UPDATED TEST BANK FOR FINANCIAL ACCOUNTING FOR MBAS 8TH EDITION BY PETER EASTON

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 offinancial statement information. 1- 4 1, 2 LO3 – Describe and examine the four financial statements, and define the accounting equation. LO4 – Explain and apply the basics of profitability analysis. LO5 – Assess business operations within the contextof a competitive environment. 14 26, 27 LO6 – Access reports filed with the SEC (Appendix 1A). LO7 – Describe the accounting principles and regulations that frame financial statements (Appendix1B). 15 28-30 These questions are available to assign in myBusinessCourse. - 1-1 Financial Accounting for MBAs, 8 th Edition Module 1 True/False Topic: Users of Financial Statement InformationLO: 2 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 ReportsLO: 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 InformationLO: 2 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 FilingsLO: 2 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 SheetLO: 3 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. - Test Bank (T/F & MC), Module 1 1-2 Module 1: Financial Accounting for MBAs Topic: Balance SheetLO: 3 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 positionover a period of time. Topic: Accounting EquationLO: 3 Assets must always equal liabilities plus equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold. Topic: Income StatementLO: 3 The income statement reports net income which is defined as the company’s profit after all expensesand dividends have been paid. Answer: False Rationale: The statement contains two errors. First, net income does not include any dividends duringthe 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 FlowsLO: 3 A statement of cash flows reports on cash flows for operating, investing and financing activities at apoint 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’ EquityLO: 3 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. - 1-3 Financial Accounting for MBAs, 8 th Edition Topic: Return on AssetsLO: 4 Return on Assets (ROA) measures the profit the company makes on each dollar of total assets ituses. Answer: True Rationale: Return on Assets is a profitability metric that measures how much profit the companymade for each dollar of assets the company holds on average during the year. Topic: Return on AssetsLO: 4 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 ROAinto its components Topic: Asset TurnoverLO: 4 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%. Topic: Financial Accounting and Business AnalysisLO: 5 Financial statements are influenced by five important forces that determine a company’s competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry. Answer: True Rationale: By systematically considering these five business forces, we can gain better insights from financial statements. Topic: Audit ReportLO: 7 A “clean” audit report asserts—among other things—that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP. Answer: False Rationale: The statement is reversed: A “clean” audit report asserts—among other things—that (a) management has prepared all necessary financial statements and (b) the auditor has expressed its opinion that they are prepared in conformity with GAAP. - Test Bank (T/F & MC), Module 1 1-4 Topic: Users of Financial Statement InformationLO: 2 Which of the following groups would likely not be interested in the financial statements of a largepublic company such as Procter & Gamble? Shareholders Employees Competitors Taxing agencies None of these are correct Answer: E Rationale: All of these parties would use the financial statements, albeit in different ways and for different purposes. Topic: Users of Financial Statement InformationLO: 2 The SEC adopted Regulation FD, to curb public companies’ practice of: Routinely filing extensions for annual reports (Form 10-K) Selectively disclosing information Reporting pro forma (non-GAAP) numbers Hiring auditors for non-audit services such as consulting engagements None of these are correct Answer: B Rationale: Reg FD reads as follows: “Whenever an issuer discloses any material nonpublic information regarding that issuer, the issuer shall make public disclosure of that information . . . simultaneously, in the case of an intentional disclosure; and . . . promptly, in the case of a non- intentional disclosure.” Topic: Components of the Balance SheetLO: 3 A list of assets, liabilities and equity can be found on which of the following? Balance Sheet Income Statement Statement of Assets and Liabilities Statement of Cash Flows Statement of Stockholders’ Equity Answer: A Rationale: A balance sheet lists amounts for assets, liabilities and equity at a point in time. - 1-5 Financial Accounting for MBAs, 8 th Edition Multiple Choice Topic: Balance SheetLO: 3 Which of the following items would not be found on a balance sheet? (Select all that apply) Stockholders’ Equity Property, plant and equipment Nonowner financing Cash Dividends Answer: E Rationale: The balance sheet reports assets (including cash and property, plant and equipment), liabilities (including nonowner financing) and equity. Dividends are reported on statement of stockholders’ equity. Topic: Profit and Cash FlowLO: 3 A company’s net cash flow will equal its net income … Almost always Rarely Occasionally Only when the company has no investing cash flow for the period Only when the company has no investing or financing cash flow for the period Answer: B Rationale: Net income reflects the company’s revenue minus expenses for the given period. Net cash flow represents the amount of money received (spent) on operating, investing and financing activities for the given period. These values are rarely the same. Topic: Financial Statement InformationLO: 3 Which of the following statements are correct (select all that apply)? A balance sheet reports on investing and financing activities. An income statement reports on financing activities. The statement of equity reports on changes in the accounts that make up equity. The statement of cash flows reports on cash flows from operating, investing, and financingactivities over a period of time. A balance sheet reports on a company’s assets and liabilities over a period of time. Answer: A, C, and D Rationale: Statement (B) is incorrect—the statement of cash flows reports on financing activities that are reflected on the balance sheet. Statement (E) is incorrect—the balance sheet reports on a company’s assets and liabilities at a point in time. - Test Bank (T/F & MC), Module 1 1-6 Topic: Balance Sheet—Numerical calculations requiredLO: 3 Kelty Company’s year-end financial statements reported the following (in millions): Total assets $41,278 Total liabilities 29,465 Total shareholders’ equity 11,813 Dividends 205 Net income (loss) 3,160 Retained earnings, Jan. 1 11,425 What did Kelty Company report for retained earnings at December 31? $14,380 million $14,768 million $14,790million $14,585 million There is not enough information to determine the answer. Answer: A Rationale: (in millions) Retained earnings, Jan. 1 $11,425 Net income 3,160 Dividends (205) Retained earnings, Dec. 31$14,380 Topic: Balance Sheet—Numerical calculations requiredLO: 3 United Company’s year-end balance sheet reported the following (in millions) Total Assets $100,228 Total Liabilities 78,713 Contributed Capital 8,933 What was United Company’s total liabilities and stockholders’ equity at December 31? $ 87,646 million $ 91,295 million $100,228 million $ 21,515 million Answer: C Rationale: Assets = Liabilities + Stockholders Equity. Assets = $100,228 so this is the total of liabilities and equity combined. - 1-7 Financial Accounting for MBAs, 8 th Edition Topic: Balance Sheet—Numerical calculations requiredLO: 3 On December 31 Starstruck Corporation reported, on its Form 10-K, the following (in millions): Total assets $21,494.3 Total stockholders’ equity 8,836.1 Total current liabilities 6,820.4 What did Starstruck report as total liabilities on December 31? $12,658.2 million $ 5,837.8 million $14,673.9 million $23,510.0 million None of these are correct. Answer: A Rationale: Assets = Liabilities + Stockholders Equity. $21,494.3 = Liabilities + $8,836.1 Therefore, total liabilities = $12,658.2 on December 31. Topic: Balance Sheet—Numerical calculations requiredLO: 3 In its 2019 annual report, Snap-Tite Incorporated reported the following (in millions): Current assets $1,884.0 Total shareholders’ equity $2,635.2 Total liabilities $2,