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39) A(n) ________ is a snapshot of a company’s assets, liabilities, and owners’ equity at a
specific point in time.
A) income statement
B) statement of cash flows
C) effectiveness statement
D) balance sheet
E) efficiency statement
40) Which of the following statements is incorrect regarding how balance sheets are prepared?
A) The left-hand side of a balance sheet shows a firm’s assets.
B) The assets on a balance sheet are shown in order of liquidity.
C) Assets are recorded at fair market value rather than cost.
D) The right-hand side of a balance sheet shows a firm’s liabilities and its owners’ equity.
E) Intellectual property receives value in some cases and in some cases it does not.
41) Real estate, buildings, equipment and furniture are classified as ________ assets on a
company’s balance sheet.
A) intermediate term
B) fixed
C) other
D) permanent
E) current
42) The Savvy Entrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the
selection of a new CEO for New Venture Fitness Drinks. The lesson learned from the feature
was ________.
A) compare a firm’s financial ratios against its primary competitors and industry norms to fairly
assess how well a firm is performing financially
B) income statements are more effective in assessing how well a firm is performing financially
than are balance sheets and statements of cash flow
C) the most powerful instrument for understanding how well a firm is performing financially is
the statement of cash flows
D) ratio analysis is ineffective
E) look at multiple years of an income statement rather than a single year to fairly assess how
well a firm is performing financially
43) Cash plus items that are readily convertible to cash, such as accounts receivable, marketable
securities, and inventories are classified as ________ assets on a firm’s balance sheet.
A) other
B) intermediate term
C) temporary
D) current
E) fixed
44) Which of the following is an example of a long-term liability?
A) Accounts payable
B) Real estate mortgage
C) Accrued expenses
D) Current portion of real estate mortgage
E) Owners’ equity
45) When evaluating a balance sheet, the two primary questions are ________.
A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
profitable
B) whether a firm is profitable and whether a firm is financially sound
C) whether a firm’s cost of sales is going up and whether it is generating excess cash that could
be used to pay down debt or pay dividends
D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
financially sound
E) whether a firm is profitable and whether it is generating excess cash that could be used to pay
down debt or pay dividends
46) A firm’s working capital is its ________.
A) inventory and accounts receivable minus its current liabilities
B) current assets minus its current liabilities
C) total assets minus its total liabilities
D) cash and cash equivalents minus its current liabilities
E) accounts receivable minus its total accounts payable
47) A firm’s ________ is its current assets divided by its current debt.
A) working share
B) present share
C) working capital
D) owners’ equity
E) current ratio
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48) Which of the financial statements used by businesses to keep track of their financial affairs is
the most similar to an ordinary person’s end-of-the month bank statement?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of ratio analysis
E) Statement of owners’ equity
49) The statement of cash flows is divided into three separate activities — ________.
A) profitability, stability, and investing
B) stability, earning, and financing
C) operating, capital, and liquidity
D) spending, earning, and capital
E) operating, investing, and financing
50) In the context of a firm’s statement of cash flows, ________ activities include the purchase,
sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).
A) operating
B) investing
C) capital
D) financing
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51) In the context of a firm’s statement of cash flows, ________ activities include cash raised
during the period by borrowing money or selling stock and/or cash used during the period by
paying dividends, buying back outstanding stock, or buying back outstanding bonds.
A) investing
B) financing
C) operating
D) liquidity
E) capital
52) According to the textbook, the most practical way to interpret or make sense of a firm’s
historical financial statements is through ________.
A) profit analysis
B) regression analysis
C) the preparation of pro forma financial statements
D) ratio analysis
E) percentage analysis
53) The income statement records all the revenues and expenses for a given period and shows
whether the firm is making a profit or is experiencing a loss.
54) The balance sheet reflects the results of the operations of a firm over a specified period of
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55) A firm’s profit margin, or return on sales, is computed by dividing net income by net sales.
56) The major categories of assets listed on a balance sheet include current, fixed, and other
57) A statement of cash flows is a snapshot of a company’s assets, liabilities, and owners’ equity
at a specific point in time.
58) A firm’s working capital is defined as its fixed assets minus its long-term liabilities.
59) The statement of cash flows summarizes the changes in a firm’s cash position for a specified
period of time and details why the change occurred.
60) In the context of a firm’s statement of cash flows, operating activities include the purchase,
sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).
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61) Describe the purpose of the income statement, the balance sheet, and the statement of cash
flows.
62) What is ratio analysis? Why is it important?
63) Shawn Jones was reading the business plan of New Venture Fitness Drinks, and noticed that
prior to its financial forecasts, New Venture Fitness Drinks placed an explanation of the sources
of the numbers for the forecast and the assumptions used to generate them. This explanation is
called a(n) ________.
A) forecast sheet
B) forecast hypothesis
C) estimate statement
D) assumption sheet
E) hypothesis sheet
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64) In the context of computing the cost of sales, the common way to do this is to use the
percent-of-sales method, which is a method for expressing each expense item as a percentage of
________.
A) net sales
B) gross profit
C) net income
D) operating income
E) cost of sales
65) If a firm determines it can use the percentage-of-sales method and it follows the procedure
described in the textbook, then the net result is that each expense item on its income statement
(with the exception of those items that can be individually forecast) will grow at the same rate as
sales. This approach is called the ________.
A) continuous percentage method of forecasting
B) stable fraction method of forecasting
C) regular proportion method of forecasting
D) constant ratio method of forecasting
E) steady percentage method of forecasting
66) The break-even point for a new restaurant or product is the point where the total revenue
received equals total costs associated with the output of the restaurant or the sale of the product.
67) What are forecasts? What role do they play in the preparation of pro forma financial
statements?
68) A firm’s pro forma financial statements are similar to its historical financial statements
except that they ________.
A) do not include the income statement
B) are required by the SEC in all cases
C) look back rather than forward
D) look forward rather than back
E) do not include the statement of cash flows
69) The What Went Wrong? feature for Chapter 8 focuses on Wise Acre Frozen Treats, a
company that made organic popsicles from unrefined sweeteners. According to the feature, Wise
Acre Frozen Treats failed largely because it ________.
A) grew too quickly, which overwhelmed its cash flow
B) was not careful enough in preparing its pro forma financial statements
C) was not efficient in the way it utilized its assets
D) spent too much money on marketing
E) did not compare its financial ratios to industry peers
70) The pro forma ________ provides a firm a sense of how its activities will affect its ability to
meet its short-term liabilities and how its finances will evolve over time.
A) balance sheet
B) statement of cash flows
C) income statement
D) expense statement
E) statement of owners’ equity
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71) According to the textbook, the most important function of the pro forma statement of cash
flows is to project whether the firm will have sufficient ________.
A) income to meet its payroll on a weekly or monthly basis
B) income to exceed industry norms
C) cash to meet its needs
D) inventory to meet its sales and production forecasts
E) short-term assets to cover its short-term liabilities
72) The pro forma balance sheet provides a firm a sense of how its activities will affect its ability
to meet its short-term liabilities and how its finances will evolve over time.
73) The pro forma income statement shows the projected flow of cash into and out of the
company during a specified period.
74) The same financial ratios used to evaluate a firm’s historical financial statement should be
used to evaluate the pro forma financial statements.
75) Describe each of the four primary financial objectives of firms.