(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
This chapter has a lot of definitions. They are important, but we don’t like to make students
memorize too many of them early in the course. We let our students use a formula sheet that
includes the key definitions.
Note that there is some overlap between the T/F and the multiple choice questions, as
some T/F statements are used in the MC questions. See the preface for information on the
AACSB letter indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. The annual report contains four basic financial statements: the income
statement, the balance sheet, the cash flow statement, and statement of
stockholders’ equity.
a. True
b. False
2. The primary reason the annual report is important in finance is that it
is used by investors when they form expectations about the firm’s
future earnings and dividends, and the riskiness of those cash flows.
a. True
b. False
3. Companies typically provide four basic financial statements: the fixed
income statement, the current income statement, the balance sheet, and
the cash flow statement.
a. True
b. False
4. On the balance sheet, total assets must always equal the sum of total
liabilities plus equity.
a. True
b. False
5. Assets other than cash are expected to produce cash over time, but the
amount of cash they eventually produce could be higher or lower than the
amounts at which the assets are carried on the books.
CHAPTER 3
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
a. True
b. False
6. The amount shown on the December 31, 2012 balance sheet as “retained
earnings” is equal to the firm’s net income for 2012 minus any
dividends it paid.
a. True
b. False
7. The income statement shows the difference between a firm’s income and
its costs–i.e., its profits–during a specified period of time.
However, not all reported income comes in the form of cash, and
reported costs likewise may not be consistent with cash outlays.
Therefore, there may be a substantial difference between a firm’s
reported profits and its actual cash flow for the same period.
a. True
b. False
8. If we were describing the income statement and the balance sheet, it
would be correct to say that the income statement is more like a video
while the balance sheet is more like a snapshot.
a. True
b. False
9. EBIT stands for earnings before interest and taxes, and it is often
called “operating income.”
a. True
b. False
10. EBITDA stands for earnings before interest, taxes, debt, and assets.
a. True
b. False
11. Consider the following balance sheet, for Games Inc. Because Games has
$800,000 of retained earnings, we know that the company would be able
to pay cash to buy an asset with a cost of $200,000.
Cash $ 50,000 Accounts payable $ 100,000
Inventory 200,000 Accruals 100,000
Accounts receivable 250,000 Total CL $ 200,000
Total CA $ 500,000 Debt 200,000
Net fixed assets $ 900,000 Common stock 200,000
Retained earnings 800,000
Total assets $1,400,000 Total L & E $1,400,000
a. True
b. False
12. Typically, the statement of stockholders’ equity starts with total
stockholders’ equity at the beginning of the year, adds net income,
subtracts dividends paid, and ends up with total stockholders’ equity
at the end of the year. Over time, a profitable company will have
earnings in excess of the dividends it pays out, and will result in a
substantial amount of retained earnings shown on the balance sheet.
a. True
b. False
13. Free cash flow (FCF) is, essentially, the cash flow that is available
for interest and dividends after the company has made the investments in
current and fixed assets that are necessary to sustain ongoing
operations.
a. True
b. False
14. The value of any asset is the present value of the cash flows the asset
is expected to provide. The cash flows a business is able to provide
to its investors is its free cash flow. This is the reason that FCF is
so important in finance.
a. True
b. False
15. If a firm is reporting its income in accordance with generally accepted
accounting principles, then its net income as reported on the income
statement should be equal to its free cash flow.
a. True
b. False
16. The fact that 70% of the interest income received by corporations is
excluded from its taxable income encourages firms to finance with more
debt than they would in the absence of this tax law provision.
a. True
b. False
17. Both interest and dividends paid by a corporation are deductible
operating expenses, hence they decrease the firm’s taxes.
a. True
b. False
18. The balance sheet measures the flow of funds into and out of various
accounts over time, while the income statement measures the firm’s
financial position at a point in time.
a. True
b. False
19. Assume that two firms are both following generally accepted accounting
principles. Both firms commenced operations two years ago with $1
million of identical fixed assets, and neither firm sold any of those
assets or purchased any new fixed assets. The two firms would be
required to report the same amount of net fixed assets on their balance
sheets as those statements are presented to investors.
a. True
b. False
20. Net operating working capital is equal to current assets minus the
difference between current liabilities and notes payable.
a. True
b. False
21. The next-to-last line on the income statement shows the firm’s
earnings, while the last line shows the dividends the company paid.
Therefore, the dividends are frequently called “the bottom line.”
a. True
b. False
22. The statement of cash flows has four main sections, one each for
operating, investing, and financing activities, and one that shows a
summary of the cash and cash equivalents at the end of the year.
a. True
b. False
23. An increase in accounts payable represents an increase in net cash
provided by operating activities just like borrowing money from a bank.
An increase in accounts payable has an effect similar to taking out a
new bank loan. However, these two items show up in different sections
of the statement of cash flows.
a. True
b. False
24. An increase in accounts receivable represents an increase in net cash
provided by operating activities because receivables will produce cash
when they are collected.
a. True
b. False
25. The first major section of a typical statement of cash flows is
“Operating Activities,” and the first entry in this section is “Net
Income.” Then, also in the first section, we show some items that
represent increases or decreases to cash, and the last entry is called
“Net Cash Provided by Operating Activities.” This number can be either
positive or negative, but if it is negative, the firm is almost certain
to soon go bankrupt.
a. True
b. False
26. To estimate the cash flow from operations, depreciation must be added
back to net income because it is a non-cash charge that has been
deducted from revenue.
a. True
b. False
27. Two metrics that are used to measure a company’s financial performance
are net income and cash flow. Accountants emphasize net income as
calculated in accordance with generally accepted accounting principles.
Finance people generally put at least as much weight on cash flows as
they do on net income.
a. True
b. False
28. Its retained earnings is the actual cash that the firm has generated
through operations less the cash that has been paid out to stockholders
as dividends. If the firm has sufficient retained earnings, it can
purchase assets and pay for them with cash from retained earnings.
a. True
b. False
29. The retained earnings account on the balance sheet does not represent
cash. Rather, it represents part of the stockholders’ claims against
the firm’s existing assets. Put another way retained earnings are
stockholders’ reinvested earnings.
a. True
b. False
30. In finance, we are generally more interested in cash flows than in
accounting profits. Free cash flow (FCF) is calculated as after-tax
operating income plus depreciation less the sum of capital expenditures
and changes in net operating working capital.
a. True
b. False
31. Free cash flow is the amount of cash that if withdrawn would harm the
firm’s ability to operate and to produce future cash flows.
a. True
b. False
32. If the tax laws were changed so that $0.50 out of every $1.00 of
interest paid by a corporation was allowed as a tax-deductible expense,
this would probably encourage companies to use more debt financing than
they presently do, other things held constant.
a. True
b. False
33. Interest paid by a corporation is a tax deduction for the paying
corporation, but dividends paid are not deductible. This treatment,
other things held constant, tends to encourage the use of debt
financing by corporations.
a. True
b. False
34. Because the U.S. tax system is a progressive tax system, a taxpayer’s
marginal and average tax rates are the same.
a. True
b. False
35. The alternative minimum tax (AMT) was created by Congress to make it
more difficult for wealthy individuals to avoid paying taxes through
the use of various deductions.
a. True
b. False
36. The time dimension is important in financial statement analysis. The
balance sheet shows the firm’s financial position at a given point in
time, the income statement shows results over a period of time, and the
statement of cash flows reflects specific changes in accounts over that
period of time.
a. True
b. False
Multiple Choice: Conceptual
37. Which of the following statements is CORRECT?
a. The four most important financial statements provided in the annual
report are the balance sheet, income statement, cash budget, and the
statement of stockholders’ equity.
b. The balance sheet gives us a picture of the firm’s financial
position at a point in time.
c. The income statement gives us a picture of the firm’s financial
position at a point in time.
d. The statement of cash flows tells us how much cash the firm must pay
out in interest during the year.
e. The statement of cash needs tells us how much cash the firm will
require during some future period, generally a month or a year.
38. Which of the following statements is CORRECT?
a. Assets other than cash are expected to produce cash over time, and
the amounts of cash they eventually produce should be exactly the
same as the amounts at which the assets are carried on the books.
b. The primary reason the annual report is important in finance is that
it is used by investors when they form expectations about the firm’s
future earnings and dividends, and the riskiness of those cash
flows.
c. The annual report is an internal document prepared by a firm’s
managers solely for the use of its creditors/lenders.
d. The four most important financial statements provided in the annual
report are the balance sheet, income statement, cash budget, and
statement of stockholders’ equity.
e. Prior to the Enron scandal in the early 2000s, companies would put
verbal information in their annual reports, along with the financial
statements. That verbal information was often misleading, so today
annual reports can contain only quantitative information–audited
financial statements.
39. Which of the following statements is CORRECT?
a. The balance sheet for a given year, say 2012, is designed to give us
an idea of what happened to the firm during that year.
b. The balance sheet for a given year, say 2012, tells us how much
money the company earned during that year.
c. The difference between the total assets reported on the balance
sheet and the liabilities reported on this statement tells us the
current market value of the stockholders’ equity, assuming the
statements are prepared in accordance with generally accepted
accounting principles (GAAP).
d. If a company’s statements were prepared in accordance with generally
accepted accounting principles (GAAP), the market value of the stock
equals the book value of the stock as reported on the balance sheet.
e. The assets section of a typical industrial company’s balance sheet
begins with cash, then lists the assets in the order in which they
will probably be converted to cash, with the longest lived assets
listed last.
40. Other things held constant, which of the following actions would
increase the amount of cash on a company’s balance sheet?
a. The company repurchases common stock.
b. The company pays a dividend.
c. The company issues new common stock.
d. The company gives customers more time to pay their bills.
e. The company purchases a new piece of equipment.
41. Which of the following items is NOT normally considered to be a current
asset?
a. Accounts receivable.
b. Inventory.
c. Bonds.
d. Cash.
e. Short-term, highly-liquid, marketable securities.
42. Which of the following items cannot be found on a firm’s balance sheet
under current liabilities?
a. Accounts payable.
b. Short-term notes payable to the bank.
c. Accrued wages.
d. Cost of goods sold.
e. Accrued payroll taxes.
(3-3) Income statement C K M Answer: e EASY
43. Which of the following statements is CORRECT?
a. The focal point of the income statement is the cash account, because
that account cannot be manipulated by “accounting tricks.”
b. The reported income of two otherwise identical firms cannot be
manipulated by different accounting procedures provided the firms
follow generally accepted accounting principles (GAAP).
c. The reported income of two otherwise identical firms must be
identical if the firms are publicly owned, provided they follow
procedures that are permitted by the Securities and Exchange
Commission (SEC).
d. If a firm follows generally accepted accounting principles (GAAP),
then its reported net income will be identical to its reported cash
flow.
e. The income statement for a given year, say 2012, is designed to give
us an idea of how much the firm earned during that year.
44. Which of the following statements is most correct?
a. Corporations are allowed to exclude 70% of their interest income
from corporate taxes.
b. Corporations are allowed to exclude 70% of their dividend income
from corporate taxes.
c. Individuals pay taxes on only 30% of the income realized from
municipal bonds.
d. Individuals are allowed to exclude 70% of their interest income from
their taxes.
e. Individuals are allowed to exclude 70% of their dividend income from
their taxes.
45. A loss incurred by a corporation
a. Must be carried forward unless the company has had 2 loss years in a
row.
b. Can be carried back 2 years, then carried forward up to 20 years
following the loss.
c. Can be carried back 5 years and forward 3 years.
d. Cannot be used to reduce taxes in other years except with special
permission from the IRS.
e. Can be carried back 3 years or forward 10 years, whichever is more
advantageous to the firm.
46. Below are the 2011 and 2012 year-end balance sheets for Tran
Enterprises:
Assets: 2012 2011
Cash $ 200,000 $ 170,000
Accounts receivable 864,000 700,000
Inventories 2,000,000 1,400,000
Total current assets $3,064,000 $2,270,000
Net fixed assets 6,000,000 5,600,000
Total assets $9,064,000 $7,870,000
Liabilities and equity:
Accounts payable $1,400,000 $1,090,000
Notes payable 1,600,000 1,800,000
Total current liabilities $3,000,000 $2,890,000
Long-term debt 2,400,000 2,400,000
Common stock 3,000,000 2,000,000
Retained earnings 664,000 580,000
Total common equity $3,664,000 $2,580,000
Total liabilities and equity $9,064,000 $7,870,000
The firm has never paid a dividend on its common stock, and it issued
$2,400,000 of 10-year, non-callable, long-term debt in 2011. As of the
end of 2012, none of the principal on this debt had been repaid.
Assume that the company’s sales in 2011 and 2012 were the same. Which
of the following statements must be CORRECT?
a. The firm increased its short-term bank debt in 2012.
b. The firm issued long-term debt in 2012.
c. The firm issued new common stock in 2012.
d. The firm repurchased some common stock in 2012.
e. The firm had negative net income in 2012.
47. On its 12/31/12 balance sheet, Barnes Inc showed $510 million of
retained earnings, and exactly that same amount was shown the following
year. Assuming that no earnings restatements were issued, which of the
following statements is CORRECT?
a. If the company lost money in 2012, it must have paid dividends.
b. The company must have had zero net income in 2012.
c. The company must have paid out half of its 2012 earnings as
dividends.
d. The company must have paid no dividends in 2012.
e. Dividends could have been paid in 2012, but they would have had to
equal the earnings for the year.
48. Below is the common equity section (in millions) of Timeless
Technology’s last two year-end balance sheets:
2012 2011
Common stock $2,000 $1,000
Retained earnings 2,000 2,340
Total common equity $4,000 $3,340
The firm has never paid a dividend to its common stockholders. Which
of the following statements is CORRECT?
a. The company’s net income in 2012 was higher than in 2011.
b. The firm issued common stock in 2012.
c. The market price of the firm’s stock doubled in 2012.
d. The firm had positive net income in both 2011 and 2012, but its net
income in 2012 was lower than it was in 2011.
e. The company has more equity than debt on its balance sheet.
49. Which of the following statements is CORRECT?
a. Typically, a firm’s DPS should exceed its EPS.
b. Typically, a firm’s net income should exceed its EBIT.
c. If a firm is more profitable than average, we would normally expect
to see its stock price exceed its book value per share.
d. If a firm is more profitable than most other firms, we would
normally expect to see its book value per share exceed its stock
price, especially after several years of high inflation.
e. The more depreciation a firm has in a given year, the higher its
EPS, other things held constant.
50. Which of the following statements is CORRECT?
a. The more depreciation a firm reports, the higher its tax bill, other
things held constant.
b. People sometimes talk about the firm’s cash flow, which is shown as
the lowest entry on the income statement, hence it is often called
“the bottom line.”
c. Depreciation reduces a firm’s cash balance, so an increase in
depreciation would normally lead to a reduction in the firm’s cash
flow.
d. Operating income is derived from the firm’s regular core business.
Operating income is calculated as Revenues less Operating costs.
Operating costs do not include interest or taxes.
e. Depreciation is not a cash charge, so it does not have an effect on
a firm’s reported profits.
51. Which of the following factors could explain why Michigan Energy’s cash
balance increased even though it had a negative cash flow last year?
a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high depreciation expenses.
e. The company repurchased 20% of its common stock.
52. Analysts who follow Howe Industries recently noted that, relative to
the previous year, the company’s net cash provided from operations
increased, yet cash as reported on the balance sheet decreased. Which
of the following factors could explain this situation?
a. The company cut its dividend.
b. The company made large investments in fixed assets.
c. The company sold a division and received cash in return.
d. The company issued new common stock.
e. The company issued new long-term debt.
53. Austin Financial recently announced that its net income increased
sharply from the previous year, yet its net cash provided from
operations declined. Which of the following could explain this
performance?
a. The company’s dividend payment to common stockholders declined.
b. The company’s expenditures on fixed assets declined.
c. The company’s cost of goods sold increased.
d. The company’s depreciation expense declined.
e. The company’s interest expense increased.
54. Which of the following statements is CORRECT?
a. The statement of cash flows reflects cash flows from operations, but
it does not reflect the effects of buying or selling fixed assets.
b. The statement of cash flows shows where the firm’s cash is located;
indeed, it provides a listing of all banks and brokerage houses
where cash is on deposit.
c. The statement of cash flows reflects cash flows from continuing
operations, but it does not reflect the effects of changes in
working capital.
d. The statement of cash flows reflects cash flows from operations and
from borrowings, but it does not reflect cash obtained by selling
new common stock.
e. The statement of cash flows shows how much the firm’s cash–the
total of currency, bank deposits, and short-term liquid securities
(or cash equivalents)–increased or decreased during a given year.
55. Which of the following statements is CORRECT?
a. In the statement of cash flows, a decrease in accounts receivable is
subtracted from net income in the operating activities section.
b. Dividends do not show up in the statement of cash flows because
dividends are considered to be a financing activity, not an
operating activity.
c. In the statement of cash flows, a decrease in accounts payable is
subtracted from net income in the operating activities section.
d. In the statement of cash flows, depreciation is subtracted from net
income in the operating activities section.
e. In the statement of cash flows, a decrease in inventories is
subtracted from net income in the operating activities section.
56. Which of the following statements is CORRECT?
a. Most rapidly growing companies have positive free cash flows because
cash flows from existing operations generally exceed fixed asset
purchases and changes to net operating working capital.
b. Changes in working capital have no effect on free cash flow.
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T)
+ Depreciation
– Capital expenditures required to sustain operations
– Required changes in net operating working capital.
d. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Capital expenditures.
e. Managers should be less concerned with free cash flow than with
accounting net income. Accounting net income is the “bottom line”
and represents how much the firm can distribute to all its
investors–both creditors and stockholders.
57. Which of the following statements is CORRECT?
a. MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common
equity.
b. The primary difference between EVA and accounting net income is that
when net income is calculated, a deduction is made to account for
the cost of common equity, whereas EVA represents net income before
deducting the cost of the equity capital the firm uses.
c. MVA gives us an idea about how much value a firm’s management has
added during the last year.
d. EVA gives us an idea about how much value a firm’s management has
added over the firm’s life.
e. EVA stands for economic value added, and it is defined as follows:
EVA = NOPAT – (Investor-supplied oper. capital)(AT cost of capital
%)
58. Which of the following statements is CORRECT?
a. Actions that increase reported net income will always increase cash
flow.
b. One way to increase EVA is to generate the same level of operating
income but with less investor-supplied capital.
c. One drawback of EVA as a performance measure is that it mistakenly
assumes that equity capital is free.
d. One way to increase EVA is to achieve the same level of operating
income but with more investor-supplied capital obtained at a higher
cost of capital.
e. If a firm reports positive net income, its EVA must also be
positive.
59. Which of the following statements is CORRECT?
a. Since companies can deduct dividends paid but not interest paid, our
tax system favors the use of equity financing over debt financing,
and this causes companies’ debt ratios to be lower than they would
be if interest and dividends were both deductible.
b. Interest paid to an individual is counted as income for federal tax
purposes and taxed at the individual’s regular tax rate, which in
2011 could go up to 35%, but dividends received were taxed at a
maximum rate of 15%.
c. The maximum federal tax rate on corporate income in 2011 was 50%.
d. Corporations obtain capital for use in their operations by borrowing
and by raising equity capital, either by selling new common stock or
by retaining earnings. The cost of debt capital is the interest
paid on the debt, and the cost of the equity is the dividends paid
on the stock. Both of these costs are deductible from income when
calculating income for tax purposes.
e. The maximum federal tax rate on personal income in 2011 was 50%.
60. Which of the following statements is CORRECT?
a. The income of certain small corporations that qualify under the Tax
Code is completely exempt from corporate income taxes. Thus, the
federal government receives no tax revenue from these businesses,
even though they report high accounting profits.
b. All businesses, regardless of their legal form of organization, are
taxed under the Business Tax Provisions of the Internal Revenue
Code.
c. Small corporations that qualify under the Tax Code can elect not to
pay corporate taxes, but then each stockholder must report his or
her pro rata shares of the firm’s income as personal income and pay
taxes on that income.
d. Congress recently changed the tax laws to make dividend income
received by individuals exempt from income taxes. Prior to the
enactment of that law, corporate income was subject to double
taxation, where the firm was first taxed on the corporation’s income
and stockholders were taxed again on this income when it was paid to
them as dividends.
e. All corporations other than non-profits are subject to corporate
income taxes, which are 15% for the lowest amounts of income and 38%
for the highest income amounts.
61. Which of the following statements is most correct?
a. Retained earnings, as reported on the balance sheet, represents the
amount of cash a company has available to pay out as dividends to
shareholders.
b. 70% of the interest received by corporations is excluded from
taxable income.
c. 70% of the dividends received by corporations is excluded from
taxable income.
d. Because taxes on long–term capital gains are not paid until the gain is
realized, investors must pay the top individual tax rate on that gain.
e. The corporate tax system favors equity financing, as dividends paid
are deductible from corporate taxes.
62. Last year, Delip Industries had (1) negative cash flow from operations,
(2) a negative free cash flow, and (3) an increase in cash as reported
on its balance sheet. Which of the following factors could explain
this situation?
a. The company had a sharp increase in its inventories.
b. The company had a sharp increase in its accrued liabilities.
c. The company sold a new issue of common stock.
d. The company made a large capital investment early in the year.
e. The company had a sharp increase in depreciation expenses.
63. Which of the following would be most likely to occur in the year after
Congress, in an effort to increase tax revenue, passed legislation that
forced companies to depreciate equipment over longer lives? Assume
that sales, other operating costs, and tax rates are not affected, and
assume that the same depreciation method is used for tax and
stockholder reporting purposes.
a. Companies’ after-tax operating profits would decline.
b. Companies’ physical stocks of fixed assets would increase.
c. Companies’ cash flows would increase.
d. Companies’ cash positions would decline.
e. Companies’ reported net incomes would decline.
64. Assume that Congress recently passed a provision that will enable Bev’s
Beverages Inc. (BBI) to double its depreciation expense for the
upcoming year but will have no effect on its sales revenue or the tax
rate. Prior to the new provision, BBI’s net income was forecasted to
be $4 million. Which of the following best describes the impact of the
new provision on BBI’s financial statements versus the statements
without the provision? Assume that the company uses the same
depreciation method for tax and stockholder reporting purposes.
a. The provision will reduce the company’s cash flow.
b. The provision will increase the company’s tax payments.
c. The provision will increase the firm’s operating income (EBIT).
d. The provision will increase the company’s net income.
e. Net fixed assets on the balance sheet will decrease.
65. The Nantell Corporation just purchased an expensive piece of equipment.
Assume that the firm planned to depreciate the equipment over 5 years
on a straight-line basis, but Congress then passed a provision that
requires the company to depreciate the equipment on a straight-line
basis over 7 years. Other things held constant, which of the following
will occur as a result of this Congressional action? Assume that the
company uses the same depreciation method for tax and stockholder
reporting purposes.
a. Nantell’s taxable income will be lower.
b. Nantell’s operating income (EBIT) will increase.
c. Nantell’s cash position will improve (increase).
d. Nantell’s reported net income for the year will be lower.
e. Nantell’s tax liability for the year will be lower.
66. Assume that Besley Golf Equipment commenced operations on January 1,
2012, and it was granted permission to use the same depreciation
calculations for shareholder reporting and income tax purposes. The
company planned to depreciate its fixed assets over 15 years, but in
December 2012 management realized that the assets would last for only
10 years. The firm’s accountants plan to report the 2012 financial
statements based on this new information. How would the new
depreciation assumption affect the company’s financial statements?
a. The firm’s reported net fixed assets would increase.
b. The firm’s EBIT would increase.
c. The firm’s reported 2012 earnings per share would increase.
d. The firm’s cash position in 2012 and 2013 would increase.
e. The provision will increase the company’s tax payments.
67. A start-up firm is making an initial investment in new plant and
equipment. Assume that currently its equipment must be depreciated on
a straight-line basis over 10 years, but Congress is considering
legislation that would require the firm to depreciate the equipment
over 7 years. If the legislation becomes law, which of the following
would occur in the year following the change?
a. The firm’s operating income (EBIT) would increase.
b. The firm’s taxable income would increase.
c. The firm’s cash flow would increase.
d. The firm’s tax payments would increase.
e. The firm’s reported net income would increase.
68. Which of the following statements is CORRECT?
a. Dividends paid reduce the net income that is reported on a company’s
income statement.
b. If a company uses some of its bank deposits to buy short-term,
highly liquid marketable securities, this will cause a decline in
its current assets as shown on the balance sheet.
c. If a company issues new long-term bonds to purchase fixed assets
during the current year, this will increase both its reported
current assets and current liabilities at the end of the year.
d. Accounts receivable are reported as a current liability on the
balance sheet.
e. If a company pays more in dividends than it generates in net income,
its retained earnings as reported on the balance sheet will decline
from the previous year’s balance.