CHAPTER 2
Financial Statements & Cash Flow
Multiple Choice Questions:
I.    DEFINITIONS
BALANCE SHEET
b    1.    The financial statement showing a firm’s accounting value on a particular date is the:
    a.    income statement.
    b.    balance sheet.
    c.    statement of cash flows.
    d.    tax reconciliation statement.
    e.    shareholders’ equity sheet.
    Difficulty level:  Easy
CURRENT ASSETS
c    2.    A current asset is:
    a.    an item currently owned by the firm.
    b.    an item that the firm expects to own within the next year.
    c.    an item currently owned by the firm that will convert to cash within the next 12 months.
    d.    the amount of cash on hand the firm currently shows on its balance sheet.
    e.    the market value of all items currently owned by the firm.
    Difficulty level:  Easy
LONG-TERM DEBT
b    3.    The long-term debts of a firm are liabilities:
    a.    that come due within the next 12 months.
    b.    that do not come due for at least 12 months.
    c.    owed to the firm’s suppliers.
    d.    owed to the firm’s shareholders.
    e.    the firm expects to incur within the next 12 months.
    Difficulty level:  Easy
NET WORKING CAPITAL
e    4.    Net working capital is defined as:
    a.    total liabilities minus shareholders’ equity.
    b.    current liabilities minus shareholders’ equity.
    c.    fixed assets minus long-term liabilities.
    d.    total assets minus total liabilities.
    e.    current assets minus current liabilities.
    Difficulty level:  Easy
LIQUID ASSETS
d    5.    A(n) ____ asset is one which can be quickly converted into cash without significant loss in value.
    a.    current
    b.    fixed
    c.    intangible
    d.    liquid
    e.    long-term
    Difficulty level:  Easy
INCOME STATEMENT
a    6.    The financial statement summarizing a firm’s performance over a period of time is the:
    a.    income statement.
    b.    balance sheet.
    c.    statement of cash flows.
    d.    tax reconciliation statement.
    e.    shareholders’ equity sheet.
    Difficulty level:  Easy
NONCASH ITEMS
d    7.    Noncash items refer to:
    a.    the credit sales of a firm.
    b.    the accounts payable of a firm.
    c.    the costs incurred for the purchase of intangible fixed assets.
    d.    expenses charged against revenues that do not directly affect cash flow.
    e.    all accounts on the balance sheet other than cash on hand.
    Difficulty level:  Easy
MARGINAL TAX RATES
e    8.    Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn.
    a.    deductible
    b.    residual
    c.    total
    d.    average
    e.    marginal
    Difficulty level:  Easy
AVERAGE TAX RATES
d    9.    Your _____ tax rate measures the total taxes you pay divided by your taxable income.
    a.    deductible
    b.    residual
    c.    total
    d.    average
    e.    marginal
    Difficulty level:  Easy
CASH FLOW FROM OPERATING ACTIVITIES
a    10.    _____ refers to the cash flow that results from the firm’s ongoing, normal business activities.
    a.    Cash flow from operating activities
    b.    Capital spending
    c.    Net working capital
    d.    Cash flow from assets
    e.    Cash flow to creditors
    Difficulty level:  Medium
CASH FLOW FROM INVESTING
deductible
b    11.    _____ refers to the changes in net capital assets.
    a.    Operating cash flow
    b.    Cash flow from investing
    c.    Net working capital
    d.    Cash flow from assets
    e.    Cash flow to creditors
    Difficulty level:  Medium
NET WORKING CAPITAL
c    12.    _____ refers to the difference between a firm’s current assets and its current liabilities.
    a.    Operating cash flow
    b.    Capital spending
    c.    Net working capital
    d.    Cash flow from assets
    e.    Cash flow to creditors
    Difficulty level:  Easy
CASH FLOW OF OPERATIONS
d    13.    _____ refers to the net total cash flow of the firm available for distribution to its creditors and stockholders.
    a.    Operating cash flow
    b.    Capital spending
    c.    Net working capital
    d.    Cash flow from operations
    e.    Cash flow to creditors
CASH FLOW TO CREDITORS
e    14.    _____ refers to the firm’s interest payments less any net new borrowing.
    a.    Operating cash flow
    b.    Capital spending
    c.    Net working capital
    d.    Cash flow from shareholders
    e.    Cash flow to creditors
CASH FLOW TO STOCKHOLDERS
e    15.    _____ refers to the firm’s dividend payments less any net new equity raised.
    a.    Operating cash flow
    b.    Capital spending
    c.    Net working capital
    d.    Cash flow from creditors
    e.    Cash flow to stockholders
EARNINGS PER SHARE
a    16.    Earnings per share is equal to:
    a.    net income divided by the total number of shares outstanding.
    b.    net income divided by the par value of the common stock.
    c.    gross income multiplied by the par value of the common stock.
    d.    operating income divided by the par value of the common stock.

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