chapter 2 conceptual Flashcards
T/F: in the U.S., publicly taxed companies can choose whether or not they wish to release periodic financial statements
false
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
false
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
false
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?
it makes it easier to compare the financial results of different firms
which of the following best describes why a firm produces financial statements?
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
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?
United States
which of the following is NOT one of the financial statements that must be produced by a public company?
the statement of activities
U.S. public companies are required to file their annual financial statements with the U.S. securities and exchange commission on which form?
10-K
which of the following is NOT a financial statement that every public company is required to produce?
statement of sources and uses of cash
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 ?
auditor
T/F: the balance sheet shows the assets, liabilities, and stockholders’ equity of a firm over a given length of time
false
T/F: stockholders’ equity is the difference between a firm’s assets and liabilities, as shown on the balance sheet
true
which of the following amounts would be included on the right side of a balance sheet?
the amount of deferred tax liability held by the company
which of the following best describes why the left and right sides of a balance sheet are equal?
the assets must equal liabilities plus stockholders’ equity because stockholders’ equity is the difference between the assets and the liabilities
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?
a patent for a drug held by the company
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?
revenue received for the delivery of items that have not yet been delivered
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?
since net working capital is negative, the company will not have enough funds to meet its obligations
what is the main problem in using a balance sheet to provide an accurate assessment of the value of a company’s equity?
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
the major components of stockholders’ equity are ?
common stock, paid-in surplus, and retained earnings
which of the following balance sheet equations is INCORRECT?
assets - current liabilities = long-term liabilities
cash is a ___
current asset
accounts payable is a ___
current liability
a 30-year mortgage loan is a ___
long-term liability
which of the following statements regarding the balance sheet is INCORRECT?
the balance sheet reports liabilities on the left-hand side
T/F: in general, a successful firm will have a market-to-book ratio that is substantially greater than 1
true
which ratio would you use to measure the financial health of a firm by assessing that firm’s leverage?
debt-equity or equity multiplier ratio
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
true
what is a firm’s net income?
all of the above (difference between sales and other income, bottom line of statement, measure of firm’s profitability)
what is a firm’s gross profit?
the difference between sales revenue and the costs
which of the following is NOT considered to be an operating expense on the income statement?
corporate taxes
which of the following statements regarding the income statement is INCORRECT?
the income statement shows the cash flows and expenses at a given point in time
gross profit is calculated as ?
total sales - cost of sales
which of the following is NOT an operating expense?
interest expense
T/F: price-earnings ratios tend to be high for fast-growing firms
true
which of the following is the LEAST likely explanation for a firm’s high ROE?
the firm is growing
which of the following firms would be expected to have a high ROE?
a grocery store chain that has very high turnover, selling many multiples of its assets per year
which of the following firms would be expected to have a high ROE based on that firm’s high profitability?
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
why must care be taken when comparing a firm’s share price to its operating income?
share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm
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
true
which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
it includes cash inflows from services rendered
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?
it adds all non-cash entries related to a firm’s operating activities
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?
it would be an addition to property, plant and equipment so it would be an investing activity
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?
the sale will be added to net income on the income statement but deducted form net income on the statement of cash flows
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?
it will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows
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?
as an outflow under investment activities
T/F: the management of public companies is not legally required to disclose any off-balance sheet transactions
false
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?
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
the notes to the financial statements would LEAST likely be used for which of the following purposes?
to disclose the financial implications of any off-balance sheet transactions
T/F: use of GAAP and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements
false
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?
the off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis or notes to the financial statement
WorldCom classified $3.85 billion in operating expenses as long-term investments. how would this make WorldCom’s financial statements more attractive to investors
by raising its reported earnings
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?
by forcing companies to audit financial statements they release
what are the requirements of section 404 of SOX?
it requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process
which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
readers of even fraudulent financial statements can spot signs of a firm’s financial health, if those statements are read fully and with care
