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8)
AOS Industries Statement of Cash Flows for 2008
Operating activities
Net Income 3.2
Depreciation and amortization 1.4
Cash efect of changes in
Accounts receivable -1.9
Accounts payable 1.0
Inventory -0.6
Cash from operating activities 3.1
Investment activities
Capital expenditures -2.2
Acquisitions and other investing activity -0.4
Cash from investing activities -2.6
Financing activities
Dividends paid -1.0
Sale or purchase of stock 2.1
Increase in short-term borrowing 1.4
Increase in long-term borrowing 3.2
Cash from inancing activities 5.7
Change in Cash and Cash Equivalents 6.2
Consider the above statement of cash lows. If all amounts shown above are in millions of
dollars, what were AOS Industries' retained earnings for 2008?
A) $5.2 million
B) $2.2 million
C) $4.4 million
D) $3.1 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
50
Use the table for the question(s) below.
AOS Industries Statement of Cash Flows for 2008
Operating activities
Net Income 3.2
Depreciation and amortization 1.4
Cash efect of changes in
Accounts receivable -2.1
Accounts payable 1.1
Inventory -0.8
Cash from operating activities 2.8
Investment activities
Capital expenditures -2.2
Acquisitions and other investing activity -0.4
Cash from investing activities -2.6
Financing activities
Dividends paid -1.5
Sale or purchase of stock 2.1
Increase in short-term borrowing 1.4
Increase in long-term borrowing 3.2
Cash from inancing activities 5.2
Change in Cash and Cash Equivalents 5.4
9) Consider the above statement of cash lows. What were AOS Industries' major means of
raising money in 2008?
A) from investment activities
B) by sale of stock
C) from its operations
D) by issuing debt
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
51
10) Consider the above statement of cash lows. Which of the following is true of AOS
Industries' operating cash lows?
A) It collected more cash from its customers than it charged.
B) It sold more inventory than it bought.
C) It charged more on its accounts payable back than it paid back.
D) All of the above are true.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
52
11) AOS Industries Statement of Cash Flows for 2008
Operating activities
Net Income 3.2
Depreciation and amortization 1.4
Cash efect of changes in
Accounts receivable -2.1
Accounts payable 1.1
Inventory -0.8
Cash from operating activities 2.8
Investment activities
Capital expenditures -2.2
Acquisitions and other investing activity -0.4
Cash from investing activities -2.6
Financing activities
Dividends paid -1.5
Sale or purchase of stock 2.1
Increase in short-term borrowing 1.4
Increase in long-term borrowing 3.2
Cash from inancing activities 5.2
Change in Cash and Cash Equivalents 5.4
Consider the above statement of cash lows. In 2008, AOS Industries had contemplated
buying a new warehouse for $3 million, the cost of which would be depreciated over 10
years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of
cash held by AOS at the end of the 2008?
A) It would have $3,000,000 less cash at the end of 2008.
B) It would have $2,925,000 less cash at the end of 2008.
C) It would have $1,500,000 less cash at the end of 2008.
D) It would have an additional $7,500,000 in cash at the end of 2008.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
12) How can we cross check the statement of cash lows?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
13) What will be the efect on the statement of cash lows if a irm buys a new processing
plant through a new loan?
AACSB Objective: Analytic Skills
53
Author: SS
Question Status: Previous Edition
2.7 Other Financial Statement Information
1) The management of public companies is not legally required to disclose any of-balance
sheet transactions.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2) A irm 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 irm's management discussion
and analysis (MD&A)?
A) that a large number of funds were allocated to advertising to increase awareness of the
irm's brand in new areas it had expanded into this year
B) that some senior members of the management team have retired in this inancial year
C) that the company has lost a class action suit brought against the irm by its employees
and is expected to have to pay a large amount of damages
D) that the irm has plans to expand into the organic food business in the next inancial
year by purchasing several small organic food retailers
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
3) The notes to the inancial statements would LEAST likely be used for which of the
following purposes?
A) to provide information regarding the context in which these inancial numbers were
generated
B) to disclose the inancial implications of any of-balance sheet transactions
C) to show how the value of assets listed in the inancial statements were arrived at
D) to explain the method of accounting that was used in the preparation of the inancial
statements
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) What is the need for the notes to the inancial statements when a irm's operations are
already documented in the inancial statements?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
54
2.8 Financial Reporting in Practice
1) Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated
the danger of inadvertent or deliberate fraud in inancial statements.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
2) One way Enron manipulated its inancial statements was to sell assets at inlated prices
to other irms, 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?
A) The assets should have been listed on the balance sheet as long-term assets.
B) Cash raised by selling assets should not be recorded as revenue.
C) The cash raised should have been recorded as short-term loans.
D) The of-balance sheet promises to repurchase assets should have been disclosed in
management discussion and analysis (MD&A) or notes to the inancial statement.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
55
3) WorldCom classiied $3.85 billion in operating expenses as long-term investments. How
would this make WorldCom's inancial statements more attractive to investors?
A) by decreasing depreciation
B) by reducing capital expenditures
C) by raising its reported earnings
D) by boosting its cash lows
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
4) Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to
improve the accuracy of information given to both boards and shareholders?
A) by increasing the penalties to irms 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 inancial statements they release
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
5) What are the requirements of section 404 of SOX?
A) It requires that senior management return any proits or bonuses resulting from stock
sales during any period covered by inancial statements that must later be restated.
B) It requires that auditors do not perform any non-auditing tasks for the companies they
audit.
C) It requires that audit partners rotate every ive years.
D) It requires that senior management and the boards of public companies attest to the
efectiveness and validity of their inancial control process.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Previous Edition
56
6) Which of the following is the main lesson that analysts and investors should take from
the cases of Enron and WorldCom?
A) The usefulness of inancial statements to investors is entirely dependent on the ethics of
those constructing them.
B) It is not possible to efectively evaluate a company unless all the inancial statements are
fully and correctly prepared.
C) The information in inancial statements should be viewed extremely critically.
D) Readers of even fraudulent inancial statements can spot signs of a irm's inancial
health, if those statements are read fully and with care.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: DS
Question Status: Revised
7) What role do external auditors play in a irm's inancial reporting process?
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Revised
8) What role does Generally Accepted Accounting Principles (GAAP) play in the accounting
process?
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Previous Edition
9) State the names of some of the irms discussed in the chapter that had inaccurate
reporting in their inancial statements.
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Previous Edition
57
10) According to the text, did Enron and WorldCom follow Generally Accepted Accounting
Principles (GAAP) in their inancial reporting process?
AACSB Objective: Ethical Understanding and Reasoning Abilities
Author: SS
Question Status: Revised
58
