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Match the term with its definition.
a. Accrual-basis accounting
b. Cash-basis accounting
c. Current ratio
d. Financial statements
e. Liquidity
f. Operating profit margin
g. Return on assets
h. Return on equity
90. An accounting method of recording profits when earned and expenses when incurred, whether or not the profits have
been received in cash or the expenses paid
91. A measure of a firm’s profitability relative to the amount of its assets, determined by dividing operating profits by
total assets
92. The degree to which a firm has working capital available to meet maturing debt obligations
93. An accounting method of recording profits when cash is received and recording expenses when they are paid
94. A measure of how well a firm is controlling its cost of goods sold and operating expenses relative to sales, determined
by dividing operating profits by sales
95. A measure of the rate of return that owners receive on their equity investment, calculated by dividing net profits by
owners’ equity
96. A firm’s income statement, balance sheets, and cash flow statements
Match the term with its definition.
a. Cost of goods sold
b. Gross profit
c. Long-term notes
d. Net profits
e. Operating profits
f. Profit margins
g. Profits before taxes
h. Total asset turnover
97. Agreements to repay cash amounts borrowed from banks or other lending sources, plus interest, for periods longer
than 12 months
98. Earnings after operating expenses and interest expenses but before taxes
99. Earnings that may be distributed to the owners or reinvested in the company
100. Sales less the cost of goods sold
101. Profits as a percentage of sales
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102. Earnings after operating expenses but before interest and taxes are paid
103. A measure of how efficiently a firm is using its assets to generate sales
Match the term with its definition.
a. Accounts payable
b. Accounts receivable
c. Accumulated depreciation
d. Common stock
e. Current assets
f. Current debt
g. Current ratio
h. Depreciation expense
104. The cost of a firm’s building and equipment, allocated over the asset’s useful life
105. The amount of credit extended to customers that is currently outstanding
106. Stock shares that represent ownership in a corporation
107. Outstanding credit payable to suppliers
108. Assets that can be converted to cash relatively quickly
109. Borrowed money that must be repaid within 12 months
110. Total depreciation taken over time
Match the term with its definition.
a. Balance sheet
b. Debt
c. Dividend
d. Financial leverage
e. Mortgage
f. Owners’ equity
g. Retained earnings
h. Working capital cycle
111. A long-term loan to purchase a building or land
112. Financing provided by creditors
113. Profits not paid out as dividends over the life of a business
114. The impact of financing with debt rather than with equity
115. Owners’ investments in a company plus cumulative net profits retained in the firm
116. The process of converting inventory to cash
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117. A distribution of a firm’s profits to the owners
Match the term with its definition.
a. Cost of goods sold
b. Current ratio
c. Debt ratio
d. Depreciable assets
e. Income statement
f. Interest expense
g. Inventory
h. Net fixed assets
118. A measure of what percentage of a firm’s assets is financed by debt
119. The cost of producing or acquiring goods or services to be sold by a firm
120. Gross fixed assets less accumulated depreciation
121. A measure of a company’s relative liquidity
122. A financial report showing the amount of profits or losses from a firm’s operations over a given period of time
123. Assets whose value declines over time
124. The cost of borrowed money
125. Compare and contrast the income statement and balance sheet. What is important to know about each statement to
determine how a company performed during the year?
126. Erin, the owner of Sweets To Eat Ice Cream Shoppe, wants to know how her company is operating from a financial
perspective. Her CPA has given her the following numbers: Sales $325,000, Operating Profits $50,000, Current Assets
$125,000, Current Liabilities $40,000, Total Assets $350,000. The ice cream retail industry norms include Operating
Profit Margin 10%, Return on Assets 11% and Current Ratio 2.7. Determine the company’s liquidity and compare the
value to the industry ratios.
127. Warren needs to generate cash flow for his lawn mowing business. What three cash flow activities can he engage to
bring in cash for his company?
128. Describe sources of current debt.
129. Why do profits based on an accrual accounting system differ from profits based on a cash-based system?
130. Trucks for Stuff is a one year old company that provides statewide moving services to customers. Describe the types
of current, fixed and other assets Trucks for Stuff would have.
131. When an entrepreneur is trying to determine how management decisions have impacted the business for the past
year, what four areas are critical? What ratios would need to be calculated to find answers?
132. What accounts would be included as operating activities and financing activities for an income statement?
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133. Erin, the owner of Sweets To Eat Ice Cream Shoppe, wants to know how her company is operating from a financial
perspective. Her CPA has given her the following numbers: Sales $325,000, Operating Profits $50,000, Current Assets
$125,000, Current Liabilities $40,000, and Total Assets $350,000. The ice cream retail industry norms include Operating
Profit Margin 10%, Return on Assets 11% and Current Ratio 2.7. Determine the company’s profitability on its assets and
compare to the industry ratios.
134. Briefly explain the difference between accrual-basis accounting and cash-basis accounting.
135. What five areas of business activity need to be examined to answer the question “How profitable is the business?”
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Answer Key
1. False
2. False
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26. False
27. b
28. b
29. a
30. a
31. d
32. a
33. c
34. d
35. b
36. d
37. c
38. d
39. a
40. c
41. c
42. d
43. c
44. d
45. d
46. a
47. c
48. a
49. a
50. c
51. b
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77. a
78. a
79. c
80. a
81. c
82. b
83. d
84. b
85. f
86. c
87. a
88. e
89. h
90. a
91. g
92. e
93. b
94. f
95. h
96. d
97. c
98. g
99. d
100. b
101. f
102. e
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103. h
104. h
105. b
106. d
107. a
108. e
109. f
110. c
111. e
112. b
113. g
114. d
115. f
116. h
117. c
118. c
119. a
120. h
121. b
122. e
123. d
124. f
125. While the income statement and balance sheet are two separate reports, they complement each other to give an
overall picture of the firm’s financial situation. The income statement reports for a given period of time while the balance
sheet covers a specific point in time. Both of these entities are important in understanding the full financial situation of the
business.
To understand how a firm performed during a year, three values must be known:
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