Chapter 01
Interpreting Financial Statements
True / False Questions
1. Current liabilities are defined as liabilities with a maturity of less than a year.
True False
2. A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a
clear indication that fixed assets were sold during 2014.
True False
3. When reporting financial performance for tax purposes, U.S. companies prefer to use
accelerated depreciation methods over the straight-line method.
True False
4. Accounting rules require U.S. companies to depreciate research and development (R&D)
expenditures using the straight-line method.
True False
,5. You can construct a sources and uses statement for 2014 if you have a company's year-end
balance sheets for 2014 and 2015.
True False
6. A reduction in long-term debt is a use of cash.
True False
7. The accrual principle requires that revenue not be recognized until payment from a sale is
received.
True False
Multiple Choice Questions
,8. 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.
9. 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".
, 10. 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
11. Which one of the following is the financial statement that shows a financial snapshot, taken at
a point in time, of all the assets the company owns and all the claims against those assets?
A. income statement
B. creditor's statement
C. balance sheet
D. cash flow statement
E. sources and uses statement
Interpreting Financial Statements
True / False Questions
1. Current liabilities are defined as liabilities with a maturity of less than a year.
True False
2. A decline in the Net fixed assets account between year-end 2013 and year-end 2014 is a
clear indication that fixed assets were sold during 2014.
True False
3. When reporting financial performance for tax purposes, U.S. companies prefer to use
accelerated depreciation methods over the straight-line method.
True False
4. Accounting rules require U.S. companies to depreciate research and development (R&D)
expenditures using the straight-line method.
True False
,5. You can construct a sources and uses statement for 2014 if you have a company's year-end
balance sheets for 2014 and 2015.
True False
6. A reduction in long-term debt is a use of cash.
True False
7. The accrual principle requires that revenue not be recognized until payment from a sale is
received.
True False
Multiple Choice Questions
,8. 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.
9. 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".
, 10. 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
11. Which one of the following is the financial statement that shows a financial snapshot, taken at
a point in time, of all the assets the company owns and all the claims against those assets?
A. income statement
B. creditor's statement
C. balance sheet
D. cash flow statement
E. sources and uses statement
