Principles of Managerial Finance, Brief, 7e (Gitman)
Chapter 3 Financial Statements and Ratio Analysis
3.1 Review the contents of the stockholders’ report and the procedures for consolidating
international financial statements.
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) The McCain-Feingold Act of 2002 was passed to eliminate many of the disclosure and
conflict-of-interest problems of corporations.
8) Publicly owned corporations are those which are financed by the proceeds from the treasury
securities.
9) Publicly owned corporations with more than $5 million assets are required by the Securities
and Exchange Commission (SEC) and individual state securities commissions to provide their
stockholders with an annual stockholders’ report.
10) The president’s letter, the first component of the stockholders’ report, is the primary
communication from management to a firm’s employees.
11) 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.
12) 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.
13) The common stock entry in balance sheet is the par value of common stock.
14) Paid-in capital in excess of par represents a firm’s book value received from the original sale
of common stock.
15) Earnings per share represents amount earned during the period on each outstanding share of
common stock.
16) Net fixed assets represent the difference between gross fixed assets and accumulated
depreciation of fixed assets.
17) Earnings per share results from dividing earnings available for common stockholders by the
number of shares of common stock authorized.
18) Retained earnings represent the cumulative total of all earnings, net of dividends, that have
been retained and reinvested in the firm since its inception.
19) The balance sheet is a statement which balances a firm’s assets (what it owns) against its debt
(what it owes) or its equity (what is provided by owners).
20) 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.
21) 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.
22) 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.
23) 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.
24) 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.
25) A U.S. parent company’s foreign retained earnings are not adjusted for currency movements
to reflect each year’s operating profits or losses.
26) 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.
27) 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
28) The rule-setting body, which authorizes generally accepted accounting principles is the
________.
A) IFRS
B) FASB
C) SEC
D) Federal Reserve System
29) Accounting practices and procedures used to prepare financial statements are called
________.
A) SEC
B) IFRS
C) GAAP
D) IRB
30) The federal regulatory body governing the sale and listing of securities is called the
________.
A) IRS
B) FASB
C) GAAP
D) SEC
31) 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
32) 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
33) 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
34) 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
35) 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
36) Total assets less net fixed assets equals ________.
A) gross assets
B) current assets
C) depreciation
D) liabilities and equity
37) 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
38) 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
39) 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
40) 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
41) 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
42) 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
43) Which of the following is a current liability?
A) accounts receivable
B) cash
C) notes payable
D) inventory
44) Which of the following represents a current asset?
A) automobiles
B) buildings
C) marketable securities
D) equipment
45) Which of the following is a fixed asset?
A) land
B) accounts payable
C) accruals
D) notes payable
46) The net value of fixed assets is also called its ________.
A) market value
B) par value
C) book value
D) intrinsic value
47) 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
48) 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
49) 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
50) 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
51) A firm has the following accounts and financial data for 2014:
The firm’s earnings available to common shareholders for 2014 is ________.
A) -$224.25
B) $195.40
C) $302.40
D) $516.60
52) A firm has the following accounts and financial data for 2014:
The firm’s earnings per share for 2014 is ________.
A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024
53) A firm had the following accounts and financial data for 2014:
The firm’s net profit after taxes for 2014 is ________.
A) -$206.40
B) $213.80
C) $320.40
D) $206.25
54) 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
55) 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
56) 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
57) 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
58) A firm’s year-end retained earnings balances are $670,000 and $560,000, for 2014 and 2015
respectively. The firm paid $10,000 in dividends in 2015. The firm’s net profit after taxes in 2015
was ________.
A) -$100,000
B) -$110,000
C) $100,000
D) $110,000
59) A firm’s year-end retained earnings balances are $320,000 and $400,000, for 2014 and 2015
respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm’s dividend
payment for 2015 is ________.
A) $0
B) $20,000
C) $80,000
D) $100,000
60) A firm has a year-end retained earnings balance of $220,000 for 2014. The firm reported net
profits after taxes of $50,000 and paid dividends of $30,000 in 2015. The firm’s retained earnings
balance at 2015 year end is ________.
A) $240,000
B) $250,000
C) $270,000
D) $300,000
61) A firm’s year-end retained earnings balance are $670,000 and $560,000 for 2014 and 2015,
respectively. The firm reported net profits after taxes of $100,000 in 2015. The firm paid
dividends of ________ in 2015.
A) $10,000
B) $100,000
C) $110,000
D) $210,000
62) 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)
63) 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
64) At the end of 2015, 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
30% 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 2015 if the company were to declare a $4.25
common stock dividend. The company has 15,000 shares of common stock outstanding.