, ACCESS Test Bank for M Finance 6th Edition Cornett
m m m m m m m m
Chapterm2 m-mReviewingmFinancialmStatements
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
m m m m m
Questions
LG2-1 1. List mand mdescribemthemfourmmajormfinancialmstatements.
Themfourmbasicmfinancialmstatementsmare:
1. Thembalancemsheetmreportsmamfirm’smassets,mliabilities,mand mequitymat mamparticularmpoint minmtime.
2. Themincomemstatementmshowsmthemtotalmrevenuesmthat mamfirmmearnsmand mthemtotalmexpensesm
themfirmmincursmtomgeneratemthosemrevenuesmovermamspecificmperiod mof mtime—
generallymonemyear.
3. Themstatementmof mcashmflowsmshowsmthemfirm’smcashmflowsmovermamgivenmperiod mof mtime.mThis
statement mreportsmthemamountsmof mcashmthemfirmmgenerated mand mdistributed mduringmamparticula
rmtimemperiod.mThembottommlinemonmthemstatement mof mcashmflows―themdifferencembetweenmcas
hmsourcesmand muses―equalsmthemchangeminmcashmand mmarketablemsecuritiesmonmthemfirm’smbala
ncemsheet mfrommthempreviousmyear’smbalance.
4. Themstatementmof mretainedmearningsmprovidesmadditionalmdetailsmabout mchangesminmretain
ed mearningsmduringmamreportingmperiod.mThismfinancialmstatement mreconcilesmnet m incomem ea
rned mduringmamgivenmperiod mminusmanymcashmdividendsmpaid mwithinmthat mperiod mtomthemcha
ngeminmretained mearningsmbetweenmthembeginningmand mendingmof mthemperiod.
LG2-1 2.
Onmwhichmof mthemfourmmajormfinancialmstatementsm(balancemsheet,mincomemstatement,mst
atement mof mcashmflows,mormstatement mof mretained mearnings)mwould myoumfind mthemfollowingmite
ms?
a. earningsmbeforemtaxesm-mincomemstatement
b. net mplant mand mequipment m-mbalancemsheet
c. increaseminmfixed massetsm-mstatement mof mcashmflows
d. grossmprofitsm-mincomemstatement
e. balancemof mretained mearnings,mDecemberm31,m20xxm-
mstatement mof mretained mearningsmand mbalancemsheet
f. commonmstockmand mpaid-inmsurplusm-mbalancemsheet
g. net mcashmflow mfromminvestingmactivitiesm-mstatement mof mcashmflows
h. accrued mwagesmand mtaxesm–mbalancemsheet
i. increaseminminventorym-mstatement mof mcashmflows
LG2-1 3. What mismthemdifferencembetweenmcurrent mliabilitiesmand mlong-termmdebt?
Current mliabilitiesmconstitutemthemfirm’smobligationsmduemwithinmonemyear,mincludingmaccrued mwagesma
nd mtaxes,maccountsmpayable,mand mnotesmpayable.mLong-termmdebt mincludesmlong-
termmloansmand mbondsmwithmmaturitiesmof mmoremthanmonemyear.
©m MCG R AW m H ILL m LLC. m ALL m R IG HTS m R ESER VED. m NOm REPR ODU CTION m OR m DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
,LG2-1 4.
How mdoesmthemchoicemof maccountingmmethod musedmtomrecordmfixedmasset mdepreciatio
nmaffect mmanagement mof mthembalancemsheet?
©m MCG R AW m H ILL m LLC. m ALL m RIG HTS m R ESER VED. m NOm R EPR ODU CTION m ORm DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
, ACCESS Test Bank for M Finance 6th Edition Cornett
m m m m m m m m
Chapterm02—ThemChemistry mof mLife
Firmmmanagersmcanmchoosemthemaccountingmmethod mtheymusemtomrecord mdepreciationmagainst mthei
rmfixed massets.mTwomchoicesmincludemthemstraight-
linemmethod mand mthemmodified maccelerated mcost mrecoverymsystemm(MACRS).mCompaniesmoftenmc
alculatemdepreciationmusingmMACRSmwhenmtheymfiguremthemfirm’smtaxesmand mthemstraight-
linemmethod mwhenmreportingmincomemtomthemfirm’smstockholders.mThemMACRSmmethod maccelerat
esmdeprecation,mwhichmresultsminmhighermdepreciationmexpenses,mlowermtaxable mincome,mand mlowe
rmtaxesminmthemearlymyearsmof mamproject’smlife.mThemstraight-
linemmethod mresultsminmlowermdepreciationmexpenses,mbut malsomresultsminmhighermtaxesminmthemearly
myearsmof mamproject’smlife.mFirmsmseekingmtomlowermtheirmcashmoutflowsmfrommtaxmpaymentsmwillmf
avormthemMACRSmdepreciationmmethod.
LG2-1 5.
What mismbonusmdepreciation?mHow mdid mthemTaxmCutsmand mJobsmAct mof m2017mtemporaril
ymextend mand mmodifymbonusmdepreciation?
Sincem2001,mbusinessesmhavemhad mthemabilitymtomimmediatelymdeduct mampercentagemof mthemacquisiti
onmcost mof mqualifyingmassetsmasm"bonusmdepreciation."mThismadditionalmdepreciationmdeductionmwas
mallowed mtomencouragembusinessminvestment.mHowever,mbonusmdepreciationmwasmamtemporarymprov
ision;mthemratemwould mhavembeenm50mpercent minm2017,m40mpercent minm2018,mand m30mpercent minm2019
,mbeforemphasingmout minm2020.mThemTaxmCutsmand mJobsmAct mof m2017mextended mand mmodified mbonus
mdepreciation,mallowingmbusinessesmtomimmediatelymdeduct m100mpercent mof mthemcost mof meligiblempro
pertyminmthemyearmit mismplaced minmservice,mthroughm2022.mThe mamount mof mallowable mbonusmdeprecia
tionmwillmthenmbemphased mdownmovermfourmyears:m80mpercent mwillmbemallowed mformpropertymplaced mi
nmserviceminm2023,m60mpercent minm2024,m40mpercent minm2025,mand m20mpercent min m2026.
MACRSmormstraight-
linemdepreciationmismapplied mtomanymcostsmthat mdomnot mqualifymformbonusmdepreciation.
LG2-1 6. What maremthemcostsmand mbenefitsmof mholdingmliquid msecuritiesmonmamfirm’smbalancemsheet?
Themmoremliquid massetsmamfirmmholds,mthemlessm likelymthemfirmmwillmbe mtomexperiencemfinancialmdis
tress.mHowever,mliquid massetsmgeneratemlittlemormnomprofitsmformamfirm.mFormexample,mcashm ismthem
most mliquid mof mallmassets,mbut mit mearnsmlittle,mif many,mreturnmformthemfirm.mInmcontrast,mfixed massetsm
aremilliquid,mbut mprovidemthemmeansmtomgeneratemrevenue.mThus,mmanagersm must mconsidermthemtra
de-
off mbetweenmthemadvantagesmof mliquiditymonmthembalancemsheet mand mthemdisadvantagesmof mhavingm
moneymsit midlemrathermthanmgeneratingmprofits.
LG2-2 7. Whymcanmthembookmvaluemand mmarket mvaluemof mamfirmmdiffer?
Amfirm’smbalancemsheet mshowsmitsmbookm(ormhistorical mcost)mvaluembased monmGenerallymAccepted m
AccountingmPrinciplesm(GAAP).mUndermGAAP,massetsmappearmonmthembalancemsheet mat mwhat mthem
firmmpaid mformthem,mregardlessmof mwhat massetsmmight mbemworthmtodaymif mthemfirmmweremtomsellmthe
m.mInflationmand mmarket mforcesmmakemmanymassetsmworthmmoremnow mthanmtheymweremwhenmthemfi
rmmbought mthem.mSominmmost mcases,mbookmvaluesmdiffermwidelymfrommthemmarket mvaluesmformthems
amemassets—
themamount mthat mthemassetsmwould mfetchmif mthemfirmmactuallymsold mthem.mFormthemfirm’smcurrent mas
©m MCG R AW m H ILL m LLC. m ALL m R IG HTS m R ESER VED. m NOm REPR ODU CTION m OR m DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
m m m m m m m m
Chapterm2 m-mReviewingmFinancialmStatements
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
m m m m m
Questions
LG2-1 1. List mand mdescribemthemfourmmajormfinancialmstatements.
Themfourmbasicmfinancialmstatementsmare:
1. Thembalancemsheetmreportsmamfirm’smassets,mliabilities,mand mequitymat mamparticularmpoint minmtime.
2. Themincomemstatementmshowsmthemtotalmrevenuesmthat mamfirmmearnsmand mthemtotalmexpensesm
themfirmmincursmtomgeneratemthosemrevenuesmovermamspecificmperiod mof mtime—
generallymonemyear.
3. Themstatementmof mcashmflowsmshowsmthemfirm’smcashmflowsmovermamgivenmperiod mof mtime.mThis
statement mreportsmthemamountsmof mcashmthemfirmmgenerated mand mdistributed mduringmamparticula
rmtimemperiod.mThembottommlinemonmthemstatement mof mcashmflows―themdifferencembetweenmcas
hmsourcesmand muses―equalsmthemchangeminmcashmand mmarketablemsecuritiesmonmthemfirm’smbala
ncemsheet mfrommthempreviousmyear’smbalance.
4. Themstatementmof mretainedmearningsmprovidesmadditionalmdetailsmabout mchangesminmretain
ed mearningsmduringmamreportingmperiod.mThismfinancialmstatement mreconcilesmnet m incomem ea
rned mduringmamgivenmperiod mminusmanymcashmdividendsmpaid mwithinmthat mperiod mtomthemcha
ngeminmretained mearningsmbetweenmthembeginningmand mendingmof mthemperiod.
LG2-1 2.
Onmwhichmof mthemfourmmajormfinancialmstatementsm(balancemsheet,mincomemstatement,mst
atement mof mcashmflows,mormstatement mof mretained mearnings)mwould myoumfind mthemfollowingmite
ms?
a. earningsmbeforemtaxesm-mincomemstatement
b. net mplant mand mequipment m-mbalancemsheet
c. increaseminmfixed massetsm-mstatement mof mcashmflows
d. grossmprofitsm-mincomemstatement
e. balancemof mretained mearnings,mDecemberm31,m20xxm-
mstatement mof mretained mearningsmand mbalancemsheet
f. commonmstockmand mpaid-inmsurplusm-mbalancemsheet
g. net mcashmflow mfromminvestingmactivitiesm-mstatement mof mcashmflows
h. accrued mwagesmand mtaxesm–mbalancemsheet
i. increaseminminventorym-mstatement mof mcashmflows
LG2-1 3. What mismthemdifferencembetweenmcurrent mliabilitiesmand mlong-termmdebt?
Current mliabilitiesmconstitutemthemfirm’smobligationsmduemwithinmonemyear,mincludingmaccrued mwagesma
nd mtaxes,maccountsmpayable,mand mnotesmpayable.mLong-termmdebt mincludesmlong-
termmloansmand mbondsmwithmmaturitiesmof mmoremthanmonemyear.
©m MCG R AW m H ILL m LLC. m ALL m R IG HTS m R ESER VED. m NOm REPR ODU CTION m OR m DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
,LG2-1 4.
How mdoesmthemchoicemof maccountingmmethod musedmtomrecordmfixedmasset mdepreciatio
nmaffect mmanagement mof mthembalancemsheet?
©m MCG R AW m H ILL m LLC. m ALL m RIG HTS m R ESER VED. m NOm R EPR ODU CTION m ORm DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
, ACCESS Test Bank for M Finance 6th Edition Cornett
m m m m m m m m
Chapterm02—ThemChemistry mof mLife
Firmmmanagersmcanmchoosemthemaccountingmmethod mtheymusemtomrecord mdepreciationmagainst mthei
rmfixed massets.mTwomchoicesmincludemthemstraight-
linemmethod mand mthemmodified maccelerated mcost mrecoverymsystemm(MACRS).mCompaniesmoftenmc
alculatemdepreciationmusingmMACRSmwhenmtheymfiguremthemfirm’smtaxesmand mthemstraight-
linemmethod mwhenmreportingmincomemtomthemfirm’smstockholders.mThemMACRSmmethod maccelerat
esmdeprecation,mwhichmresultsminmhighermdepreciationmexpenses,mlowermtaxable mincome,mand mlowe
rmtaxesminmthemearlymyearsmof mamproject’smlife.mThemstraight-
linemmethod mresultsminmlowermdepreciationmexpenses,mbut malsomresultsminmhighermtaxesminmthemearly
myearsmof mamproject’smlife.mFirmsmseekingmtomlowermtheirmcashmoutflowsmfrommtaxmpaymentsmwillmf
avormthemMACRSmdepreciationmmethod.
LG2-1 5.
What mismbonusmdepreciation?mHow mdid mthemTaxmCutsmand mJobsmAct mof m2017mtemporaril
ymextend mand mmodifymbonusmdepreciation?
Sincem2001,mbusinessesmhavemhad mthemabilitymtomimmediatelymdeduct mampercentagemof mthemacquisiti
onmcost mof mqualifyingmassetsmasm"bonusmdepreciation."mThismadditionalmdepreciationmdeductionmwas
mallowed mtomencouragembusinessminvestment.mHowever,mbonusmdepreciationmwasmamtemporarymprov
ision;mthemratemwould mhavembeenm50mpercent minm2017,m40mpercent minm2018,mand m30mpercent minm2019
,mbeforemphasingmout minm2020.mThemTaxmCutsmand mJobsmAct mof m2017mextended mand mmodified mbonus
mdepreciation,mallowingmbusinessesmtomimmediatelymdeduct m100mpercent mof mthemcost mof meligiblempro
pertyminmthemyearmit mismplaced minmservice,mthroughm2022.mThe mamount mof mallowable mbonusmdeprecia
tionmwillmthenmbemphased mdownmovermfourmyears:m80mpercent mwillmbemallowed mformpropertymplaced mi
nmserviceminm2023,m60mpercent minm2024,m40mpercent minm2025,mand m20mpercent min m2026.
MACRSmormstraight-
linemdepreciationmismapplied mtomanymcostsmthat mdomnot mqualifymformbonusmdepreciation.
LG2-1 6. What maremthemcostsmand mbenefitsmof mholdingmliquid msecuritiesmonmamfirm’smbalancemsheet?
Themmoremliquid massetsmamfirmmholds,mthemlessm likelymthemfirmmwillmbe mtomexperiencemfinancialmdis
tress.mHowever,mliquid massetsmgeneratemlittlemormnomprofitsmformamfirm.mFormexample,mcashm ismthem
most mliquid mof mallmassets,mbut mit mearnsmlittle,mif many,mreturnmformthemfirm.mInmcontrast,mfixed massetsm
aremilliquid,mbut mprovidemthemmeansmtomgeneratemrevenue.mThus,mmanagersm must mconsidermthemtra
de-
off mbetweenmthemadvantagesmof mliquiditymonmthembalancemsheet mand mthemdisadvantagesmof mhavingm
moneymsit midlemrathermthanmgeneratingmprofits.
LG2-2 7. Whymcanmthembookmvaluemand mmarket mvaluemof mamfirmmdiffer?
Amfirm’smbalancemsheet mshowsmitsmbookm(ormhistorical mcost)mvaluembased monmGenerallymAccepted m
AccountingmPrinciplesm(GAAP).mUndermGAAP,massetsmappearmonmthembalancemsheet mat mwhat mthem
firmmpaid mformthem,mregardlessmof mwhat massetsmmight mbemworthmtodaymif mthemfirmmweremtomsellmthe
m.mInflationmand mmarket mforcesmmakemmanymassetsmworthmmoremnow mthanmtheymweremwhenmthemfi
rmmbought mthem.mSominmmost mcases,mbookmvaluesmdiffermwidelymfrommthemmarket mvaluesmformthems
amemassets—
themamount mthat mthemassetsmwould mfetchmif mthemfirmmactuallymsold mthem.mFormthemfirm’smcurrent mas
©m MCG R AW m H ILL m LLC. m ALL m R IG HTS m R ESER VED. m NOm REPR ODU CTION m OR m DISTR IB U TION m W ITH OU T m TH E m
PR IOR
W R ITTEN m CON SEN T m OF m MCG R AW m H ILL m LLC.
mynursytest.store
