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Finance Flashcards

FINANCE 3716- CH 2

false In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
false 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 firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.
false 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.
It makes it easier to compare the financial results of different firms 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 (GAAP) when creating financial statements?
to provide a means for interested outside parties such as creditors to obtain informationabout a firm, with an overview of the short- and long-term financial condition of abusiness Which of the following best describes why a firm produces financial statements?
United States 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?
the statement of activities Which of the following is NOT one of the financial statements that must be produced by a public company?
10-K U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
statement of sources and uses of cash Which of the following is NOT a financial statement that every public company is required to produce?
auditor The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
What is the role of an auditor in financial statement analysis? 1. to ensure that the annual financial statements are prepared accurately2. to ensure that the annual financial statements are prepared according to GenerallyAccepted Accounting Principles (GAAP)3. to verify that the information used in preparing the annual financial statements is reliable
balance sheet, income statement, statement of cash flows, statement of stockholder’s equity four financial statements that all public companies must product
false The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time
true Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet
the amount of deferred tax liability held by the company Which of the following amounts would be included on the right side of a balance sheet?
The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities Which of the following best describes why the left and right sides of a balance sheet are equal?
a patent for a drug held by the company 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?
revenue received for the delivery of items that have not yet been delivered 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?
Since net working capital is negative, the company will not have enough funds to meet its obligations 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?
Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?
common stock, paid in surplus, and retained earnings The major components of stockholdersʹ equity are ________.
Assets – Current liabilities = Long-term liabilities Which of the following balance sheet equations is INCORRECT?
current asset Cash is a ________.
current liability Accounts payable is a ________.
long-term liability A 30-year mortgage loan is a ________.
The balance sheet reports liabilities on the left-hand side Which of the following statements regarding the balance sheet is INCORRECT?
true In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
Investors believe the companyʹs assets are not likely to be profitable since its market valueis worth less than its book value A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
1.35 GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?
$3.8 billion A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
2.35 Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?
debt-equity or equity multiplier ratio Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?
Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. How does a firm select the date for preparation of its balance sheet?
The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant. What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
true
a firm’s net income the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period, the last or “bottom” line of the income statement, a measure of the firm’s profitability over a given period
firm’s gross profit the difference between sales revenues and the costs
corporate taxes Which of the following is NOT considered to be an operating expense on the income statement?
operating expenses on the income statement administrative expenses and overhead, salaries, depreciation and amortization
total sales – cost of sales gross profit is calculates as ________.
interest expense which of the following is NOT an operating expense?
operating expense depreciation and amortization, selling, general, and administrative expenses, research and development
The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets. How does a firm select the dates for preparation of its income statement?
The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant. What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
true Price-earnings ratios tend to be high for fast-growing firms.
$330,000 In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
the firm is growing Which of the following is the LEAST likely explanation for a firmʹs 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?
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?
1.59% Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 .Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 .How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm. Why must care be taken when comparing a firmʹs share price to its operating income?
true A firmʹs 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.
It includes cash inflows from services rendered Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
It adds all non-cash entries related to a firmʹs operating activities 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 would be an addition to property, plant and equipment so it would be an investing activity 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?
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction 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 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?
as an outflow under investment activities 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?
The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets How can we cross check the statement of cash flows?
The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
false The management of public companies is not legally required to disclose any off-balance sheettransactions.
that the company has lost a class action suit brought against the firm by its employees andis expected to have to pay a large amount of damages 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 firmʹs management discussion and analysis (MD&A)?
to disclose the financial implications of any off-balance sheet transactions The notes to the financial statements would LEAST likely be used for which of the following purposes?
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements What is the need for the notes to the financial statements when a firmʹs operations are already documented in the financial statements?
false Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement 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?
by raising its reported earnings WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?
by forcing companies to audit financial statements they release 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?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process What are the requirements of section 404 of SOX?
Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
As the name implies, external auditors act as third party monitors to a firmʹs financial reporting process What role do external auditors play in a firmʹs financial reporting process?
All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?
Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements
Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?

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