A classified balance sheet means that the asset and liability sections are categorized into
key areas.
The FASB has congressional authority to set accounting policies.
Congress passed the Sarbanes-Oxley Act of 2002 in hopes of ending future accounting
scandals and renewing investor confidence in the marketplace.
A firm’s annual report contains only two pieces of information: the financial statements
and the notes to the financial statements.
Accounts receivable are recorded on the balance sheet at gross realizable value.
The time period assumption assumes a two year time frame with interim reporting
occurring daily and weekly.
Which of the following items could be found on a statement of shareholders’ equity?
a. Reasons for retained earnings increases or decreases.
b. A reconciliation of beginning to ending cash.
c. The market value of the firm’s common stock.
d. Assets = Liabilities + Stockholders’ Equity.
Which of the following items is a discretionary expenditure?
a. Union wages.
b. Factory building to produce inventory.
c. Advertising.
d. Taxes.
Which item is a noncash item that would be added to net income to convert it to cash
flow from operating activities?
a. Accounts receivable.
b. Depreciation.
c. Accounts payable.
d. Inventory.
What is important to understand about the label ‘pro forma’?
a. Pro forma refers to GAAP-based financial statements.
b. Pro forma requires firms to present two distinct net profit amounts in their Form
10-Ks.
c. Pro forma relates to the amount of debt in a firm’s capital structure.
d. Pro forma earnings or financial statements are sometimes based on a firm’s own
definition which is not technically a correct definition.
Jett Co.’s gross profit, operating profit and net profit margins for 2015 are:
a. 50.0%, 32.5%, 22.5% respectively.
b. 29.2%, 12.5%, 10.0%, respectively.
c. 27.0%, 11.0%, 10.5%, respectively.
d. 21.5%, 17.5%, 12.0%, respectively.
What information can be found on a statement of stockholders’ equity?
a. A reconciliation of the cash account and the retained earnings account.
b. A reconciliation of the beginning and ending balances of all accounts that appears in
the stockholders’ equity section of the balance sheet.
c. A reconciliation of the operating, investing and financing activities of a firm.
d. A reconciliation of net profit or loss and the cash account.
ABC Company purchases five products for sale in the order and at the costs shown:
Assume ABC sells two items and uses the LIFO method of inventory valuation. What
amount would appear for cost of goods sold on the income statement?
a. $37
b. $41
c. $22
d. $31
The balancing equation is expressed as:
a. Assets + Liabilities = Stockholders’ Equity.
b. Revenues ‘“ Expenses = Net Income.
c. Sales ‘“ Costs = Net Profit.
d. Assets = Liabilities + Stockholders’ Equity.
All of the following are reasons that the statement of cash flows is useful to the analyst
except:
a. The statement of cash flows shows how cash is generated during an accounting
period and how it has been used.
b. A positive net income figure on the income statement is ultimately insignificant
unless a company can translate its earnings into cash, and the only source in financial
statements for learning about cash generation is the statement of cash flows.
c. The statement of cash flows shows the adjustments made to net income in order to
calculate cash flow from operations; those should be examined to determine why cash
flow from operations is negative or positive.
d. The statement of cash flows is the only financial statement that cannot be
manipulated.
Which of the following statements is false with regard to quality of financial reporting?
a. Financial statements should reflect an accurate picture of a company’s financial
condition and performance.
b. It is unlikely that management can manipulate the bottom line due to the regulations
in place to enforce GAAP.
c. Financial information should be useful both to assess the past and predict the future.
d. The closer that the picture presented through the financial data is to reality, the higher
the quality of financial reporting.
What is cash from financing activities for Felix Company?
a. $50
b. $65
c. ($50)
d. $60
Which financial statement presents the results of operations?
a. Balance sheet.
b. Statement of financial position.
c. Income statement.
d. Statement of cash flows.
Indicate whether each of the following items would result in net cash flow from
operating activities being higher (H) or lower (L) than net income.
a. Increase in inventory
b. Increase in accounts payable
c. Amortization expense
d. Decrease in accrued liabilities
e. Loss on sale of assets
f. Decrease in accounts receivable
g. Decrease in deferred tax assets
h. Increase in deferred revenue
i. Decrease in income taxes payable
j. Decrease in prepaid expenses
Which items would be classified as long-term debt?
a. Accounts payable, unearned revenue, pension liabilities.
b. Common stock, retained earnings, bonds payable.
c. Mortgages, convertible debentures, bonds payable.
d. Deferred taxes, accrued expenses, treasury stock.
What does a financial leverage index greater than one indicate about a firm?
a. Return on assets exceeds the return on equity.
b. Return on equity exceeds the return on assets.
c. The firm is not employing debt successfully.
d. The firm does not generate enough funds to cover interest payments.
ABC Company purchases five products for sale in the order and at the costs shown:
Assume ABC sells two items and uses the FIFO method of inventory valuation. What
amount would appear in ending inventory on the balance sheet?
a. $22
b. $46
c. $45
d. $31
Which item would not be classified as an operating expense?
a. Interest expense.
b. Rent expense.
c. Depreciation.
d. Repairs and maintenance.
What is cash flow from operating activities for Armstrong Company?
a. $505
b. $495
c. $335
d. $55
Why is it important to assess operating profit?
a. Operating profit represents the firm’s profits after consideration of all revenues,
expenses and comprehensive income.
b. The figure for operating profit provides a basis for assessing the success of the firm
apart from its financing and investing activities and separate from tax considerations.
c. Operating profit represents the firm’s profits after consideration of all revenues and
expenses.
d. Operating profit represents the firm’s profits after consideration of all revenues and
expenses, except for taxes.
All of the following items should be discussed in the management discussion and
analysis except for:
a. Anticipated changes in the mix and cost of financing resources.
b. The market value of all assets.
c. The internal and external sources of liquidity.
d. Unusual or infrequent transactions that affect income from continuing operations.
What is cash flow from operating activities for Felix Company?
a. $240
b. $70
c. $320
d. $250
Which format of the income statement should be used for analysis purposes?
a. Multiple-step.
b. Cash basis.
c. Single-step.
d. Accrual basis.
The net realizable value of accounts receivable is the actual amount of the account less
an .
Using the summary analysis for eApparel, Inc. analyze the cash inflows and cash
outflows for 2015 and 2014.
Three ratios that help the financial analyst assess short-term solvency are the current
ratio, the quick ratio and the cash flow liquidity ratio.
Why should the allowance for doubtful accounts and the valuation and qualifying
accounts schedule be analyzed?
Analyze the common size income statements below for 3T Company:
Explain why the notes are an integral part of the financial statements.
The was passed in 2002 and was one of the most sweeping corporate reforms since the
Securities Act of 193
ratios measure the extent of a firm’s financing with debt relative to equity and its ability
to cover interest and other fixed charges.
What can be learned from a statement of cash flows?
The amounts on a cash flow statement cannot be manipulated.