash flows and profits is false? A. Managers must be at least as concerned with cash flows as with profits. B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production. C. The cash flows generated in a given time period can differ from the profits reported. D. Profits are no assurance that cash flow will be sufficient to maintain solvency. E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".

B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. based on historical cost.

Which one of the following is a use of cash? A. increase in notes payable B. increase in inventory C. increase in long-term debt D. decrease in accounts receivable E. increase in common stock

B. increase in inventory

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time? A. income statement B. balance sheet C. cash flow statement D. shareholders' equity statement E. market value statement

C. cash flow statement

A company purchases a new $10 million building, financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet? A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million. B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million. C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million. D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

Which of the following statements concerning the cash flow-production cycle is true? A. The profits reported in a given time period equal the cash flows generated. B. A company's operations and finances are independent of each other. C. Financial statements have nothing to do with reality. D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle. E. A profitable company will always have sufficient cash to meet its obligations.

D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

Which of the following is a reason why a company's market value of equity differs from its book value of equity? A. Shareholders are keenly aware of book values, but have little interest in market values. B. Accountants' charges for the cost of equity are often higher than they should be. C. Fair value accounting is becoming more widely used. D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

D. Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. shareholders' equity statement. D. cash flow statement. E. statement of operating position.

D. cash flow statement.