Chapter 01 Test Bank
1. Current liabilities are defined as liabilities with a maturity of less than one year.
TRUE
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Difficulty: 1 Easy
Gradable: automatic
2. A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were
sold during 2017.
FALSE
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Difficulty: 2 Medium
Gradable: automatic
3. When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the
straight-line method.
TRUE
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Difficulty: 2 Medium
Gradable: automatic
4. Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line
method.
FALSE
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Difficulty: 1 Easy
Gradable: automatic
5. You can construct a sources and uses statement for 2017 if you have a company’s year-end balance sheets for 2017 and 2018.
FALSE
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Difficulty: 1 Easy
Gradable: automatic
6. A reduction in long-term debt is a use of cash.
TRUE
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Difficulty: 1 Easy
Gradable: automatics
7. The accrual principle requires that revenue not be recognized until payment from a sale is received.
FALSE
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Difficulty: 1 Easy
Gradable: automatic
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Difficulty: 2 Medium
Gradable: automatic
9. A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing
activities, or financing activities.
TRUE
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Difficulty: 1 Easy
Gradable: automatic
10. The cost of equity is usually reported on the income statement right below interest expense.
FALSE
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Difficulty: 1 Easy
Gradable: automatic
11. Which of the following statements concerning the cash flow production cycle is true?
A. The profits reported in a given time period equal the cash flows generated.
B. A company’s operations and finances are independent of each other.
C. Financial statements have nothing to do with reality.
D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm’s working capital cycle.
E. A profitable company will always have sufficient cash to meet its obligations.
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Difficulty: 2 Medium
Gradable: automatic
12. Which of the following statements concerning a firm’s cash flows and profits is false?
A. Managers must be at least as concerned with cash flows as with profits.
B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued
production.
C. The cash flows generated in a given time period can differ from the profits reported.
D. Profits are no assurance that cash flow will be sufficient to maintain solvency.
E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".
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Difficulty: 2 Medium
Gradable: automatic
13. Which of the following is NOT a typical reason for differences between profits and cash flow?
A. Goodwill
B. Depreciation expense
C. Changes in accounts receivable
D. Accrual accounting practices
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Difficulty: 2 Medium
Gradable: automatic
,A. income statement
B. creditor’s statement
C. balance sheet
D. cash flow statement
E. sources and uses statement
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Difficulty: 1 Easy
Gradable: automatic
15. A balance sheet reports the value of a firm’s assets, liabilities, and equity
A. over an annual period.
B. over any period of time.
C. at any point in time.
D. at the end of the year.
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Difficulty: 1 Easy
Gradable: automatic
16. A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the
company’s balance sheet?
A. Equity rises $250,000; net plant and equipment falls $250,000.
B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.
C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000.
D. Cash rises $250,000; net plant and equipment falls $250,000.
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Difficulty: 2 Medium
Gradable: automatic
17. A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this
transaction affect the company’s balance sheet?
A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million.
B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million.
C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million.
D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.
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Difficulty: 2 Medium
Gradable: automatic
18. Which one of the following is the financial statement that summarizes a firm’s revenue and expenses over a period of time?
A. income statement
B. balance sheet
C. cash flow statement
D. sources and uses statement
E. market value statement
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Difficulty: 1 Easy
Gradable: automatic
, B. balance sheet.
C. shareholders’ equity statement.
D. cash flow statement.
E. statement of operating position.
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Difficulty: 1 Easy
Gradable: automatic
20. Which one of the following is a source of cash?
A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in inventory
E. increase in accounts payable
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Difficulty: 1 Easy
Gradable: automatic
21. Which one of the following is a use of cash?
A. increase in notes payable
B. increase in inventory
C. increase in long-term debt
D. decrease in accounts receivable
E. increase in common stock
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Difficulty: 1 Easy
Gradable: automatic
22. Which one of the following is a source of cash?
A. decrease in accounts receivable
B. decrease in common stock
C. decrease in long-term debt
D. decrease in accounts payable
E. increase in inventory
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Difficulty: 1 Easy
Gradable: automatic
23. Which of the following would NOT be considered a use of cash?
A. Dividends paid
B. A decrease in accounts payable
C. Depreciation
D. An increase in the cash and marketable securities account
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Difficulty: 2 Medium
Gradable: automatic
1. Current liabilities are defined as liabilities with a maturity of less than one year.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
2. A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were
sold during 2017.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
3. When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the
straight-line method.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
4. Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line
method.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
5. You can construct a sources and uses statement for 2017 if you have a company’s year-end balance sheets for 2017 and 2018.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
6. A reduction in long-term debt is a use of cash.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatics
7. The accrual principle requires that revenue not be recognized until payment from a sale is received.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
, Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
9. A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing
activities, or financing activities.
TRUE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
10. The cost of equity is usually reported on the income statement right below interest expense.
FALSE
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
11. Which of the following statements concerning the cash flow production cycle is true?
A. The profits reported in a given time period equal the cash flows generated.
B. A company’s operations and finances are independent of each other.
C. Financial statements have nothing to do with reality.
D. The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm’s working capital cycle.
E. A profitable company will always have sufficient cash to meet its obligations.
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
12. Which of the following statements concerning a firm’s cash flows and profits is false?
A. Managers must be at least as concerned with cash flows as with profits.
B. A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued
production.
C. The cash flows generated in a given time period can differ from the profits reported.
D. Profits are no assurance that cash flow will be sufficient to maintain solvency.
E. Due to required cash investments in current assets, fast-growing and profitable companies can literally "grow broke".
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
13. Which of the following is NOT a typical reason for differences between profits and cash flow?
A. Goodwill
B. Depreciation expense
C. Changes in accounts receivable
D. Accrual accounting practices
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
,A. income statement
B. creditor’s statement
C. balance sheet
D. cash flow statement
E. sources and uses statement
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
15. A balance sheet reports the value of a firm’s assets, liabilities, and equity
A. over an annual period.
B. over any period of time.
C. at any point in time.
D. at the end of the year.
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
16. A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the
company’s balance sheet?
A. Equity rises $250,000; net plant and equipment falls $250,000.
B. Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.
C. Cash rises $250,000; accounts receivable falls $100,000; goodwill rises $150,000.
D. Cash rises $250,000; net plant and equipment falls $250,000.
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
17. A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this
transaction affect the company’s balance sheet?
A. Net plant and equipment rises $10 million; cash falls $10 million; bank debt rises $5 million.
B. Net plant and equipment rises $5 million; cash falls $10 million; bank debt rises $5 million.
C. Net plant and equipment rises $5 million; cash falls $5 million; bank debt rises $5 million.
D. Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
18. Which one of the following is the financial statement that summarizes a firm’s revenue and expenses over a period of time?
A. income statement
B. balance sheet
C. cash flow statement
D. sources and uses statement
E. market value statement
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
, B. balance sheet.
C. shareholders’ equity statement.
D. cash flow statement.
E. statement of operating position.
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
20. Which one of the following is a source of cash?
A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in inventory
E. increase in accounts payable
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
21. Which one of the following is a use of cash?
A. increase in notes payable
B. increase in inventory
C. increase in long-term debt
D. decrease in accounts receivable
E. increase in common stock
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
22. Which one of the following is a source of cash?
A. decrease in accounts receivable
B. decrease in common stock
C. decrease in long-term debt
D. decrease in accounts payable
E. increase in inventory
Accessibility: Keyboard Navigation
Difficulty: 1 Easy
Gradable: automatic
23. Which of the following would NOT be considered a use of cash?
A. Dividends paid
B. A decrease in accounts payable
C. Depreciation
D. An increase in the cash and marketable securities account
Accessibility: Keyboard Navigation
Difficulty: 2 Medium
Gradable: automatic
