chapter 2 conceptual

Question 1

T/F: in the U.S., publicly taxed companies can choose whether or not they wish to release periodic financial statements

Answer 1

false

Question 2

T/F: financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm’s assets and the financing of those assets, and a prediction of the firm’s future performance

Answer 2

false

Question 3

T/F: international financial reporting standards are taking root throughout the world. however, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century

Answer 3

false

Question 4

what is the main reason that it is necessary for public companies to follow the rules and format set out in the generally accepted accounting principles (GAACP) when creating financial statements?

Answer 4

it makes it easier to compare the financial results of different firms

Question 5

which of the following best describes why a firm produces financial statements?

Answer 5

to provide a menas for interested outside parties such as creditors to obtain information about a firm, with an overview of the short-and long-term financial condition of a business

Question 6

the exchanges in which of the following countries or regions do NOT accept the international financial reporting standards set out by the international accounting standards board?

Answer 6

United States

Question 7

which of the following is NOT one of the financial statements that must be produced by a public company?

Answer 7

the statement of activities

Question 8

U.S. public companies are required to file their annual financial statements with the U.S. securities and exchange commission on which form?

Answer 8

10-K

Question 9

which of the following is NOT a financial statement that every public company is required to produce?

Answer 9

statement of sources and uses of cash

Question 10

the third party who checks annual financial statements to ensure that they are prepared according to GAAP and verifies that the information required reported is reliable to the ?

Answer 10

auditor

Question 11

T/F: the balance sheet shows the assets, liabilities, and stockholders’ equity of a firm over a given length of time

Answer 11

false

Question 12

T/F: stockholders’ equity is the difference between a firm’s assets and liabilities, as shown on the balance sheet

Answer 12

true

Question 13

which of the following amounts would be included on the right side of a balance sheet?

Answer 13

the amount of deferred tax liability held by the company

Question 14

which of the following best describes why the left and right sides of a balance sheet are equal?

Answer 14

the assets must equal liabilities plus stockholders’ equity because stockholders’ equity is the difference between the assets and the liabilities

Question 15

a company that produces drugs is preparing a balance sheet. which of the following would be most likely to be considered a long-term asset on this balance sheet?

Answer 15

a patent for a drug held by the company

Question 16

a delivery company is creating a balance sheet. which of the following would most likely be considered a short-term liability on this balance sheet?

Answer 16

revenue received for the delivery of items that have not yet been delivered

Question 17

a small company has current assets of $112,000 and current liabilities of $117,000. which of the following statements about that company is most likely to be true?

Answer 17

since net working capital is negative, the company will not have enough funds to meet its obligations

Question 18

what is the main problem in using a balance sheet to provide an accurate assessment of the value of a company’s equity?

Answer 18

valuable assets such as the company’s reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet

Question 19

the major components of stockholders’ equity are ?

Answer 19

common stock, paid-in surplus, and retained earnings

Question 20

which of the following balance sheet equations is INCORRECT?

Answer 20

assets - current liabilities = long-term liabilities

Question 21

cash is a ___

Answer 21

current asset

Question 22

accounts payable is a ___

Answer 22

current liability

Question 23

a 30-year mortgage loan is a ___

Answer 23

long-term liability

Question 24

which of the following statements regarding the balance sheet is INCORRECT?

Answer 24

the balance sheet reports liabilities on the left-hand side

Question 25

T/F: in general, a successful firm will have a market-to-book ratio that is substantially greater than 1

Answer 25

true

Question 26

which ratio would you use to measure the financial health of a firm by assessing that firm’s leverage?

Answer 26

debt-equity or equity multiplier ratio

Question 27

T/F: the income statement reports the firm’s revenues and expenses, and it computes the firm’s bottom line of net income, or earnings

Answer 27

true

Question 28

what is a firm’s net income?

Answer 28

all of the above (difference between sales and other income, bottom line of statement, measure of firm’s profitability)

Question 29

what is a firm’s gross profit?

Answer 29

the difference between sales revenue and the costs

Question 30

which of the following is NOT considered to be an operating expense on the income statement?

Answer 30

corporate taxes

Question 31

which of the following statements regarding the income statement is INCORRECT?

Answer 31

the income statement shows the cash flows and expenses at a given point in time

Question 32

gross profit is calculated as ?

Answer 32

total sales - cost of sales

Question 33

which of the following is NOT an operating expense?

Answer 33

interest expense

Question 34

T/F: price-earnings ratios tend to be high for fast-growing firms

Answer 34

true

Question 35

which of the following is the LEAST likely explanation for a firm’s high ROE?

Answer 35

the firm is growing

Question 36

which of the following firms would be expected to have a high ROE?

Answer 36

a grocery store chain that has very high turnover, selling many multiples of its assets per year

Question 37

which of the following firms would be expected to have a high ROE based on that firm’s high profitability?

Answer 37

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals

Question 38

why must care be taken when comparing a firm’s share price to its operating income?

Answer 38

share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm

Question 39

T/F: a firm’s statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period

Answer 39

true

Question 40

which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?

Answer 40

it includes cash inflows from services rendered

Question 41

which of the following is a way that the operating activity section of the statement of cash flows adjusts net income from the balance sheet?

Answer 41

it adds all non-cash entries related to a firm’s operating activities

Question 42

allen company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. where would this purchase be reflected on the statement of cash flows?

Answer 42

it would be an addition to property, plant and equipment so it would be an investing activity

Question 43

a printing company prints a brochure for a client then bills them for this service. at the time the printing company’s financial disclosure statements are prepared, the client has not yet paid the bill for this service. how will this transaction be recorded?

Answer 43

the sale will be added to net income on the income statement but deducted form net income on the statement of cash flows

Question 44

a manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. how will the cost to the company of this piece of equipment be recorded?

Answer 44

it will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows

Question 45

a software company acquires a smaller company in order to acquire the patents that it holds. where will the cost of this acquisition be recorded on the statement of cash flows?

Answer 45

as an outflow under investment activities

Question 46

T/F: the management of public companies is not legally required to disclose any off-balance sheet transactions

Answer 46

false

Question 47

a firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm’s management discussion and analysis?

Answer 47

that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages

Question 48

the notes to the financial statements would LEAST likely be used for which of the following purposes?

Answer 48

to disclose the financial implications of any off-balance sheet transactions

Question 49

T/F: use of GAAP and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements

Answer 49

false

Question 50

one way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. the incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. which of the following is one of the ways that such a transaction is deceptive?

Answer 50

the off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis or notes to the financial statement

Question 51

WorldCom classified $3.85 billion in operating expenses as long-term investments. how would this make WorldCom’s financial statements more attractive to investors

Answer 51

by raising its reported earnings

Question 52

which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?

Answer 52

by forcing companies to audit financial statements they release

Question 53

what are the requirements of section 404 of SOX?

Answer 53

it requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process

Question 54

which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?

Answer 54

readers of even fraudulent financial statements can spot signs of a firm’s financial health, if those statements are read fully and with care