Financial & Managerial Accounting for MBAs, 6e
Easton, Halsey, McAnally (Test Bank, 100-
Verified)
Financial Accounting for MBAs
Learning Objectives – Coverage by question
S
True/False Multiple Choice Exercises Problems Essays
R
VE
LO1 – Explain and assess the
1
four main business activities.
LO2 – Identify and discuss the
users and suppliers of financial
statement information.
1- 4 IE
1, 2 2
H
AC
LO3 – Describe and examine
the four financial statements, 5-10 3-19 1-8 1-5, 10 3, 4
and define the accounting
equation.
M
LO4 – Explain and apply the
11-13 20-25 1, 9, 10 6, 7 5
EA
basics of profitability analysis.
LO5 – Assess business
R
operations within the context 14 26, 27 8
of a competitive environment.
D
LO6 – Access reports filed
with the SEC (Appendix 1A).
LO7 – Describe the
accounting principles and 15 28-30 9 6
regulations that frame financial
statements (Appendix 1B).
,Module 1: Financial Accounting for MBAs
True/False
Topic: Users of Financial Statement Information
LO: 2
1. 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.
S
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
R
and creditworthiness.
VE
Topic: Publicly Available Financial Reports
LO: 2
2. Publicly traded companies are required to provide quarterly financial reports directly to the public.
Answer: False IE
Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which
H
posts them to the Internet for the public to access them.
AC
Topic: Users of Financial Statement Information
LO: 2
3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax
authorities (that is, the Internal Revenue Service).
M
Answer: False
Rationale: Demand for information extends to many users; the regulators such as the SEC and the IRS
EA
are only one class of users.
Topic: SEC Filings LO:
R
2
4. 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).
D
Answer: False
Rationale: Quarterly reports do not need to be audited.
Topic: Balance Sheet
LO: 3
5. 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.
Topic: Balance Sheet LO:
3
6. 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 position over
a period of time.
S
Topic: Accounting Equation
LO: 3
R
7. Assets must always equal liabilities plus equity.
Answer: True
VE
Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.
Topic: Income Statement LO:
3
IE
8. The income statement reports net income which is defined as the company’s profit after all expenses
and dividends have been paid.
H
Answer: False
Rationale: The statement contains two errors. First, net income does not include any dividends during
AC
the 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).
M
Topic: Statement of Cash Flows
LO: 3
9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
EA
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
R
activities over a period of time.
D
Topic: Statement of Stockholders’ Equity LO:
3
10. 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.
, Return on Assets
4
11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses.
Answer: True
Rationale: Return on Assets is a profitability metric that measures how much profit the company made
for each dollar of assets the company holds on average during the year.
Topic: Return on Assets
LO: 4
12. Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover
S
Answer: True
Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROA into
R
its components
VE
Topic: Asset Turnover LO:
4
13. 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
IE
turnover, is less profitable because it requires more revenue to turn its assets over.
Answer: False
H
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%.
AC
Topic: Financial Accounting and Business Analysis
LO: 5
M
14. 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.
EA
Answer: True
Rationale: By systematically considering these five business forces, we can gain better insights from
financial statements.
R
Topic: Audit Report LO:
D
7
15. 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.
Easton, Halsey, McAnally (Test Bank, 100-
Verified)
Financial Accounting for MBAs
Learning Objectives – Coverage by question
S
True/False Multiple Choice Exercises Problems Essays
R
VE
LO1 – Explain and assess the
1
four main business activities.
LO2 – Identify and discuss the
users and suppliers of financial
statement information.
1- 4 IE
1, 2 2
H
AC
LO3 – Describe and examine
the four financial statements, 5-10 3-19 1-8 1-5, 10 3, 4
and define the accounting
equation.
M
LO4 – Explain and apply the
11-13 20-25 1, 9, 10 6, 7 5
EA
basics of profitability analysis.
LO5 – Assess business
R
operations within the context 14 26, 27 8
of a competitive environment.
D
LO6 – Access reports filed
with the SEC (Appendix 1A).
LO7 – Describe the
accounting principles and 15 28-30 9 6
regulations that frame financial
statements (Appendix 1B).
,Module 1: Financial Accounting for MBAs
True/False
Topic: Users of Financial Statement Information
LO: 2
1. 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.
S
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
R
and creditworthiness.
VE
Topic: Publicly Available Financial Reports
LO: 2
2. Publicly traded companies are required to provide quarterly financial reports directly to the public.
Answer: False IE
Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which
H
posts them to the Internet for the public to access them.
AC
Topic: Users of Financial Statement Information
LO: 2
3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax
authorities (that is, the Internal Revenue Service).
M
Answer: False
Rationale: Demand for information extends to many users; the regulators such as the SEC and the IRS
EA
are only one class of users.
Topic: SEC Filings LO:
R
2
4. 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).
D
Answer: False
Rationale: Quarterly reports do not need to be audited.
Topic: Balance Sheet
LO: 3
5. 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.
Topic: Balance Sheet LO:
3
6. 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 position over
a period of time.
S
Topic: Accounting Equation
LO: 3
R
7. Assets must always equal liabilities plus equity.
Answer: True
VE
Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.
Topic: Income Statement LO:
3
IE
8. The income statement reports net income which is defined as the company’s profit after all expenses
and dividends have been paid.
H
Answer: False
Rationale: The statement contains two errors. First, net income does not include any dividends during
AC
the 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).
M
Topic: Statement of Cash Flows
LO: 3
9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
EA
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
R
activities over a period of time.
D
Topic: Statement of Stockholders’ Equity LO:
3
10. 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.
, Return on Assets
4
11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses.
Answer: True
Rationale: Return on Assets is a profitability metric that measures how much profit the company made
for each dollar of assets the company holds on average during the year.
Topic: Return on Assets
LO: 4
12. Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover
S
Answer: True
Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROA into
R
its components
VE
Topic: Asset Turnover LO:
4
13. 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
IE
turnover, is less profitable because it requires more revenue to turn its assets over.
Answer: False
H
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%.
AC
Topic: Financial Accounting and Business Analysis
LO: 5
M
14. 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.
EA
Answer: True
Rationale: By systematically considering these five business forces, we can gain better insights from
financial statements.
R
Topic: Audit Report LO:
D
7
15. 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.
