Principles of Managerial Finance, 15e (Zutter)
Chapter 3 Financial Statements and Ratio Analysis
3.1 The stockholder’s report
1) The Financial Accounting Standards Board (FASB) is the federal regulatory body that governs the sale
and listing of securities.
2) GAAP is the accounting profession’s rule–setting body.
3) Generally accepted accounting principles are authorized by the Financial Accounting Standards Board
(FASB).
4) The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board
(PCAOB) which is a not-for-profit corporation that oversees auditors of public corporations.
5) The Sarbanes-Oxley Act of 2002 was passed to eliminate many of the disclosure and conflict–of-interest
problems of corporations.
6) The Sarbanes-Oxley Act of 2002 established the Private Company Accounting Oversight Board
(PCAOB) which is a for-profit corporation that oversees CEOs of public corporations.
7) Publicly owned corporations with more than $5 million assets are required by the Securities and
Exchange Commission (SEC) to provide their stockholders with an annual stockholders’ report.
8) The letter to stockholders is the primary communication from management in an annual report.
9) Common stock dividends paid to stockholders is equal to the earnings available for common
stockholders divided by the number of shares of common stock outstanding.
10) The income statement is a financial summary of a firm’s operating results during a specified period
while the balance sheet is a summary statement of a firm’s financial position at a given point in time.
11) The common stock entry in balance sheet is the par value of common stock.
12) Paid-in capital in excess of par represents the proceeds in excess of par value received from the
original sale of common stock.
13) Earnings per share represents amount earned during the period on each outstanding share of
common stock.
14) Net fixed assets represent the difference between gross fixed assets and the amount of depreciation
expense from the most recent year.
15) Earnings per share results from dividing earnings available for common stockholders by the number
of shares of common stock authorized.
16) Retained earnings represent the cumulative total of all earnings, net of dividends, that have been
retained and reinvested in the firm since its inception.
17) The balance sheet is a statement which balances a firm’s assets (what it owns) against its debt (what it
owes) and its equity (what is provided by owners).
18) The amount paid in by the original purchasers of common stock is shown by two entries in the firm’s
balance sheet—common stock and paid-in capital in excess of par on common stock.
19) The original price per share received by the firm on a single issue of common stock is equal to the sum
of the common stock and paid-in capital in excess of par accounts divided by the number of shares
outstanding.
20) The statement of cash flows reconciles the net income earned during a given year, and any cash
dividends paid, with the change in retained earnings between the start and end of that year.
21) The statement of cash flows provides insight into a firm’s operating, investment, and financing cash
flows and reconciles them with changes in its cash and marketable securities during the period of
concern.
22) A U.S. parent company’s foreign equity accounts are translated into dollars using the historical rate or
average rate based on the company’s discretion.
23) A U.S. parent company’s foreign retained earnings are not adjusted for currency movements to reflect
each year’s operating profits or losses.
24) The Financial Accounting Standards Board (FASB) Standard No. 52 mandates that U.S.-based
companies translate their foreign-currency-denominated assets and liabilities into dollars using the
current rate (translation) method.
25) A firm’s annual stockholders’ report ________.
A) is only accessible to the shareholders of the firm
B) summarizes and documents the firm’s financial activities during the past year
C) documents the list of all investors who bought the firm’s shares during the past year
D) summarizes and documents the firm’s financial plan and budgets during the past year
26) The rule-setting body, which authorizes generally accepted accounting principles is the ________.
A) IFRS
B) FASB
C) SEC
D) Federal Reserve System
27) Accounting practices and procedures used to prepare financial statements are called ________.
A) SEC
B) IFRS
C) GAAP
D) IRB
28) The federal regulatory body governing the sale and listing of securities is called the ________.
A) IRS
B) FASB
C) GAAP
D) SEC
29) The stockholders’ annual report must include ________.
A) common-size financial statements
B) an income statement
C) an advance tax statement
D) the margin of safety report
30) The 2002 Sarbanes-Oxley Act was designed to ________.
A) limit the compensation that could be paid to corporate CEOs
B) eliminate the many disclosure and conflict–of-interest problems of corporations
C) provide uniform international accounting standards
D) provide the guidelines to minimize the tax
31) The 2002 law that established the Public Company Accounting Oversight Board (PCAOB) was called
________.
A) the McCain-Feingold Act
B) the Harkins-Oxley Act
C) the Sarbanes-Harkins Act
D) the Sarbanes-Oxley Act
32) The Public Company Accounting Oversight Board (PCAOB) ________.
A) is a not-for-profit corporation that oversees auditors of public corporations
B) is a not-for-profit corporation that oversees managers of public corporations
C) is a for-profit corporation that oversees auditors of public corporations
D) is a for-profit corporation that oversees managers of public corporations
33) The stockholder’s report includes ________.
A) an estimated interest cost report
B) an estimated dividend report
C) a break-even sales report
D) a statement of retained earnings
34) Total assets less net fixed assets equals ________.
A) gross assets
B) current assets
C) depreciation
D) liabilities and equity
35) A(n) ________ provides a financial summary of a firm’s operating results during a specified period.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings
36) Gross profit is ________.
A) operating profits minus depreciation
B) operating profits minus cost of goods sold
C) sales revenue minus operating expenses
D) sales revenue minus cost of goods sold
37) Operating profit is ________.
A) gross profit minus operating expenses
B) sales revenue minus cost of goods sold
C) earnings before depreciation and taxes
D) sales revenue minus depreciation expense
38) Net profit after taxes is ________.
A) gross profits minus operating expenses
B) sales revenue minus cost of goods sold
C) EBITDA minus interest
D) EBIT minus interest and taxes
39) Operating profit is known as ________.
A) earnings after interest and taxes
B) earnings before interest and taxes
C) earnings before depreciation and taxes
D) earnings after tax
40) Earnings available for common stockholders is calculated as net profits ________.
A) before taxes minus preferred dividends
B) after taxes minus preferred dividends
C) after taxes minus common dividends
D) before taxes minus common dividends
41) Which of the following is a current liability?
A) accounts receivable
B) cash
C) notes payable
D) inventory
42) Which of the following represents a current asset?
A) automobiles
B) buildings
C) marketable securities
D) equipment
43) Which of the following is a fixed asset?
A) land
B) accounts payable
C) accruals
D) notes payable
44) The net value of fixed assets is also called its ________.
A) market value
B) par value
C) book value
D) intrinsic value
45) Retained earnings on the balance sheet represents the ________.
A) net profit after taxes
B) amount of proceeds in excess of the par value received from the original sale of common stock
C) net profit after taxes minus preferred dividends
D) cumulative total of all earnings reinvested in the firm
46) The ________ represents a summary statement of a firm’s financial position at a given point in time.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of retained earnings
47) The statement of cash flows ________.
A) shows the financial position of a firm at a given point of time.
B) summarizes all the purchase and sale of fixed assets and raw materials
C) provides insight into a firm’s operating, investment, and financing cash flows
D) classifies a firm’s cash flows as operating, investing, financing, and other activities
48) When preparing the retained earnings statement, ________ is(are) subtracted in order to derive at the
ending balance of retained earnings.
A) net profits after taxes
B) interest expense
C) depreciation
D) dividends
49) A firm has the following accounts and financial data for 2019:
The firm’s earnings available to common shareholders for 2019 is ________.
A) -$224.25
B) $195.40
C) $302.40
D) $516.60
50) A firm has the following accounts and financial data for 2019:
The firm’s earnings per share for 2019 is ________.
A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024
51) A firm had the following accounts and financial data for 2019:
The firm’s net profit after taxes for 2019 is ________.
A) -$206.40
B) $213.80
C) $320.40
D) $206.25
52) On the balance sheet, net fixed assets represent ________.
A) gross fixed assets at cost minus depreciation expense
B) gross fixed assets at market value minus depreciation expense
C) gross fixed assets at cost minus accumulated depreciation
D) gross fixed assets at market value minus accumulated deprecation
53) Paid-in capital in excess of par represents the amount of proceeds ________.
A) in deficit of the par value from the original sale of common stock
B) in excess of the par value from the original sale of common stock
C) in excess of the par value from the current value of common stock
D) in excess of the par value from the intrinsic value of common stock
54) Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000, and
preferred dividends of $5,000. What was the firm’s net profit after taxes?
A) $66,000
B) $49,000
C) $44,000
D) $83,000
55) Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid
preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense.
What was Candy Corporation’s earnings per share?
A) $3.91
B) $4.52
C) $7.42
D) $7.59
56) A firm’s year-end retained earnings balances are $670,000 and $560,000, for 2018 and 2019
respectively. The firm paid $10,000 in dividends in 2019. The firm’s net profit after taxes in 2019 was
________.
A) -$100,000
B) -$110,000
C) $100,000
D) $110,000
57) A firm’s year-end retained earnings balances are $320,000 and $400,000, for 2018 and 2019
respectively. The firm reported net profits after taxes of $100,000 in 2019. The firm’s dividend payment for
2019 is ________.
A) $0
B) $20,000
C) $80,000
D) $100,000
58) A firm has a year-end retained earnings balance of $220,000 for 2018. The firm reported net profits
after taxes of $50,000 and paid dividends of $30,000 in 2019. The firm’s retained earnings balance at 2019
year end is ________.
A) $240,000
B) $250,000
C) $270,000
D) $300,000
59) A firm’s year-end retained earnings balance are $670,000 and $560,000 for 2018 and 2019, respectively.
The firm reported net profits after taxes of $100,000 in 2019. The firm paid dividends of ________ in 2019.
A) $10,000
B) $100,000
C) $110,000
D) $210,000
60) Information on the accounting policies, procedures, calculations, and transactions underlying entries
in the financial statements can be found on ________.
A) the notes to the financial statements
B) the statement of retained earnings
C) the proxy statement
D) the management discussion and analysis (MD&A)
61) FASB Standard No. 52 mandates that U.S.-based companies must translate their foreign-currency-
denominated assets and liabilities into dollars using the ________.
A) historical rate
B) current rate
C) average rate
D) rate prescribed by the SEC
62) At the end of 2019, Long Life Light Bulb Corporation announced a gross profit of $1 million. The
company has also established that over the course of this year that it has incurred $345,000 in operating
expenses and $125,000 in interest expenses. The company is subject to a 21% tax rate and has declared
$57,000 of total preferred stock dividends.
(a) Calculate the earnings available for common stockholders?
(b) Compute the increased retained earnings for 2019 if the company were to declare a $4.25 common
stock dividend. The company has 15,000 shares of common stock outstanding.
63) Reliable Auto Parts has 5,000 shares of common stock outstanding. The company also has the
following amounts in revenue and expense accounts.
Calculate
(a) gross profits.
(b) operating profits.
(c) net profits before taxes.
(d) net profits after taxes (assume a 21 percent tax rate).
(e) earnings available to common stockholders.
(f) earnings per share.
64) Colonial Furniture’s net profits before taxes for 2019 totaled $354,000. The company’s total retained
earnings were $338,000 for 2018 year-end and $389,000 for 2019 year-end. Colonial is subject to a 21
percent tax rate. What was the cash dividend declared by Colonial Furniture in 2019?
65) On December 31, 2018, Bradshaw Corporation had $485,000 as an ending balance for its retained
earnings account. During 2019, the corporation declared a $3.50/share dividend to its stockholders. The
company has 35,000 shares of common stock outstanding. When the books were closed for 2019 year end,
the corporation had a final retained earnings balance of $565,000. What was the net profit earned by
Bradshaw Corporation during 2019?
66) Ag Silver Mining, Inc. has $500,000 of earnings before interest and taxes at the year end. Interest
expenses for the year were $10,000. The firm expects to distribute $100,000 in dividends. Calculate the
earnings after taxes for the firm assuming a 21 percent tax on ordinary income.
67) Sunshine Corporation had a retained earnings balance of $850,000 at the beginning of 2019. By the end
of 2019, the company’s retained earnings balance stood at $950,000. During 2019, the company earned
$245,000 as net profits after paying its taxes. The company was then able to pay its preferred stockholders
a sum of $45,000. Compute the common stock dividend per share in 2019 assuming 10,000 shares of
common stock outstanding.
3.2 Using financial ratios
1) The basic inputs to an effective financial analysis are the firm’s income statement and the balance sheet.
2) Both current and prospective shareholders are interested in the firm’s current and future level of risk
and return, which directly affect share price.
3) Creditors are primarily interested in short-term liquidity of the company and its ability to make
interest and principal payments.
4) Time-series analysis is the evaluation of a firm’s financial performance in comparison to other firm(s) at
the same point in time.
5) Cross-sectional analysis involves the comparison of different firms’ financial ratios at the same point in
time.