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FoundationshofhFinancialhManagement,h17eh(Block)h
Chapterh2 ReviewhofhAccounting
1) Thehincomehstatementhishthehmajorhdevicehforhmeasuringhthehprofitabilityhofhahfirmhoverhahp
eriodhofhtime.
2) Thehincomehstatementhshowshthehamounthofhprofitshearnedhbasedhonhanyhonehgivenhday.
3) Saleshminushcosthofhgoodshsoldhishequalhtohearningshbeforehtaxes.
4) Saleshminushcosthofhgoodshsoldhishequalhtohgrosshprofit.
5) Ithishnothpossiblehforhahcompanyhwithhahhighhgrosshprofithmarginhtohhavehahlowhoperatinghprofit.
6) Grosshprofithmarginhishahmeasurementhofhhowhmuchhgrosshprofithahcompanyhgeneratedhfromhtheha
mounthofhsaleshithearned.
7) Operatinghprofithishessentiallyhahmeasurehofhhowhefficienthmanagementhishinhgeneratinghr
evenueshandhcontrollinghexpenses.
8) Anotherhwayhofhwritinghnethincomehafterhtaxhishearningshafterhtaxesh(EAT).
9) Dividinghearningshafterhtaxesh(whichhincludeshallhprofitshdistributedhtohbothhpreferredhstockho
ldershandhcommonhstockholders)hbyhcommonhshareshoutstandinghproduceshearningshperhshare.
10) Thehprice-earningsh(P/E)hratiohishstronglyhrelatedhtohthehpasthperformancehofhthehfirm.
11) Accountinghincomehishbasedhonhverifiablyhcompletedhtransactions.
12) Whenhahfirmhhashahsharphdrophoffhinhearnings,hitshP/Ehratiohmayhbehartificiallyhhigh.
13) ThehP/Ehratiohprovideshnohindicationhofhinvestors'hexpectationshabouththehfuturehofhahc
ompany.
14) Thehrealhvaluehofhahfirmhishthehsamehfromhanheconomichandhaccountinghperspective.
15) Ahbalancehsheethrepresentshthehassets,hliabilities,handhowner'shequityhofhahcompanyhathahgivenhp
ointhinhtime.
16) Ahbalancehsheethrepresentshwhaththehfirmhowns,howes,handhownershiphofhahcompanyhathahgivenhd
ate.
17) Liquidityhmeanshthaththehitemshthathcanhconverthtohcashhshowhuphashcashhonhthehbalancehsheet.
18) Thehinvestmentshaccounthincludeshmarketablehsecurities.
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19) Thehlong-
termhinvestmentshaccounthrepresentshahcommitmenthofhfundshofhathleasthoneh yearhorhmore.
20) Assethaccountsharehlistedhinhorderhofhtheirhliquidity.
21) Accumulatedhdepreciationhshowshuphinhthehincomehstatement,hwhilehdepreciationhexpensehs
howshuphonhthehbalancehsheet.
22) Accumulatedhdepreciationhshouldhalwayshbehequalhtohthehdepreciationhexpensehchargedhinhthehi
ncomehstatement.
23) Totalhassetshofhahfirmharehpaidhforhwithhliabilitieshandhstockholders'hequity.
24) Marketablehsecuritiesharehshorthtermhinvestmentshandharehvaluedhonhthehbalancehsheethaththeirho
riginalhpurchasehprice.
25) Bookhvaluehperhsharehofhstockhandhmarkethvaluehperhsharehofhstockharehusuallyhthehsamehdollarha
mount.
26) Bookhvaluehperhsharehofhstockhishofhgreaterhconcernhtohthehfinancialhmanagerhthanhmarkethv
aluehperhsharehofhstock.
27) Bookhvaluehofhahcompanyhishequalhtohnethworthhofhahcompany,hwhichhishnothalwayshequalhtohth
ehmarkethvaluehofhthehcompany.
28) Equityhishahmeasurehofhthehmonetaryhcontributionshthathhavehbeenhmadehdirectlyhorhindirectlyho
nhbehalfhofhthehownershofhthehcompany.
29) Stockholdershequityhishequalhtohliabilitieshplushassets.
30) Stockholdershequityhishequalhtohassetshminushliabilities.
31) Retainedhearningshshownhonhthehbalancehsheethrepresentshprofitshgeneratedhfromhpriorhyear'she
arningshlesshanyhpriorhdividends.
32) Balancehsheethitemshshouldhbehadjustedhforhinflationhwhenhvaluinghahcompany.
33) Balancehsheethitemshconsiderhinflationhandhmarkethvaluehwhenhassigninghthehamounthtohassets,hl
iabilities,handhequityhaccounts.
34) Cashhandhcashhequivalentsharehconsideredhanythinghthathcanhconverthtohcashhwithinhonehyear.
35) ThehStatementhofhCashhFlowshhashthreehparts:hoperating,hinvesting,handhfinancinghunderhbothht
hehindirecthandhdirecthmethod.
36) Thehstatementhofhcashhflowshhelpshmeasurehhowhthehchangeshinhahbalancehsheethaccountshwerehfi
nancedhbetweenhtwohtimehperiods,hthehbeginninghandhthehendinghbalance.
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37) Cashhflowhfromhoperationshishequalhtohearningshbeforehtaxeshminushdepreciation.
38) ThehindirecthmethodhofhpreparinghthehCashhFlowhStatementhbasicallyhadjustshthehnethincomeht
ohreflecthwhaththehfinancialshwouldhhavehlookedhlikehifhcashhbasishwashusedhinsteadhofhaccrualhbas
is.
39) Assumehthathtwohcompanieshbothhhavehahnethincomehofh$100,000.hThehfirmhwithhthehhighesthd
epreciationhexpensehwillhhavehthehhighesthcashhflow,hassuminghallhotherhadjustmentsharehequal.
40) Anhincreasehinhassetshrepresentshahpositivehsourcehofhfunds.
41) Anhincreasehinhahliabilityhaccounthrepresentshahsourcehofhpositivehfundshonhthehcashhflowhst
atement.
42) Thehpurchasehofhahnewhfactoryhbuildinghwouldhreducehthehcashhflowshfromhinvestinghactivitiesho
nhthehstatementhofhcashhflows.
43) PayinghcashhdividendshtohcommonhshareholdershwillhnothaffecththehCashhFlowhStatement.
44) Thehsalehofhahfirm'shsecuritieshishahsourcehofhpositivehfunds,hwhereashthehpurchasehofhsecuritieshis
hahusehofhfunds.
45) Depreciationhishanhaccrualhaccountinghentryhthathdoeshnothaffecththehcashhaccounthsohithneedsht
ohbehadjustedhforhwhenhusinghthehindirecthmethodhofhthehCashhFlowhStatement.
46) Freehcashhflowhishequalhtohcashhflowhfromhoperatinghactivitieshplushdepreciation.
47) Freehcashhflowhishequalhtohcashhflowhfromhoperatinghactivitieshminushnecessaryhcapitalhe
xpenditureshandhnormalhdividendhpayments.
48) Beginninghinh2018,honehofhthehmajorhchangeshregardinghthehcorporatehtaxhratehwashitshr
eductionhfromh35%htohahflathratehofh21%.
49) Thehcorporatehtaxhratehchangehofh2018hmeanshthathcorporationsharehnohlongerhresponsiblehtohp
ayhstatehandhforeignhtaxes.
50) Forhcorporationshwithhlowhtaxablehincomeh(lesshthanh$50,000),htheheffectivehtaxhratehcanhbehash
muchhash40%.
51) Thehcorporatehtaxhratehreductionhtohahflathratehofh21%hinh2018hwashdonehtohmakehthehU.S.hc
orporatehtaxhratehmorehcompetitivehwithhrateshimposedhbyhotherhcountrieshandhtohencouragehec
onomichactivityhinhthehU.S.
52) Interesthexpensehishdeductiblehbeforehtaxeshandhthereforehhashanhafter-
taxhcosthequalhtohthehinteresthpaidhtimesh(1h-htaxhrate).
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53) Federalhcorporatehtaxhrateshhavehchangedhseveralhtimeshsinceh1980.
54) Ah$125,000hcredithsalehcouldhbehahparthofhahfirm'shcashhflowhfromhoperationshifhmoneyhishr
eceivedhwithinhthehfirm'shsamehfiscalh year.
55) Preferredhstockhdividendsharehtaxhdeductible.
56) Bookhvaluehperhsharehishthehmosthimportanthmeasurehofhvaluehofhahfirmhforhahstockholder.
57) Anhincreasehinhaccountshreceivablehresultshinhahcashhinflowhonhthehstatementhofhcashhflows.
58) Ahdecreasehinhbondshpayablehresultshinhahcashhoutflowhonhthehstatementhofhcashhflows.
59) Anhincreasehinhaccruedhexpenseshresultshinhahcashhoutflowhonhthehstatementhofhcashhflows.
60) Ahcashhflowhstatementhishconsideredhcorrecthifhthehchangehinhcashhflowhplushthehbeginninghb
alancehtieshtohthehendinghcashhbalance.
61) Althoughhdepreciationhdoeshnothprovidehcashhtohthehfirmhdirectly,hthehfacththathithishtax-
hdeductiblehcanhprovidehcashhinflowhtohthehcompany.
62) Grosshprofithishequalhto
A) saleshminushcosthofhgoodshsold.
B) saleshminushsellinghandhadministrativehexpenses.
C) saleshminushcosthofhgoodshsoldhandhsellinghandhadministrativehexpenses.
D) saleshminushcosthofhgoodshsoldhandhdepreciationhexpense.
63) Whichhofhthehfollowinghishnothsubtractedhinharrivinghathoperatinghincome?
A) Interesthexpense
B) Costhofhgoodshsold
C) Depreciation
D) Sellinghandhadministrativehexpense
64) IncreasinghinteresthexpensehwillhhavehwhatheffecthonhEarningshBeforehInteresthandhTaxesh(
EBIT)?
A) Increasehit.
B) Decreasehit.
C) Ithwillhhavehnoheffect.
D) Therehishnothenoughhinformationhtohtell.
4
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h h h h h h h h h h
on Block h
FoundationshofhFinancialhManagement,h17eh(Block)h
Chapterh2 ReviewhofhAccounting
1) Thehincomehstatementhishthehmajorhdevicehforhmeasuringhthehprofitabilityhofhahfirmhoverhahp
eriodhofhtime.
2) Thehincomehstatementhshowshthehamounthofhprofitshearnedhbasedhonhanyhonehgivenhday.
3) Saleshminushcosthofhgoodshsoldhishequalhtohearningshbeforehtaxes.
4) Saleshminushcosthofhgoodshsoldhishequalhtohgrosshprofit.
5) Ithishnothpossiblehforhahcompanyhwithhahhighhgrosshprofithmarginhtohhavehahlowhoperatinghprofit.
6) Grosshprofithmarginhishahmeasurementhofhhowhmuchhgrosshprofithahcompanyhgeneratedhfromhtheha
mounthofhsaleshithearned.
7) Operatinghprofithishessentiallyhahmeasurehofhhowhefficienthmanagementhishinhgeneratinghr
evenueshandhcontrollinghexpenses.
8) Anotherhwayhofhwritinghnethincomehafterhtaxhishearningshafterhtaxesh(EAT).
9) Dividinghearningshafterhtaxesh(whichhincludeshallhprofitshdistributedhtohbothhpreferredhstockho
ldershandhcommonhstockholders)hbyhcommonhshareshoutstandinghproduceshearningshperhshare.
10) Thehprice-earningsh(P/E)hratiohishstronglyhrelatedhtohthehpasthperformancehofhthehfirm.
11) Accountinghincomehishbasedhonhverifiablyhcompletedhtransactions.
12) Whenhahfirmhhashahsharphdrophoffhinhearnings,hitshP/Ehratiohmayhbehartificiallyhhigh.
13) ThehP/Ehratiohprovideshnohindicationhofhinvestors'hexpectationshabouththehfuturehofhahc
ompany.
14) Thehrealhvaluehofhahfirmhishthehsamehfromhanheconomichandhaccountinghperspective.
15) Ahbalancehsheethrepresentshthehassets,hliabilities,handhowner'shequityhofhahcompanyhathahgivenhp
ointhinhtime.
16) Ahbalancehsheethrepresentshwhaththehfirmhowns,howes,handhownershiphofhahcompanyhathahgivenhd
ate.
17) Liquidityhmeanshthaththehitemshthathcanhconverthtohcashhshowhuphashcashhonhthehbalancehsheet.
18) Thehinvestmentshaccounthincludeshmarketablehsecurities.
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19) Thehlong-
termhinvestmentshaccounthrepresentshahcommitmenthofhfundshofhathleasthoneh yearhorhmore.
20) Assethaccountsharehlistedhinhorderhofhtheirhliquidity.
21) Accumulatedhdepreciationhshowshuphinhthehincomehstatement,hwhilehdepreciationhexpensehs
howshuphonhthehbalancehsheet.
22) Accumulatedhdepreciationhshouldhalwayshbehequalhtohthehdepreciationhexpensehchargedhinhthehi
ncomehstatement.
23) Totalhassetshofhahfirmharehpaidhforhwithhliabilitieshandhstockholders'hequity.
24) Marketablehsecuritiesharehshorthtermhinvestmentshandharehvaluedhonhthehbalancehsheethaththeirho
riginalhpurchasehprice.
25) Bookhvaluehperhsharehofhstockhandhmarkethvaluehperhsharehofhstockharehusuallyhthehsamehdollarha
mount.
26) Bookhvaluehperhsharehofhstockhishofhgreaterhconcernhtohthehfinancialhmanagerhthanhmarkethv
aluehperhsharehofhstock.
27) Bookhvaluehofhahcompanyhishequalhtohnethworthhofhahcompany,hwhichhishnothalwayshequalhtohth
ehmarkethvaluehofhthehcompany.
28) Equityhishahmeasurehofhthehmonetaryhcontributionshthathhavehbeenhmadehdirectlyhorhindirectlyho
nhbehalfhofhthehownershofhthehcompany.
29) Stockholdershequityhishequalhtohliabilitieshplushassets.
30) Stockholdershequityhishequalhtohassetshminushliabilities.
31) Retainedhearningshshownhonhthehbalancehsheethrepresentshprofitshgeneratedhfromhpriorhyear'she
arningshlesshanyhpriorhdividends.
32) Balancehsheethitemshshouldhbehadjustedhforhinflationhwhenhvaluinghahcompany.
33) Balancehsheethitemshconsiderhinflationhandhmarkethvaluehwhenhassigninghthehamounthtohassets,hl
iabilities,handhequityhaccounts.
34) Cashhandhcashhequivalentsharehconsideredhanythinghthathcanhconverthtohcashhwithinhonehyear.
35) ThehStatementhofhCashhFlowshhashthreehparts:hoperating,hinvesting,handhfinancinghunderhbothht
hehindirecthandhdirecthmethod.
36) Thehstatementhofhcashhflowshhelpshmeasurehhowhthehchangeshinhahbalancehsheethaccountshwerehfi
nancedhbetweenhtwohtimehperiods,hthehbeginninghandhthehendinghbalance.
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37) Cashhflowhfromhoperationshishequalhtohearningshbeforehtaxeshminushdepreciation.
38) ThehindirecthmethodhofhpreparinghthehCashhFlowhStatementhbasicallyhadjustshthehnethincomeht
ohreflecthwhaththehfinancialshwouldhhavehlookedhlikehifhcashhbasishwashusedhinsteadhofhaccrualhbas
is.
39) Assumehthathtwohcompanieshbothhhavehahnethincomehofh$100,000.hThehfirmhwithhthehhighesthd
epreciationhexpensehwillhhavehthehhighesthcashhflow,hassuminghallhotherhadjustmentsharehequal.
40) Anhincreasehinhassetshrepresentshahpositivehsourcehofhfunds.
41) Anhincreasehinhahliabilityhaccounthrepresentshahsourcehofhpositivehfundshonhthehcashhflowhst
atement.
42) Thehpurchasehofhahnewhfactoryhbuildinghwouldhreducehthehcashhflowshfromhinvestinghactivitiesho
nhthehstatementhofhcashhflows.
43) PayinghcashhdividendshtohcommonhshareholdershwillhnothaffecththehCashhFlowhStatement.
44) Thehsalehofhahfirm'shsecuritieshishahsourcehofhpositivehfunds,hwhereashthehpurchasehofhsecuritieshis
hahusehofhfunds.
45) Depreciationhishanhaccrualhaccountinghentryhthathdoeshnothaffecththehcashhaccounthsohithneedsht
ohbehadjustedhforhwhenhusinghthehindirecthmethodhofhthehCashhFlowhStatement.
46) Freehcashhflowhishequalhtohcashhflowhfromhoperatinghactivitieshplushdepreciation.
47) Freehcashhflowhishequalhtohcashhflowhfromhoperatinghactivitieshminushnecessaryhcapitalhe
xpenditureshandhnormalhdividendhpayments.
48) Beginninghinh2018,honehofhthehmajorhchangeshregardinghthehcorporatehtaxhratehwashitshr
eductionhfromh35%htohahflathratehofh21%.
49) Thehcorporatehtaxhratehchangehofh2018hmeanshthathcorporationsharehnohlongerhresponsiblehtohp
ayhstatehandhforeignhtaxes.
50) Forhcorporationshwithhlowhtaxablehincomeh(lesshthanh$50,000),htheheffectivehtaxhratehcanhbehash
muchhash40%.
51) Thehcorporatehtaxhratehreductionhtohahflathratehofh21%hinh2018hwashdonehtohmakehthehU.S.hc
orporatehtaxhratehmorehcompetitivehwithhrateshimposedhbyhotherhcountrieshandhtohencouragehec
onomichactivityhinhthehU.S.
52) Interesthexpensehishdeductiblehbeforehtaxeshandhthereforehhashanhafter-
taxhcosthequalhtohthehinteresthpaidhtimesh(1h-htaxhrate).
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53) Federalhcorporatehtaxhrateshhavehchangedhseveralhtimeshsinceh1980.
54) Ah$125,000hcredithsalehcouldhbehahparthofhahfirm'shcashhflowhfromhoperationshifhmoneyhishr
eceivedhwithinhthehfirm'shsamehfiscalh year.
55) Preferredhstockhdividendsharehtaxhdeductible.
56) Bookhvaluehperhsharehishthehmosthimportanthmeasurehofhvaluehofhahfirmhforhahstockholder.
57) Anhincreasehinhaccountshreceivablehresultshinhahcashhinflowhonhthehstatementhofhcashhflows.
58) Ahdecreasehinhbondshpayablehresultshinhahcashhoutflowhonhthehstatementhofhcashhflows.
59) Anhincreasehinhaccruedhexpenseshresultshinhahcashhoutflowhonhthehstatementhofhcashhflows.
60) Ahcashhflowhstatementhishconsideredhcorrecthifhthehchangehinhcashhflowhplushthehbeginninghb
alancehtieshtohthehendinghcashhbalance.
61) Althoughhdepreciationhdoeshnothprovidehcashhtohthehfirmhdirectly,hthehfacththathithishtax-
hdeductiblehcanhprovidehcashhinflowhtohthehcompany.
62) Grosshprofithishequalhto
A) saleshminushcosthofhgoodshsold.
B) saleshminushsellinghandhadministrativehexpenses.
C) saleshminushcosthofhgoodshsoldhandhsellinghandhadministrativehexpenses.
D) saleshminushcosthofhgoodshsoldhandhdepreciationhexpense.
63) Whichhofhthehfollowinghishnothsubtractedhinharrivinghathoperatinghincome?
A) Interesthexpense
B) Costhofhgoodshsold
C) Depreciation
D) Sellinghandhadministrativehexpense
64) IncreasinghinteresthexpensehwillhhavehwhatheffecthonhEarningshBeforehInteresthandhTaxesh(
EBIT)?
A) Increasehit.
B) Decreasehit.
C) Ithwillhhavehnoheffect.
D) Therehishnothenoughhinformationhtohtell.
4
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NohreproductionhorhdistributionhwithouththehpriorhwrittenhconsenthofhMcGraw-HillhEducation.
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