d.
statement of financial position
42. The cash flow activities on the cash flow statement are divided into these categories:
a.
cash from operations, buying or selling assets, and financing the business.
b.
payments on accounts receivable, payments on accounts payable, and changes in owner’s
equity.
c.
cash from sales, cash from accounts receivable, and payments on accounts payable.
d.
payment on debt, cash from sales, and increases to owner’s equity.
43. Depreciation is added back on the cash flow statement in which activity section?
a.
Financing
b.
Income
c.
Investment
d.
Operating
44. In order to derive a cash flow statement, the owner must add back the _____ to the income statement.
a.
depreciation expense
b.
increase in accounts receivable
c.
increases in inventory
d.
decrease in accounts payable
45. To determine how much Harlan sold to cash customers, he must:
a.
add the increase in accounts receivable to total sales.
b.
subtract the increase in accounts receivable from total sales.
c.
add the increase in accounts payable to total cash.
d.
subtract the increase in liabilities from owner’s equity.
46. Guenther bought merchandise for his retail business on credit and sold some of it for cash. To record
his purchases on his cash flow statement, Guenther will:
a.
subtract the cash sales of this new inventory from total inventory purchased.
b.
subtract the increase in accounts payable from the increase in inventory.
c.
subtract the increase in inventory from the increase in accounts payable.
d.
subtract the decrease in accounts receivable from the increase in inventory.
47. Fatima borrowed money from the bank to expand her business. She plans to repay the loan within 12
months. How is this reflected on the cash flow statement?
a.
As an increase in owner’s equity and an increase to cash.
b.
As an increase to cash.
c.
As a decrease to cash.
d.
As an increase to current liabilities.
48. The liquidity of a firm is
a.
often measured by a ratio of current assets to current liabilities.
b.
not important to a company‘s financial health.
c.
the ability of the firm to sell its products quickly.
d.
a measurement of spontaneous financing.
49. Comparing this year’s results to last year’s, Hector discovered that his firm’s current ratio improved
from 1.5 to 2.0. What has happened?
a.
Current liabilities have decreased.
b.
Fixed assets have increased.
c.
Ownership equity has increased.
d.
Long-term debt has decreased.
50. If Hector’s firm’s current ratio _____, its liquidity _____.
a.
increases; increases
b.
increases; decreases
c.
decreases; increases
d.
increases; remains the same
51. Irma’s current ratio is 2.5. This means that:
a.
for every dollar of current assets, Irma has $2.50 in current liabilities.
b.
for every dollar of current liabilities, Irma has $2.50 in current assets.
c.
Irma has enough cash to pay her debts for the next 2.5 years.
d.
Irma can borrow 2.5 times her annual sales.
52. Jasper bought some new equipment for his business. Six months later he wants to know whether this
was a good idea. To do that, he can calculate the:
a.
current ratio.
b.
operating profit margin.
c.
total asset turnover.
d.
return on assets.
53. Kermit calculated his total asset turnover to be 1.13. This tells Kermit that:
a.
every dollar of assets generates $1.13 in sales.
b.
every dollar of sales costs Kermit $1.13 to generate.
c.
every year he turns his inventory 1.13 times.
d.
every dollar of assets generates $1.13 in profits.
54. To determine his company’s debt ratio, Hector should divide the firm’s total debt by the total _____.
a.
income
b.
operating profits
c.
assets
d.
liabilities
55. Lance is trying to decide whether to purchase a new bulldozer to expand his business. He is confident
he has enough work to keep the bulldozer busy and that repaying the loan will not be a problem.
What advice would you give Lance?
a.
If the interest rate on the loan is less than the return on assets for the dozer, buy.
b.
If the return on this asset is more than the return on his equity, don’t buy.
c.
If his current return on equity is greater than the return on this asset, buy.
d.
If his total asset turnover rate is greater than one, don’t buy.
56. To increase her return on equity, Latitia could:
a.
increase the amount of assets he company owns.
b.
increase the amount of debt on her balance sheet.
c.
decrease the amount of liabilities on her balance sheet.
d.
decrease the amount of inventory she carries.
MATCHING
Match the term with its definition.
a.
Accrual-basis accounting
e.
Liquidity
b.
Cash-basis accounting
f.
Operating profit margin
c.
Current ratio
g.
Return on assets
d.
Financial statements
h.
Return on equity
1. 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
2. A measure of a firm’s profitability relative to the amount of its assets, determined by dividing
operating profits by total assets
3. The degree to which a firm has working capital available to meet maturing debt obligations
4. An accounting method of recording profits when cash is received and recording expenses when they
are paid
5. 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
6. A measure of the rate of return that owners receive on their equity investment, calculated by dividing
net profits by owners’ equity
7. A firm’s income statement, balance sheets, and cash flow statements
Match the term with its definition.
a.
Accounts payable
e.
Current assets
b.
Accounts receivable
f.
Current debt
c.
Accumulated depreciation
g.
Current ratio
d.
Common stock
h.
Depreciation expense
8. The cost of a firm’s building and equipment, allocated over the asset’s useful life
9. The amount of credit extended to customers that is currently outstanding
10. Stock shares that represent ownership in a corporation
11. Outstanding credit payable to suppliers
12. Assets that can be converted to cash relatively quickly
13. Borrowed money that must be repaid within 12 months
14. Total depreciation taken over time
Match the term with its definition.
a.
Accrued expenses
e.
Gross fixed assets
b.
Cash flow activities
f.
Long-term debt
c.
Cash flow statement
g.
Other assets
d.
Fixed assets
h.
Short-term notes
15. Physical assets that will be used in the business for more than one year
16. Operating, investing, and financing activities that result in cash inflows or outflows
17. Loans from banks or other sources with repayment terms of more than 12 months
18. A financial report showing a firm’s sources of cash as well as its uses of cash
19. Operating expenses that have been incurred and are owed but not yet paid
20. Depreciable assets at their original cost, before any depreciation expense has been taken
21. Agreements to repay cash amounts borrowed from banks or other lending sources within 12 months or
less
21. ANS: H PTS: 1 DIF: Difficulty: Easy
REF: p. 267 OBJ: LO: 10-2b NAT: BUSPROG: Analytic
KEY: Bloom’s: Knowledge
a.
Balance sheet
e.
Mortgage
b.
Debt
Dividend
g.
Retained earnings
d.
Financial leverage
h.
Working capital cycle
22. A long-term loan to purchase a building or land
23. Financing provided by creditors
24. Profits not paid out as dividends over the life of a business
25. The impact of financing with debt rather than with equity
26. Owners’ investments in a company plus cumulative net profits retained in the firm
27. The process of converting inventory to cash
28. A distribution of a firm’s profits to the owners
Match the term with its definition.
a.
Cost of goods sold
e.
Operating profits
b.
Gross profit
f.
Profit margins
c.
Long-term notes
g.
Profits before taxes
d.
Net profits
h.
Total asset turnover
29. Agreements to repay cash amounts borrowed from banks or other lending sources, plus interest, for
periods longer than 12 months
30. Earnings after operating expenses and interest expenses but before taxes
31. Earnings that may be distributed to the owners or reinvested in the company
32. Sales less the cost of goods sold
33. Profits as a percentage of sales
34. Earnings after operating expenses but before interest and taxes are paid
35. A measure of how efficiently a firm is using its assets to generate sales
Match the term with its definition.
a.
Cost of goods sold
e.
Income statement
b.
Current ratio
f.
Interest expense
c.
Debt ratio
g.
Inventory
d.
Depreciable assets
h.
Net fixed assets
36. A measure of what percentage of a firm’s assets is financed by debt
37. The cost of producing or acquiring goods or services to be sold by a firm
38. Gross fixed assets less accumulated depreciation
39. A measure of a company’s relative liquidity
40. A financial report showing the amount of profits or losses from a firm’s operations over a given period
of time
41. Assets whose value declines over time
42. The cost of borrowed money
ESSAY
1. What five areas of business activity need to be examined to answer the question “How profitable is the
business?”
2. What accounts would be included as operating activities and financing activities for an income
statement?
3. 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.
4. Describe sources of current debt.
5. 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?
6. Briefly explain the difference between accrual-basis accounting and cash-basis accounting.
7. Why do profits based on an accrual accounting system differ from profits based on a cash-based
system?
8. 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?
9. 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?
10. 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.
11. 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.