Name: Class: Date:
CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
1. In Canada, amortization is a concept similar to depreciation and can be applied to both tangible and intangible assets.
a. True
b. False
ANSWER: True
2. The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified
period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not correctly
reflect cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash
flow for the same period.
a. True
b. False
ANSWER: True
3. Income statements must be prepared only on an annual basis.
a. True
b. False
ANSWER: False
4. Total net before-tax operating income is equal to net fixed assets.
a. True
b. False
ANSWER: False
5. Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if
it had no interest income or interest expense.
a. True
b. False
ANSWER: True
6. The fact that interest income received by a corporation is 50% taxable encourages firms to use more debt financing than
equity financing.
a. True
b. False
ANSWER: False
7. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-
deductible expense, this would probably encourage companies to use more debt financing than they currently do, other
things held constant.
a. True
b. False
ANSWER: False
8. The interest and dividends paid by a corporation are considered to be deductible operating expenses; hence, they
decrease the firm’s tax liability.
a. True
b. False
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,Name: Class: Date:
CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
ANSWER: False
9. The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time,
while the income statement measures the firm’s financial position at a point in time.
a. True
b. False
ANSWER: False
10. The FIFO method leads to a higher balance sheet inventory value but a lower cost of goods sold in the income
statement.
a. True
b. False
ANSWER: True
11. The value of goodwill on intangible assets is calculated according to the impairment rule instead of a fixed annual
charge.
a. True
b. False
ANSWER: True
12. Retained earnings are the existing shareholders’ reinvested profit and do not represent cash.
a. True
b. False
ANSWER: True
13. Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is
for operation only.
a. True
b. False
ANSWER: False
14. The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm
depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future
flows with which investors are concerned.
a. True
b. False
ANSWER: False
15. 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
changes in the firm’s accounts over that period of time.
a. True
b. False
ANSWER: True
16. Which statement about financial statements is correct?
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, Name: Class: Date:
CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
a. The balance sheet gives us a picture of the firm’s financial position at a point in time.
b. The income statement gives us a picture of the firm’s financial position at a point in time.
c. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
d. The statement of cash needs tells us how much cash the firm will require during some future period, generally
a month or a year.
ANSWER: a
17. Which statement about the balance sheet is true?
a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
b. The balance sheet for a given year tells us how much money the company earned during that year.
c. For most companies, the market value of the stock equals the book value of the stock as reported on the
balance sheet.
d. A balance sheet lists the assets that will be converted to cash first and the longest-lived ones last.
ANSWER: d
18. Other things held constant, which action would increase the amount of cash on a company’s balance sheet?
a. The company purchases a new piece of equipment.
b. The company pays a dividend.
c. The company issues new common stock.
d. The company gives customers more time to pay their bills.
ANSWER: c
19. Which of the following items is NOT included in current assets?
a. accounts receivable
b. Inventory
c. Bonds
d. Cash
ANSWER: c
20. 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
ANSWER: d
21. Which statement about the income statement is true?
a. The focal point of the income statement is the cash account, because that account cannot be manipulated by
“accounting tricks.”
b. EBITDA is a truer measure of financial strength than are net income and free cash flow.
c. If a firm follows the International Financial Reporting Standard (IFRS), its reported net income and net cash
flow will be the same.
d. The income statement for a given year is designed to give us an idea of how much the firm earned during that
year.
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CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
1. In Canada, amortization is a concept similar to depreciation and can be applied to both tangible and intangible assets.
a. True
b. False
ANSWER: True
2. The income statement shows the difference between a firm’s income and its costs—i.e., its profits—during a specified
period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not correctly
reflect cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash
flow for the same period.
a. True
b. False
ANSWER: True
3. Income statements must be prepared only on an annual basis.
a. True
b. False
ANSWER: False
4. Total net before-tax operating income is equal to net fixed assets.
a. True
b. False
ANSWER: False
5. Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if
it had no interest income or interest expense.
a. True
b. False
ANSWER: True
6. The fact that interest income received by a corporation is 50% taxable encourages firms to use more debt financing than
equity financing.
a. True
b. False
ANSWER: False
7. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-
deductible expense, this would probably encourage companies to use more debt financing than they currently do, other
things held constant.
a. True
b. False
ANSWER: False
8. The interest and dividends paid by a corporation are considered to be deductible operating expenses; hence, they
decrease the firm’s tax liability.
a. True
b. False
Copyright Cengage Learning. Powered by Cognero. Page 1
,Name: Class: Date:
CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
ANSWER: False
9. The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time,
while the income statement measures the firm’s financial position at a point in time.
a. True
b. False
ANSWER: False
10. The FIFO method leads to a higher balance sheet inventory value but a lower cost of goods sold in the income
statement.
a. True
b. False
ANSWER: True
11. The value of goodwill on intangible assets is calculated according to the impairment rule instead of a fixed annual
charge.
a. True
b. False
ANSWER: True
12. Retained earnings are the existing shareholders’ reinvested profit and do not represent cash.
a. True
b. False
ANSWER: True
13. Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is
for operation only.
a. True
b. False
ANSWER: False
14. The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm
depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future
flows with which investors are concerned.
a. True
b. False
ANSWER: False
15. 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
changes in the firm’s accounts over that period of time.
a. True
b. False
ANSWER: True
16. Which statement about financial statements is correct?
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, Name: Class: Date:
CHAPTER 2 - FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
a. The balance sheet gives us a picture of the firm’s financial position at a point in time.
b. The income statement gives us a picture of the firm’s financial position at a point in time.
c. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
d. The statement of cash needs tells us how much cash the firm will require during some future period, generally
a month or a year.
ANSWER: a
17. Which statement about the balance sheet is true?
a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
b. The balance sheet for a given year tells us how much money the company earned during that year.
c. For most companies, the market value of the stock equals the book value of the stock as reported on the
balance sheet.
d. A balance sheet lists the assets that will be converted to cash first and the longest-lived ones last.
ANSWER: d
18. Other things held constant, which action would increase the amount of cash on a company’s balance sheet?
a. The company purchases a new piece of equipment.
b. The company pays a dividend.
c. The company issues new common stock.
d. The company gives customers more time to pay their bills.
ANSWER: c
19. Which of the following items is NOT included in current assets?
a. accounts receivable
b. Inventory
c. Bonds
d. Cash
ANSWER: c
20. 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
ANSWER: d
21. Which statement about the income statement is true?
a. The focal point of the income statement is the cash account, because that account cannot be manipulated by
“accounting tricks.”
b. EBITDA is a truer measure of financial strength than are net income and free cash flow.
c. If a firm follows the International Financial Reporting Standard (IFRS), its reported net income and net cash
flow will be the same.
d. The income statement for a given year is designed to give us an idea of how much the firm earned during that
year.
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