Answer Options:
a. True
b. False
Answer: a
Question: On its 12/31/14 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. If the company lost money in 2014, it must have paid dividends. b. The company must have had zero net income in 2014. c. The company must have paid out half of its 2014 earnings as dividends. d. The company must have paid no dividends in 2014. e. Dividends could have been paid in 2014, but they would have had to equal the earnings for the year.
Answer: b
Question: The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.
Answer Options:
a. True
b. False
Answer: a
Question: The first major section of a typical statement of cash flows is “Operating Activities,” and the first entry in this section is “Net Income.” Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called “Net Cash Provided by Operating Activities.” This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
Answer Options:
a. True
b. False
Answer: b
Question: Which of the following statements is CORRECT? a. The New York Stock Exchange is an auction market, and it has a physical location. b. Home mortgage loans are traded in the money market. c. If an investor sells shares of stock through a broker, then it would be a primary market transaction. d. Capital markets deal only with common stocks and other equity securities. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
Answer: a
Question: Money markets are markets for a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper.
Answer: e
Question: The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes. a. Nantell’s taxable income will be lower. b. Nantell’s operating income (EBIT) will increase. c. Nantell’s cash position will improve (increase). d. Nantell’s reported net income for the year will be lower. e. Nantell’s tax liability for the year will be lower.
Answer: a
Question: Which of the following items cannot be found on a firm’s balance sheet under current liabilities? a. Accounts payable. b. Short-term notes payable to the bank. c. Accrued wages. d. Cost of goods sold. e. Accrued payroll taxes.
Answer: d
Question: The amount shown on the December 31, 2015, balance sheet as “retained earnings” is equal to the firm’s net income for 2015 minus any dividends it paid.
Answer Options:
a. True
b. False
Answer: b (The correct answer is True because retained earnings on a balance sheet typically represent the cumulative amount of net income that has been retained by the firm over time, not distributed as dividends, and not just the net income for a single year.)
Question: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders’ claims against the firm’s existing assets. Put another way retained earnings are stockholders’ reinvested earnings.
Answer Options:
a. True
b. False
Answer: a
Question: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.
Answer Options:
a. True
b. False
Answer: a
Question: Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?
Answer Options:
a. The company repurchases common stock.
b. The company pays a dividend.
Answer: b
Question: Assume that Belsey Golf Equipment commenced operations on January 1, 2014, and it was granted permission to use the same depreciation calculations for stockholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2014 management realized that the assets would last for only 10 years. The firm’s accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements? a. The firm’s reported net fixed assets would increase. b. The firm’s EBIT would increase. c. The firm’s reported 2014 earnings per share would increase. d. The firm’s cash position in 2014 and 2015 would increase. e. The provision will increase the company’s tax payments.
Answer: a
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer: a