Financial Management: Core Concepts, 3e (Brooks)
Chapter 2 Financial Statements
2.1 Financial Statements
1) The purpose of studying financial statements is ________.
A) to mechanically build portfolio analysis
B) to understand those portions of the statements that have relevance for financial decision making
C) to primarily investigate all portions of the statements that have relevance for dividend policy
D) to mechanically learn how to read and understand footnotes
Answer: B
Explanation: B) Accounting and finance view the numbers in DIFFERENT WAYS.
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
2) Which of the statements below is FALSE?
A) The purpose of studying financial statements is to understand those portions of the statements that
have relevance for financial decision making.
B) We need to understand how to interpret and use the information presented in financial statements to
form a picture of the financial profile of the firm.
C) Accounting, it has been said, looks back to where a company has been—somewhat like looking
through a rear view mirror.
D) Accounting and finance view the numbers in the same way.
Answer: D
Explanation: D) Accounting and finance view the numbers in DIFFERENT WAYS.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
3) Understanding the sources and uses of cash in the recent past will enable a manager to ________ the
cash flow for a potential project of the firm.
A) determine with perfect precision
B) forecast with perfect precision
C) predict more accurately
D) know today
Answer: C
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
1
Copyright © 2016 Pearson Education, Inc.
,4) The fundamental starting point of all the accounting statements is the ________.
A) accounting identity
B) computing identity
C) investing identity
D) financing identity
Answer: A
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
5) Which of the statements below is TRUE?
A) Accounting Identity is: Assets ≡ Liabilities - Owners' Equity.
B) Accounting Identity is: Assets ≡ Liabilities + Owners' Equity.
C) Accounting Identity is: Assets ≡ Owners' Equity - Liabilities.
D) Accounting Identity is: Liabilities ≡ Assets + Owners' Equity.
Answer: B
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
6) There are four primary financial statements that are used to measure the performance of a firm. Which
of the choices below are included among these four?
A) The balance statement and income statement
B) The income sheet and statement of retained earnings
C) The statement of cash flows and statement of balance
D) The balance sheet and statement of cash flows
Answer: D
Explanation: D) There are four primary financial statements that are used to measure the performance of
a firm: the income statement, the balance sheet, the statement of retained earnings, and the statement of
cash flows (also known as sources and uses of cash). Together, these four financial statements contain
much of the essential historical information about the performance and management choices of a firm.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
7) It is important to remember that the fundamental ________ of accounting is the debit and credit
recording activity where debits always equal credits.
A) effect
B) end product
C) outcome
D) identity
Answer: D
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
2
Copyright © 2016 Pearson Education, Inc.
, 8) It is important to remember that the fundamental identity of accounting is the debit and credit
recording activity where debits ________ equal credits.
A) never
B) seldom
C) sometimes
D) always
Answer: D
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
9) Which of the statements below is FALSE?
A) The income statement summaries and categorizes a company's revenues and expenses for that period.
B) Typically, income statements are prepared quarterly and annually for distribution outside the
company, but usually monthly for internal managers.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at
Earnings Before Interest and Taxes (EBIT).
D) The balance sheet reports the performance of the firm over the past period. It summarizes and
categorizes a company's revenues and expenses for that period.
Answer: D
Explanation: D) The income statement reports the performance of the firm over the past period. It
summarizes and categorizes a company's revenues and expenses for that period.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
10) Which of the below statements is FALSE?
A) Typically, income statements are prepared quarterly and annually for distribution outside the
company, but usually semiannually for internal managers.
B) Typically, income statements are prepared quarterly and annually for distribution outside the
company.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at
Earnings Before Interest and Taxes (EBIT).
D) The income statement reports the performance of the firm over the past period. It summaries and
categorizes a company's revenues and expenses for that period.
Answer: A
Explanation: A) Typically, income statements are prepared quarterly and annually for distribution
outside the company, but usually MONTHLY for internal managers.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
3
Copyright © 2016 Pearson Education, Inc.
Chapter 2 Financial Statements
2.1 Financial Statements
1) The purpose of studying financial statements is ________.
A) to mechanically build portfolio analysis
B) to understand those portions of the statements that have relevance for financial decision making
C) to primarily investigate all portions of the statements that have relevance for dividend policy
D) to mechanically learn how to read and understand footnotes
Answer: B
Explanation: B) Accounting and finance view the numbers in DIFFERENT WAYS.
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
2) Which of the statements below is FALSE?
A) The purpose of studying financial statements is to understand those portions of the statements that
have relevance for financial decision making.
B) We need to understand how to interpret and use the information presented in financial statements to
form a picture of the financial profile of the firm.
C) Accounting, it has been said, looks back to where a company has been—somewhat like looking
through a rear view mirror.
D) Accounting and finance view the numbers in the same way.
Answer: D
Explanation: D) Accounting and finance view the numbers in DIFFERENT WAYS.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
3) Understanding the sources and uses of cash in the recent past will enable a manager to ________ the
cash flow for a potential project of the firm.
A) determine with perfect precision
B) forecast with perfect precision
C) predict more accurately
D) know today
Answer: C
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
1
Copyright © 2016 Pearson Education, Inc.
,4) The fundamental starting point of all the accounting statements is the ________.
A) accounting identity
B) computing identity
C) investing identity
D) financing identity
Answer: A
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
5) Which of the statements below is TRUE?
A) Accounting Identity is: Assets ≡ Liabilities - Owners' Equity.
B) Accounting Identity is: Assets ≡ Liabilities + Owners' Equity.
C) Accounting Identity is: Assets ≡ Owners' Equity - Liabilities.
D) Accounting Identity is: Liabilities ≡ Assets + Owners' Equity.
Answer: B
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
6) There are four primary financial statements that are used to measure the performance of a firm. Which
of the choices below are included among these four?
A) The balance statement and income statement
B) The income sheet and statement of retained earnings
C) The statement of cash flows and statement of balance
D) The balance sheet and statement of cash flows
Answer: D
Explanation: D) There are four primary financial statements that are used to measure the performance of
a firm: the income statement, the balance sheet, the statement of retained earnings, and the statement of
cash flows (also known as sources and uses of cash). Together, these four financial statements contain
much of the essential historical information about the performance and management choices of a firm.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
7) It is important to remember that the fundamental ________ of accounting is the debit and credit
recording activity where debits always equal credits.
A) effect
B) end product
C) outcome
D) identity
Answer: D
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
Hmwrk Questions: * Taken from "Prepping for Exams" questions at the end of the chapter.
2
Copyright © 2016 Pearson Education, Inc.
, 8) It is important to remember that the fundamental identity of accounting is the debit and credit
recording activity where debits ________ equal credits.
A) never
B) seldom
C) sometimes
D) always
Answer: D
Diff: 1
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
9) Which of the statements below is FALSE?
A) The income statement summaries and categorizes a company's revenues and expenses for that period.
B) Typically, income statements are prepared quarterly and annually for distribution outside the
company, but usually monthly for internal managers.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at
Earnings Before Interest and Taxes (EBIT).
D) The balance sheet reports the performance of the firm over the past period. It summarizes and
categorizes a company's revenues and expenses for that period.
Answer: D
Explanation: D) The income statement reports the performance of the firm over the past period. It
summarizes and categorizes a company's revenues and expenses for that period.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
10) Which of the below statements is FALSE?
A) Typically, income statements are prepared quarterly and annually for distribution outside the
company, but usually semiannually for internal managers.
B) Typically, income statements are prepared quarterly and annually for distribution outside the
company.
C) The income statement begins with revenue and subtracts various operating expenses until arriving at
Earnings Before Interest and Taxes (EBIT).
D) The income statement reports the performance of the firm over the past period. It summaries and
categorizes a company's revenues and expenses for that period.
Answer: A
Explanation: A) Typically, income statements are prepared quarterly and annually for distribution
outside the company, but usually MONTHLY for internal managers.
Diff: 2
Topic: 2.1 Financial Statements
AACSB: 3 Analytical Thinking
LO: 2.1 Explain the foundations of the balance sheet and income statement.
3
Copyright © 2016 Pearson Education, Inc.
