Chapter 2 Financial Statements

2.1 Financial Statements

1)
The purpose of studying financial statements is ________.
A)
to mechanically build portfolio analysis
B)
to understand those portions of the statements that have relevance for
financial decision making
C)
to primarily investigate all portions of the statements that have relevance for
dividend policy
D)
to mechanically learn how to read and understand footnotes
.

2)
Which of the statements below is FALSE?
A)
The purpose of studying financial statements is to understand those portions of
the statements that have relevance for financial decision making.
B)
We need to understand how to interpret and use the information presented in
financial statements to form a picture of the financial profile of the firm.
C)
Accounting, it has been said, looks back to where a company has been — somewhat
like looking through a rear view mirror.
D)
Accounting and finance view the numbers in the same way.

3)
Understanding the sources and uses of cash in the recent past will enable a
manager to ________ the cash flow for a potential project of the firm.
A)
determine with perfect precision
B)
forecast with perfect precision
C)
predict more accurately
D)
know today

4)
The fundamental starting point of all the accounting statements is the
________.
A)
accounting identity
B)
computing identity
C)
investing identity
D)
financing identity

5)
Which of the statements below is TRUE?
A)
Accounting Identity is: Assets ? Liabilities – Owners’ Equity.
B)
Accounting Identity is: Assets ? Liabilities + Owners’ Equity.
C)
Accounting Identity is: Assets ? Owners’ Equity – Liabilities.
D)
Accounting Identity is: Liabilities ? Assets + Owners’ Equity.

6)
There are four primary financial statements that are used to measure the
performance of a firm. Which of the choices below are included among these
four?
A)
The balance statement and income statement
B)
The income sheet and statement of retained earnings
C)
The statement of cash flow and statement of balance
D)
The balance sheet and statement of cash flow
7)
It is important to remember that the fundamental ________ of accounting is the
debit and credit recording activity where debits always equal credits.
A)
effect
B)
end product
C)
outcome
D)
identity
.

8)
It is important to remember that the fundamental identity of accounting is the
debit and credit recording activity where debits ________ equal credits.
A)
never
B)
seldom
C)
sometimes
D)
always

9)
Which of the statements below is FALSE?
A)
The income statement summaries and categorizes a company’s revenues and
expenses for that period.
B)
Typically, income statements are prepared quarterly and annually for
distribution outside the company, but usually monthly for internal managers.
C)
The income statement begins with revenue and subtracts various operating
expenses until arriving at Earnings Before Interest and Taxes (EBIT).
D)
The balance sheet reports the performance of the firm over the past period. It
summarizes and categorizes a company’s revenues and expenses for that period.
10)
Which of the below statements is FALSE?
A)
Typically, income statements are prepared quarterly and annually for
distribution outside the company, but usually semi-annually for internal
managers.
B)
Typically, income statements are prepared quarterly and annually for
distribution outside the company.
C)
The income statement begins with revenue and subtracts various operating
expenses until arriving at Earnings Before Interest and Taxes (EBIT).
D)
The income statement reports the performance of the firm over the past period.
It summaries and categorizes a company’s revenues and expenses for that period.

11)
The income statement begins with revenue and subtracts various operating
expenses until arriving at ________.
A)
earning after taxes
B)
net income
C)
taxable income
D)
EBIT
12)
The income statement begins with revenue and subtracts various operating
expenses until arriving at Earnings Before Interest and Taxes. Next, interest
expense is subtracted to find the ________ for the period.
A)
EBIT
B)
after-tax income
C)
net income
D)
taxable income

13)
The income statement begins with revenue and subtracts various operating
expenses until arriving at Earnings Before Interest and Taxes. Next, interest
expense is subtracted to find the taxable income for the period. Then the
appropriate taxes are calculated and subtracted. We finally arrive at the
________ , the so-called bottom line of the income statement.
A)
after-tax income
B)
before-tax income
C)
net income
D)
EBIT

14)
Net income is ________.
A)
not cash flow
B)
the cash flow from the operations of the company during the period
C)
the increase or decrease in cash flow for the period
D)
earnings before interest and taxes

15)
Net income is ________.
A)
the accounting profit from the operations of the company during the period
B)
cash flow
C)
the accounting profit from the non-operating assets of the company during the
period
D)
always the dividends paid shareholders

16)
Cash flow is ________.
A)
the increase but not decrease in cash for the period
B)
the decrease but not increase in cash for the period
C)
the increase or decrease in cash for the period
D)
the net income for the period

17)
One of the key components to making financial decisions is to ________.
A)
understand the timing and amount of dividends
B)
understand the timing and amount of cash flow
C)
understand the timing of EBIT
D)
understand the amount of net income

18)
Which of the statements below is FALSE?
A)
The textbook uses the framework of the income statement to find the operating
income of the company (an accounting measure) and then makes adjustments to
find the true cash flow from operations.
B)
In accrual-based accounting, revenue is recorded at the time of sale if the
revenue has been received in cash.
C)
Three fundamental issues separate net income and cash flow: accrual-based
accounting, non-cash expense items, and interest expense.
D)
Generally Accepted Accounting Principles (GAAP) in the United States allow the
use of accrual accounting to record revenue.

19)
Three fundamental issues separate net income and cash flow. Which of the
answers below is NOT one of these three fundamental issues?
A)
Accrual accounting
B)
Non-cash accounting
C)
Non-cash expense items
D)
Interest expense
20)
Which of the following statements is true?
A)
The finance manager uses the framework of the income statement to find the
operating income of the company (an accounting measure), which is also the true
cash flow from operations.
B)
In accrual-based accounting, revenue is recorded at the time of sale if the
revenue has been received in cash.
C)
Three fundamental issues separate net income and cash flow: accrual accounting,
noncash expense items, and interest expense.
D)
Generally accepting accounting principles (GAAP) in the United States do not
allow the use of accrual accounting to record revenue.