Small Business- Chapter 10

To determine how much Harlan sold to customers, he must

subtract the increase in accounts receivable from total sales.

Which of the following is a reason why profits based on an accrual-basis accounting system will differ from the firm's cash flows?

Cash spent for inventory doesn't represent all inventory purchases since some inventory is financed by credit

____ equals current assets divided by current liabilities.

Current ratio equals current assets divided by current liabilities.

To convert the company's income statement from accrual basis to cash basis, we take two steps: 1) add back _____ to net profits and 2) subtract any uncollected sales and payments for inventory.

Depreciation must be added back to net profits to convert the company's income statement from accrual basis to cash basis.

The best definition of cost of goods sold is

Expenses associated directly with the production of products and/or services

The amount of the business owner's initial investment, owner's later investment in the business, and retained earnings comprise

Owner's equity capital is the amount of the business owner's initial investment, the owner's later investment in the business, and retained earnings.

A conventional measure of a firm's liquidity is a comparison of current assets to current liabilities.

True

The statement of cash flows answers the questions "Where did the cash come from?" and "Where did the cash go?"

True

Total assets less outstanding debt must always equal ownership equity.

True. Total assets less outstanding debt must always equal ownership equity.

Which of the following shows the profits and losses of a firm's operations over a period of time?

income statement

Depreciation

is not a cost expense

Total asset turnover equal sales divided by

total assets

To determine his company's return on assets, Harold should divide the firm's operating profits by

total assets.

The return on owner's equity can be calculated as net profits divided by _____.

total owners' equity

Current assets are also known as

working capital

The debts that Rhonda's company will repay within the next _____ are considered to be current debt

12 months

Liquidity can also be described as:

The availability of cash to meet maturing debt obligations

Which of the following statements about a firm's financial statements is true?

a) An income statement helps a small business owner know the financial strengths and capabilities of the business—something that cannot be known in any other way. b) Small business owners tend to pay close attention to the firm's income statement, but much less attention to the balance sheet. c) A mistake that many small business owners is viewing the balance sheet and income statement as complements of each other rather than treating them as separate reports. d) None of these are correct. ** correct

Fixed assets include all of the following EXCEPT:

a. land. b. inventory ** correct c. trucks. d. machinery.

Operating expenses consist of all of the following EXCEPT:

a. marketing and selling expenses. b. general and administrative expenses. c. depreciation. d. cost per number of item sold. ** correct

When Darla prepares her company's balance sheet, she should include _____ in the list of current assets.

accounts receivable

In ____ accounting, transactions are reported when they actually occur

cash basis- used by very small business. It records expenses when they occur and cash as it is received. As businesses grow bigger they usually convert to accrual-basis accounting methods.

The type of assets that can quickly be converted into cash are called

current assets

The ___ ratio is traditionally used to measure a company's liquidity

current ratio, current asset divided by current liabilities, tells how capable a firm is of meeting is debt obligations

To calculate his company's _____, Edgar will deduct operating expenses from gross profits.

profits before taxes

A two-year-old asset has a useful life of 10 years. Its initial purchase cost was $450,000, and it is depreciated by 10 percent annually. What is the remaining depreciable value of the asset?

$360,000

Which of the following assets would considered an other asset?

Goodwill

____ consist of payments due from a firm's customers.

Accounts receivable consists of payments due from a firm's customers.

Profits are not the same as cash flows because:

They are calculated on an accural rather than a cash basis

Having positive net profits in an income statement does not necessarily mean that a firm has generated positive cash flows.

True. Cash flows from operations are calculated by adding back the depreciation expense to the net profits and then subtracting (or adding) any increase (or decrease) in accounts receivable and inventory, or any decrease (or increase) in accounts payable.

A profitable company does not necessarily have positive cash flows

True. The profits shown on a company's income statement are not the same as its cash flows and even profitable companies can exhaust their cash and go out of business.

A profit and loss statement is a financial report that shows the sources of a firm's cash and its uses of the cash.

False. A profit and loss statement, or income statement, indicates the amount of profits or losses generated by a firm over a given time period.

The income statement and the cash flow statement complement each other to give an overall picture of the firm's financial situation.

False. An income statement is not a measure of cash flows because it is calculated on an accrual basis rather than a cash basis.

The best financial ratio to determine a company's ability to pay debt as it come due is the _____ ratio.

** current- Ability to pay debt as it comes due is determined by the current ratio which equals current assets divided by current liabilities.

The income statement provides a snapshot of a business's financial position at a specific point in time

False

The terms earnings, profits, and income refer to different amounts on the income statement.

False

The three activities that explain the cash inflows and outflows of a business are the operating, selling, and financing activities.

False

You do not need to know a firm's financial position at the beginning of the year to fully understand how that firm performed during that year

False. Three financial reports are needed to evaluate a firm's performance over a given time: a balance sheet showing a firm's financial position at the beginning of a year, a balance sheet for the end of the year, and an income statement spanning the time between the two balance sheets.

The number that results when taxes are subtracted from profits (before taxes) is called ____and represents money that can be reinvested in the firm or paid out to owners (assuming enough cash is on hand?

Net profits are important, no guarantee that cash flow is adequate

Interest expense is deducted from the _____ to arrive at the company's profits before taxes.

Operating profits. From the firm's operating profits, we deduct any interest expense incurred from borrowing money (debt) to find profits before taxes, also called taxable income.

____ are the shares that represent investor ownership in a firm.

Shares of (common stock) are issued to the investors in corporations, representing their ownership in the corporation.

The value of a depreciable asset

decreases over time

To determine his company's net profits, Edward should

deduct income taxes from profits before taxes. ** wrong