fin tb - chapter 2

true

(T/F) A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period

false

(T/F) Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance

false

(T/F) In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements

false

(T/F) International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the US will report according to IFRS before the second half of the twenty-first century

true

(T/F) Price - earnings ratio tend to be high for fast - growing firms

true

(T/F) Stockholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet

false

(T/F) The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time

false

(T/F) Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements

true

(T/F) in general, a successful firm will have a market-to-book ratio that is substantially greater than 1

true

(T/F) the income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings

false

(T/F) the management of public companies is not legally required to disclose any off-balance sheet transactions

long term liability

A 30 year mortgage loan is a ______________

a patent for a drug held by the company

A company that produces drugs is preparing a balance sheet. Which of the following would most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company

revenue received for the delivery of items that have not yet been delivered

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must be paid back in two years D) prepaid rent on the offices occupied by the company

that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firm's brand in new areas it has expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic foot retailers

the sale will be added to net income on the income statement but deducted from net income on the statement of cash flows

A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?

investors believe the companys assets are not likely to be profitable since its market value is worth less than its book value

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?

since net working capital is negative, the company will not have enough funds to meet its obligations

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations B) since net working capital is high, the company will likely have little difficult meeting its obligations C) since net working capital is very high, the company will have ample money to invest after it meets its obligations D) since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors

as an outflow under investment activities

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?

current liability

Accounts payable is a _______________

it would be an addition to property plant and equipment so it would be an investing activity

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?

current asset

Cash is a ___________

company a is less likely than company b to have sufficient working capital to meet its short term needs

Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) company a is less likely than company b to have sufficient working capital to meet its short term needs B) company a has greater leverage than company b C) company a has less leverage than company b D) company a and company b have roughly equivalent enterprise values

total sales - cost of sales

Gross profit is calculated as __________.

The off balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

united states

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom

common stock, paid in surplus, and retained earnings

The major components of stockholder's equity are ________________

to disclose the financial implications of any off balance sheet transactions

The notes to the financial statements would LEAST likely be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off balance sheet transaction C) to show how the value of assets listed in the financial statements were arrives at D) to explain the method of accounting that was used in the preparation of the financial statements

auditor

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ____________

10 k

US public companies are required to file their annual financial statements with the US Securities and Exchange Commission on which form?

it requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process

What are the requirements of section 404 of SOX?

the difference between sales revenue and the costs

What is a firm's gross profit?

all of the above

What is a firm's net income? A) the difference between the sales and other income generated by a firm, and all costs, taxes and expenses incurred by the firm in a given period B) the last or "bottom" line of the income statement C) a measure of the firm's probability over a given period D) all of the above

valuable assets such as the companys reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet

What is the main problem using a balance sheet to provide an accurate assessment of the value of a company's equity?

it makes it easier to compare the financial results of different firms

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements

the amount of deferred tax liability held by the company

Which of the following amounts would be included on the right side of a balance sheet A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received

assets - current liabilities = long term liabilities

Which of the following balance sheet equations is INCORRECT A) assets - liabilities = shareholders equity B) assets = liabilities + shareholders equity C) assets - current liabilities = long term liabilities D) assets - current liabilities = long term liabilities + shareholders equity

to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short and long term financial condition of a business

Which of the following best describes why a firm produces financial statements? A) to use tool when planning future investments within a firm B) to increase the intrinsic value of a firm C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short and long term financial condition of a business D) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

the assets must equal liabilities plus stockholders equity because stockholders equity is the difference between the assets and the liabilities

Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company B) By definition, the assets plus the liabilities will be the same as the stockholders' equity C) The assets must equal liabilities plus stockholders equity because stockholders equity is the difference between the assets and the liabilities D) by accounting convention, the assets of a company must be equal to the liabilities of that company

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

Which of the following firms would be expected to have a high ROE based on that firm's high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

a grocery store chain that has very high turnover, selling many multiples of its assets per year

Which of the following firms would be expected to have a high ROE? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all item it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year

statement of sources and uses of cash

Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholders' equity

it includes cash inflows from services rendered

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) it includes entries for the depreciation of assets B) it does not include entries for expenditures on inventory C) it does not include entries for collection of money from account receivables D) it includes cash inflows from services rendered

interest expense

Which of the following is NOT an operating expense A) interest expense B) depreciation and amortization C) selling, general and administrative expenses D) research and development

corporate taxes

Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization

the statement of activities

Which of the following is NOT one of the financial statements that must be produced by a public company A) the balance sheet B) the income statement C) the statement of cash flows D) the statement of activities

by forcing companies to audit financial statements they release

Which of the following is NOT one of the ways that the Sarbanes-Oaxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non audit fees that an auditor can receive from a client D) by forcing companies to audit financial statement they release

it adds all non cash entries related to a firms operating activities

Which of the following is a way that the operating activity section of the statement of cash flows adjusts. Net Income from the balance sheet? A) it subtracts all expenses and costs related to a firms operating activities B) it adds all non cash entries related to a firms operating activities C) it adds the cash that flows from investors to a firm D) it removes the cash used for investment purposes

the firm is growing

Which of the following is the LEAST likely explanation for a firm's high ROE? A) the firm is growing B) the firm is able to find investment opportunities that are very profitable C) the firm has very efficient use of its assets D) the firm enjoys high sales margins

readers of even fraudulent financial statements can spot signs of a firms financial health if those statements are read fully and with care

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom

the balance sheet reports liabilities on the left hand side

Which of the following statements regarding the balance sheet is INCORRECT A) the balance sheet provides a snapshot of a firm's financial position at a given point in time B) the balance sheet lists a firm's assets and liabilities C) the balance sheet reports stockholders equity on the right hand side D) the balance sheet reports liabilities on the left hand side

the income statement shows the cash flows and expenses at a given point in time

Which of the following statements regarding the income statement is INCORRECT? A) the income statement shows the cash flows and expenses at a given point in time B) the income statement shows the flow of revenues and expenses generated by a firm between two dates C) the last or "bottom" line of the income statement shows a firm's net income D) the first line of an income statement lists the revenues from the sales of products or services

debt equity or equity multiplier ratio

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?

share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm

Why must care be taken when comparing a firm's share price to its operating income

by raising its reported earnings

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors?

it will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows

a manufacturer of plastic bottles for the medical trade purchases anew compression blow molder for its bottle production plant. How will the cost of the company of this piece of equipment be recorded?