(Test Bank) Financial & Managerial Accounting For Mbas

Easton, Halsey, Mcanally, Hartgraves, Morse, 5

Business

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5th Edition

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Author(s): Easton, Halsey, Mcanally, Hartgraves, Morse

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Test Bank for Financial & Managerial Accounting for MBAs, 5e Easton, Halsey, McAnally, Hartgraves, Morse Module 1 Financial Accounting for MBAs Learning Objectives – Coverage by question True/False Multiple Choice Exercises Problems Essay s LO1 – Explain and assess the four main business activities. 1 LO2 – Identify and discuss the users and suppliers of financial statement information. 1- 4 1, 2 2 LO3 – Describe and examine the four financial statements, and define the accounting equation. 5-10 3-19 1-8 1-5, 10 3, 4 LO4 – Explain and apply the basics of profitability analysis. 11-13 20-25 1, 9, 10 6, 7 5 LO5 – Assess business operations within the context of a competitive environment. 14 26, 27 8 LO6 – Access reports filed with the SEC (Appendix 1A). LO7 – Describe the accounting principles and regulations that frame financial statements (Appendix 1B) . 15 28-30 9 6 Module 1: Financial Accounting for MBAs True/False Topic: Users of Financial Statement Information LO: 2 1. Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to r epay loan interest and principal . Answer: True Rationale: While both shareholders and bankers are interested in all the information companies provide, shareholders care about more about a company’s profitability and bankers care more about solvency and creditworthiness. Topic: Publicly Available Financial Reports LO: 2 2. Publicly traded companies are required to provide quarterly financial reports directly to the public. Answer: False Rationale: Companies provide electronic versions of quarterly fina ncial statements to the SEC, which posts them to the I nternet for the public to access them. Topic: Users of Financial Statement Information LO: 2 3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax authorities (that is, the Internal Revenue Service). Answer: False Rationale: Demand for in formation extends to many users; the regulators such as the SEC and the IRS are only one class of users. Topic: SEC Filings LO: 2 4. Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10 -K reports) and quarterly audited financial statements (10 -Q reports). Answer: False Rationale: Quarterly reports do not need to be audited. Topic: Balance Sheet LO: 3 5. If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’ equity. That does not imply, however, that liability and equity accounts relate directly to specific assets. Topic: Balance Sheet LO: 3 6. A balance sheet shows a company’s position over a period of time, whereas an income statement, statement of stockholders’ equity, and statement of cash flows show its position at a point in time. Answer: False Rationale: The statement is reversed: A balance sheet shows a company’s position at a point in time, whereas an income statement, statement of equity, and statement of cash flows show its position over a period of time. Topic: Accounting Equation LO: 3 7. Assets must always equal liabilities plus equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold. Topic: Income Statement LO: 3 8. The income statement reports net income which is defined as the company’s profit after all expenses and dividends have been paid. Answer: False Rationale: The statement contains two errors. First, net income does not include any dividends during the period; these are a distribution of profits and not part of its calcu lation. Second, the income statement is prepared on an accrual basis and thus includes expenses incurred (as opposed to paid). Topic: Statement of Cash Flows LO: 3 9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. Topic: Statement of Stockholders’ Equity LO: 3 10. An increase in common stock would be reflected in the statement of stockholders’ equity. Answer: True Rationale: The statement of stockholders’ equity reports on changes in the accounts that make up stockholders’ equity. This includes contributed capital, retained earnings, and other equity. Topic: Return on Assets LO: 4 11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses. Answer: True Rationale: Return on Assets is a profitability metric that measures how much profit the company made for each dollar of assets the company holds on average during the year. Topic: Return on Assets LO: 4 12. Return on Assets (ROA) = (Net Income / Sales ) × Asset Turnover Answer: True Rationale: Return on Assets = Net I ncome / Average Assets. T his is t he disaggregation of the ROA into its components Topic: Asset Turnover LO: 4 13. Consider two companies (A and B) with equal profit margins of 1 8%. Compa ny A has an asset turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its’ higher asset turnover, is less profitable because it requires more revenue to turn its assets over. Answer: False Rationale: Asset turnover is an efficiency metric. The higher the turnover, the more efficient the company is with its assets and thus, the more profitable. Algebraically, ROA = PM × AT. Company A above is less profitable: 1 8% × 1.2 = 21.6% wher eas Company B’s ROA is 18% × 1.5 = 27.0%. Topic: Financial Accounting and Business Analysis LO: 5 14. Financial statements are influenced by five important forces that determine a company’s competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry. Answer: True Rationale: By systematically considering these five business forces, we can gain better insights from financial statements. Topic: Audit Report LO: 7 15. A “clean” audit report asserts —among other things —that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP. Answer: False Rationale: The statement is reversed: A “clean” audit report asserts —among other things —that (a) management has prepared all necessary financial statements and (b) the auditor has expressed its opinion that they are prepared in conformity with GAAP. Multiple Choice Topic: Users of Financial Statement Information LO: 2 1. Which of the following groups would likely not be interested in the financial statements of a large public company such as Procter & Gamble ? A) Shareholders B) Employees C) Competitors D) Taxing agencies E) None of the above Answer: E Rationale: All of these parties would use the financial statements, albeit in different ways and for different purposes. Topic: Users of Financial Statement Information LO: 2 2. The SEC adopted Regulation FD, to curb public companies ’ practice of: A) Routinely filing extensio ns for annual reports (Form 10 -K) B) Selectively disclosing information C) Reporting pro forma (non -GAAP) numbers D) Hiring auditors for non -audit services such as consulting engagements E) None of the above Answer: B Rationale: Reg FD reads as follows: “Whenever an issuer discloses any material nonpublic information regarding that issuer, the issuer shall make public disclosure of that information . . . simultaneously, in the case of an intentional disclosure; and . . . promptly, in the case of a non - intentional disclosure.” Topic: Components of the Balance Sheet LO: 3 3. A list of assets, liabilities and equity can be found on which of the following? A) Balance Sheet B) Income Statement C) Statement of As sets and Liabilities D) Statement of Cash Flows E) Statement of Stockholders’ Equity Answer: A Rationale: A balance sheet lists amounts for assets, liabilities and equity at a point in time. Topic: Balance Sheet LO: 3 4. Which of the following items would not be found on a balance sheet? (Select all that apply) A) Stockholders’ Equity B) Property, plant and equipment C) Nonowner financing D) Cash E) Dividends Answer: E Rationale: The balance sheet reports assets (including cash and property, plant and equipment), liabilities (including nonowner financing) and equity. Dividends are reported on statement of stockholders’ equity . Topic: Profit and Cash Flow LO: 3 5. A company’s net cash flow will equal its net income … A) Almost always B) Rarely C) Occasionally D) Only when the company has no investing cash flow for the period E) Only when the company has no investing or financing cash flow for the period Answer: B Rationale: Net income reflects the company’s revenue minus expenses for the given period. Net cash flow represents the amount of money received (spent) on operating, investing and financing activities for the given period. These values are rarely the same. Topi c: Financial Statement Information LO: 3 6. Which of the following statements are correct ( select all that apply )? A) A balance sheet reports on investing and financing activities. B) An income statement reports on financing activities. C) The statement of equity reports on changes in the accounts that make up equity. D) The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time. E) A balance sheet reports on a company’s assets a nd liabilities over a period of time. Answer: A, C, and D Rationale: Statement ( B) is incorrect —the statement of cash flows reports on financing activities that are reflected on the balance sheet. Statement ( E) is incorrect —the balance sheet reports on a company’s assets and liabilities at a point in time . Topic: Balance Sheet —Numerical calculations required LO: 3 7. The Goodyear Tire & Rubber Company’s D ecember 31, 20 16 financial statements reported the following (in millions) : Total assets $16,511 Total liabilities 11,786 Total shareholders’ equity 4,725 Dividends 82 Net income (loss) 1,264 Reta ined earnings, December 31, 20 15 4,570 What did Goodyear report for retain ed earnings at December 31, 20 16? A) $5,907 million B) $5,752 million C) $5,916 million D) $5,834 million E) There is not enough information to determine the answer. Answer: B Rationale: $4,570 + $1,264 - $82 = $5,752 Topic: Balance Sheet —Numerical calculations required LO: 3 8. United Airlines’ 201 6 balance sheet reported the following (in millions) Total Assets $40,091 Total Liabilities 31,485 Contributed Capital 3,573 What was United Ai rlines’ total liabilities and stockhold ers’ equity at December 31, 201 6? A) $36,518 million B) $40,091 million C) $35,058 million D) $8,606 million E) $36,518 million Answer: B Rationale: Assets = Liabilities + S tockholders Equity. Assets = $ 40,091 so this is the total of liabilities and equity combined. Topic: Balance Sheet —Numerical calculations required LO: 3 9. On October 2, 2016 Starbuck s Corporation reported, on its Form 10 -K, the following (in millions): Total assets $14,329.5 Total stockholders’ equity 5,890.7 Total current liabilities 4,546.9 What did Starbuck s report as total liabilities on October 2, 2016 ? A) $ 12,516.7 million B) $ 6,377.3 million C) $ 995.0 million D) $ 8,438.8 million E) None of the above Answer: D Rationale: Assets = Liabilities + Stockholders Equity. $ 14,329.5 = Liabilities + $ 5,890.7 Therefore, Liabilities = $ 8,438.8 on October 2, 2016 . Topic: Balance Sheet —Numerical calculations required LO: 3 10. In its 201 6 annual report, Snap -On Incorporated reported the following (in millions): Current assets $1,884.0 Total shareholders’ equity $2,635.2 Total liabilities $2,088.0 What did Snap -On report as total assets at year -end 201 6? A) $3,885.8 million B) $2,796.2 million C) $4,723.2 million D) $3,526.6 million E) None of the above Answer: C Rationale: Assets = Liabilities + Stockholders Equity. Assets = $ 2,088.0 + $2,635.2 Therefore, Assets = $4,723 .2 Topic: Balance Sheet—Numerical calculations required LO: 3 11. In its 201 6 annual report, Kohl’s Corporation reported the following (in millions): Total assets $13,574 Total shareholders’ equity $ 5,177 Total liabilities $ 8,397 What proportion of Kohl’s Corporation is financed by non owners? A) 61.9% B) 44.2% C) 53.5% D) 77.0% E) None of the above Answer: A Rationale: Nonowner financing for Kohl’s assets is provided from liabilities (the shar eholders are the owners). $8,397 / $13,574 = 61.9% Topic: Balance Sheet—Numerical calculations required ( more challenging ; requires calculation of total assets before ratio can be calculated.) LO: 3 12. In its 201 6 annual report, Mattel Inc. reported the following (in millions): Total liabilities $ 4,086.0 Total shareholders’ equity $2,407.8 What proporti on of Mattel is financed by non owners? A) 64.6% B) 53.0% C) 78.6% D) 62.9% E) None of the above Answer: D Rationale: Nonowner financing for Mattel ’s assets is provided from liabilities (the shareholders are the owners). Assets = Liabi lities + Equity. Assets = $ 4,086.0 + $2,407.8 = $6,493.8 $4,086.0 / $6,493.8 = 62.92 % Topic: Income Statement —Numerical calculations required LO: 3 13. The Goodyear Tire & Rubber Company’s Decemb er 31, 201 6 financial statements reported the following (in millions) Sales $15,158 Cost of sales $10,972 Other expenses (excluding cost of sales) $ 2,902 What did Goodyear report for n et income for t he year ending December 31, 201 6? A) $29,032 million B) $ 1,284 million C) $ 4,186 million D) $13,874 million E) $ 8,070 million Answer: B Rationale: Sales – Cost of sale s – Other expenses = Net income $15,158 – $10,972 – $2,902 = $1,284 Topic: Income Statement —Numerical calculations required LO: 3 14. Intel Corporation reported the following on its 20 16 income statement (in millions) Sales revenue $59,387 Gross profit $36,191 Total expenses $23,317 What did Intel report for c ost of goods sold during 20 16? A) $23,196 million B) $15,502 million C) $36,478 million D) $12,874 million E) None of the above Answer: A Rationale: Sales – Cost of go ods sold = Gross profit $59,387 – Cost of goods sold = $ 36,191 Therefo re, Cost of goods sold = $ 23,196 Topic: Income s tatement —Numerical calculations required LO: 3 15. On October 2, 2016 , Starbuck s Corporation reported, on its Form 10 -K, the following (in millions): 2016 2015 Total expenses $18,497.0 $16,403.4 Operating income $4,171.9 $3,601.0 Net earnings $2,818.9 $2,759.3 What amount of revenues did Starbuck s report for the year ending October 2, 2016 ? A) $24,883.4 B) $25,208.8 C) $24,558.0 D) $21,315.9 E) None of the above Answer: D Rationale: Revenues – Total expenses = Ne t earnings Revenues – $18,497.0 = $2,818.9 Therefore, Revenues were $ 21,315.9 Topic: Income Statement —Numerical calculations required ( more challenging; requires calculation of growth rate.) LO: 3 16. On October 2, 2016 , Starbuck s Corporation reported, on its Form 10 -K, the following (in millions): 2016 2015 Operating income $4,171.9 $3,601.0 Net earnings $2,818.9 $2,759.3 Calculate year -over-year increase or (decrease) in net earnings, in percentage terms. A) (33.8)% B) 22.0% C) 16.5% D) 2.2% E) None of the above Answer: D Rationale: During the y ear, n et earnings increased compared to the prior year. This increase is calculated as ($ 2,818.9 – $2,759.3 ) / $2,759.3 = 2.2%. Topic: Income Statement —Numerical calculations required ( more challenging ; requires calculation of gross profit and ratios for two years.) LO: 3 17. In its 2016 annual report, Caterpillar Inc. reported the following (in millions): 2016 2015 Sales $38,537 $47,011 Cost of goods sold $28,309 $33,546 As a percentage of sales, did Caterpillar’s g ross profit increase or decrease du ring 201 6? A) Gross profit increased from 26.8% to 2 8.6% B) Gross profit decreased from 2 8.6% to 26.5% C) Gross profit increased from 7 1.4% to 73.2% D) Gross profit decreased from 73.2% to 71.4% E) There is not enough information to answer the question. Answer: B Rationale: Sales – Cost of go ods sold = Gross profit. In 20 15, gross profit to sales was 28.6%. This ratio decreased to 2 6.5% in 201 6. Topic: Statement of Cash Flows—Numerical calculations required LO: 3 18. The Goodyear Tire & Rubber Company’s December 31, 20 16, financial statements reported the following (in millions) . Cash December 31, 201 6 $1,132 Cash from operating activities $1,504 Cash from investing activities $(973) Cash from financing activities $(875) What did Goodyear report for c ash on its December 31, 201 5 balance sheet? A) $1,476 million B) $2,281 million C) $3,711 million D) $ 715 million E) None of the above Answer: A Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year Cash, beginning of year + $1,504 – $973- $875 = $1,132 . Cash, beginning of year = $ 1,476 Topic: Statement of Cash Flows—Numerical calculations required LO: 3 19. Procter & Gamble’s June 30, 2016, financial statements reported the following (in millions) : Cash, beginning of year $ 6,836 Cash, end of year $ 7,102 Cash from operating activities $15,435 Cash from investing activities $ (5,575 ) What did Procter & Gamble report for cash from financing activities for the year en ded June 30, 2016? A) $ 9,514 million B) $ 20,961 million C) $ (20,961) million D) $ (9,594 ) million E) $ 7,067 million Answer: D Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year $6,836 + $15,435 – $5,575 + Cash from financing = $ 7,102 Cash from financing = $( 9,594 ) Topic: Return on Ass ets LO: 4 20. A company’s return on assets (ROA) can be disaggregated to reveal which of the following (select all that apply): A) Financial leverage B) Profit m argin C) Sales growth D) Asset growth E) Asset turnover Answer: B and E Rationale: ROA can be disaggregated into profit margin and asset turnover. Financial leverage and sales growth are not components of this ratio. Asset growth affects the calculation via the denominator, but can’t be disaggregated directly. Topic: Return on Equity LO: 4 21. The ratio of net income to equity is also known as: A) Total net equity ratio B) Profit margin C) Return on equity D) Net income ratio E) None of the above Answer: C Rationale: The ratio of net income to equity is called ROE, return on equity , and measures how profitable the company was given the shareholders’ investment. Topic: Return on Equity —Numerical calculations required LO: 4 22. Sales for the year = $ 324,882 , Net Income for the year = $36,610 , Income from equity investments = $8,603 , and average Equity during the year = $ 123,650 . Return on equity (ROE) for the year is: A) 29.6% B) 11.3% C) 22.7% D) 127.6% E) There is not enough information to answer the question. Answer: A Rationale: Return on equity = N et income / Average Equity $36,610 / $123,650 = 29.6%. Topic: Return on Assets —Numerical calculations required LO: 4 23. Sales for the y ear = $ 246,687 , Net Income for the year = $22,965 , and average Assets during the year = $136,357 . Return on Assets (ROA) for the year is: A) 53.8% B) 16.8% C) 9.3% D) There is not enough information to calculate ROA. E) None of the above Answer: B Rationale: ROA = Net Income / Average assets Therefore ROA equals $ 22,965 / $136,357 = 16.8%. Topic: Return on Assets —Numerical calculations required ( more challenging because net income is not provided, must be calculated.) LO: 4 24. Sales for the year = $ 831,066 , Profit margin = 18%, and average Assets during the year = $ 647,770 . Return on Assets (ROA) for the year is: A) 17.1% B) 23.1% C) 64.0% D) There is not enough information to calculate ROA. E) None of the above Answer: B Rationale: ROA = Net Income / Average assets. We are not given Net income, but we do know that profit margin is 18%. Thus we can calculate : Net income as Sales × PM = $831,066 x 18% = $149,592 ROA = $ 149,592 / $647,770 = 23.1% Topic: Return on Assets —Numerical calculations required ( more challenging because average assets are not provided ; must be calculated.) LO: 4 25. On December 31, 201 6, Harley -Davidson , Inc., reported, on its Form 10 -K, the following (in millions): 2016 2015 Total assets $9,890 $9,973 Total sales $5,996 $5,995 Net income $692 $752 Calculate return on assets (ROA) for 201 6. A) 7.0% B) 62.8% C) 71.5% D) 7.5% E) None of the ab ove Answer: A Rationale: Return on assets = Net income / Average a ssets. A simple way to calculate average assets is to take the average of the beg inning and ending assets: ($ 9,890 + $9,973) / 2 = $ 9,932. ROA = $ 692 / $9,932 = 0.0697 = 7.0% Topic: Five Forces of Competitive Industry LO: 5 26. Which of the following are not one of the five forces that determine a company’s competitive intensity? ( Select as many as apply ) A) Bargaining power of suppliers B) Threat of substitution C) Ability to obtain financing D) Threat of entry E) Threat of regulatory intervention Answer: C and E Rationale: The five forces of the competitive industry include: industry competitors, bargaining power of buyers, bargaining power of suppliers, threat o f substitution, and threat of entry. Topic: Business Environment LO: 5 27. Which of the following are relevant in an analysis of a company’s business environment? ( Select as many as apply ) A) Financing B) Labor C) Buyers D) Governance E) All of the above Answer: E Rationale: The components of business analysis are: life cycle, outputs, buyers, inputs, competition, financing, labor, governance, and risk.