Financial Management, 12e (Titman/Keown/Martin)
Chapter 3 Understanding Financial Statements, Taxes, and Cash
Flows
3.1 An Overview of the Firm’s Financial Statements
1) Which of the basic inancial statements is best used to answer the question, “How
proitable is the business?”
A) Balance sheet
B) Statement of shareholder’s equity
C) Income statement
D) Accounts receivable aging schedule
Question Status: Previous edition
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
2) Who owns the retained earnings of a public irm?
A) The IRS
B) Common stockholders
C) Bondholders
D) Preferred stockholders
Question Status: Previous edition
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
3) Which of the following represents an attempt to measure the earnings of the irm’s
operations over a given time period?
A) Balance sheet
B) Cash low statement
C) Income statement
D) None of the above
Question Status: Previous edition
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
4) Stock that is repurchased by the issuing company is called
A) paid in capital.
B) treasury stock.
C) retained capital.
D) par value stock.
Question Status: Previous edition
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
5) Which of the basic inancial statements is best used to answer the questions “What does
the company own and how is it inanced?”
A) Balance sheet
B) Statement of shareholder’s equity
C) Income statement
D) Cash low statement
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
6) Which of the basic inancial statements is best used to answer the questions “Where did
the company’s money come from and how was it spent over the preceding year?”
A) Balance sheet
B) Statement of shareholder’s equity
C) Income statement
D) Cash low statement
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
2
7) Which of the basic inancial statements is best used to answer questions about changes
in owner’s equity that are not explained by the income statement?
A) Balance sheet
B) Statement of shareholder’s equity
C) Income statement
D) Cash low statement
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 3: Cash Flows Are the Source of Value
8) The income statement shows a company’s earnings since it has been in business.
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
9) The balance includes information about the company’s assets and liabilities.
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
10) The cash low statement shows amounts that the company has earned but for which it
has not yet received cash.
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
3
11) The cash low statement is an alternative term for the balance sheet.
Question Status: New question
Objective: 3.1 Describe the content of the four basic inancial statements and discuss the
importance of inancial statement analysis to the manager.
Keywords: inancial statements
Principles: Principle 4: Market Prices Relect Information
3.2 The Income Statement
1) On the income statement, sales revenue, minus cost of goods sold and operating
expenses, equals which of the following?
A) Net proit
B) Retained earnings
C) Net income available to preferred shareholders
D) EBIT
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
2) Which of the following streams of income is not afected by how a irm is inanced
(whether with debt or equity)?
A) Net proit after tax but before dividends
B) Net working capital
C) Operating income
D) Income before tax
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
4
3) Which of the following is not included in computing EBT (earnings before taxes)?
A) Marketing expenses
B) Depreciation expense
C) Cost of goods sold
D) Dividends
Question Status: Revised
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
4) Your irm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the irm’s EBIT?
A) $15,552,000
B) $58,000,000
C) $5,110,000
D) $4,630,000
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
5) Your irm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the irm’s gross proit?
A) $18,000,000
B) $15,225,000
C) $5,000,110
D) $6,632,000
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
5
6) Your irm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the irm’s income before tax?
A) $4,360,000
B) $750,000
C) $10,865,000
D) $25,115,000
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
7) Your irm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; and
interest expense of $750,000. What is the amount of the irm’s net income?
A) $255,223
B) $4,731,000
C) $2,616,000
D) $7,775,000
Question Status: New question
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
8) Your irm has the following income statement items: sales of $52,000,000; income tax of
$1,880,000; operating expenses of $9,000,000; cost of goods sold of $36,000,000; and
interest expense of $800,000. Compute the irm’s gross proit margin.
A) 13.5%
B) 8.3%
C) 30.8%
D) 69.2%
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
6
Table 1
Jones Company
Financial Information
March 1995 March 1996
Net income $1,500 $3,000
Accounts receivable 750 750
Accumulated depreciation 1,125 1,500
Common stock 4,500 5,250
Capital surplus 7,500 8,250
Retained earnings 1,500 2,250
Accounts payable 750 750
9) Based on the information given in Table 1, calculate the dividends paid in 1996.
A) $3,750
B) $3,000
C) $750
D) $2,250
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
7
Table 2
Bird Industries, Inc.
Balance Sheets
2011 2012
Cash $1,000 $?
Accounts receivable 5,000 6,000
Inventories 6,500 6,000
Land 10,000 12,000
Other ixed assets 8,000 9,000
Accumulated depreciation (1,000 ) (1,600 )
Total assets $29,500 $?
Accounts payable $3,200 $ 6,800
Bonds 4,000 4,000
Common stock 17,000 16,000
Retained earnings 5,300 5,000
Total debt and equity $29,500 $?
Bird Industries, Inc.
Income Statement
Sales $84,000
Cost of goods sold 66,400
Gross proit $17,600
Operating expenses (13,000)
Depreciation (600 )
EBIT $4,000
Interest expense (500 )
EBT $3,500
Taxes (1,500 )
Net Income $2,000
10) Based on the information contained in Table 2, what was the total amount of Bird
Industries’ common stock dividend for 2012?
A) $800
B) $2,300
C) $2,000
D) Cannot be determined with available information
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
8
11) Based on the information contained in Table 2, what was Bird Industries’ operating
proit margin for 22012?
A) 21%
B) 4.8%
C) 4.2%
D) 2.4%
Question Status: New question
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
9
Table 3
Snark Enterprises, Inc.
Balance Sheets
2011 2012
Cash $1,000 $?
Accounts receivable 8,000 9,000
Inventories 4,000 7,000
Land 10,000 10,000
Other ixed assets 5,000 5,500
Accumulated depreciation (1,600 ) (2,000 )
Total assets $26,400 $?
Accounts payable $4,200 $ 7,000
Bonds 4,000 4,000
Common stock 15,000 16,000
Retained earnings 3,200 3,800
Total debt and equity $26,400 $?
Snark Enterprises, Inc.
Income Statement
Sales $44,900
Cost of goods sold (22,000 )
Gross proit $12,900
Operating expenses (10,000)
Depreciation (400 )
EBIT $2,500
Interest expense (500)
EBT $2,000
Taxes (1,000 )
Net Income $1,000
12) Based on the information contained in Table 3, what was the total amount of Snark
Enterprise’s common stock dividend for 2012?
A) $0
B) $400
C) $600
D) Cannot be determined with available information
Question Status: Previous edition
Objective: 3.2 Evaluate irm proitability using the income statement.
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
10