FIN 340 Exam 1 UPDATED ACTUAL
Exam Questions and CORRECT Answers
On its 12/31/18 balance sheet, Wildcat Inc. showed $510 million of retained earnings, and
exactly that same amount was shown the following year. Assuming that no earnings restatements
were issued, which of the following statements is correct?
A. Wildcat Inc. must have paid out half of its 2018 earnings as dividends.
B. If Wildcat Inc. lost money in 2018, it must have paid dividends.
C. Wildcat Inc. could have paid dividends in 2018, but they would have had to equal the earnings
for the year.
D. Wildcat Inc. must have paid no dividends in 2018.
E. Wildcat Inc. must have had zero net income in 2018. - CORRECT ANSWER - C.
If retained earnings did not increase, then the company either had no earnings or it paid out all of
its earnings as dividends.
Which of the following items found in an annual report is considered qualitative in nature?
A. chairperson's description of operating results
B. balance sheet
C. statement of stockholders' equity
D. statement of cash flows
E. income statement - CORRECT ANSWER - A.
The chairperson's description of operating results attempts to explain why things turned out the
way they did.
Which of the following items found in a company's annual report generally appears before the
others?
,A. chairperson's description of operating results
B. balance sheet
C. statement of stockholders' equity
D. statement of cash flows
E. income statement - CORRECT ANSWER - A.
A company's annual report usually begins with the chairperson's description of the firm's
operating results during the past year and a discussion of new developments that will affect
future operations
All of the following are financial statements typically found in an annual report EXCEPT the:
A. chairperson's description of operating results.
B. balance sheet.
C. statement of stockholders' equity.
D. statement of cash flows.
E. income statement. - CORRECT ANSWER - A.
The annual report presents four basic financial statements—the balance sheet, the income
statement, the statement of stockholders' equity, and the statement of cash flows.
On the balance sheet, assets are listed in the order of _____, followed by liabilities, which are
listed in the order of _____.
A. liquidity; when the debt was incurred
B. size, smallest to largest; size, smallest to largest
C. size, smallest to largest; when they must be paid
D. liquidity; when they must be paid
,E. liquidity; size, smallest to largest - CORRECT ANSWER - D.
Assets are listed in the order of liquidity, most liquid first; and liabilities are listed in the order in
which they must be paid.
The following items are often found on a balance sheet. Which one is NOT normally considered
to be a current asset?
A. Accounts receivable
B. Cash and equivalents
C. Inventories
D. Short-term investments
E. Equipment - CORRECT ANSWER - E.
Current assets are items that can be turned into cash within a year. Equipment is considered a
long-term asset.
Last year Bartlett & Croy's operations provided a negative cash flow, yet the cash shown on its
balance sheet increased. Which of the following statements could explain the increase in cash?
A. Bartlett & Croy had high depreciation expenses.
B. Bartlett & Croy retired a large amount of its long-term debt.
C. Bartlett & Croy sold some of its fixed assets.
D. Bartlett & Croy dramatically increased its capital expenditures.
E. Bartlett & Croy repurchased some of its common stock. - CORRECT ANSWER - C.
Selling fixed assets is a nonoperating activity that would increase cash. Repurchasing stock,
increasing capital expenditures, and retiring debt would decrease cash, and depreciation would
have no effect
, Which of the following factors could explain why Spartan Financial's net income increased
sharply from the previous year, yet its net cash provided from operations declined?
A. Spartan Financial's expenditures on fixed assets declined.
B. Spartan Financial's short-term investments increased.
C. Spartan Financial's dividend payment to common stockholders declined.
D. Spartan Financial's depreciation expense declined.
E. Spartan Financial's cost of goods sold increased. - CORRECT ANSWER - D.
Dividends, short-term investments, and fixed assets are nonoperating uses of cash. An increase in
cost of goods sold would decrease net income, all else being equal. Depreciation is added back to
find net cash from operating activities, so it would affect the balance.
Consider the following balance sheet for Big Dog Games, Inc. Because Big Dog has $800,000 of
retained earnings, we know that the company would be able to pay cash to buy an asset with a
cost of $200,000.
T/F? - CORRECT ANSWER - False
Note that the firm has only $50,000 of cash. It would have to either sell assets or borrow
$150,000 to pay cash for the new asset. That might not be possible.
The modified equation for net cash flow (Net cash flow = Net income + Depreciation and
amortization) assumes that all noncash items other than depreciation and amortization roughly
net out to zero.
T/F? - CORRECT ANSWER - True
Depreciation and amortization usually are the largest noncash items, and in many cases the other
noncash items roughly net out to zero. For this reason, many analysts assume that net cash flow
equals net income plus depreciation and amortization.
Exam Questions and CORRECT Answers
On its 12/31/18 balance sheet, Wildcat Inc. showed $510 million of retained earnings, and
exactly that same amount was shown the following year. Assuming that no earnings restatements
were issued, which of the following statements is correct?
A. Wildcat Inc. must have paid out half of its 2018 earnings as dividends.
B. If Wildcat Inc. lost money in 2018, it must have paid dividends.
C. Wildcat Inc. could have paid dividends in 2018, but they would have had to equal the earnings
for the year.
D. Wildcat Inc. must have paid no dividends in 2018.
E. Wildcat Inc. must have had zero net income in 2018. - CORRECT ANSWER - C.
If retained earnings did not increase, then the company either had no earnings or it paid out all of
its earnings as dividends.
Which of the following items found in an annual report is considered qualitative in nature?
A. chairperson's description of operating results
B. balance sheet
C. statement of stockholders' equity
D. statement of cash flows
E. income statement - CORRECT ANSWER - A.
The chairperson's description of operating results attempts to explain why things turned out the
way they did.
Which of the following items found in a company's annual report generally appears before the
others?
,A. chairperson's description of operating results
B. balance sheet
C. statement of stockholders' equity
D. statement of cash flows
E. income statement - CORRECT ANSWER - A.
A company's annual report usually begins with the chairperson's description of the firm's
operating results during the past year and a discussion of new developments that will affect
future operations
All of the following are financial statements typically found in an annual report EXCEPT the:
A. chairperson's description of operating results.
B. balance sheet.
C. statement of stockholders' equity.
D. statement of cash flows.
E. income statement. - CORRECT ANSWER - A.
The annual report presents four basic financial statements—the balance sheet, the income
statement, the statement of stockholders' equity, and the statement of cash flows.
On the balance sheet, assets are listed in the order of _____, followed by liabilities, which are
listed in the order of _____.
A. liquidity; when the debt was incurred
B. size, smallest to largest; size, smallest to largest
C. size, smallest to largest; when they must be paid
D. liquidity; when they must be paid
,E. liquidity; size, smallest to largest - CORRECT ANSWER - D.
Assets are listed in the order of liquidity, most liquid first; and liabilities are listed in the order in
which they must be paid.
The following items are often found on a balance sheet. Which one is NOT normally considered
to be a current asset?
A. Accounts receivable
B. Cash and equivalents
C. Inventories
D. Short-term investments
E. Equipment - CORRECT ANSWER - E.
Current assets are items that can be turned into cash within a year. Equipment is considered a
long-term asset.
Last year Bartlett & Croy's operations provided a negative cash flow, yet the cash shown on its
balance sheet increased. Which of the following statements could explain the increase in cash?
A. Bartlett & Croy had high depreciation expenses.
B. Bartlett & Croy retired a large amount of its long-term debt.
C. Bartlett & Croy sold some of its fixed assets.
D. Bartlett & Croy dramatically increased its capital expenditures.
E. Bartlett & Croy repurchased some of its common stock. - CORRECT ANSWER - C.
Selling fixed assets is a nonoperating activity that would increase cash. Repurchasing stock,
increasing capital expenditures, and retiring debt would decrease cash, and depreciation would
have no effect
, Which of the following factors could explain why Spartan Financial's net income increased
sharply from the previous year, yet its net cash provided from operations declined?
A. Spartan Financial's expenditures on fixed assets declined.
B. Spartan Financial's short-term investments increased.
C. Spartan Financial's dividend payment to common stockholders declined.
D. Spartan Financial's depreciation expense declined.
E. Spartan Financial's cost of goods sold increased. - CORRECT ANSWER - D.
Dividends, short-term investments, and fixed assets are nonoperating uses of cash. An increase in
cost of goods sold would decrease net income, all else being equal. Depreciation is added back to
find net cash from operating activities, so it would affect the balance.
Consider the following balance sheet for Big Dog Games, Inc. Because Big Dog has $800,000 of
retained earnings, we know that the company would be able to pay cash to buy an asset with a
cost of $200,000.
T/F? - CORRECT ANSWER - False
Note that the firm has only $50,000 of cash. It would have to either sell assets or borrow
$150,000 to pay cash for the new asset. That might not be possible.
The modified equation for net cash flow (Net cash flow = Net income + Depreciation and
amortization) assumes that all noncash items other than depreciation and amortization roughly
net out to zero.
T/F? - CORRECT ANSWER - True
Depreciation and amortization usually are the largest noncash items, and in many cases the other
noncash items roughly net out to zero. For this reason, many analysts assume that net cash flow
equals net income plus depreciation and amortization.
