1. Which equation represents an income statement?
a. Assets = liabilities + stockholders' equity
b. Cash in - cash out = net income
c. Revenues - expenses = net income
d. Beginning retained earnings + revenues - expenses = ending retained earnings
2. Which format of the income statement should be used for analysis purposes?
a. Multiple-step
b. Cash basis
c. Single-step
d. Accrual basis
3. Which of the following is an acceptable method to report total comprehensive income?
a. On the face of the balance sheet
b. Total comprehensive income does not have to be reported
c. In the operating section of the cash flow statement
d. In the statement of stockholders' equity
4. How is a common-size income statement prepared?
a. Each income statement item is expressed as a percentage total assets.
b. Each income statement item is expressed as a percentage of net sales.
c. Each income statement item is expressed as a percentage of net income.
d. Each income statement item is expressed as a percentage of cash flow.
5. How are sales reported on the income statement?
a. Sales are shown for three years net of returns and allowances.
b. Sales amounts are inflation-adjusted.
c. Sales are shown for 2 years and are reported in nominal terms.
d. Sales are shown at gross amounts. adjusted for inflation.
6. Which of the following statements is true?
a. In stable industries, scubas retailers, the gross profit margin is generally volatile from year to year.
b. Gross profit margin and operating profit margin are complements of each other and the two percentages add up to 100%.
c. Fixed costs do not vary proportionately with volume changes but remain the same within a relevant rand of activity.
d. In capital intensive industries sales volume changes result in a stable gross profit margin.
7. How should companies with more than on revenue source report revenue and cost of goods sold?
a. Each revenue source should be reported separately, but all cost of goods sold should be added together and reported as a single amount.
b.The revenues and cost of goods sold should be netted together and reported as a single line item.
c. All revenue sources should be added together and shown as one line item and all cost of goods sold should be added together and shown as one line item.
d. Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.
8. Selling and administrative expenses include wish of the following income statement items?
a. Salaries, insurance, and interest
b. Salaries, rent, and advertising
c. Rent, Interest, and cost of goods
d. Advertising, research and development, and amortization
9. What is amortization?
a. The process used to allocate the cost of natural resources
b. The process used to allocate the cost of tangible fixed assets
c. The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.
d. The process used to allocate the cost of oil, gas, minerals and standing timber
10. Which item would not be classified as an operating expense?
a. interest expense
b. rent expense
c. depreciation
d. repairs and maintenance
11. Which of the following statements is true?
a. It is unnecessary to analyze operating expenses over which management exercises discretion.
b. Impairment charges do not need to be analyzed since they are generally a non-recurring expense.
c. A good way to improve operating profit is to cut repairs and maintenance cost as much as possible.
d. Operating expenses can easily analyzed by preparing a common-size income statement.
12. Why is it important to assess operating profit?
a. Operating profit represents the firm's profits after consideration of all revenues, expenses and comprehensive income.
b. The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations.
c. Operating profit represents the firm's profits after consideration of all revenues and expenses.
d. Operating profit represents the firm's profits after consideration of all revenues and expenses, except for taxes.
13. Which of the items below would be included under "Other income and expense"?
a. Salaries, interest expense, and equity losses.
b. Equity earnings, gains from sale of assets, and interest income.
c. Research and development, dividend income, and interest expense
d. Advertising, cost of goods sold, and selling and administrative expenses.
14. How does the equity method distort earnings?
a. Income is recognized even though cash may never be received.
b. Equity earnings are recorded even if the investor cannot exercise influence over the investor's policies.
c. Equity earnings are only recorded on a cash basis of accounting.
d. Equity earnings are recorded when investment ownership is 100%.
15. How is it possible for a U.S. firm to have increasing earnings but a lower effective tax rate?
a. The firm has expenses that are not deductible for tax purposes.
b. Tax rates in foreign countries where the firm operates are higher.
c. Tax rates in foreign countries where the firm operates are lower.
d. It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.
16. Which item is NOT a special item that must be disclosed separately on the income statement?
a. Extraordinary gain
b. Extraordinary loss
c. Foreign currency translation adjustments
d. Discontinued operations
17. How is earnings per common share calculated?
a. Operating profit divided by the average number of common stock shares outstanding
b. Net profit divided by the average number of common and preferred stock shares outstanding
c. Operating profit divided by the average number of repurchased common stock shares
d. Net profit divided by the average number of common stock shares outstanding
18 Which of the following items could be found on a statement of shareholder's equity?
a. Reasons for retained earnings increases or decreases
b. A reconciliation of beginning to ending cash
c. The market value of the firm's common stock
d. assets = liabilities + stockholders' equity
19. Use the following information for jett co. to answer the next question.
2015 2014
Sales 1,200 1,000
COGS 850 700
Operating expenses 200 200
Income taxes 30 35
Jett Co.'s gross profit, operating profit and net profit margins for 2015 are:
a. 50.0%, 32.5%, 22.5% respectively.
b. 29.2%, 12.5%, 10%, respectively.
c. 27.0%, 11.0%, 10.5%, respectively.
d. 21.5%, 17.5%, 12.0%, respectively.
20. Use the following information for Jett Co. to answer the next question.
2015 2014
Sales 1,200 1,000
COGS 850 700
Operating 200 200
Income Taxes 30 35
Jett Co.'s average tax rates for 2015 and 2014 are:
a. 15.5% and 10.0%.
b. 20.00% and 35.0%
c. 25.*% and 35.4%
d. 31.4% and 36.8%
21. Why is the statement of cash flows useful to the analyst?
a. It is an additional source in financial statements for leaning about cash generation.
b. Focusing on net income can be misleading if a company has a healthy profit, but cannot translate the profit into cash.
c. The statement of cash flows reveals why a company was able to generation.
d. The balance sheet is the only source in financial statements for learning about cash generation.
22. Which of the following items would be classified as investing activities on the statement of cash flows?
a. Sale of property, purchase of equity securities, and loans to others
b. Sale of goods, receipt of dividends, and repurchase of firm's own stock
c. Proceeds from borrowing, payment of dividends, and receipt of dividends
d. Payment to lenders, proceeds from issuing common stock and revenue.
23. What type of accounts are accounts receivable and accounts payable?
a. Cash accounts
b. Operating accounts
c. Financing accounts
d. Investing accounts
24. What impact does depreciation have on the cash account?
a. Depreciation results in a increase to cash.
b. Depreciation results in a decrease to cash.
c. Depreciation has no impact on the cash account.
d. depreciation only impacts the cash account if inflation has occurred.
25. How would you know if a statement of cash flows had been prepared using the direct or the indirect method?
a. The indirect method begins with net income and adds and subtracts adjustments to obtain cash flow from operating activities.
b. The direct method adjusts for deferrals and accruals.
c. Depreciation will subtracted front income.
d. The direct method starts with cash flow from operating activities and adds and subtracts adjustments to obtain net income.
26. Which item may be of concern when analyzing cash flow from operating activities?
a. Increasing Inventories
b. Decreasing accounts receivable
c. Repayment of debt
d. Payments of dividends
27. The following question is based on the indirect method of presenting cash flow from operating activities. Indicate whether the following items will be added or subtracted from net income to obtain cash flow from operating activities.
How will an increase in accounts payable and a decrease in inventory affect net income?
a. An increase in accounts payable will be added to net income to obtain cash flow from operating activities; A decrease in inventory will be added to net income to obtain cash flow from operating activities
b. An increase in accounts payable will be added to net income to obtain cash flow from operating activities; A decrease in inventory will be subtracted from net income to obtain cash flow from operating activities
c. An increase in accounts payable will be subtracted from net income to obtain cash flow from operating activities; A decrease in inventory will be added to net income to obtain cash flow from operating activities
d. An increase in accounts payable will be subtracted from net income to obtain cash flow from operating activities; A decrease in inventory will be subtracted from net income to obtain cash flow from operating activities.
28. Use the indirect method to answer the question below. The following information is available for Casey Company:
Net Income $200 Increase in plant and equip. $90
Depreciation expense 50 payment of dividends 25
increase in accts. receiv. 30 Increase in long-term debt 100
Decrease in inventories 10 decrease in accounts payable 20
What is cash flow from operating activities for Casey Company?
a. $195
b. $310
c. $210
d. $290
29. Use the indirect method to answer the question below. The following information is available for Casey Company:
Net Income $200 Increase in plant and equip. $90
Depreciation expense 50 payment of dividends 25
increase in accts. receiv. 30 Increase in long-term debt 100
Decrease in inventories 10 decrease in accounts payable 20
What is cash from financing activities for Casey Company?
a. $75
b. $125
c. ($125)
d. $55
30. What is implied if the accounts receivable account has increased?
a. Cash flow from operating activities is greater relative to net income.
b. Cash flow from operating activities is less relative to net income,
c, The firm's sales have increased relative to the prior year.
d. Nothing can be implied from this information because the type of accounts receivables must first be determined.
31. If net cash provided or used by operating, financing and investing activities are added together, the result is:
a. net income.
b the change in cash.
c. cash outflow.
d. cash inflow.
32. The four parts of a statement of cash flows include:
a. operating, profit, and income activities
b. operating, cost and income activities
c. financing, profit, and expenditure activities.
d. operating, profit, and expenditure activities
33. Payments for purchases of inventory, dividends, and acquisitions are all examples of ________ cash flows.
a. financing
b. investing
c. operating
d. marketing
34. There are two formats the FASB allows, the ________ and the _______ method, for presenting cash flows from operating activities.
a. cost and indirect
b. cash and indirect
c. direct and cost
d. direct and indirect
35. depreciation and amortization expense _______ net income because they represent the recognition of a cash expense.
a, are subtracted from
b. are not included in
c. are added back to
d. have no effect on
36. Temporary shortfalls of cash can be satisfied by borrowing or other means, such as selling long-lived assets, but ultimately a company must generate cash from:
a. Operations.
b. financing.
c. speculating.
d. investments.
37. Generating cash from ________ activities is the preferred method for obtaining excess cash.
a. operating
b. financing
c. investing
d. sales
38. Capital expenditures are a(n) ________ use of cash for firms.
a. usual
b. unusual
c. customary
d. common
39. Which are examples of cash inflows for investing activities?
a. Cash inflows from investing activities would include purchases of long-lived assets, sales of securities and returns from loans to others.
b. Cash inflows from investing activities would include sales of long-lived assets, purchases of securities and returns from loans to others.
c. Cash inflows from investing activities would include sales of long-lived assets, sales of securities and returns form loans to others.
d. cash inflows from investing activities would include purchases long lived assets, purchases of securities and returns from loans to others.
40. Which are examples of cash outflows for investing activities?
a. Cash outflows from investing activities would include short lived assets, purchases of securities and loans to others.
b. Cash outflows from investing activities would include short lived assets, sales of securities and loans to others.
c. Cash outflows from investing activities would include long lived assets, sales of securities and loans to others.
d. Cash outflows from investing activities would include long lived assets, purchases of securities and loans to others.