(Test Bank) Financial Accounting for MBAs

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Test Bank

8th Edition

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© Cambridge Business Publishers, 2021 1-1 Financial Accounting for MBAs, 8th Edition Module 1 Financial Accounting for MBAs Learning Objectives – Coverage by question True/False Multiple Choice LO1 – Explain and assess the four main business activities. LO2 – Identify and discuss the users and suppliers of financial statement information. 1- 4 1, 2 LO3 – Describe and examine the four financial statements, and define the accounting equation. 5-10 3-19 LO4 – Explain and apply the basics of profitability analysis. 11-13 20-25 LO5 – Assess business operations within the context of a competitive environment. 14 26, 27 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 These questions are available to assign in myBusinessCourse. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-2 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 repay 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 financial statements to the SEC, which posts them to the Internet 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 information 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. © Cambridge Business Publishers, 2021 1-3 Financial Accounting for MBAs, 8th Edition 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 calculation. 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. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-4 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 Income / Average Assets. This is the disaggregation of the ROA into its components Topic: Asset Turnover LO: 4 13. Consider two companies (A and B) with equal profit margins of 18%. Company 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: 18% × 1.2 = 21.6% whereas 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. © Cambridge Business Publishers, 2021 1-5 Financial Accounting for MBAs, 8th Edition 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 these are correct 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 extensions 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 these are correct 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 Assets 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. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-6 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. Topic: 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 and 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. © Cambridge Business Publishers, 2021 1-7 Financial Accounting for MBAs, 8th Edition Topic: Balance Sheet—Numerical calculations required LO: 3 7. Kelty Company’s year-end financial statements reported the following (in millions): Total assets $41,278 Total liabilities 29,465 Total shareholders’ equity 11,813 Dividends 205 Net income (loss) 3,160 Retained earnings, Jan. 1 11,425 What did Kelty Company report for retained earnings at December 31? A) $14,380 million B) $14,768 million C) $14,790million D) $14,585 million E) There is not enough information to determine the answer. Answer: A Rationale: (in millions) Retained earnings, Jan. 1 $11,425 Net income 3,160 Dividends (205) Retained earnings, Dec. 31 $14,380 Topic: Balance Sheet—Numerical calculations required LO: 3 8. United Company’s year-end balance sheet reported the following (in millions) Total Assets $100,228 Total Liabilities 78,713 Contributed Capital 8,933 What was United Company’s total liabilities and stockholders’ equity at December 31? A) $ 87,646 million B) $ 91,295 million C) $100,228 million D) $ 21,515 million Answer: C Rationale: Assets = Liabilities + Stockholders Equity. Assets = $100,228 so this is the total of liabilities and equity combined. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-8 Topic: Balance Sheet—Numerical calculations required LO: 3 9. On December 31 Starstruck Corporation reported, on its Form 10-K, the following (in millions): Total assets $21,494.3 Total stockholders’ equity 8,836.1 Total current liabilities 6,820.4 What did Starstruck report as total liabilities on December 31? A) $12,658.2 million B) $ 5,837.8 million C) $14,673.9 million D) $23,510.0 million E) None of these are correct. Answer: A Rationale: Assets = Liabilities + Stockholders Equity. $21,494.3 = Liabilities + $8,836.1 Therefore, total liabilities = $12,658.2 on December 31. Topic: Balance Sheet—Numerical calculations required LO: 3 10. In its 2019 annual report, Snap-Tite 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-Tite report as total assets at year-end? A) $6,607.2 million B) $2,839.2 million C) $3,972.0 million D) $4,723.2 million E) None of these are correct. Answer: D Rationale: Assets = Liabilities + Stockholders Equity. Assets = $2,088.0 + $2,635.2 Therefore, Assets = $4,723.2 © Cambridge Business Publishers, 2021 1-9 Financial Accounting for MBAs, 8th Edition Topic: Balance Sheet—Numerical calculations required LO: 3 11. In its 2016 annual report, Kehl’s Corporation reported the following (in millions): Total assets $20,361 Total shareholders’ equity $ 7,766 Total liabilities $12,596 What proportion of Kehl’s Corporation is financed by nonowners? A) 44.8% B) 38.1% C) 61.9% D) 61.7% E) None of these are correct. Answer: C Rationale: Nonowner financing for Kehl’s assets is provided from liabilities (the shareholders are the owners). $12,596 / $20,361 = 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 2016 annual report, Malibu Inc. reported the following (in millions) on its year-end balance sheet: Total liabilities $4,086.0 Total shareholders’ equity $2,648.6 What proportion of Malibu Inc. is financed by nonowners? A) 60.7% B) 39.3% C) 64.8% D) 78.6% E) None of these are correct. Answer: A Rationale: Nonowner financing for Malibu’s assets is provided from liabilities (the shareholders are the owners). Assets = Liabilities + Equity. Assets = $4,086.0 + $2,648.6 = $6,734.6 $4,086.0 / $6,734.6 = 60.7% © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-10 Topic: Income Statement—Numerical calculations required LO: 3 13. The Tread Company’s December 31 financial statements reported the following (in millions) Sales $22,737 Cost of sales $16,458 Other expenses (excluding cost of sales) $ 4,353 What did Tread Company report for net income for the year ending December 31? A) $ 6,279 million B) $12,105 million C) $10,632 million D) $ 1,926 million E) $43,548 million Answer: D Rationale: Sales – Cost of sales – Other expenses = Net income $22,737 – $16,458 – $4,353 = $1,926 Topic: Income Statement—Numerical calculations required LO: 3 14. Tully Corporation reported the following on its annual income statement (in millions) Sales revenue $118,774 Gross profit $72,382 Total expenses $46,634 What did Tully report for cost of goods sold during the year? A) $31.004 million B) $93,026 million C) $25,748 million D) $46,392 million E) None of these are correct. Answer: D Rationale: Sales – Cost of goods sold = Gross profit $118,774 – Cost of goods sold = $72,382 Therefore, Cost of goods sold = $46,392 © Cambridge Business Publishers, 2021 1-11 Financial Accounting for MBAs, 8th Edition Topic: Income statement—Numerical calculations required LO: 3 15. On September 30, Star Corporation reported, in its annual report, the following (in millions): Year 2 Year 1 Total expenses $27,745.5 $24,605.1 Operating income $6,257.9 $5,401.5 Net earnings $4,228.4 $4,139.0 What amount of revenues did Star Corporation report for the year ended September 30, Year 2 (in millions)? A) $31.973.9 B) $34,003.4 C) $29,775.0 D) $27,834.9 E) None of these are correct. Answer: A Rationale: Revenues – Total expenses = Net earnings Revenues – $27,745.5 = $4,228.4 Therefore, Revenues were $31.973.9 Topic: Income Statement—Numerical calculations required (more challenging; requires calculation of growth rate.) LO: 3 16. On December 31, Sleek Corporation reported, on its annual report, the following (in millions): Year 2 Year 1 Operating income $4,255.3 $3,673.0 Net earnings $2,875.3 $2,759.3 Calculate year-over-year increase or (decrease) in net earnings, in percentage terms. A) 4.2% B) 15.9% C) 16.8% D) 4.0% E) None of these are correct. Answer: A Rationale: During the year, net earnings increased compared to the prior year. This increase is calculated as ($2,875.3 – $2,759.3) / $2,759.3 = 4.2%. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-12 Topic: Income Statement—Numerical calculations required (more challenging; requires calculation of gross profit and ratios for two years.) LO: 3 17. In its year-end financial statements, Pillar Inc. reported the following (in millions): Year 2 Year 1 Sales $38,537 $47,011 Cost of goods sold $28,309 $33,546 As a percentage of sales, did Pillar’s gross profit increase or decrease during the year? A) Gross profit increased from 25.0% to 28.6% B) Gross profit decreased from 28.6% to 25.0% C) Gross profit increased from 71.4% to 75.0% D) Gross profit decreased from 75.0% to 71.4% E) There is not enough information to answer the question. Answer: B Rationale: Sales – Cost of goods sold = Gross profit. In Year 1, gross profit to sales was $13,196 / $46,071 = 28.6%. In Year 2, gross profit to sales was $9,457 / $37,766 = 25.0%. Topic: Statement of Cash Flows—Numerical calculations required LO: 3 18. Trio Company’s December 31, Year 2, financial statements reported the following (in millions). Cash December 31 $1,698 Cash from operating activities $2,256 Cash from investing activities $(1,460) Cash from financing activities $(1,313) What did Trio Company report for cash on its December 31, Year 1 balance sheet? A) $2,215 million B) $3,422 million C) $ 517 million D) $1,181 million E) None of these are correct 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 + $2.256 – $1,460 – $1,313 = $1,698 Cash, beginning of year = $2,215 © Cambridge Business Publishers, 2021 1-13 Financial Accounting for MBAs, 8th Edition Topic: Statement of Cash Flows—Numerical calculations required LO: 3 19. Page’s June 30, year-end financial statements reported the following (in millions): Cash, beginning of year $17,090 Cash, end of year $17,755 Cash from operating activities $38,588 Cash from investing activities $(13,938) What did Page report for cash from financing activities for the year ended June 30? A) $ 23,985 million B) $25,315 million C) $(23,985) million D) $25,315 million E) $24,650 million Answer: C Rationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of year $17,090 + $38.588 – $13,938 + Cash from financing = $17,755 Cash from financing = $(23,985) Topic: Return on Assets 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 margin 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 these are correct. 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. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-14 Topic: Return on Equity—Numerical calculations required LO: 4 22. Sales for the year = $341,126, Net Income for the year = $38,441, Income from equity investments = $9,033, and average Equity during the year = $123,650. Return on equity (ROE) for the year is: A) 31.1% B) 11.3% C) 7.3% D) 2.6% E) There is not enough information to answer the question. Answer: A Rationale: Return on equity = Net income / Average Equity $38,441 / $123,650 = 31.1%. Topic: Return on Assets—Numerical calculations required LO: 4 23. Sales for the year = $296,024, Net Income for the year = $22,965, and average Assets during the year = $163,628. Return on Assets (ROA) for the year is: A) 55.3% B) 7.8% C) 14.0% D) There is not enough information to calculate ROA. E) None of these are correct. Answer: C Rationale: ROA = Net Income / Average assets Therefore ROA equals $22,965 / $163,628 = 14.0%. 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 = $997,279, Profit margin =18%, and average Assets during the year = $647,770. Return on Assets (ROA) for the year is: A) 65.0% B) 27.7% C) 11.7% D) There is not enough information to calculate ROA. E) None of these are correct. 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 = $997,279 x 18% = $179,510.22 ROA = $179,510.22 / $647,770 = 27.7% © Cambridge Business Publishers, 2021 1-15 Financial Accounting for MBAs, 8th Edition Topic: Return on Assets—Numerical calculations required (more challenging because average assets are not provided; must be calculated.) LO: 4 25. On December 31, Harper, Inc., reported, on its year-end financial statements, the following (in millions): Year 2 Year 1 Total assets $11,868 $11,968 Total sales $7,195 $7,194 Net income $692 $902 Calculate return on assets (ROA) for Year 2. A) 5.8% B) 60.6% C) 60.4% D) 6.8% E) None of these are correct. Answer: A Rationale: Return on assets = Net income / Average assets. A simple way to calculate average assets is to take the average of the beginning and ending assets: ($11,868 + $11,968) / 2 = $911,918 ROA = $692 / $11,918 = 0.05815 = 5.8% 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 of 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. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 1 1-16 Topic: Clean Audit Opinion LO: 7 28. A clean audit opinion includes which of the following assertions: (Select as many as apply) A) Financial statements present fairly the company’s financial condition B) The auditor certifies the financials to be error free C) The financial statements are management’s responsibility D) Management has handled transactions efficiently in all material respects E) All of the above Answer: A and C Rationale: The audit is not a certification (B is wrong) and the auditor does not provide any opinion about how management handles transactions (D is wrong). Topic: Auditor Report LO: 7 29. The audit report is addressed to: A) The audit committee B) The board of directors C) The shareholders D) The board of directors and the shareholders E) The Securities and Exchange Commission (SEC) Answer: D Rationale: The auditors’ report to the owners and the directors. Topic: GAAP LO: 7 30. Generally Accepted Accounting Principles (GAAP) are created by: (select all that apply) A) The Securities and Exchange Commission B) The Generally Accepted Accounting Principles Task Force C) The Sarbanes Oxley Act D) The Financial Accounting Standards Board E) The Public Company Accounting Oversight Board Answer: A and D Rationale: The Sarbanes Oxley Act did not create new accounting principles but rather, rules for auditors and corporate governance mechanisms for companies. Answer B is fictional. The PCAOB was established to oversee the development of audit standards and to monitor the effectiveness of auditors. © Cambridge Business Publishers, 2021 2-1 Financial Accounting for MBAs, 8th Edition Module 2 Introducing Financial Statements Learning Objectives – Coverage by question True/False Multiple Choice LO1 – Examine and interpret a balance sheet. 1-7, 11 1-8, 13-15, 24, 26, 27, 29 LO2 – Examine and interpret an income statement. 7-9 9-12, 25, 28, 30 LO3 – Examine and interpret a statement of stockholders’ equity. LO4- Describe a statement of cash flows. 10 20-23 LO5 – Construct and apply linkages among the four financial statements. 12-14 16-23 LO6 – Locate and use additional information from public sources. 15, 16 These questions are available to assign in myBusinessCourse. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 2 2-2 Module 2: Introducing Financial Statements and Transaction Analysis True/False Topic: Definition of an Asset LO: 1 1. In order for an asset to be reported on the balance sheet, it must be owned or controlled by the company and be expected to provide future benefits. Answer: True Rationale: Assets reported on the balance sheet must be owned or controlled by the company and must be expected to provide future benefits. These benefits can relate to the expected receipt of cash or another asset, or the expected decrease in a liability. Topic: Historical Cost LO: 1 2. Assets are reported on the balance sheet at their current market value. Answer: False Rationale: Assets are generally reported at historical costs. An exception is marketable securities. Topic: Book vs. Market Value LO: 1 3. The book value of stockholders’ equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company. Answer: False Rationale: Book value and market value differ for many reasons, including reporting assets at historical costs instead of current market value, and differences between the accounting periods in which transactions are recognized in the financial statements and when the value implications of those transactions are recognized by the capital markets. Topic: Reporting of Assets and Liabilities LO: 1 4. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity. Answer: True Rationale: Assets are reported in the order that they are generally expected to be converted into cash. Receivables are, thus, reported before inventories, and inventories before PPE. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year and long-term liabilities expected to be paid over a longer period of time. © Cambridge Business Publishers, 2021 2-3 Financial Accounting for MBAs, 8th Edition Topic: Unrecorded Assets LO: 1 5. In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name. Answer: True Rationale: Companies may report intangible assets if they acquired them in an arms’ length transaction. But if the intangible was not purchased, if it was internally generated it may not be included on the balance sheet because its future economic benefits cannot be reliably measured. So, all internally generated intangible assets are excluded from the balance sheet under GAAP. Topic: Liabilities LO: 1 6. Liabilities and equities are both claims against the assets of a company. Answer: True Rationale: Both liabilities and equity are claims against the assets. In the event of default of a company, liabilities are settled first against the assets of the company. The owners, however, still have an interest in the remaining assets. Topic: Unearned Revenue and Revenue Recognition Principle (more challenging—involves unearned revenue and recognition thereof.) LO: 1, 2 7. A customer’s prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle. Answer: False Rationale: Unearned revenue is recorded for customer prepayments. But it is only moved to the income statement when the services have been rendered and not automatically at the end of the accounting period. Topic: Revenue Recognition Principle and Cash LO: 2 8. According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors. Answer: False Rationale: Revenue is recognized when the company has done what it is obligated to do under the sales contract, such as, when goods have been transferred or services performed for the customer. This means a sale of goods on credit would qualify for recognition of revenue although no cash was received. Topic: Accrual Accounting for Expenses LO: 2 9. Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased. Answer: True Rationale: Under accrual accounting, the cost of inventory is reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets, notwithstanding whether or not they have been paid for. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 2 2-4 Topic: Statement of Cash Flows LO: 4 10. The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from capital activities. Answer: False Rationale: The statement of cash flows has three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Topic: Net working Capital LO: 1 11. Net working capital = Current assets + Current liabilities Answer: False Rationale: Net working capital = Current assets less current liabilities. Topic: Articulation of Financial Statements LO: 5 12. Articulation refers to the concept that financial statements are linked to each other and linked across time. Answer: True Rationale: Balance sheets are linked over time because the permanent accounts’ closing balance last period becomes the opening balance in the current period. The statements are linked to each other via cash (statements of cash flow and balance sheets), via retained earnings (income statements and balance sheets), and via equity accounts (statements of stockholders’ equity and balance sheets). Topic: Articulation of Financial Statements LO: 5 13. The income statements of the prior and current year are linked via the balance sheet. Answer: False Rationale: The balance sheets of the prior and current year are linked via the income statement. Topic: Articulation of Retained Earnings LO: 5 14. Retained earnings articulate across time which means that last period’s retained earnings plus current period net income (or loss) is equal to the current period’s retained earnings. Answer: False Rationale: Last period’s retained earnings plus current period net income (or loss) less any dividends paid, is equal to the current period’s retained earnings. © Cambridge Business Publishers, 2021 2-5 Financial Accounting for MBAs, 8th Edition Topic: Additional Information Sources LO: 6 15. All companies must file with the SEC a detailed annual report and discussion of their business activities in their Form 10-K. Answer: False Rationale: Companies with publicly traded securities must file with the SEC, not all companies. Topic: Additional Information Sources LO: 6 16. A publicly traded company must file a Form 8-K with the SEC within four business days following a change in its certified public accounting firm. Answer: True Rationale: A change in a company’s certified public accounting firm is one of several events in which the SEC requires a company to disclose the change by filing a Form 8-K within four business days following the event. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 2 2-6 Multiple Choice Topic: Reporting of Assets LO: 1 1. Assets are recorded in the balance sheet in order of: A) Market Value B) Historic Value C) Liquidity D) Maturity E) None of these are correct. Answer: C Rationale: Liquidity refers to the ease of conversation to cash. Current Assets are to be used during the current operating cycle. Non-current assets, like equipment and goodwill are reported after current assets. Market value and historic value refer not to the order but to the valuation of assets. Maturity refers to the order in which liabilities are recorded in the balance sheet. Topic: Current Assets LO: 1 2. Which of the following are included in current assets? A) Prepaid rent B) Taxes payable C) Automobiles D) Common stock E) None of these are correct. Answer: A Rationale: Taxes payable is a liability, automobiles is not a current asset but a long-term one, and common stock is an equity. Topic: Net Working Capital—Numerical calculations required LO: 1 3. At year-end, Rapid Airlines had negative net working capital of $(4,692) million and current assets of $8,996 million. The firm’s current liabilities are: A) $4,692 million B) $4,304 million C) $10,472 million D) $13,688 million E) There is not enough information to calculate the amount. Answer: D Rationale: Net working capital = Current assets – Current liabilities. Current liabilities = Current assets – Net working capital Current liabilities = $8,996 – $(4,692) Current liabilities = $13,688 million © Cambridge Business Publishers, 2021 2-7 Financial Accounting for MBAs, 8th Edition Topic: Net Working Capital—Numerical calculations required LO: 1 4. At year-end, ABC Auto had current assets of $10,838 million and current liabilities of $8,296 million. The firm’s net working capital is: A) $2,542 million B) $10,838 million C) $(2,542) million D) 19,134 million E) None of these are correct. Answer: A Rationale: Net working capital = Current assets – Current liabilities. Net working capital = $10,838 – $8,296 Net working capital = $2,542 million. Topic: Net Working Capital—Numerical calculations required LO: 1 5. At year end, Kay Corporation had net working capital of $4,546 million and current liabilities of $5,948 million. The firm’s current assets are: A) $1.402 million B) $10,494 million C) $16,442 million D) $5,948 million E) None of these are correct. Answer: D Rationale: Net working capital = Current assets – Current liabilities. $4,546 = Current assets – $5,948 Current assets = $10,494 Topic: Liabilities LO: 1 6. Which one of the following is not a current liability? A) Taxes payable B) Accounts payable C) Wages payable D) Wage expense E) None of these are correct. Answer: D Rationale: Wage expense is an income statement account, not a balance sheet account. It is not a current liability. © Cambridge Business Publishers, 2021 Test Bank (T/F & MC), Module 2 2-8 Topic: Stockholders’ Equity LO: 1 7. Which of the following is included as a component of stockholders’ equity? A) Buildings B) Retained earnings C) Prepaid property taxes D) Accounts payable E) Dividends Answer: B Rationale: Retained earnings is a component of stockholders’ equity. Dividends affect retained earnings but they are not reported as a separate component. Topic: Recognition of Costs as Expense LO: 1 8. As inventory and property plant and equipment on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As a use of cash on the statement of cash flows D) On the balance sheet because assets are never consumed E) Both B and C because the financial statements articulate Answer: B Rationale: As assets are consumed (used up), their cost is transferred to the income statement as expenses. Cash is not involved so C and E are incorrect. Topic: Income Statement LO: 2 9. Interest expense appears in which financial statement? A) Statement of stockholders’ equity B) Balance sheet C) Income statement D) Statement of cash flows E) All of the above Answer: C Rationale: Expenses, including interest expense, appear in the income statement. © Cambridge Business Publishers, 2021 2-9 Financial Accounting for MBAs, 8th Edition Topic: Gross Profit—Numerical calculations required LO: 2 10. During the year, Macur Inc. had sales of $10,913,300, total expenses of $10,277,256 and gross profit of $5,108,782. What was the company’s cost of sales for the year? ($ in thousands) A) $ 5,804,518 thousand B) $ 5,744,826 thousand C) $10,277,256 thousand D) $ 1,807,888 thousand E) There is not enough information to calculate the cost of sales. Answer: A Rationale: Sales – Cost of sales = Gross profit $10,913,300– Cost of sales = $5,108,782 Cost of sales = $5,804,518 thousand Topic: Net Income—Numerical calculations required LO: 2 11. During the year, Kale Inc. had Sales of $28,029 million, Cost of merchandise sold of $17,916 million, and Gross profit of $10,112 million. What was net income for the year? A) $ 7,949 million B) $10,112 million C) $17,916 million D) $28,029 million E) There is not enough information to calculate the amount. Answer: E Rationale: Sales – Total expenses = Net income. There is no information about total expenses, so we cannot compute net income. Topic: Net Income—Numerical calculations required LO: 2 12. During the year, Sparkle Inc. had Sales of $2,850.6 million, Gross profit of $1,307.7 million and Selling, general, and administrative expenses of $1,022.4 million. What was Sparkle’s Cost of sales for the year? A) $1,828.2 million B) $1,542.9 million C) $2,330.1 million D) $ 285.3 million E) There is not enough information to calculate the amount. Answer: B Rationale: Sales – Cost of sales = Gross profit $2,850.6 – Cost of sales = $1,307.7 Cost of sales = $1,542.9 million