146. Marissa is taking her first course in accounting this semester. One of the first things she
learns is that
revenue
and
net income
mean the same thing.
147. Bark Three Times Pet Store’s owner is concerned with how his business decisions affect
the bottom line. This is another way of saying that he is concerned with the impact of his
decisions on net income after taxes.
148. Money received from tickets sold for the Katy Perry concert is recorded as net income on
the concert promoter’s income statement.
149. Potential investors are interested in both a firm’s balance sheet and income statement
when evaluating whether or not to invest in a firm.
150. When valuing items in inventory for financial reporting purposes, generally accepted
accounting principles (GAAP) requires firms to value the cost of goods sold by assuming that the
items that have been in inventory the longest are the ones that are sold first.
151. If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory
valuation methods will produce the same reported net income.
152. During a period of rising prices, the FIFO technique of inventory valuation will result in a
lower net income figure than would the LIFO technique.
153. In businesses that handle a lot of perishable items (such as supermarkets) the actual
movement of goods through inventory most closely resembles the LIFO inventory valuation
technique.
154. If the economy began experiencing a prolonged period of deflation in which the prices of
most goods are falling, many firms would find that the LIFO method of inventory valuation would
result in higher reported profits.
155. During periods of rising prices, firms that want to report more attractive profits would
tend to favor the FIFO technique of inventory valuation.
156. If the goal of a business is to pay lower taxes on its income during an inflationary period,
it is likely to use the FIFO inventory costing method.
157. A hospital emergency room serves several patients from a ten-car pile-up on the local
interstate. Most of the victims require bandages, antibiotics, foot and arm casts, topical
ointments, and pain pills. These items are part of the costs of good sold for the hospital
emergency room.
158. Preferred Pet Care, Inc., a mobile veterinary care clinic, has more appointments than it
ever expected to have when it opened its doors. Each week it orders more vaccines, antibiotics,
and preventive care supplies from a major veterinary supplier, with the understanding that it will
pay for these supplies in one month’s time. Most of the company’s clients are elderly and on fixed
incomes, and often do not pay for services for two or more months. This is not a problem
because as long as the company continues to increase its appointments, it will create profits and
growth.
159. Cash revenues from the sale of new cars at Pete’s Auto Emporium would be listed as a
cash inflow from operations on Pete’s statement of cash flows.
160. A loan officer at Southwest Bank is considering a loan application from Preferred Pet
Care, Inc. He is concerned about the company’s ability to make payments on the loan. The loan
officer is likely to be interested in Preferred Pet Care’s statement of cash flows.
161. Preferred Pet Care, Inc., successfully took out a loan for $130,000 from Southwest Bank.
It used $80,000 of this loan to pay off an existing loan that had a higher interest rate, and
purchased X-ray equipment with the remaining funds. These events were noted as financing and
investing activities on its balance sheet.
162. Financial ratios are used to analyze a firm’s financial condition and financial performance.
163. Liquidity ratios are of particular importance to stockholders, but have little relevance for
creditors.
164. The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed
funds in its operations.
165. Liquidity refers to how fast an asset can be converted to cash.
166. The current ratio is used to evaluate a firm’s ability to pay its short-term debts.
167. The current ratio is found by dividing the firm’s total assets by its total liabilities.
168. The current ratio is a good indicator of the degree to which a firm relies on borrowed funds
in its operations.
169. Both the current ratio and the acid-test ratio are liquidity ratios.
170. The acid-test ratio is found by dividing inventory by cost of goods sold.
171. For firms that sometimes have difficulty selling their inventory, the current ratio is likely to
be a better measure of liquidity than the acid-test ratio.
172. A firm that takes on too much debt could experience problems repaying its lenders or
meeting promises made to stockholders.
173. Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in
its operations.
174. The debt to owners’ equity ratio is a common type of liquidity ratio.
175. Profitability ratios are often used to measure management’s earnings performance.
176. A firm’s basic earnings per share measures how much profit was earned for each dollar
invested by the firm’s owners.
177. The return on sales ratio measures a firm’s use of leverage.
178. The basic earnings per share ratio does not take stock options, warrants, and preferred
stock into account.
179. Activity ratios measure the effectiveness of the firm’s management in using its various
resources to achieve profits.
180. The inventory turnover ratio measures the speed of inventory moving through the firm and
its conversion into sales.
181. An extremely high inventory turnover ratio may represent lost sales due to holding
inadequate stocks of merchandise.
182. The acid-test ratio emphasizes the ability to convert inventory quickly into cash.
183. The inventory turnover ratio for all firms should be greater than 2 times.
184. One way to make ratio analysis more meaningful is to compare the ratios of one firm to
those of other firms in the same industry.
185. A debt to owners’ equity ratio of 25% indicates that a firm has more debt than equity.
186. The basic earnings per share and the diluted earnings per share would have quite
different values for a firm that relied heavily on preferred stock and convertible debt securities to
acquire funds.
187. A lower than average inventory turnover ratio indicates excellent inventory management
practices.
188. Preferred Pet Care, Inc., has recorded the following on its income statement for the
period ending December 31, 2016:
The return on sales = 34%. This return is outstanding and there is no need to compare this return
to competitors in the veterinary services industry.
189. Bark Three Times Pet Store’s accountant has recorded the following: Total current assets
= $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and Inventory = $16,000.
Total assets = $230,000; Total current liabilities = $48,000; and Total current and long-term
liabilities = $98,000. The store’s current ratio = 1.25. The store’s acid-test ratio = .92.
190. An important difference between accounting and other business functions, such as
marketing and management, is that:
191. To effectively run a business, it is necessary to: