95. (p. 464) Assets are economic resources that are owned by a firm.
96. (p. 463) The fundamental accounting equation is as follows: Assets = Liabilities + Owners’ equity.
97. (p. 464) The balance sheet reflects the fact that assets equal the sum of liabilities and owners’ equity.
98. (p. 464) A balance sheet is composed of assets, liabilities, and revenues.
99. (p. 464) The equipment a firm owns and the money it has in its bank account would both be considered among
its assets.
100. (p. 465) Brand names such as Coca-Cola and McDonald’s are examples of assets.
101. (p. 466) Assets are listed on the balance sheet according to their liquidity.
102. (p. 466) The firm’s most valuable assets are listed at the top of its balance sheet.
103. (p. 466) Patents and copyrights are examples of intangible assets.
104. (p. 466) Liquidity refers to how soon liabilities must be paid.
105. (p. 466) Liquidity refers to how fast an asset can be converted into cash.
106. (p. 466) The amount of the business that belongs to the owners minus any liabilities owed by the business is
called owners’ equity.
107. (p. 466) Accounts payable are listed as an asset on a firm’s balance sheet.
108. (p. 466) The owners’ equity in a firm is listed as an asset on the balance sheet.
109. (p. 466) Current liabilities are payments due in one year or less.
110. (p. 467, Spotlight on Small Business box) According to the “Spotlight on Small Business” in Chapter 17, the value of
things you own minus the amount of money you owe others is called your net worth.
111. (p. 466) Owners’ equity can be found by subtracting liabilities from assets.
112. (p. 466) Liabilities are what the firm owes to others.
113. (p. 467) The “bottom line” of an income statement is the net worth of the firm.
114. (p. 468) Revenues, cost of goods, and expenses would all be reported on a firm’s income statement.
115. (p. 467) An income statement will present the net income (or net loss) of a firm resulting from the operations
of the organization over a period of time.
116. (p. 467) The income statement computes net income by subtracting liabilities from assets.
117. (p. 468, figure 17.6) Revenue represents the dollar amount of what is received for goods sold, services rendered
and/or from other financial sources.
118. (p. 468, figure 17.6) Net income is simply the difference between revenue and cost of goods sold.
119. (p. 468, figure 17.6) The cost of goods sold reflects the selling price of the merchandise sold over a period of
time.
120. (p. 470) Companies are not permitted to use depreciation as an expense when calculating their income.
121. (p. 470) When an accountant “writes off” the cost of a tangible asset over its estimated lifetime, it is called
depreciation.
122. (p. 469, Legal Briefcase box) The cost of goods sold reported on an income statement is not affected by the
inventory valuation method the firm uses.
123. (p. 469, Legal Briefcase box) Although a firm may use different inventory valuation methods, generally accepted
rules of accounting state that these methods must produce the same dollar value when used to determine the cost
of goods sold.
124. (p. 469-470; Legal Briefcase box) Generally accepted accounting practices (GAAP) allow firms to choose among
different methods of depreciation and inventory valuation.
125. (p. 469, Legal Briefcase box) FIFO and LIFO are two common methods used to compute the depreciation of tangible
assets.
126. (p. 469, Legal Briefcase box) FIFO is a method of computing net cash flows by subtracting financial inflows from
financial outflows.
127. (p. 469, Legal Briefcase box) FIFO is a method of inventory valuation that assumes the most recent items received in
inventory are sold first.
128. (p. 469, Legal Briefcase box) The LIFO method of inventory valuation assumes the newest items in inventory are
sold first.
129. (p. 469, Legal Briefcase box) When a firm sells merchandise from its inventory, the cost of goods sold it reports will
depend on which inventory valuation method it uses.
130. (p. 469, Legal Briefcase box) When a firm sells merchandise from its inventory, there are different techniques used
to calculate the cost of goods sold.
131. (p. 469, Legal Briefcase box) According to generally accepted accounting principles, a firm must use the inventory
valuation method that most accurately reflects the actual movement of goods through its inventory.
132. (p. 469) The cost of goods sold includes all the costs of buying and keeping merchandise available for sale.
133. (p. 469) Rent, salaries, insurance and depreciation are all examples of the cost of goods sold.
134. (p. 469-470) Gross margin represents the amount a firm earns by buying (or making) and selling merchandise.
135. (p. 470) Rents, salaries, utilities and insurance are all examples of operating expenses.
136. (p. 470) Expenses are costs involved in operating a business.
137. (p. 470) The two major classes of operating expenses are current expenses and long-term expenses.
138. (p. 470) Salaries of salespeople and advertising costs are common examples of general expenses.
139. (p. 470) General expenses would include office salaries, rent, and insurance.
140. (p. 470, figure 17.6) Net income before taxes is found by deducting total operating expenses from gross profit.
141. (p. 471) A statement of cash flows summarizes a company’s cash receipts and cash payments over a period of
time.
142. (p. 471, figure 17.7) Cash flow statements identify three sources of cash receipts and disbursements: assets,
liabilities and owners’ equities.
143. (p. 472) Cash flow difficulties are unlikely for a firm that is profitable.
144. (p. 472) A statement of cash flows reports the receipts and disbursements of cash in a given time period as the
result of three types of activities: operations, investments, and financing.
145. (p. 471, figure 17.7) Cash a firm raises from issuing new debt or equity capital would be reported on a statement
of cash flows.
146. (p. 472) An analysis of the statement of cash flows can help a firm prevent cash shortages.
147. (p. 472, figure 17.7) The statement of cash flows shows a firm’s revenues, costs of goods sold, expenses, and net
income.
148. (p. 468) Banks are likely to request a firm’s balance sheet when determining whether or not to loan money to
the firm. However, banks would have little interest in the firm’s income statement since it covers a short period
of time.
149. (p. 466) Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its bank
account. On its balance sheet, Harrison would list its land holdings before it listed its cash.
150. (p. 466) Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave him a
written promise to repay the amount within six months. Julio should list this business debt as an expense on his
pub’s income statement.
151. (p. 463) If a firm has $100,000 in assets and liabilities of $62,000, then the owner’s equity is equal to
$162,000.
152. (p. 468, figure 17.6) Marissa is taking her first course in accounting this semester. One of the first things she
should learn in the course is that revenue and net income are terms that mean the same thing.
153. (p. 467) Many managers are concerned with how their decisions affect the “bottom line”. These managers are
concerned with the impact of their decisions on net income.
154. (p. 463) Potential investors are interested in both a firm’s balance sheet and income statement when evaluating
whether or not to invest in a firm.
155. (p. 468, figure 17.6) Money received from tickets sold for the Rolling Stones concert is considered to be the net
income for the concert promoter.
156. (p. 469, Legal Briefcase box) When valuing items in inventory for financial reporting purposes, generally accepted
accounting practices require firms to value the cost of goods sold by assuming that the items that have been in
inventory the longest are the ones that are sold.
157. (p. 469-470; Legal Briefcase box) The net income of a firm can change significantly depending upon the specific
accounting procedures that are used for depreciation and inventory valuation.
158. (p. 469, Legal Briefcase box) If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory
valuation methods will produce the same reported net income.
159. (p. 469, Legal Briefcase box) During a period of rising prices, the FIFO technique of inventory valuation will result
in a lower net income figure than would the LIFO technique.
160. (p. 469, Legal Briefcase box) In businesses that handle a lot of perishable items (such as supermarkets) the actual
movement of goods through inventory most closely resembles the LIFO inventory valuation technique.
161. (p. 469, Legal Briefcase box) If the economy began experiencing a prolonged period of deflation in which the costs
of most goods were actually falling, many firms would find that the LIFO method of inventory valuation would
result in higher reported profits.
162. (p. 469, Legal Briefcase box) During periods of rising prices, firms that want to report more attractive profits would
tend to favor the FIFO technique of inventory valuation.
163. (p. 469, Legal Briefcase box) If the goal of a business is to pay lower taxes on its income during an inflationary
period, it is likely to use the FIFO inventory costing method.
164. (p. 469) The cost of the buns, meat, and pickles would all be considered part of the cost of goods sold for the
Burgers R Us restaurant.
165. (p. 472) The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales.
166. (p. 471, figure 17.7) Cash provided by the sale of new cars at Pete’s Auto Emporium would be listed as a cash
inflow from operations on Pete’s statement of cash flows.
167. (p. 471) A loan officer at the Saltwater State Bank is considering a loan application from Lanwell Mills. He is
concerned about the ability of the company to make repayments if it grants the loan. The loan officer is likely to
be very interested in Lanwell’s statement of cash flows.
168. (p. 470) One of the problems with current accounting procedures is that there is no way for firms to
systematically write off the costs of property and equipment over time.
169. (p. 473) Financial ratios are used to analyze a firm’s financial condition and performance.
170. (p. 473) Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors.
171. (p. 473) The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in
its operations.
172. (p. 473) Liquidity refers to how fast an asset can be converted to cash.
173. (p. 473) The current ratio is used to evaluate a firm’s ability to pay its short-term debts.
174. (p. 473-474) The current ratio is found by dividing the firm’s total assets by its total liabilities.
175. (p. 474) The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its
operations.
176. (p. 473-474) Both the current ratio and the acid-test ratio are liquidity ratios.
177. (p. 474) The acid-test ratio is found by dividing inventory by cost of goods sold.
178. (p. 474) For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a
better measure of liquidity than the acid-test ratio.
179. (p. 474) A firm that takes on too much debt could experience problems repaying its lenders or meeting
promises made to stockholders.
180. (p. 474) Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its
operations.
181. (p. 474) The debt to owners’ equity ratio is a common type of liquidity ratio.
182. (p. 474-475) Profitability ratios are often used to measure management’s performance.
183. (p. 475) A firm’s basic earnings per share measures how much profit was earned for each dollar invested by
the firm’s owners.
184. (p. 475) The return on sales ratio measures a firm’s use of leverage.
185. (p. 475) The basic earnings per share ratio does not take stock options, warrants, and preferred stock into
account.
186. (p. 475) The higher the risk of a particular investment, the greater the expected rate of return required by
investors.
187. (p. 475) Activity ratios measure the effectiveness of the firm’s management in using its various resources to
achieve profits.
188. (p. 475) Return on equity measures how much was earned for each dollar invested by the firm’s creditors.
189. (p. 476) The inventory turnover ratio measures the speed of inventory moving through the firm and its
conversion into sales.
190. (p. 476) An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks
of merchandise.
191. (p. 473) Prattville Manufacturing has applied for a short-term loan with the First National Bank. The loan
officers of the bank are likely to look carefully at Prattville’s liquidity ratios before they decide to grant the
loan.
192. (p. 473) One weakness of the acid-test ratio is that it puts too much emphasis on the ability to convert
inventory quickly into cash.
193. (p. 475) A look at the EPS ratio for a corporation will give you insights into its ability to pay a dividend to its
stockholders.