Financial Statements Quiz

Which of the following is not a current asset? A. Accumulated Depreciation B. Accounts Receivable C. Notes Receivable

A. Accumulated Depreciation Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. It's not a current asset.

The return on equity for a company and the industry in which it operates are 10.3% and 9.6%, respectively. The company is most likely performing: A better than the industry. B the same as the industry. C worse than the industry.

A. Better than the industry The return on equity is higher for the company than for the industry, indicating that the company is performing better. An analyst should conduct further analysis to identify the source(s) of this apparently superior performance.

In the income statement, revenue will increase retained earnings, while expenses will serve to reduce retained earnings

True

True/False: A customer pays for goods and services on credit. The balance sheet impact of this purchase is an increase in the seller's accounts receivable and retained profit.

True

Ratio analysis is used to: A compare companies of different sizes. B identify the uses of cash during the period. C determine profit or loss associated with operations.

A. Compare companies of different sizes Ratio analysis is used to compare companies of different sizes. When companies are different sizes, it is critical to standardize the financial information. B is incorrect because the cash flow statement is used to identify the sources and uses of cash over a period of time. C is incorrect because the income statement is used to identify the profit or loss associated with operations over a period of time.

Income that is available to reinvest in the company or distribute to owners is: A net income. B operating income. C earnings before taxes.

A. Net Income Net income is calculated as revenues minus all expenses and represents income that a company has available to retain or reinvest in the company or to distribute to owners in the form of dividends. B is incorrect because interest and tax expenses must be subtracted from operating income to arrive at the amount that is available to reinvest in the company or distribute to owners. C is incorrect because taxes must be subtracted from earnings before taxes to arrive at the amount that is available to reinvest in the company or distribute to owners.

The ratio that best measures a company's ability to meet its short-term obligations is: A the quick ratio. B the asset turnover ratio. C the debt-to-equity ratio.

A. The quick ratio The quick ratio is a liquidity ratio used to assess a company's ability to pay its outstanding obligations in the short term. B is incorrect because the asset turnover ratio measures asset utilization, which indicates the volume of revenues being generated by the assets used in the business. C is incorrect because the debt-to-equity ratio, a leverage ratio, measures how much debt is used in the financing of the business.

Which of the following best shows the accounting equation? A. Total assets = Total liabilities + Total shareholders' equity B. Total assets + Total liabilities = Total shareholders' equity C. Total shareholders' equity - Total assets = Total liabilities

A. Total assets = Total liabilities + Total shareholders' equity Assets=Liabilities + Equity

Retained earnings represent: A. Undistributed net income in the last accounting period B. Accumulated, undistributed earnings since inception C. Earnings inclusive of any paid-in capital since inception

B. Accumulated, undistributed earnings since inception Retained earnings are a firm's cumulative net earnings or profit after accounting for dividends. They're also referred to as the earnings surplus.

Dividends: A increase shareholders' equity. B are a distribution of net income. C are an expense on the income statement.

B. Are a distribution of net income Dividends represent the amount of net income distributed to shareholders. A is incorrect because dividends decrease shareholders' equity; dividends reduce retained earnings, a component of shareholders' equity. C is incorrect because dividends are not reported as an expense on the income statement.

Which financial statement is not prepared on an accrual basis? A Income statement B Cash flow statement C Profit and loss statement

B. Cash flow statement The cash flow statement is prepared on a cash, not accrual, basis. A and C are incorrect because the income statement (also called the profit and loss statement) is prepared on an accrual basis. The accrual basis requires revenues to be recorded when the revenues are earned rather than when they are received in cash. Recognition of related expenses on the income statement does not necessarily coincide with when they are paid in cash. Expenses may be recognized before, at the same time, or after they are paid for

Gross profit represents revenue minus: A all expenses. B cost of sales. C operating expenses.

B. Cost of Sales Gross profit is calculated as revenues minus the cost of sales. It represents the cost of producing or acquiring the goods or services provided or sold by the company. A is incorrect because revenue minus all expenses represents net income, not gross profit. C is incorrect because revenue minus operating expenses represents operating income (or profit), not gross profit.

Which of the following is used to evaluate how a company is financing its assets? A Current ratio B Debt-to-equity ratio C Return on assets

B. Debt-to-equity ratio Ratios used in determining how a company is financing its assets often look at the amount of debt that is used by the company. Ratios that can help provide this information include the debt-to-equity ratio and financial leverage (or the equity multiplier) ratios. A is incorrect because the current ratio is used to assess liquidity. C is incorrect because return on assets is used to evaluate a company's profitability.

A net loss during an accounting period will cause shareholders' equity to: A increase. B decrease. C remain unchanged.

B. Decrease A net loss during an accounting period decreases a company's retained earnings and will thus cause shareholders' equity to decrease.

True/False The cash flow statement sometimes reflects transactions that appear neither on the income state nor on the balance sheet

False

True/False The impact of a sale (revenue) on a balance sheet is always in increase to accounts receivable

False

The profit or loss generated by a company over a year is presented in the: A balance sheet. B income statement. C cash flow statement.

B. Income statement The income statement (sometimes called the P&L statement) identifies the profit or loss generated by a company over a given time period, such as a year. A is incorrect because the balance sheet provides information about a company's financial position at a specific point in time. C is incorrect because the cash flow statement identifies the sources and uses of cash over a given time period.

Which of the following accounts is most likely classified as a current asset? A. Goodwill B. Inventory C. Property, plant, and equipment

B. Inventory Goodwill is an intangible asset, property, plants, and equipment, also called PP&E, are not current assets. Current assets are any assets that will provide an economic benefit for or within one year.

A manufacturing company recently sold one of its buildings. The proceeds from the sale are classified as a cash flow from: A financing activities. B investing activities. C operating activities.

B. Investing activities The proceeds of a sale by a manufacturing company of a building are classified as a cash inflow from investing activities. Investing activities typically relate to purchases or sales of long-term assets, such as equipment or buildings.

Accounts payable are classified as: A. assets. B. liabilities. C. shareholders' equity.

B. Liabilities Accounts payable (credit extended by suppliers) are current liabilities—obligations that must be repaid in the next year. A is incorrect because assets are what the company owns. C is incorrect because shareholders' equity represents the owners' investment in the company.

Which of the following sentences is most accurate? A The income statement and cash flow statement are unrelated. B Net income is often the starting point for the cash flow statement. C The income statement presents information for a period of time, whereas the cash flow statement presents information at a point in time.

B. Net income is often the starting point for the cash flow statement When preparing a cash flow statement, many companies use an indirect method and begin with the net income reported on the income statement and make adjustments to arrive at cash flows from operations. A is incorrect because the income statement and cash flow statement are related. C is incorrect because both the income statement and cash flow statements present information for a period of time. It is the balance sheet that presents information at a point in time.

The statement of cash flows presents: A revenues and expenses over a period of time. B sources and uses of cash over a period of time. C assets, liabilities, and owners' equity at a point in time.

B. Sources and uses of cash over a period of time The statement of cash flows presents the sources and uses of cash over a period of time. A is incorrect because revenues and expenses over a period of time are presented on the income statement. C is incorrect because assets, liabilities, and shareholders' equity at a point in time are presented on the balance sheet or statement of financial position

Shareholders' equity, as reported on the balance sheet, includes: A. cash. B. common stock. C. long-term debt.

B. common stock. Common stock is a component of shareholders' equity. Shareholders' equity includes the amount received from selling stock to common shareholders and retained earnings (retained income). A is incorrect because cash is an asset. C is incorrect because long-term debt is a liability.

Which of the following values of a company's quick ratio indicates the best liquidity? A 0.50 B 1.00 C 1.50

C. 1.50 C is correct. The quick ratio, a liquidity ratio, measures a company's ability to meet its short-term obligations. When analyzing a liquidity ratio, the higher the number, the higher the company's liquidity. Thus, 1.50 represents the best liquidity ratio. A and B are incorrect because both values are lower than 1.50 and when analyzing liquidity, a higher ratio is preferable.

If a company is profitable, then its cash flow from operating activities: A is positive. B is negative. C can be positive or negative.

C. Can be positive or negative If a company is profitable, its cash flow from operating activities can be positive or negative. Profit and net cash flow from operating activities may differ in sign because profits are measured on an accrual basis. For example, revenues may be included on the income statement before the cash is collected.

Which of the following is best described as an investing activity on the cash flow statement? A Cash inflow from the issuance of new shares of equity B Cash outflow from the payment of dividends to stockholders C Cash outflow from the purchase of property, plant, and equipment

C. Cash outflow from the purchase of property, plant, and equipment The statement of cash flows identifies the purchase of property, plant, and equipment as a cash outflow in investing activities. A and B are incorrect because issuing new shares and paying dividends are financing activities.

A company incurs marketing expenses of 10,000, but is given one month's credit to pay for this amount. What is the immediate impact of this transaction in the financial statements? A. Increase in net income of 10,000, reduction in cash balance of 10,000, increase in liabilities & equity of 10,000. B. Decrease in net income of 10,000, reduction in cash balance of 10,000, increase in liabilities & equity of 10,000. C. Decrease in net income of 10,000, no change in cash balance, increase in liabilities and a reduction in equity both by 10,000.

C. Decrease in net income of 10,000, no change in cash balance, increase in liabilities and a reduction in equity both by 10,000.

Which of the following is an example of an operating expense? A Dividends paid to shareholders B Interest payments made on a bank loan C Depreciation expenses for plant and equipment

C. Depreciation expenses for plan and equipment Operating expenses report expenses incurred by the regular operations of a business and include such items as cost of sales, administrative expenses, and depreciation expenses. A is incorrect because dividend payments are not expenses and are not incurred in the operations of the company. Dividend payments are reported as a financing activity on the cash flow statement. B is incorrect because interest payments are reported on the income statement as a financing expense, not as an operating expense.

Net cash flow is most likely: A equal to net income over a reporting period. B equal to operating income over a reporting period. C different from profit depending on the timing of the cash flows.

C. Different from profit depending on the timing of cash flows Net cash flow most likely differs from profit because revenues and expenses, which are used to calculate profit, are accounted for on an accrual basis (when the revenue is earned or the expense incurred). Cash flows for revenues and expenses are accounted for when cash is actually exchanged. Thus, profit and cash flow generally differ in the timing of recognition of revenues and expenses. A and B are incorrect because revenue, expenses, and measures of income such as net and operating income are accounted for on an accrual basis. There are non-cash expenses, such as amortization and depreciation, included when calculating income. The related cash flows were reported when they were made to acquire the long-term assets.

Ratio analysis provides analysts: A information about only the past financial performance of a company. B information about only the valuation of a company based on the market price of its shares. C information about both the past financial performance of a company and the valuation of a company based on the market price of its shares.

C. Information about both the past financial performance of a company and the valuation of a company based on the market price of its shared Ratio analysis can provide an analyst with information about the past financial performance of a company, including its relative position of assets, liabilities, liquidity, and profitability using such ratios as the quick ratio, return on assets, and financial leverage. Additionally, an analyst can use the historical information provided by the financial statements combined with market price of a company's shares to compare companies and their relative valuation in the market by using such ratios as price-to-earnings and price-to-book. A and B are incorrect because ratio analysis can be used by analysts to evaluate both historical financial performance and relative market valuation.

A company's return on equity (ROE) can be broken down into which of the following components? A Asset turnover, liquidity, and financial leverage B Net profit margin, liquidity, and financial leverage C Net profit margin, asset turnover, and financial leverage

C. Net profit margin, asset turnover, and financial leverage The basic ratio for return on equity (ROE) is calculated as Net income/Equity. Analysts often break this down into component parts to determine what is affecting the return on equity. ROE can be calculated as follows: ROE = (Net income/Revenues) × (Revenues/Total assets) × (Revenues/Equity) or, put differently, ROE = Net profit margin × Asset turnover × Financial leverage. A and B are incorrect because liquidity is not used in the calculation of ROE.

Net property, plant, and equipment is included in: A shareholders' equity. B long-term debt. C non-current assets.

C. Non-current assets Net property, plant, and equipment is included in non-current assets. It is used over a number of years to generate revenue for the company. A is incorrect because shareholders' equity represents the owners' investment in the company and includes common stock and retained earnings. B is incorrect because long-term debt is money borrowed from banks and other lenders to be paid back over periods of longer than a year.

Cash paid for salaries would be included as a component of cash flows from: A financing activities. B investing activities. C operating activities.

C. Operating activities Cash paid for salaries is an operating cash outflow. Operating activities relate to the company's profit-making activities and occur on an ongoing basis. Any salaries paid would be considered an integral component of such activities. A is incorrect because financing activities relate to raising new capital (an increase in borrowing and/or issuance of shares) and paying dividends, repaying debt, or repurchasing of shares. B is incorrect because investing activities typically relate to purchases or sales of long-term assets, such as equipment or buildings

Operating income and cash flow from operating activities are reported, respectively, on the: A income statement and the balance sheet. B balance sheet and the cash flow statement. C profit and loss statement and the cash flow statement.

C. Profit and loss statement and the cash flow statement Operating income is reported on the income statement, or profit and loss statement. Cash flow from operating activities is reported on the cash flow statement. A and B are incorrect because the balance sheet does not report either operating income or cash flow from operating activities. The balance sheet reports the value of a company's assets, liabilities, and shareholders' equity at a specific point in time.

Cash flow from financing activities is most likely related to: A the payment for inventory. B the purchase of a machine. C the issuance of long-term debt.

C. The issuance of long-term debt When a company issues long-term debt, it is a cash inflow from financing activities. A is incorrect because the payment for inventory is a cash outflow for an operating activity related to the company's recurring profit-making activities. B is incorrect because the purchase of a machine is a cash outflow related to investing activities

Which of the following will reduce the equity section of a company's balance sheet? A. The purchase of an asset financed by debt B. The purchase of inventory for cash C. The payment of a dividend D. Revenue from the sale of goods

C. The payment of a dividend

Company Beta reports negative net income on its income statement, but it shows a positive cash flow from operations. Which is the best potential explanation? A. Increase in operating expenses B. Increase in accounts receivable C. Increase in dividends D. Increase in sales

D. Increase in sales

True/False Increases in fixed assets represent a source of cash for a company

False