CHAPTER 03 14FINANCIAL STATEMENTS CASH FLOW AND TAXES
Chapter 3: Financial Statements, Cash Flow, and Taxes
This chapter has a lot of definitions. They are important, but we don’t like to make students memorize too many of them early in the course. We let our students use a formula sheet that includes the key definitions.
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions.
Multiple Choice: True/False
1. 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
ANSWER: True
2. 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
ANSWER: True
3. 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
ANSWER: False
4. On the balance sheet, total assets must always equal the sum of total liabilities and equity.
a. True
b. False
ANSWER: True
5. 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
ANSWER: True
6. The amount shown on the December 31, 2013, balance sheet as “retained earnings” is equal to the firm’s net income for 2013 minus any dividends it paid.
a. True
b. False
ANSWER: False
7. 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
This chapter has a lot of definitions. They are important, but we don’t like to make students memorize too many of them early in the course. We let our students use a formula sheet that includes the key definitions.
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions.
Multiple Choice: True/False
1. 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
ANSWER: True
2. 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
ANSWER: True
3. 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
ANSWER: False
4. On the balance sheet, total assets must always equal the sum of total liabilities and equity.
a. True
b. False
ANSWER: True
5. 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
ANSWER: True
6. The amount shown on the December 31, 2013, balance sheet as “retained earnings” is equal to the firm’s net income for 2013 minus any dividends it paid.
a. True
b. False
ANSWER: False
7. 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