Chapter 2 "Recharge"

Question 1

Which of these questions can be answered by reviewing a firm’s balance sheet?

Answer 1

How much debt is used to finance the firm? AND What is the total amount of assets the firm owns?

Question 2

What does the balance sheet help us do?

Answer 2

It is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (the firm’s equity) at a given point in time.

Question 3

On a balance sheet, total assets must always equal total liabilities plus:

A) Retained Earnings
B) Net Working Capital
C) Shareholders’ Equity
D) Fixed Assets

Answer 3

Shareholders’ Equity

Question 4

True or False: Current assets plus current liabilities equals net working capital.

Answer 4

False. CA minus CL equals NWC.

Question 5

Liquidity has two dimensions which are the ability to:

A) Convert assets into cash so that the value is maximized.
B) Quickly convert assets into cash without significant loss in value.
C) Quickly convert assets into cash regardless of loss in value.

Answer 5

Quickly convert assets into cash without significant loss in value.

Question 6

The price at which willing buyers and sellers would trade is called ___ value.

A) Market
B) Carrying
C) Accounting
D) Book

Answer 6

Market

Question 7

According to GAAP, when is income reported?

A) Whenever the firm decides to report it.
B) When it is earned or accrued.
C) When cash payment is received.
D) When it is first anticipated.

Answer 7

When it is earned or accrued.

Question 8

What does the matching principle of GAAP state?

Answer 8

States that costs associated with a good or service should be recorded at the same time as the revenue from selling that good or service. Recognition takes place when revenue is earned and expense incurred, rather than when cash is collected or spent.

Question 9

In the long run, costs may be considered as:

A) All fixed.
B) Some fixed and some variable.
C) All variable.

Answer 9

All variable

Question 10

In practice, accountants tend to classify costs as either ___ costs or ___ costs.

A) Variable; Fixed
B) Fixed; Period
C) Product; Variable
D) Product; Period

Answer 10

Product; Period

Question 11

When a firm smooths earnings to please investors, it is called:

A) Discretionary reporting.
B) Earnings smoothing.
C) Fair market accounting.
D) Earnings management.

Answer 11

Earnings management.

Question 12

In finance, the value of a firm depends on its ability to generate:

A) Cash flows
B) Earnings per share.
C) Net working capital
D) Net income.

Answer 12

Cash flows.

Question 13

A balance sheet reflects a firm’s:

A) Economic value over a specified time period.
B) Earnings per share over an unspecified time.
C) Accounting value on a specific date.
D) Income at a specific time.

Answer 13

Accounting value on a specific date.

Question 14

The balance sheet identity shows that stockholders’ equity equals assets ____ liabilities.

A) Minus
B) Plus
C) Times

Answer 14

Minus

Question 15

Current assets ___ current liabilities equals NWC.

A) Plus
B) Minus

Answer 15

Minus

Question 16

Liquidity refers to the ease of changing ___.

A) Cash into other assets.
B) Liabilities to assets.
C) Cash to liabilities.
D) Assets to cash.

Answer 16

Assets to cash.

Question 17

What does liquidity refer to?

Answer 17

Refers to the speed and ease with which an asset can be converted to cash.

Question 18

The market value of an item is:

A) The amount you paid it.
B) The amount recorded in the balance sheet.
C) Its appraised value.
D) The cash value you’d get if you sold it.

Answer 18

The cash value you’d get if you sold it.

Question 19

Select all that apply.
According to GAAP, when is revenue recognized on an income statement?

A) When the value of an exchange of goods or services is known or reliably determined.
B) Only when cash has been received for sale.
C) After the related expenses are paid in full.
D) When the earnings process is virtually completed.

Answer 19

A & D.

Question 20

The short run is:

A) An imprecise period of time.
B) Defined as six months.
C) Defined as one month.
D) Defined as more than one year.

Answer 20

An imprecise period of time.

Question 21

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as:

A) Product Costs
B) Variable Costs
C) Fixed Costs
D) Period Costs

Answer 21

Period Costs

Question 22

Earnings management is a controversial practice in which corporations ____ or ___ their earnings to “smooth out” dips and surges and keep investors calm.

A) Change; Don’t Change
B) Overstate; Understate
C) Lie; Fudge
D) Overstate; Inflate

Answer 22

Overstate; Understate

Question 23

Cash flow refers to:

A) The difference between the number of dollars that come in and the number that went out.
B) The sum of the number of dollars that came in and the number that went out.
C) Only the cash that corresponds to the net income for the year.
D) Only the cash that represents the closing balance of retained earnings.

Answer 23

The difference between the number of dollars that came in and the number that went out.

Question 24

Select all that apply.
Which of these questions can be answered by reviewing a firm’s balance sheet?

A) What is the total amount of assets the firm owns?
B) How much net income has the firm earned this period?
C) How much debt is used to finance the firm?
D) How much of the firm’s net income was paid out in dividends?

Answer 24

A & C

Question 25

Which of the following is the balance sheet equation?

A) Stockholders’ equity equals assets plus liabilities.
B) Assets equals stockholders’ equity minus liabilities.
C) Assets equal liabilities plus stockholders’ equity.
D) Liabilities equal assets plus stockholders’ equity.

Answer 25

Assets equal liabilities plus stockholders’ equity.

Question 26

True or False: Current assets plus current liabilities equals net working capital.

Answer 26

False