Chapter 3 T/F

Question 1

Owners equity increase each period by the amount of the corporation’s positive net cash flow.

Answer 1

False

Question 2

An income statement reports a firm’s cumulative revenues and expenses from the inception of the firm through the income statement date.

Answer 2

False

Question 3

If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

Answer 3

True

Question 4

Common-sized income statements are used to compare companies that have the same amount of revenues

Answer 4

False

Question 5

Common-size income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm’s financial performance across time and with competitors.

Answer 5

True

Question 6

Net profit margin is equal to the gross profit margin times the operating profit margin.

Answer 6

False

Question 7

Earnings before taxes, or taxable income, is equal to operating income minus financing costs.

Answer 7

True

Question 8

The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.

Answer 8

False.

Question 9

Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense.

Answer 9

False

Question 10

Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners.

Answer 10

True

Question 11

Earnings available to common shareholders is equal to a corporation’s positive net cash flow over a given period, typically one year.

Answer 11

False

Question 12

Profits-to-Sales relationships are defined as profit margins.

Answer 12

True

Question 13

Common-sized balance sheet show each account as a percentage of total sales to help analysts in comparing companies of difference sizes.

Answer 13

False

Question 14

The balance sheet equation is Total Assets = Total Revenues - Total Liabilities.

Answer 14

False

Question 15

The accounting book value of an asset represents the historical cost of the asset rather than its current market value or replacement cost.

Answer 15

True

Question 16

Intangible assets such as copyrights and goodwill are not included on the balance sheet because they are impossible to value objectively.

Answer 16

False

Question 17

Additional Paid in Capital on the balance sheet equals the amount paid by investors for the company’s common stock that exceeds the market price of the stock at the time of purchase.

Answer 17

False

Question 18

A firm’s income statement reports the results from operating the business for a period of time, while the firm’s balance sheet provides a snapshot of the firm’s financial position at a specific point in time.

Answer 18

True

Question 19

If a company’s cash balance increases during the year, and the company also reports positive net income, then the company’s retained earnings balance must increase.

Answer 19

False

Question 20

Fixed assets are assets whose balances will remain the same throughout the year.

Answer 20

False

Question 21

Inventories are considered fixed assets because inventory levels remain fairly constant throughout the year.

Answer 21

False

Question 22

Finished goods held for sale are inventory, but raw materials to be used in the production process are considered other assets.

Answer 22

False

Question 23

Accounting rules specify that assets on the balance sheet must be reported at current market value, because this is the valuation most useful to potential investors.

Answer 23

False

Question 24

The retained earnings balance on IBM’s balance sheet at the end of 2010 is equal to IBM’s 2010 net income minus dividends paid in 2010.

Answer 24

False

Question 25

Financing activities have no impact on the income statement, but rather are reflected in changes in long-term debt and short-term debt on the balance sheet.

Answer 25

False

Question 26

Common stockholders’ equity equals common stock issued minus treasury stock.

Answer 26

False

Question 27

An income statement reports the firm’s revenues and expenses for a specific period of time such as one year.

Answer 27

True

Question 28

A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities and equity.

Answer 28

True

Question 29

The profit and loss (income) statement is complied on a cash basis.

Answer 29

False

Question 30

The income statement describes the financial position of a firm on a given date.

Answer 30

False

Question 31

Under current accounting rules, the plan and equipment accounts shows the historical cost (purchase price) of, plus any subsequent improvements to, the plant and equipment.

Answer 31

True

Question 32

On an accrual basis income statement, revenues equal cash receipts and expenses equal expenditures.

Answer 32

False

Question 33

A balance sheet reflects the current market value of a firm’s assets and liabilities.

Answer 33

Fale

Question 34

Net working capital is equal to gross working capital minus depreciation.

Answer 34

False

Question 35

The balance sheet reflects the accounting equation: Assets = Liabilities +Owner’s Equity

Answer 35

True

Question 36

Generally accepted accounting principles (GAAP) require finance statements prepared on a cash basis because these statement are most useful for investors and managers.

Answer 36

False

Question 37

A company with negative net income will also have negative operating cash flow.

Answer 37

False

Question 38

According to accrual accounting, revenues are recognized when earned and expenses are recognized when incurred.

Answer 38

True

Question 39

In order to be conservative, accrual accounting requires that expenses be recorded when incurred, but revenues are recorded only after the cash has been received.

Answer 39

False

Question 40

The statement of cash flow explains the changes that took place in the firm’s cash balance over the period of interest.

Answer 40

True