Multiple Choice Answers

1. Dividends are distributions of profits to the owners of a corporation, but do not represent an expense to the firm.
True
False
2. Credits are generally good and debits are generally bad.
True
False
3. Debt-to-Equity and Debt-to Assets ratios usually provide a clear picture of the financial leverage employed by a firm. The higher the level of debt, the higher the implied financial risk. An informed reader, however, understands that it is appropriate to draw this general conclusion only when comparing firms within the same or very similar industries.
True
False
4. Compounding is discounting in reverse.
True
False
5. A well-presented statement of cash flows can provide all of the information found in a balance sheet and income statement.
True
False
6. Compounding is discounting in reverse
True
False
7. A well-presented statement of cash flows can provide all of the information found in a balance sheet and income statement.
True
False
8. The inventory turnover ratio is one indicator of a firm’s operation efficiency. Typically, faster turns means that management is doing a better job of buying or controlling inventory.
True
False
9. Two major elements of return on assets (ROA) are profit margin and asset turnover. An analysis of these two component parts can provide valuable insights into a firm’s performance.
True
False
10. Accounting is a set of rules and methods by which economic information of a business is collected and made into reports that are useful to end users.
True
False
11. A transaction is an event that affects the financial position of a company.
True
False
12. If a bank were to impose a working capital covenant in a loan agreement to you, what strategy below would help you to keep net working capital above mandated minimum?
A) Selling excess inventory (below cost) for cash.
B) Converting accounts payable to a long-term note payable.
C) Issuing short-term debt for cash.
D) Buying raw materials and agreeing to pay the invoice in 30 days.
13. The accounting process is concerned only with external transactions representing economic events.
True
False
14. Discounting is more frequently of value to a capital budget than is compounding because we are usually interested in measuring the current value of a payment to be received in the future.
True
False
15. Debits always increase an account, while credits decrease an account.
True
False
16. Which organization is recognized today as the authoritative voice of accounting rules and principles?
A) S.E.C.
B) A.I.C.P.A
C) F.A.S.B.
D) A.A.A.
17. The statement of retained earnings shows the revenues, expenses and net income of an enterprise over a period of time.
True
False
18. Current ratios and quick ratios usually provide a clear picture of the financial leverage employed by a firm.
True
False
19. After one year, an investment earning 2% interest would grow to 1.02 times it’s initial value.
True
False
20. Revenue and expense accounts are nothing more than temporary accounts.
True
False
21. Current Assets almost always equal Current Liabilities.
True
False
22. Managerial accounting has no strict rules which govern internal accounting procedures.
True
False
23. Liabilities are not the claims of creditors to a company’s resources.
True
False
24. Current ratios and quick ratios indicate the relative liquidity of a company. These two ratios are essential in that they provide an analyst with information concerning a company’s ability to meet its current obligations.
True
False
25. Dividends are distributions of profits to the owners of a corporation, and therefore represent an expense to the firm.
True
False
26. The income statement shows the revenues, expenses and net income of an enterprise over a period of time.
True
False
27. Financial accounting, unlike managerial accounting, has firm guidelines that it must follow.
True
False
28. The balance sheet shows the financial position of a company as of a certain date.
True
False
29. Since the total of all the right-hand sides of accounts equals the total of left-hand sides, then the total amount of increases entered in the general ledger must equal the total amount of decreases.
True
False
30. If we know a present value and an interest rate, we should be able to find a future value.
True
False
31. A well-presented statement of cash flows cannot provide all of the information found in a balance sheet and income statement.
True
False
32. The two major sections of the statement of cash flows are sources of cash and uses of cash.
True
False

33. If we know a present value, an interest rate, and a given number of periods, we should be able to find a future value.
True
False
34. Analysts often take a short cut in estimating a firm’s cash from operations: they just add depreciation back to net income. What is the greatest shortcoming of this approach?
A) Depreciation is not relevant to a cash flow analysis.
B) Expenditures for PP&E are not considered in the cash flow from operations.
C) Changes in working capital elements are disregarded in this approach.
D) Companies do not report their depreciation expenses.
35. Horizontal and vertical analysis are two key techniques used in analyzing financial statements, usually applied in tandem. Briefly stated, vertical analysis requires that a significant element be measured as a percentage of a base to which it is related. For example, the various components of an income statement might be measured as a percentage of sales. This technique can be applied to the balance sheet as well.
True
False
36. Economic events may or may not affect the financial position of a company.
True
False
37. G.A.A.P is:
A) the collection of accounting standards and conventions that has evolved over the years to govern the profession.
B) the Governmental Association of Accounting Professionals.
C) the rule making committee of the A.I.C.P.A.
D) a chain of clothing stores.

38. Which of the following is a source of cash?
A) Increase in accounts receivable.
B) Gain on sale of a piece of equipment.
C) a decrease in inventories.
D) a decrease in long-term debt.
39. Ratio analysis is unqualifiably the best method of financial statement analysis.
True
False
40. Which of the following items listed below would you subtract from Net Income to arrive at Cash Provided (Used) by operating Activities.
A) Depreciation on a delivery truck.
B) Amortization of a patent.
C) The gain arising from the sale of a new fork lift which was carried on the books at $21,500 and was sold for $26,000.
D) All of the above
E) None of the above

41. A companys operating cycle is a measurement of the average length of time from the point of a sale to the collection of an account receivable. This measure is an important tool used in measuring operating efficiency and in forecasting the cash requirements of the firm.
True
False
42. The statement of financial position shows how well a company has performed over a period of time.
True
False
43. Liabilities normally have a left hand balance.
True
False
44. Debt to equity and debt to assets ratios indicate the relative liquidity of a company.
True
False
45. Which of the following would appear in the operating activities sections of a statement of cash flows prepared using the direct method, but not in one using the indirect method?
A – change in accounds receiveable
B – Depreciation expenses
C. Cash paid to employees
D.  Change in accounts payable
E. Change in retained earnings