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CHAPTER 4
PREPARING AND USING FINANCIAL STATEMENTS
True-False Questions
accrual accounting.
recognized rather than waiting until realized.
Income.
one year are known as current liabilities.
reflect the usage or wearing out of the asset is called accumulated depreciation.
less than one year are known as receivables.
that cover the cost of the equipment plus a return on investment in the
equipment is known as a capital lease.
profits after all operating expenses, excluding financing costs, have been
deducted from net sales.
firm’s net sales after operating expenses, financing costs, and taxes have been
deducted.
Chapter 4: Preparing and Using Financial Statements
25
investing is positive.
investing is negative.
sheet reflects the acquisition of initial assets and the obtaining of seed
financing.
statement typically shows no sales but expenses such as rent, utilities, and a
subsistence salary for the entrepreneur.
statement typically shows no sales but expenses including the production and
market of products or services.
give credit to customers) usually occurs during the development stage in a new
venture’s life cycle.
friends) usually occurs during the development stage in a new venture’s life
cycle.
capitalists) usually occurs during the development stage in a new venture’s life
cycle.
incurred to produce the products that were sold.
range of revenues for a specific time period.
contributes to covering the cash fixed costs.
Chapter 4: Preparing and Using Financial Statements
26
survival revenues.
True-false questions for Chapter 4, Appendix A:
a specified time period.
a specified time period.
is zero because no taxes are payable.
Multiple-Choice Questions
position as of a specific date is called the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
incurred over an accounting period is called the
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
flows into and out of a company during a specific period of operation is called
the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
a. total liabilities + depreciation
b. total liabilities + owners’ equity
Chapter 4: Preparing and Using Financial Statements
27
c. owners’ equity + net income
d. owners’ equity + current liabilities
e. total liabilities + net income
a. cash
b. receivables
c. inventories
d. fixed assets
a. a corporate asset
b. part of owners’ equity
c. neither a or b
d. both a and b
a. coins
b. currency
c. checking accounts
d. certificates of deposit
a. short-term
b. illiquid
c. high-quality
d. interest-bearing
a. raw materials
b. finished products
c. goods sold but not yet shipped
d. work-in-process
a. inventory
b. machinery
c. land
d. both a and b
e. both a and c
a. a decrease in inventory
b. an increase in accrued liabilities
c. the sale of an asset for a gain
Chapter 4: Preparing and Using Financial Statements
28
d. a drop in the amount owed on a bond
e. an increase in stock issued
a. an increase in accounts receivable
b. a decrease in wages payable
c. the acquisition of land
d. an increase in the amount owed on a note payable
e. the repurchase of outstanding shares of stock
a. cash flow from operating activities
b. cash flow from equity activities
c. cash flow from investing activities
d. cash flow from financing activities
Note: Use the following data for the next three problems (14, 15, & 16).
Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling
expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a
tax rate of 34%.
a. $4,000
b. $2,000
c. $9,500
d. $6,000
e. $1,320
a. $6,000; $2,040
b. $2,000; $1,320
c. $4,000; $1,360
d. $2,000; $680
e. $9,500; $3,230
a. $2,720
b. $897.60
c. $6,460
d. $2,040
e. $1,320
Chapter 4: Preparing and Using Financial Statements
29
debt of $80, and stockholders’ equity of $400. What is the amount of your
venture’s current liabilities?
a. -$100
b. $100
c. $210
d. $290
e. $1,090
breakeven in terms of:
a. economic revenues
b. variable costs
c. survival revenues
d. fixed costs
usually cancelable is called:
a. capital lease
b. liability lease
c. operating lease
d. asset lease
e. equity lease
schedule?
a. income statement
b. cost of production schedule
c. cost of goods sold schedule
d. inventories schedule
negative?
a. cash flows from operations and financing
b. cash flows from investing and financing
c. cash flows from operations and investing
d. cash flows from net income and depreciation
e. cash flows from operations and net income
a. fixed expenses
b. semi-fixed expenses
c. semi-variable expenses
d. variable expenses
Chapter 4: Preparing and Using Financial Statements
30
a. revenues – variable costs – cash fixed costs
b. revenues + variable costs + cash fixed costs
c. revenues – variables costs – total fixed costs
d. revenues + variable costs – cash fixed costs
a. Revenue – After-Tax cost of financial capital used
b. net income ÷ sales
c. (net sales – the cost of production) × tax rate
d. net sales – the cost of production
a. revenues times (1 + tax rate)
b. revenues times (1 – tax rate)
c. EBITDA times (1 – tax rate)
d. EBIT times (1 – tax rate)
e. net income times (1 + tax rate)
and administrative and marketing expenses were $25,000 each. Depreciation
expense was $10,000, while interest expense was $15,000. If the tax rate is
30%, what was the firm’s NOPAT last year?
a. $19,500
b. $35,000
c. $45,500
d. $52,500
e. $80,500
$400,000 and a variable cost revenue ratio = .65?
a. $460,500
b. $615,385
c. $1,142,857
d. $2,000,334
e. $4,000,667
Administrative expenses = $200,000; Marketing expenses = $180,000;
Depreciation expenses = $100,000; and Interest expenses = $20,000.
a. $380,000
b. $400,000
c. $480,000
d. $500,000
e. $620,000
Chapter 4: Preparing and Using Financial Statements
31
cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.
a. 70%
b. 60%
c. 30%
d. 40%
e. 100%
based on the following information: cash fixed costs = $60,000; variable costs
= $70,000; and sales = $100,000.
a. $85,714
b. $100,000
c. $116,667
d. $200,000
e. $300,000
Administrative expenses = $200,000; Marketing expenses = $180,000;
Depreciation expenses = $100,000; and Interest expenses = $20,000; and a
variable cost revenue ratio = .50?
a. $400,000
b. $600,000
c. $800,000
d. $1,000,000
e. $1,200,000
$375,000. This year it had $250,000 in sales, $100,000 of which was a fixed
cost. What are the firm’s cash fixed costs?
a. $150,000
b. $225,000
c. $625,000
d. $937,500
$63,000. If its breakeven survival revenue level was $94,000, what was its
variable cost revenue ratio (VCRR)?
a. .27
b. .30
c. .33
d. .67
Chapter 4: Preparing and Using Financial Statements
32
cost of goods sold of $81,250, which was the only variable cost. Depreciation
was $20,000, and cash costs were $5,000 in financing costs, admin expenses of
$50,000, and $45,000 in marketing expenses – all of which were fixed. What
is the survival breakeven revenue?
a. $342,857
b. $285,714
c. $271,429
d. $184,615
e. $153,846
Multiple Choice Questions and Problems for Chapter 4, Appendix A:
a. NOPAT plus after-tax dollar cost of financial capital used
b. ROE minus percentage cost of financial capital
c. NOPAT minus after-tax dollar cost of financial capital used
d. ROE plus the percentage cost of financial capital
a. net profit
b. EBIT times one minus the tax rate
c. EBT minus interest paid
d. EBIT times the tax rate
a. cash operating fixed costs (excluding interest expenses)
b. noncash fixed costs (e.g., depreciation)
c. interest expenses
d. a plus b
e. a plus b plus c
earnings before interest = $100,000; interest = $20,000; and the tax rate =
30%. a. $70,000
b. $56,000
c. $30,000
d. $24,000
e. $10,000
information: total operating fixed costs = $75,000; variable costs = $150,000;
and sales = $200,000.
a. $100,000
Chapter 4: Preparing and Using Financial Statements
33
b. $240,000
c. $300,000
d. $400,000
e. $460,000
Administrative expenses = $200,000; Marketing expenses = $180,000;
Depreciation expenses = $100,000; and Interest expenses = $20,000.
a. $200,000
b. $380,000
c. $400,000
d. $480,000
e. $500,000