Financial Statements, Cash Flow, and Taxes

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CHAPTER 2
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES


True/False

Easy:

| (2.1) Annual report F K | Answer: a | EASY |
. | The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity. |
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| a. | True | | | | | | |
| b. | False | | | | | | |
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| (2.1) Annual report and expectations F K | Answer: a | EASY |
. | 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. |
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| a. | True | | | | | | |
| b. | False | | | | | | |
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| (2.2) Retained earnings versus cash C K | Answer: b | EASY |
. | Consider the balance sheet of Wilkes Industries as shown below.   Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000. |
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| Cash | $   50,000 | | Accounts payable | | $   100,000 |
| Inventory | 200,000 | | Accruals | |     100,000 |
| Accounts receivable |     250,000 | | Total CL | | $   200,000 |
| Total CA | $   500,000 | | Debt | | 200,000 |
| Net fixed assets | $   900,000 | | Common stock | | 200,000 |
| |            | | Retained earnings | |     800,000 |
| Total assets | $1,400,000 | | Total L & E | | $1,400,000 |
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| a. | True | | | | | | |
| b. | False | | | | | | |
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| (2.2) Balance sheet F K | Answer: a | EASY |
. | On the balance sheet, total assets must always equal total liabilities and equity. |
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| a. | True | | | | | | |
|... [continues]

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