,ACCESS Test Bank for Finance Applications and Theory 6th Edition Cornett
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
h h h h h
Questions
LG2-1 1.h Listhandhdescribehthehfourhmajorhfinancialhstatements.
Thehfourhbasichfinancialhstatementshare:
1. Thehbalancehsheethreportshahfirm’shassets,hliabilities,handhequityhathahparticularhpointhinhtime.
2. Thehincomehstatementhshowshthehtotalhrevenueshthathahfirmhearnshandhthehtotalhexpenseshthehfi
rmhincurshtohgeneratehthosehrevenueshoverhahspecifichperiodhofhtime—generallyhonehyear.
3. Thehstatementhofhcashhflowshshowshthehfirm’shcashhflowshoverhahgivenhperiodhofhtime.hThishsta
tementhreportshthehamountshofhcashhthehfirmhgeneratedhandhdistributedhduringhahparticularhtime
hperiod.hThehbottomhlinehonhthehstatementhofhcashhflows―thehdifferencehbetweenhcashhsources
handhuses―equalshthehchangehinhcashhandhmarketablehsecuritieshonhthehfirm’shbalancehsheethfro
mhthehprevioushyear’shbalance.
4. Thehstatementhofhretainedhearningshprovideshadditionalhdetailshabouthchangeshinhretainedh
earningshduringhahreportinghperiod.hThishfinancialhstatementhreconcileshnethincomehearnedhd
uringhahgivenhperiodhminushanyhcashhdividendshpaidhwithinhthathperiodhtohthehchangehinhretai
nedhearningshbetweenhthehbeginninghandhendinghofhthehperiod.
LG2-1
2.h Onhwhichhofhthehfourhmajorhfinancialhstatementsh(balancehsheet,hincomehstatement,hstate
menthofhcashhflows,horhstatementhofhretainedhearnings)hwouldhyouhfindhthehfollowinghitems?
a. earningshbeforehtaxesh-hincomehstatement
b. nethplanthandhequipmenth-hbalancehsheet
c. increasehinhfixedhassetsh-hstatementhofhcashhflows
d. grosshprofitsh-hincomehstatement
e. balancehofhretainedhearnings,hDecemberh31,h20xxh-
hstatementhofhretainedhearningshandhbalancehsheet
f. commonhstockhandhpaid-inhsurplush-hbalancehsheet
g. nethcashhflowhfromhinvestinghactivitiesh-hstatementhofhcashhflows
h. accruedhwageshandhtaxesh–hbalancehsheet
i. increasehinhinventoryh-hstatementhofhcashhflows
LG2-1 3.h Whathishthehdifferencehbetweenhcurrenthliabilitieshandhlong-termhdebt?
Currenthliabilitieshconstitutehthehfirm’shobligationshduehwithinhonehyear,hincludinghaccruedhwageshandht
axes,haccountshpayable,handhnoteshpayable.hLong-termhdebthincludeshlong-
termhloanshandhbondshwithhmaturitieshofhmorehthanhonehyear.
LG2-1
4.h Howhdoeshthehchoicehofhaccountinghmethodhusedhtohrecordhfixedhassethdepreciation
h affecthmanagementhofhthehbalancehsheet?
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
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mynursytest.store
,ACCESS Test Bank for Finance Applications and Theory 6th Edition Cornett
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
Firmhmanagershcanhchoosehthehaccountinghmethodhtheyhusehtohrecordhdepreciationhagainsththeirhfix
edhassets.hTwohchoiceshincludehthehstraight-
linehmethodhandhthehmodifiedhacceleratedhcosthrecoveryhsystemh(MACRS).hCompanieshoftenhcalc
ulatehdepreciationhusinghMACRShwhenhtheyhfigurehthehfirm’shtaxeshandhthehstraight-
linehmethodhwhenhreportinghincomehtohthehfirm’shstockholders.hThehMACRShmethodhaccelerateshd
eprecation,hwhichhresultshinhhigherhdepreciationhexpenses,hlowerhtaxablehincome,handhlowerhtaxeshi
nhthehearlyhyearshofhahproject’shlife.hThehstraight-
linehmethodhresultshinhlowerhdepreciationhexpenses,hbuthalsohresultshinhhigherhtaxeshinhthehearlyh year
shofhahproject’shlife.hFirmshseekinghtohlowerhtheirhcashhoutflowshfromhtaxhpaymentshwillhfavorhthehM
ACRShdepreciationhmethod.
LG2-1
5.h Whathishbonushdepreciation?hHowhdidhthehTaxhCutshandhJobshActhofh2017htemporarilyh
extendhandhmodifyhbonushdepreciation?
Sinceh2001,hbusinesseshhavehhadhthehabilityhtohimmediatelyhdeducthahpercentagehofhthehacquisitionhc
osthofhqualifyinghassetshash"bonushdepreciation."hThishadditionalhdepreciationhdeductionhwashallow
edhtohencouragehbusinesshinvestment.hHowever,hbonushdepreciationhwashahtemporaryhprovision;hthe
hratehwouldhhavehbeenh50hpercenthinh2017,h40hpercenthinh2018,handh30hpercenthinh2019,hbeforehphasi
nghouthinh2020.hThehTaxhCutshandhJobshActhofh2017hextendedhandhmodifiedhbonushdepreciation,hall
owinghbusinesseshtohimmediatelyhdeducth100hpercenthofhthehcosthofheligiblehpropertyhinhthehyearhithish
placedhinhservice,hthroughh2022.hThehamounthofhallowablehbonushdepreciationhwillhthenhbehphasedh
downhoverhfourhyears:h80hpercenthwillhbehallowedhforhpropertyhplacedhinhservicehinh2023,h60hpercent
hinh2024,h40hpercenthinh2025,handh20hpercenthinh2026.
MACRShorhstraight-
linehdepreciationhishappliedhtohanyhcostshthathdohnothqualifyhforhbonushdepreciation.
LG2-1 6.h Whatharehthehcostshandhbenefitshofhholdinghliquidhsecuritieshonhahfirm’shbalancehsheet?
Thehmorehliquidhassetshahfirmhholds,hthehlesshlikelyhthehfirmhwillhbehtohexperiencehfinancialhdistress
.hHowever,hliquidhassetshgeneratehlittlehorhnohprofitshforhahfirm.hForhexample,hcashhishthehmosthliqui
dhofhallhassets,hbuthithearnshlittle,hifhany,hreturnhforhthehfirm.hInhcontrast,hfixedhassetsharehilliquid,hbuth
providehthehmeanshtohgeneratehrevenue.hThus,hmanagershmusthconsiderhthehtrade-
offhbetweenhthehadvantageshofhliquidityhonhthehbalancehsheethandhthehdisadvantageshofhhavinghmon
eyhsithidlehratherhthanhgeneratinghprofits.
LG2-2 7.h Whyhcanhthehbookhvaluehandhmarkethvaluehofhahfirmhdiffer?
Ahfirm’shbalancehsheethshowshitshbookh(orhhistoricalhcost)hvaluehbasedhonhGenerallyhAcceptedhAc
countinghPrinciplesh(GAAP).hUnderhGAAP,hassetshappearhonhthehbalancehsheethathwhaththehfirmhp
aidhforhthem,hregardlesshofhwhathassetshmighthbehworthhtodayhifhthehfirmhwerehtohsellhthem.hInflatio
nhandhmarkethforceshmakehmanyhassetshworthhmorehnowhthanhtheyhwerehwhenhthehfirmhboughththe
m.hSohinhmosthcases,hbookhvalueshdifferhwidelyhfromhthehmarkethvalueshforhthehsamehassets—
thehamounththaththehassetshwouldhfetchhifhthehfirmhactuallyhsoldhthem.hForhthehfirm’shcurrenthassets
—
thosehthathmaturehwithinhahyear―thehbookhvaluehandhmarkethvaluehofhanyhparticularhassethwillhre
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
C.
mynursytest.store
, ACCESS Test Bank for Finance Applications and Theory 6th Edition Cornett
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
mainhveryhclose.hForhexample,hthehbalancehsheethlistshcashhandhmarketable
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
C.
mynursytest.store
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
h h h h h
Questions
LG2-1 1.h Listhandhdescribehthehfourhmajorhfinancialhstatements.
Thehfourhbasichfinancialhstatementshare:
1. Thehbalancehsheethreportshahfirm’shassets,hliabilities,handhequityhathahparticularhpointhinhtime.
2. Thehincomehstatementhshowshthehtotalhrevenueshthathahfirmhearnshandhthehtotalhexpenseshthehfi
rmhincurshtohgeneratehthosehrevenueshoverhahspecifichperiodhofhtime—generallyhonehyear.
3. Thehstatementhofhcashhflowshshowshthehfirm’shcashhflowshoverhahgivenhperiodhofhtime.hThishsta
tementhreportshthehamountshofhcashhthehfirmhgeneratedhandhdistributedhduringhahparticularhtime
hperiod.hThehbottomhlinehonhthehstatementhofhcashhflows―thehdifferencehbetweenhcashhsources
handhuses―equalshthehchangehinhcashhandhmarketablehsecuritieshonhthehfirm’shbalancehsheethfro
mhthehprevioushyear’shbalance.
4. Thehstatementhofhretainedhearningshprovideshadditionalhdetailshabouthchangeshinhretainedh
earningshduringhahreportinghperiod.hThishfinancialhstatementhreconcileshnethincomehearnedhd
uringhahgivenhperiodhminushanyhcashhdividendshpaidhwithinhthathperiodhtohthehchangehinhretai
nedhearningshbetweenhthehbeginninghandhendinghofhthehperiod.
LG2-1
2.h Onhwhichhofhthehfourhmajorhfinancialhstatementsh(balancehsheet,hincomehstatement,hstate
menthofhcashhflows,horhstatementhofhretainedhearnings)hwouldhyouhfindhthehfollowinghitems?
a. earningshbeforehtaxesh-hincomehstatement
b. nethplanthandhequipmenth-hbalancehsheet
c. increasehinhfixedhassetsh-hstatementhofhcashhflows
d. grosshprofitsh-hincomehstatement
e. balancehofhretainedhearnings,hDecemberh31,h20xxh-
hstatementhofhretainedhearningshandhbalancehsheet
f. commonhstockhandhpaid-inhsurplush-hbalancehsheet
g. nethcashhflowhfromhinvestinghactivitiesh-hstatementhofhcashhflows
h. accruedhwageshandhtaxesh–hbalancehsheet
i. increasehinhinventoryh-hstatementhofhcashhflows
LG2-1 3.h Whathishthehdifferencehbetweenhcurrenthliabilitieshandhlong-termhdebt?
Currenthliabilitieshconstitutehthehfirm’shobligationshduehwithinhonehyear,hincludinghaccruedhwageshandht
axes,haccountshpayable,handhnoteshpayable.hLong-termhdebthincludeshlong-
termhloanshandhbondshwithhmaturitieshofhmorehthanhonehyear.
LG2-1
4.h Howhdoeshthehchoicehofhaccountinghmethodhusedhtohrecordhfixedhassethdepreciation
h affecthmanagementhofhthehbalancehsheet?
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
C.
mynursytest.store
,ACCESS Test Bank for Finance Applications and Theory 6th Edition Cornett
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
Firmhmanagershcanhchoosehthehaccountinghmethodhtheyhusehtohrecordhdepreciationhagainsththeirhfix
edhassets.hTwohchoiceshincludehthehstraight-
linehmethodhandhthehmodifiedhacceleratedhcosthrecoveryhsystemh(MACRS).hCompanieshoftenhcalc
ulatehdepreciationhusinghMACRShwhenhtheyhfigurehthehfirm’shtaxeshandhthehstraight-
linehmethodhwhenhreportinghincomehtohthehfirm’shstockholders.hThehMACRShmethodhaccelerateshd
eprecation,hwhichhresultshinhhigherhdepreciationhexpenses,hlowerhtaxablehincome,handhlowerhtaxeshi
nhthehearlyhyearshofhahproject’shlife.hThehstraight-
linehmethodhresultshinhlowerhdepreciationhexpenses,hbuthalsohresultshinhhigherhtaxeshinhthehearlyh year
shofhahproject’shlife.hFirmshseekinghtohlowerhtheirhcashhoutflowshfromhtaxhpaymentshwillhfavorhthehM
ACRShdepreciationhmethod.
LG2-1
5.h Whathishbonushdepreciation?hHowhdidhthehTaxhCutshandhJobshActhofh2017htemporarilyh
extendhandhmodifyhbonushdepreciation?
Sinceh2001,hbusinesseshhavehhadhthehabilityhtohimmediatelyhdeducthahpercentagehofhthehacquisitionhc
osthofhqualifyinghassetshash"bonushdepreciation."hThishadditionalhdepreciationhdeductionhwashallow
edhtohencouragehbusinesshinvestment.hHowever,hbonushdepreciationhwashahtemporaryhprovision;hthe
hratehwouldhhavehbeenh50hpercenthinh2017,h40hpercenthinh2018,handh30hpercenthinh2019,hbeforehphasi
nghouthinh2020.hThehTaxhCutshandhJobshActhofh2017hextendedhandhmodifiedhbonushdepreciation,hall
owinghbusinesseshtohimmediatelyhdeducth100hpercenthofhthehcosthofheligiblehpropertyhinhthehyearhithish
placedhinhservice,hthroughh2022.hThehamounthofhallowablehbonushdepreciationhwillhthenhbehphasedh
downhoverhfourhyears:h80hpercenthwillhbehallowedhforhpropertyhplacedhinhservicehinh2023,h60hpercent
hinh2024,h40hpercenthinh2025,handh20hpercenthinh2026.
MACRShorhstraight-
linehdepreciationhishappliedhtohanyhcostshthathdohnothqualifyhforhbonushdepreciation.
LG2-1 6.h Whatharehthehcostshandhbenefitshofhholdinghliquidhsecuritieshonhahfirm’shbalancehsheet?
Thehmorehliquidhassetshahfirmhholds,hthehlesshlikelyhthehfirmhwillhbehtohexperiencehfinancialhdistress
.hHowever,hliquidhassetshgeneratehlittlehorhnohprofitshforhahfirm.hForhexample,hcashhishthehmosthliqui
dhofhallhassets,hbuthithearnshlittle,hifhany,hreturnhforhthehfirm.hInhcontrast,hfixedhassetsharehilliquid,hbuth
providehthehmeanshtohgeneratehrevenue.hThus,hmanagershmusthconsiderhthehtrade-
offhbetweenhthehadvantageshofhliquidityhonhthehbalancehsheethandhthehdisadvantageshofhhavinghmon
eyhsithidlehratherhthanhgeneratinghprofits.
LG2-2 7.h Whyhcanhthehbookhvaluehandhmarkethvaluehofhahfirmhdiffer?
Ahfirm’shbalancehsheethshowshitshbookh(orhhistoricalhcost)hvaluehbasedhonhGenerallyhAcceptedhAc
countinghPrinciplesh(GAAP).hUnderhGAAP,hassetshappearhonhthehbalancehsheethathwhaththehfirmhp
aidhforhthem,hregardlesshofhwhathassetshmighthbehworthhtodayhifhthehfirmhwerehtohsellhthem.hInflatio
nhandhmarkethforceshmakehmanyhassetshworthhmorehnowhthanhtheyhwerehwhenhthehfirmhboughththe
m.hSohinhmosthcases,hbookhvalueshdifferhwidelyhfromhthehmarkethvalueshforhthehsamehassets—
thehamounththaththehassetshwouldhfetchhifhthehfirmhactuallyhsoldhthem.hForhthehfirm’shcurrenthassets
—
thosehthathmaturehwithinhahyear―thehbookhvaluehandhmarkethvaluehofhanyhparticularhassethwillhre
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
C.
mynursytest.store
, ACCESS Test Bank for Finance Applications and Theory 6th Edition Cornett
h h h h h h h h h h
Chapterh2h-hReviewinghFinancialhStatements
mainhveryhclose.hForhexample,hthehbalancehsheethlistshcashhandhmarketable
©hMcGrawhHillhLLC.hAllhrightshreserved.hNohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGrawhHillhLL
C.
mynursytest.store
