, 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
1- 4 1, 2
financial statement information.
LO3 – Describe and examine the four financial
5-10 3-19
statements, and define the accounting equation.
LO4 – Explain and apply the basics of profitability
11-13 20-25
analysis.
LO5 – Assess business operations within the context
14 26, 27
of a competitive environment.
LO6 – Access reports filed with the SEC (Appendix
1A).
LO7 – Describe the accounting principles and
regulations that frame financial statements (Appendix 15 28-30
1B).
These questions are available to assign in myBusinessCourse.
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.
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.
Return on Assets
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%.
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
1- 4 1, 2
financial statement information.
LO3 – Describe and examine the four financial
5-10 3-19
statements, and define the accounting equation.
LO4 – Explain and apply the basics of profitability
11-13 20-25
analysis.
LO5 – Assess business operations within the context
14 26, 27
of a competitive environment.
LO6 – Access reports filed with the SEC (Appendix
1A).
LO7 – Describe the accounting principles and
regulations that frame financial statements (Appendix 15 28-30
1B).
These questions are available to assign in myBusinessCourse.
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.
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.
Return on Assets
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%.
