Chapter 02 The Incoming Cash Was Recorded Revenue But

89) 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?

A) The sale will be added to Net Income on the income statement and retained in Net Income on the

statement of cash flows.

B) The sale will be added to Net Income on the income statement but deducted from Net Income on the

statement of cash flows.

C) The sale will not be added to Net Income on the income statement but added to Net Income on the

statement of cash flows.

D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on

the statement of cash flows.

90) A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its

bottle production plant. How will the cost to the company of this piece of equipment be recorded?

A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the

statement of cash flows.

B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement

of cash flows.

C) It will be depreciated over time on the income statement and therefore not be recorded separately on

the statement of cash flows.

D) It will be subtracted from Gross Profit on the income statement and therefore not be recorded

separately on the statement of cash flows.

91) 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?

A) as an outflow under Operating Activities

B) as an outflow under Investment Activities

C) as an outflow under Financial Activities

D) The acquisition would not be recorded on the statement of cash flows.

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 effect 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 financing activities 5.2

Change in Cash and Cash Equivalents 5.4

92) Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what

were AOS Industries’ retained earnings for 2008?

A) $1.3 million

B) $1.7 million

C) $2.1 million

D) $5.4 million

93) Consider the above statement of cash flows. 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

94) Consider the above statement of cash flows. Which of the following is true of AOS Industries‘ operating

cash flows?

A) It collected more cash from its customers than they 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.

95) Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new

warehouse for $2 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 theend of the 2008?

A) It would have $2,000,000 less cash at the end of 2008.

B) It would have $1,950,000 less cash at the end of 2008.

C) it would have $150,000 less cash at the end of 2008.

D) it would have an additional $50,000 in cash at the end of 2008.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

96) How can we cross check the statement of cash flows?

97) What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

98) The management of public companies are not legally required to disclose any off balance sheet transactions.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

99) 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 had 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 food retailers

100) The notes to the financial statements would be LEAST likely to 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 transactions

C) to show how the value of assets listed in the financial statements were arrived at

D) to explain the method of accounting that was used in the preparation of the financial statements

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

101) What is the need for the notes to the financial statements when the firm’s operations are already documented

in the financial statements?

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

102) Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of

inadvert ent or deliberate fraud in financial statements.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

103) 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?

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 off balance sheet promises to repurchase assets should have been disclosed in management

discussion and analysis (MD&A) or notes to the financial statement.

104) WorldCom classified $3.85 billion in operating expenses as long–term investments. How would this make

WorldCom’s financial 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 flows

105) 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 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 statements they release

106) What are the requirements of section 404 of SOX?

A) It requires that senior management return any profits or bonuses resulting from stock sales during any

period covered by financial 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 five years.

D) It requires that senior management and the boards of public companies attest to the effectiveness and

validity of their financial control process.

107) 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 financial statements to investors is entirely dependent on the ethics of those

constructing them.

B) It is not possible to effectively evaluate a company unless all the financial statements are fully and

correctly prepared.

C) The information in financial statements should be viewed extremely critically.

D) Readers of even fraudulent financial statements can spot signs of a firm’s financial health if those

statements are read fully and with care.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

108) What role do external auditors play in the firm’s financial reporting process?

109) What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?

110) State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial

statements.

111) According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP)

in their financial reporting process?