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103. Gross profit represents profit after the deduction of cost of goods sold, and before the
deduction of all other selling expenses, general expenses, and tax expense.
104. Rents, salaries, utilities and insurance are examples of operating expenses.
105. The two major classes of operating expenses are current expenses and long-term
expenses.
106. General expenses include office salaries, rent, and insurance.
107. Net income before taxes is found by deducting total operating expenses from gross profit.
108. A statement of cash flows summarizes a company's cash receipts and cash payments over
a period of time.
109. Cash flow statements identify three sources of cash receipts and disbursements: assets,
liabilities and owners' equity.
110. The statement of cash flows calculates cash flows from operations, investing activities,
and financing activities.
111. An analysis of the statement of cash flows can help a firm prevent cash shortages.
112. The statement of cash flows shows a firm's revenues, costs of goods sold, expenses, and
net income.
113. The equipment a firm owns and the money it has in its bank account are considered
assets.
114. Brand names such as Coca-Cola and McDonald's are examples of intangible assets.
115. Assets are listed on the balance sheet in order of liquidity, with the most liquid assets
listed first.
116. The firm's most valuable assets are listed at the top of its balance sheet.
117. Patents and copyrights are examples of intangible assets.
118. Liquidity refers to how quickly liabilities must be paid.
119. Net income is simply the difference between revenue and cost of goods sold.
120. The cost of goods sold reflects the selling price of the merchandise sold over a period of
time.
121. The cash a firm raised from issuing new debt or equity capital would be reported on a
statement of cash flows.
122. One important source of financing for most small businesses is the owner's savings. If the
owner contributes money to the business from his/her personal savings, it will be recorded in the
owners' equity account on the balance sheet.
123. The income statement computes net income by subtracting liabilities from assets.
124. Revenue on the income statement represents the dollar amount of what is received for
goods sold, services rendered and/or from other revenue sources.
125. When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it
is called depreciation.
126. Although a firm may use different inventory valuation methods, generally accepted
accounting principles (GAAP) states that these methods must produce the same dollar value for
the cost of goods sold.
127. FIFO and LIFO are two common methods used to compute the depreciation of tangible
assets.
128. FIFO is a method of computing net cash flows by subtracting financial inflows from
financial outflows.
129. FIFO is a method of inventory valuation that assumes the items most recently purchased
are also the items that are sold first.
130. The LIFO method of inventory valuation assumes the newest items in inventory are sold
first.
131. According to generally accepted accounting principles (GAAP), a firm must use the
inventory valuation method that most accurately reflects the actual movement of goods through
its inventory.
132. Banks are likely to request a firm's balance sheet when determining whether or not to
loan money to the firm. However, banks would have little interest in the firm's income statement
since it covers a short period of time.
133. The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth
in sales.
134. Cash flow difficulties are unlikely for a firm that is profitable.
135. The Barkley Company's balance sheet shows: what the business owns, minus what the
business owes, which equals the book value (or net worth) of the business.
136. Hendry, Inc., has recorded its unpaid bill for supplies under a current liabilities account
on the balance sheet. This payment will be due to the supplier in less than a year.
137. The McGowan Group wants to know the value of its owners' equity. It will total its assets
and subtract its liabilities.
138. The Montgomery Company balance sheet shows the following items: accounts payable
totaling $50,000; salaries payable totaling $65,000; and notes payable totaling $100,000. These
are liabilities, or money that the firm owes others.
139. The bottom line of the Collins Corporation's income statement is equal to the net worth
of the firm.
140. Luther Landscapes will refer to its income statements to determine whether it was
profitable, or whether it lost money over the past year.
141. O'Donnell Construction has several trucks that are used in the business. Recently, the
owners were told that even though the government permits the firm to depreciate the vehicles, it
is not a deductible expense on the income statement.
142. Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its
bank account. In the asset section of the balance sheet, Harrison lists its land holdings prior to
listing its cash since it is a higher value.
143. Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave
him a written promise to repay the amount within six months. Julio should list this business debt
as an operating expense on his pub's balance sheet.
144. Bark Three Times Pet Store established a line of credit with its local banker and used
(borrowed) $85,000 against it to purchase its first year's inventory. Since it is required to repay
the money before the end of its fiscal year, the company's accountant lists this liability with the
current liabilities on the balance sheet.
145. At this point in time, Bark Three Times Pet Store's balance sheet shows $100,000 in
assets and $90,000 in liabilities. The company's accounting system will show the owners' equity
as $190,000.
