Financial Statements Test Answers

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Cost of Goods Sold is calculated using which of the following?
Sales + Gross Profit + Beginning Inventory - Ending Inventory
Beginning Inventory + Cost of Goods Purchased - Ending Inventory
Beginning Inventory - Cost of Goods Purchased + Ending Inventory
Sales - Cost of Goods Purchased + Beginning Inventory - Ending Inventory


What category would cash paid for taxes fall under?
Cash flows from accounting activities
Cash flows from investing activities
Cash flows from operating activities
Cash flows from credit activities


Which item does not depreciate?
Manufacturing Equipment
Goodwill
Factory Building


What is the basic accounting equation used to calculate the balance sheet?
Assets = Securities + Stockholders Equity
Profit = Liabilities + Stockholders Equity
Assets = Liabilities + Stockholders Equity
Capital = Liabilities + Stockholders Assets


Which of the following is NOT one of the four basic financial statements?
Statement of Cash Flows
Income Statement
Audit Statement
Balance Sheet


What information is found on the Balance Sheet?
Revenues, Expenses, Net Profit or Loss
Assets, Liabilities and Shareholder's Equity
Gross Profit, Cost of Goods Sold and Net Income
Cash inflows and Cash outflows from Operating, Investing and Financing Activities


What is GAAP, and why is it important?
Greatly Anticipated Accounting Principles; These principles were set because the IRS is anticipating payment.
Generally Acknowledged Accounting Principles; It is important because taxation isn't an exact science and the goal is to be approximate in tax payment.
Generally Accepted Accounting Principles; It is important because it is responsible for standardizing accounting procedures.
Greatly Appreciated Accounting Practices; It is important because the IRS appreciates your taxes.


What is the calculation used on the income statement?
Liabilities – Expenses = Net Income
Revenues – Equity = Net Income
Revenues – Expenses = Net Income
Liabilities – Assets = Net Income


What sources of cash flow are included on the statement of cash flows?
Cash flows from credit activities, expansion activities, and marketing activities
Cash flows from employment activities, research activities, and financing activities
Cash flows from credit activities, investing activities, and marketing activities
Cash flows from operating activities, investing activities, and financing activities


What are revenues?
Income from liabilities
Income from assets
Income from goods or services that have been sold
Income from investments


What should balance on a company’s balance sheet?
Deferred Assets and Deferred Credits
Total Assets and the sum of Liabilities and Shareholders’ Equity
Revenues and Expenses
Accounts Payable and Accounts Receivable


What audience is an annual report addressing?
Shareholders
Other businesses
The media
Environmental groups


On a balance sheet, goodwill is an example of what?
Deferred Liabilities
Charitable Donations
Accounts Receivable
Intangible Assets


What agency does a publicly traded company file with if they sell stock?
The Federal Reserve
The Securities Exchange Commission
Central Intelligence Agency
National Security Agency


What are retained earnings?
Earnings that have been converted into stock
Earnings that have been reinvested back into the business
Earnings that have been converted into assets
Earnings that have been paid out as salaries


True or False? Liabilities and shareholders’ equity must be equal.
False
True


What is another name for the Balance Sheet?
Statement of Earnings
Statement of Profitability and Loss
Statement of Financial Position
Statement of Operations


Which of the following is NOT a division of sources and uses of cash flow on the cash flow statement?
Operating activities
Material business activities
Investing activities
Financing activities


Which two line items are used to calculate Working Capital?
All Assets and All Liabilities
Current Assets and Current Liabilities
Retained Earnings and Total Liabilities
Fixed Assets and Long-term Liabilities


What information is found on the Income Statement?
Assets, Liabilities and Shareholder's Equity
Cash inflows and Cash outflows from Operating, Investing and Financing activities
Revenues, Expenses, Net Profit or Loss
Retained Earnings, Accumulated Depreciation and Shareholders Equity


What is an example of a liability?
A property tax bill
Equipment
Stocks owned by the business
Cash


A company’s working capital is defined as
Current assets minus current liabilities
Accounts receivable minus accounts payable
Revenues minus expenses
Current assets plus long-term assets


Which of the following is NOT a primary section of a company’s financial statements?
Summary of Operations
Balance Sheet
Letter from the CEO
Statement of Cash Flows


Of the following, which is an item that doesn't belong in the heading of a balance sheet?
Title of the statement
Name of the entity
Specific date of the statement
Address of the business


Why would investors have an interest in a company's statement of retained earnings?
Investors want to know that the products being sold are ones they believe are good quality
Investors want to know that a company is reinvesting enough of their earnings to expand vertically
Investors want to know that a company is reinvesting enough of their earnings to support future growth and pay dividends
Investors want to know that a company is reinvesting enough of their earnings to expand into other industries


Almost all financial statements use what form of accounting?
Cash basis accounting
Cost basis accounting
Accrual basis accounting
Voodoo accounting


When goods have been sold but not paid for, where are they documented in the balance sheet?
As assets.
As accounts receivable.
As accounts payables.
As liabilities.


What happens to retained earnings as dividends are declared?
Dividends do not affect retained earnings.
Retained earnings increase.
Retained earnings stay the same.
Retained earnings decrease.


Current assets do NOT include which of the following
Accounts receivable
Machinery and equipment
Cash on hand
Securities


What does it mean when a company's stock is volatile?
The value of the stock often changes drastically
The companies stock is stable but expensive
The companies stock is rising quickly
The companies stock is sinking quickly


When are current liabilities due to be paid?
On the date of the balance sheet
Within the next three months
Within the next 60 days
Within the next 12 months


True or False? All expenses required to be paid in the same accounting period.
False
True


What four components are contained in a financial statement?
Balance sheet, income statement, statement of retained earnings, statement of cash flow
Balance sheet, auditing form, statement of retained earnings, statement of cash flow
Statement sheet, income statement, statement of retained earnings, statement of cash flow
Balance sheet, income statement, annual report, statement of cash flow


A measure of the overall efficiency of asset utilization is the:
Earnings Per Share
Asset Turnover Ratio
Acid-test Ratio
Receivable Turnover Ratio


On a balance sheet, which of the following is subject to depreciation?
All assets
All long-term assets including land
All long-term assets except for land
All assets and liabilities


Is net income equal to the net cash generated by operations? Where is net cash reported?
No. Net cash is reported on the cash flow statement.
No. Net cash is spending money that does not need to be reported.
No. Net cash is placed into a special account.
Yes. Net cash is reported as net income.


The income statement is also called what?
Statement of earnings
Balance sheet
Statement of retained income
Statement of cash flows


What is the objective of financial statement analysis?
To understand how to properly address shareholders
To understand whether a product is worth buying
To understand the risk vs. profitability of a company
To better understand how to report earnings to the Federal Reserve


Which corporate officers must certify the accuracy of financial statements?
CEO and CFO
COO and Comptroller
Treasurer and Chair of the Board
Any two senior corporate officers


What is the order in which assets are typically listed on the balance sheet?
In order of acquisition
In order of liquidity
In order of value
In alphabetical order


What equation is used when calculating the statement of retained earnings?
Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
Beginning Retained Earnings + Liabilities – Dividends = Ending Retained Earnings
Beginning Retained Earnings + Net Income – Ending Retained Earnings = Dividends
Beginning Retained Earnings + Net Income – Assets = Ending Retained Earnings


Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment are referred to as:
Capital Expenditures
Revenue Expenditure
Capital Assets
Operational Expenditures


How is the return on assets calculated?
Gross margin divided by total assets
Net income divided by total assets
Gross revenues divided by total assets
Tangible assets divided by intangible assets


What does the statement of retained earnings tell you about a company's position?
It tells you how much has been earned
It tells you how much the company is paying their employees
It tells you how it has been affected by net income and distribution of dividends
It tells you what items would be best to sell in the following year


What do the footnotes to financial statements typically provide?
an overview of significant accounting policies
A review of stock compensation plans
All of these
A discussion of contingencies potentially affecting earnings


What is the first statement to calculate before moving on to the statement of retained earnings?
The statement of cash flows.
Statement of dividends.
The balance sheet.
Income statement.


Current assets are assets that are intended to be converted into cash or consumed within:
The Inventory Cycle
Two Years
One year
The Operating Cycle


What's the difference between a Capital lease and an Operational lease?
Capital leases are fixed while Operational leases are variable.
Capital leases are variable while Operational leases are fixed.
Capital leases are traditionally used for long-term leases while Operational leases are for short-term leases.
Capital leases are traditionally used for short-term leases while Operational leases are for long-term leases.


Which component of a financial statement will tell you, ultimately, whether a company has earned or lost money?
Statement of cash flows
The balance sheet
Statement of retained earnings
Income statement


All are Profitability Ratios, except:
Return On Assets
Return On Equity
Return On Capital Employed
Current Ratio


Income from Operations is equal to Gross Profit less:
Cost of Goods Sold
Operating Expenses
Other Expenses
Financing Expenses


True or false? A company can never have negative income tax liabilities.
False
True


What is Goodwill?
An asset that captures the excess purchase price of an acquired business bought for greater than fair market value.
An asset that is recorded to adjust year-end changes to long-term assets on the Balance Sheet.
A liability that causes the valuation of a company to fall below fair market value.
An asset category that captures all of the intangible assets of a company.


How do you calculate the Current Ratio?
Total Assets / Total Liabilities
Total Current Assets / Total Current Liabilities
Net Income / Net Revenue
(Current assets – Inventories) / Current Liabilities


Companies report accounts receivable at:
Gross Realizable Value
Net Realizable Value
Cumulative Gross Value
Liquidation Value


If you needed to replace machinery at your company, where would you list this on the statement of cash flows?
Under cash flows from investing activities
Under cash flows from purchasing activities
Under cash flows from accounting activities
Under cash flows from cash activities


When all statements and documents are collated, what activity does it allow investors to partake in?
Business valuation
Patent valuation
Cash flow analysis
Product valuation


Parentheses around a number in financial statements indicates what?
The number is a loss or decrease
The number is an estimate
the number is very important
The number is a gain or increase


EBITDA is Operating Profit:
Before Cost of Goods Sold
Before Gross Profit
After Deprecition and Amortization
Before Depreciation and Amortization


When profits are reinvested into the business, what are they called?
Retained money
Contributed equity
Retained earnings
Contributed capital


What is ROE, and why is it important?
Return on equity; It is important because it tells you the amount of gross income returned as a percentage of creditors equity
Return on equity; It is important because it tells you the amount of gross income returned as a percentage of shareholders equity
Return on equity; It is important because it tells you the amount of dividends returned as a percentage of shareholders equity
Return on equity; It is important because it tells you the amount of net income returned as a percentage of shareholders equity


SOX stands for:
none of these
Standard Operation and Execution
Simple Options Exchange
The Sarbanes-Oxley Act


How will a business acquisition typically impact a company’s cash flow?
increase
decrease
make no change to


Which of the following is NOT a component of the acronym EBITDA?
Depreciation
Interest
Assets
Earnings


How are retained earnings calculated?
Total assets minus liabilities
Net income minus dividends
Gross income minus expenses
Gross revenues minus expenses


What is the overall objective of using ratio analysis?
Determine the business's liquidity
Evaluate how well the business is using its resources
(none of these are correct)
Evaluate the company's return on investment


How do you calculate the Quick Ratio?
Gross Profit / Net Revenue
(Current assets – Inventories) / Current Liabilities
Total Current Assets / Total Current Liabilities
Total Liabilities / Total Assets


Analysis of risk has what intention?
Understand a company's competitive advantage
Revealing a company's credit risk
Revealing a company's ethical standards
Revealing a company's environmental risk


Which of the following would be reported as a cash inflow from investing activities?
Proceeds from selling shares of the company
Cash paid to retire bonds
Cash paid for dividends
Proceeds from selling investments in the equity securities of other companies


Which items are traditionally disclosed separately on an Income Statement?
Payroll expense, rent expense and operating income
Gross profit, operating profit and net profit
Repairs and Maintenance, operating profit and gross profit
Extraordinary items, changes in accounting principles and discontinued operations


Which of the following is NOT a method of calculating depreciation?
Straight-line method
Declining balance method
Activity method
Mechanical valuation method


What is an accounting entity?
An entity that must be included with all the other accounting entities
An undefined unit that is recognized, but not accounted for
A clearly defined unit that must be accounted for separately
A clearly defined unit that must be accounted for with the rest of the units


The Dividend Payout Ratio is calculated by dividing total dividends by:
Net Income
Income before Interest and Taxes
Revenues
Income before Taxes


What does it mean when a company's change in cash is negative?
The company has earned enough money to repay its creditors.
The company did not make enough money to repay creditors, pay dividends for the next year.
Cash flows from business activities are superseding that of the prior year.


Which of the following is not an element included in the statement of retained earnings?
Dividends
Beginning-of-the-year retained earnings
Stockholder equity
Net income


Within the context of stockholders equity, what are cash and other assets considered?
Profits
More stockholders equity
Contributed capital
Liabilities


Which of the following is NOT one of the four GAAP principles?
Market value principle
Revenue recognition principle
Full disclosure principle
Matching principle


What is the final line of the statement of operations?
Net after-tax profits
Profit margin
Price-to-earnings ratio
Gross profits minus expenses


Gross profit equals
Gross revenues minus expenses
Net revenues minus taxes
Net revenues minus cost of sales
Assets minus liabilities


Where would an entry be made for the purchase of goods or services without a contract or note?
Under assets as accounts receivable
Under contracts as notes payable
Under assets as goods receivable
Under liabilities as accounts payable


What does a company’s debt-to-equity ratio describe?
When a company will go bankrupt
The nature of the company’s capitalization
The relationship between current liabilities and shares outstanding
Shares of stock purchased on credit


Which value appears on all three components of financial statements?
Accounts receivable
Taxes paid
Gross revenues
Net profits


When you have finished calculating your statement of cash flows, where is the final result transferred to?
The balance sheet.
The income statement.
The statement of retained earnings.
The statement of cash flows.


Which entity is primarily responsible for setting accounting standards?
the FASB
the SEC
the AICPA
the GAAP


Why would a creditor heavily scrutinize a company's statement of retained earnings?
Every dollar that is paid to the stockholders as dividends is a dollar not available to pay back its debt.
It tells the creditor how much debt the company is in.
Every dollar that is paid to the creditor is a dollar not available to pay back its debt.
It gives the creditor insight as to whether it should buy the companies stock.


Which of the following does NOT increase cash flows?
Increase in accounts payable
Collection of notes receivable
Increase in accounts receivable
Decrease in inventory


On which Financial Statement(s) are Discontinued Operations reported?
Statement of Cash Flows
Income Statement
Balance Sheet and Income Statement
Balance Sheet


Two figures must be transferred to the balance sheet before the final result can be calculated. What are they, and where are they transferred from?
Retained earnings from the statement of retained earnings, and cash from the statement of cash flows.
Retained earnings from the income statement, and cash from the statement of cash flows.
Retained earnings from the statement of retained earnings, and cash from the balance sheet.
Retained earnings from the income statement, and cash from the balance sheet.


A financial statement is a smaller piece of a much larger annual document submitted to the Securities Exchange Commission. What is the name of the document?
Annual report.
10K
10Q
W-2


Which of the following activities would be regarded as a financing activity on the Statement of Cash Flows?
Dividend distributions
Profits earned from the sale of other companies stocks
Employee wages
Loans made to other businesses


True or false? A declared dividend decreases shareholders’ equity.
False
True


In the DuPont system, what is the Return On Equity equal to?
Net Profit Margin times Sales times Equity Multiplier
Sales times Asset Turnover
Profit Margin times Total Asset Turnover times Equity Multiplier
Net Profit Margin times Fixed Assets times Equity Multiplier


Using the financial statements, how is Free Cash Flow calculated?
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditures
EBITDA - Depreciation & Amortization + Change in Net Working Capital + Capital Expenditures
EBIT - Depreciation & Amortization + Change in Net Working Capital - Capital Expenditures
EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital


What are the two basic formats of the Income Statement?
Accural Basis and Single-Step
Single-Step and Multi-Step
Accrual Basis and Multiple-Step.
Cash Basis and Single-Step.


Which of the following is NOT a potential off-balance-sheet liability?
Long-term lease obligations
Pension obligations
Undisclosed subsidiaries or partnerships
Reserve for bad debts
(none of these)


In preparing consolidated financial statements, which type of transaction is NOT wholly or partially eliminated?
Purchases and sales within the company
Parent company investments in a subsidiary
Interest revenue and expenses on loans within the company
Parent company stock repurchases


On a classified Balance Sheet, the asset line items appear in which order?
Current Assets; Property, Plant, and Equipment; Long-term Investments; Intangible Assets; Other Assets
Current Assets; Intangible Assets; Property, Plant, and Equipment; Long-term Investments; Other Assets
Current Assets; Other Assets; Long-term Investments; Intangible Assets; Property, Plant, and Equipment
Current Assets; Long-term Investments; Property, Plant, and Equipment; Intangible Assets; Other Assets

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