Chapter 3 Exam Study Objective

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CHAPTER 3 EXAM STUDY OBJECTIVE

.The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.

a.True
b.False

.The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

a.True
b.False

.Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.

a.True
b.False

.On the balance sheet, total assets must always equal the sum of total liabilities plus equity.

a.True
b.False

.Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.

a.True
b.False
.The amount shown on the December 31, 2012 balance sheet as “retained earnings” is equal to the firm's net income for 2012 minus any dividends it paid.

a.True
b.False

.The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

a.True
b.False
.EBIT stands for earnings before interest and taxes, and it is often called “operating income.”

a.True
b.False

.EBITDA stands for earnings before interest, taxes, debt, and assets.

a.True
b.False

.Typically, the statement of stockholders' equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.

a.True
b.False

.Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

a.True
b.False

.Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

a.True
b.False

.The first major section of a typical statement of cash flows is “Operating Activities,” and the first entry in this section is “Net Income.” Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called “Net Cash Provided by Operating Activities.” This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.

a.True
b.False

.To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

a.True

.Which of the following statements is CORRECT?

a.The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. b.The balance sheet gives us a...
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