Chap 014 1v2r5

Chapter 14 - ing and Financial Statements

Chapter 14 ing and Financial Statements

True / False Questions 1. (p. 425) Only large businesses use the financial information compiled by ants. FALSE

AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Easy Learning Objective: 1

2. (p. 425) ing is the recording, measurement, and interpretation of financial information. TRUE


3. (p. 425) Only business organizations use ing information to demonstrate how their funds are being used. FALSE


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4. (p. 427) The ing and bookkeeping are interchangeable because they mean almost the same thing. FALSE

AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Medium Learning Objective: 1

5. (p. 427) Bookkeeping is only one aspect of ing and involves the recording of routine, day-to-day business transactions. TRUE


6. (p. 429) Governments are immune from ing scandals FALSE


Multiple Choice Questions 7. (p. 425) ants compile financial information to A. give to competitors. B. make sure the organization's financial resources are used efficiently. C. mislead stockholders. D. keep the organization's managers confused about their bonuses. E. give to customers.

AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Easy Learning Objective: 1

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8. (p. 425) ing A. records, measures, and interprets financial data. B. produces goods and services. C. reports only to those within the organization. D. reports only to those outside the organization. E. develops promotional plans.


9. (p. 425) If Sara Sidle is a self-employed, state-certified ant who provides various types of ing services for different companies and organizations, she is probably a A. private ant. B. certified management ant. C. certified public ant. D. noncertified ant. E. forensic ant.


10. (p. 425) A stands for A. Certified Private ant. B. Credentialed Private ant. C. Credentialed Public ant. D. Certified Public ant. E. Certified Professional ant.


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11. (p. 425) A A may A. officially express an unbiased opinion about the accuracy of a firm's financial statements. B. may express a biased opinion about the accuracy of a firm's financial statements. C. make no errors. D. handle every firm's reports by different rules. E. all of the above.


12. (p. 426) A forensic ant A. investigates crime scenes. B. works for a public corporation. C. analyzes financial documents in search of fraudulent entries or financial misconduct. D. investigates workplace accidents to determine fault. E. analyzes annual reports to ensure that corporations have adequate corporate governance mechanisms.


13. (p. 428) John James is an ant who is employed by a large department store chain in the tax department. He is probably a(n) A. public ant. B. private ant. C. legal ant. D. junior ant. E. senior ant.

AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Medium Learning Objective: 1

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14. (p. 428) Private ants do all of the following except A. work for a corporation, government, or other organization to prepare and analyze its financial information. B. have titles such as controller or internal auditor. C. prepare and interpret a firm's financial statements. D. express an official unbiased opinion regarding the accuracy of a client's financial statements. E. take part in internal planning and decision making.

AACSB: Reflective Thinking Bloom's Taxonomy: Knowledge Difficulty: Hard Learning Objective: 1

15. (p. 428) CMA stands for A. Certified Money ant. B. Credentialed Management ant. C. Certified Management ant. D. Credentialed Marketing ant. E. Certified Marketing Analyst.


16. (p. 428-429) All of the following are outsiders who rely on information from an organization's financial statements except A. lenders. B. the Internal Revenue Service. C. stockholders. D. creditors. E. managers.


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17. (p. 429) Bob Banker has to decide whether to lend the Yubble Bubble Gum Company $10,000 to pay suppliers. He will A. review the company's financial statements. B. give it the loan because he likes its looks. C. see if its gum blows good bubbles. D. ask its competition what to do. E. turn down the loan application.


18. (p. 427) Although the ing and bookkeeping are often used interchangeably, a point of distinction is that the scope of bookkeeping tends to be more A. narrow. B. important. C. interpretive. D. highly paid. E. broad.


19. (p. 428) Managers use ing information to A. evaluate the success of the firm's activities. B. pinpoint problems. C. plan for the future. D. report financial performance to outsiders. E. all of the above.


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20. (p. 428) According to the text, a financial managers' greatest concern is probably A. ensuring they have the right credentials. B. employees. C. federal regulators. D. budgets. E. cash flow.


Essay Questions 21. (p. 428) How do managers and owners use financial statements?

Managers and owners use financial statements to aid in internal planning and control and for external purposes such as reporting to the Internal Revenue Service, stockholders, creditors, employees, and other interested parties.


True / False Questions 22. (p. 430) Assets are a firm's economic resources. TRUE


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23. (p. 431) The ing cycle is a system of analyzing and interpreting business transactions in separate s in order to maintain the balance of the ing equation. FALSE


24. (p. 431) All business transactions can be classified as assets, liabilities, or owner's equity. TRUE


25. (p. 431-432) The ing cycle collects, records, and analyzes raw data constantly through the business's life cycle. TRUE


26. (p. 434) When the financial statements are completed, a firm's books are said to be "closed," and the ing cycle begins anew for the next ing period. TRUE


Multiple Choice Questions

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27. (p. 430) All of the following represent assets except A. cash. B. inventory. C. land. D. equipment. E. a bank loan.


28. (p. 431) The debts Anna's Flowers owes to the Small Business istration and her company's suppliers represent which of the following? A. Owners' equity B. Assets C. Liabilities D. Stock E. Bonds


29. (p. 431) Which of the following equations is equivalent to the ing equation? A. Equity = liabilities - assets B. Owners' equity = assets - liabilities C. Revenues - expenses = net income D. Net income = expenses - revenues + taxes E. Profit = sales - revenues

AACSB: Reflective Thinking Bloom's Taxonomy: Comprehension Difficulty: Hard Learning Objective: 2

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30. (p. 431) Double-entry bookkeeping is a system of recording and classifying business transactions A. in separate s in order to maintain the ing equation. B. by the amount of the transaction. C. in all s including those that do not maintain the ing equation. D. in general ledgers. E. none of the above.


31. (p. 431-434) The ing cycle includes which of the following? A. Collecting data B. Recording data C. Analyzing data D. Posting transactions E. All of the above are part of the ing cycle.


32. (p. 434) After gathering together and analyzing source documents and recording each financial transaction in a journal, a financial manager, bookkeeper, or ant next A. closes out the books. B. posts transactions in a journal. C. posts transactions in a ledger. D. prepares a trial balance. E. balances the ing equation.


Essay Questions

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33. (p. 431) Define double-entry bookkeeping and explain how to use it, keeping the ing equation in balance.

Double-entry bookkeeping is a system of recording and classifying business transactions in s that maintain the ing equation. To keep the ing equation in balance, each business transaction must be classified and recorded in two separate s.


True / False Questions 34. (p. 435) Income statements show revenue, expenses, and income over a period of time. TRUE


35. (p. 436) Only business organizations have revenue to report. FALSE


36. (p. 437) Cost of goods sold is calculated by subtracting the ending inventory from the beginning inventory. FALSE


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37. (p. 437) Expenses can be incurred daily. TRUE


38. (p. 437-438) Net income is the profit (loss) after all expenses excluding taxes have been deducted from revenue. FALSE


Multiple Choice Questions 39. (p. 436) An ing term that is synonymous with revenue is A. profit. B. expenses. C. sales. D. net income. E. price.


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40. (p. 437) An ing term that is synonymous with net income is A. earnings after taxes. B. assets after taxes. C. liabilities after taxes. D. expenses after taxes. E. cash disbursements after taxes.


41. (p. 435) An income statement shows A. revenues, expenses, and net income over a period of time. B. assets, liabilities, and equity. C. the company's status at a particular point in time. D. how much income each employee earned. E. how much income the CEO earned.


42. (p. 435) The financial document that shows a company's revenue, expenses, and profits over a period of time is called a(n) A. income statement. B. balance sheet. C. budget. D. statement of cash flow. E. discount statement.


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43. (p. 437) Acme Model Trains started the ing period with $10,000 worth of model trains in inventory. During the ing period, it purchased $5,000 worth of model trains and sold $7,500 worth. What is its cost of goods sold? A. $15,000 B. $2,500 C. $5,000 D. $7,500 E. $10,000

AACSB: Reflective Thinking Bloom's Taxonomy: Application Difficulty: Hard Learning Objective: 3

44. (p. 437) All of the following could be expense s except A. interest expense. B. retained expense. C. general and istrative expense. D. research and development expense. E. depreciation expense.


45. (p. 437) When an ant allocates the cost of a piece of equipment over a period of time, this is called A. discounting. B. encumberment. C. cost plus. D. expense designation. E. depreciation.


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46. (p. 437) When a company wants to place a value on a physical asset, it must A. reduce the value by the amount the asset has depreciated. B. auction the asset off. C. ask its competitors what the asset is worth. D. price a new one. E. increase the value by the amount the asset has appreciated.


47. (p. 437) The profits of a company are equal to the revenue minus A. assets. B. equity. C. expenses. D. sales. E. income.


48. (p. 435-438) The information presented in an income statement could be described using which of the following equations? A. Equity = liabilities - assets B. Equity = assets - liabilities C. Revenues - expenses = net income D. Net income = expenses - revenues + taxes E. All of the above


Essay Questions

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49. (p. 436) Define the "cost of goods sold" line on an income statement and explain how to calculate it.

Cost of goods sold is the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. It may be calculated with this formula: Cost of goods sold = Beginning inventory + Interim purchases - Ending inventory.


True / False Questions 50. (p. 439) Balance sheets show revenues, expenses, and profits. FALSE


51. (p. 439) Balance sheets show assets, liabilities, and expenses over a period of time. FALSE


52. (p. 439) A balance sheet shows the financial position of an organization at any given moment in time. TRUE


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53. (p. 440) Liquidity is judged by how easily an asset can be turned into cash. TRUE


54. (p. 442) Owners' equity includes owners' contributions to their business along with income retained to finance growth and development. TRUE


55. (p. 443) Negative cash flow always indicates that a company is in financial trouble FALSE

AACSB: Reflective Thinking Bloom's Taxonomy: Analysis Difficulty: Medium Learning Objective: 4

Multiple Choice Questions 56. (p. 439) The financial document that has been likened to a snapshot of how the company's finances are doing at that moment is called a(n) A. income statement. B. balance sheet. C. annual report. D. budget. E. statement of cash flow.


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57. (p. 439) The financial statement that represents an accumulation of all of a company's transactions since it began is the A. income statement. B. balance sheet. C. profit and loss statement. D. statement of cash flow. E. income tax form.


58. (p. 439) The balance sheet uses all of the following titles to describe assets except A. s receivable. B. cash. C. inventory. D. current assets. E. deferred income taxes.


59. (p. 440) A company's assets that can be easily converted into cash are called A. fixed assets. B. long-term assets. C. current assets. D. equity. E. revenue assets.


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60. (p. 442) A company's financial obligations are called its A. assets. B. equity. C. net profit. D. liabilities. E. revenue.


61. (p. 442) The balance sheet uses all of the following titles to describe liabilities except A. sales revenue. B. s payable. C. current liabilities. D. taxes payable. E. wages payable.


62. (p. 442) The owners' contributions to a company and all earnings retained to finance continued growth and product development are A. owners' equity. B. assets. C. liabilities. D. revenue. E. profits.


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63. (p. 442) All of the following would be considered owners' equity s except A. common stock. B. preferred stock. C. stockholders' equity. D. s payable. E. retained earnings.


64. (p. 442) The financial statement that explains how a firm's cash changed from the beginning of the ing period to the end is called the A. statement of cash flows. B. balance sheet. C. income statement. D. master budget. E. profit-loss statement.


Essay Questions

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65. (p. 439) Discuss why the financial statement called the "balance sheet" was given the name and explain the two different formats that this statement can have.

This statement is called a balance sheet because it must reflect a balanced ing equation: Assets must equal liabilities plus owners' equity. Balance sheets can be presented in two different formats. In the first format, assets, liabilities, and ownership are presented in a vertical format, with assets at the top followed by liabilities and the owner's investment. In the second format, assets can be presented on the left side and liabilities and owners' investment on the right side.


True / False Questions 66. (p. 444) Ratio analysis brings the information on financial statements into sharper focus so that a firm's managers and others can measure its productivity, profitability, and sources of financing relative to other firms. TRUE


67. (p. 445) After ratios are computed, it is not much help to compare them with those of similar organizations. FALSE


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68. (p. 445) Profitability ratios measure how efficiently a firm uses its assets to generate $1 of sales. FALSE


69. (p. 448) Liquidity ratios show how fast a company can turn current assets into cash to pay off short-term debt. TRUE


70. (p. 448) Debt utilization ratios measure how much debt a company is using relative to other sources of capital. TRUE


Multiple Choice Questions

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71. (p. 444) Information found on the company's income statement and balance sheet is extracted from these documents and examined more closely through the use of A. general analysis. B. specific analysis. C. psychoanalysis. D. summative analysis. E. ratio analysis.


72. (p. 444) Ratio analysis is used to determine A. what a firm is worth. B. how much a firm made or lost. C. how a firm compares to others in the industry. D. all of the above. E. none of the above.


73. (p. 445) Profitability ratios are used to measure A. how efficiently a firm uses its assets to generate sales. B. the speed with which a company can turn its short-term assets into cash to pay off its shortterm debts. C. how much income (net or operating) a firm generates relative to its assets, equity, and sales. D. how much debt the firm is using relative to other sources of financing. E. the performance of the firm relative to others on a per-share basis.


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74. (p. 445) One of the best ways to analyze a company's financial performance is to compare its ratios with those of A. suppliers who work in the field. B. manufacturers producing their products. C. companies in the same industry. D. the U.S. government. E. foreign governments.


75. (p. 445-447) Return on assets and return on equity are examples of which type of ratio? A. Asset utilization B. Liquidity C. Debt D. Profitability E. Current


76. (p. 447) Asset utilization ratios are used to measure A. the speed with which a company can turn its short-term assets into cash to pay off its shortterm debts. B. how much income a firm generates relative to its assets, equity, and sales. C. how much debt the firm is using relative to other sources of financing. D. the performance of the firm relative to others on a per-share basis. E. how efficiently the firm uses its assets to generate $1 in sales.


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77. (p. 448) Barbara was asked to extend trade credit to a restaurant she hadn't serviced before. She asked to see its balance sheet to determine if it could pay its bills. She divided its current assets by current liabilities to get its A. current ratio. B. receivable turnover. C. inventory turnover. D. earnings per share. E. book value per share.


78. (p. 448) The ratio that reflects a company's liquidity after the inventory has been deleted is which type of ratio? A. Past B. Current C. Future D. Slow E. Quick


79. (p. 448-449) If a company is relying on borrowing and credit too extensively, this will probably be reflected in which ratio? A. Current usage B. Past utilization C. Debt utilization D. Liquid utilization E. Fixed asset usage


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Essay Questions 80. (p. 444) Discuss how analysts can use ratio analysis to evaluate a company's financial performance.

In evaluating a company's financial performance, analysts use ratio analysis to bring the information on the balance sheet and the income statement into sharper focus to help measure its productivity, profitability, and sources of finances relative to those of other firms. They can then take these ratios and compare them to other firms in the industry to evaluate financial performance.


81. (p. 454) Describe the three basic ing statements. What types of information does each provide that can help you evaluate the situation?

The three basic ing statements are the income statement, the balance sheet, and the statement of cash flow. The income statement shows the profitability of a firm over a period of time—its overall revenues and the costs incurred in generating those revenues. The balance sheet is a snapshot of a company's financial position at a given moment and indicates what the organization owns or controls and the various sources of funds used to pay for these assets (debt or equity). In other words, it shows what is owned (and who owns it) and owed. The statement of cash flow provides information about the movement of cash through the firm from the beginning of an ing period to the end.


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82. (p. 454) Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company's financial ratios might you expect to be especially poor?

Students' answers may vary but should include logical justification. For example, profitability ratios (profit margin, return on assets, and return on equity) are likely to be of great value (at least initially) because they measure how much operating or net income an organization is able to generate relative to its assets, owners' equity, and sales. Simply, is the firm making or losing money? Because the firm is in trouble, debt and asset utilization, and liquidity ratios may be poor.

AACSB: Reflective Thinking Bloom's Taxonomy: Application Difficulty: Hard Learning Objective: 6

83. (p. 454) Discuss the limitations of ratio analysis.

The main limitation of ratio analysis is that ing practices of different organizations are never quite the same. Hence, making comparisons with ratios is never quite comparing apples to apples. Another limitation is that a single or even a set of ratios provides only part of the financial story. Other information is needed to evaluate clearly a firm's performance. For example, strategic objectives and environmental (business environment, social/political environment, etc.) factors may impede or facilitate the firm's ability to perform, thus biasing conclusions drawn merely from ratio analysis.


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