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introductory financial accounting for business

Questions and Answers of Introductory Financial Accounting for Business

12-27. Electric utilities that have substantial construction work in progress are usually viewed as being more risky investments than electric utilities that do not have substantial construction work
12-26. No. Long-term capitalization, the major source of funds, including long-term debt, is presented first. Current liabilities are quite unimportant.
12-25. Yes, the times interest earned ratio is meaningful for utilities, since they have such a heavy use of debt.
12-24. Funded debt to operating property is a type of debt coverage ratio. It tells how funds are supplied for long-term investment.
12-23. Inventory ratios have little meaning for utilities, because they are unable to store their finished product.
12-22. Plant and equipment are listed first because the uniform accounting system recognized their importance in the operation. Current assets are a very small part of total assets.
12-21. Demand for utilities is inelastic; there are no substitute services. There is virtually no competition.
12-20. Utilities have heavy investment in fixed assets, necessitating long-term debt. Further, they are able to use leverage favorably, since their profits are controlled and are reasonably stable,
12-19. This footnote may reveal significant additional commitments and contingent liabilities.
12-18. A decreasing amount in savings deposits would indicate that the bank is losing one of its cheapest source of funds.
12-17. In general, nonperforming assets are assets that the bank is not receiving income on or receiving inadequate income. The amount and trend of nonperforming assets should be observed closely.
12-16. It may indicate a significant change and/or significant losses charged.
12-15. In general, foreign loans are perceived as being more risky than domestic loans.
12-14. This review may indicate that investments have a market value that is substantially above or below the book amount.
12-13. A review of assets may indicate that the bank has a substantial investment in long-term bonds. Such an investment could reflect substantial risk if interest rates increase. Another example
12-12. Deposits times capital is a type of debt to equity or leverage ratio.
12-11. The loan loss coverage ratio measures the quality of the loans and the level of protection related to loan payment.
12-10. Earning assets are those that generate interest from which the firm earns its profits.
12- 9. Interest margin to average assets, earnings per share, return on equity, and return on assets are all ratios that indicate a bank's profitability.
12- 8. Total deposits times capital is a measure of liabilities to equity, of creditors' to owners' funds.
12- 7. Interest expense will usually be the biggest expense item for banks.
12- 6. Bank holding companies own banks and other types of subsidiaries that may not be financially related. These holdings can affect the special bank ratios.
12- 5. Banks report to the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and to their shareholders, and they must publish their reports in
12- 3. Savings accounts are liabilities because they hold cash owed to customers. 12- 4. Loans/deposits is a type of debt coverage, since loans are a main amount to repay depositors.
12- 2. Loans are assets because they are an investment of the banks, money. They are like receivables; money is owed to the bank, not by it.
#!# 12- 1. Interest income, service charges, and earnings in investments are the main sources of revenue for banks.
11-29.a. The proper use of estimates and judgments to prepare financial statements.b. Some firms use estimates and judgments to improperly manipulate financial statements. Also some firms
11-28. This statement is not true. Chartered Financial Analysts gave relatively low significance ratings to liquidity ratios.
11-27. The surveyed analysts gave the highest significance ratings to profitability ratios.
11-26. Visually, a pie graph can mislead. Also, some accounting data do not fit on a pie graph.
11-25. 1. Not extending the vertical axis to zero 2. Having a broken vertical axis
11-24. 1. Line 2. Column 3. Pie
11-23. A proposed comprehensive budget should be compared with financial ratios that have been agreed upon as part of the firm's corporate objectives. If the proposed comprehensive budget will not
11-22. The abnormally low turnover for accounts receivable indicates that a very detailed audit of accounts receivable should be performed to satisfy ourselves of the collectibility of the
11-21. False. These studies help substantiate that firms that have weak ratios are more likely to go bankrupt than firms that have strong ratios.
11-20. Variable X4 in the model requires that the market value of the stock be determined. Determining the market value of the stock of a closely held company can be difficult if not impossible.
11-19. Firms that scored below 2.675 are assumed to have similar characteristics of past failures.
11-18. (a) cash - low (b) accounts receivable - high (c) inventory - low
11-17. (a) Cash flow/Total debt (b) Net income/Total assets (return on assets) (c) Total debt/Total assets (debt ratio)
11-16. There are many definitions or descriptions of financial failure. Financial failure can include liquidation, deferment of payments to short-term creditors, deferment of payment of interest on
11-15. Such a model could be used by management to take preventive measures. Such a model could aid investors in selecting and disposing of stocks. Banks could use this model to aid in loan decision
11-14. Substantial research and development will result in more conservative earnings because research and development expenses are charged to the period in which they are incurred.
11-13. Conservative Yes No (a) x (b) x (c) x (d) x (e) x (f) x (g) x (h) x (i) x (j) x (k) x
11-12. Accounting policies that result in the slowest reporting of income are the most conservative.
11-11. Presently, no regulatory agency such as the Securities and Exchange Commission or the Financial Accounting Standards Board accepts responsibility for determining either the content of
11-10. Earnings per share is the only ratio that is required to be disclosed in the annual report. It must be disclosed at the bottom of the income statement.
11- 9. Profitability ratios and ratios related to investing are the most likely to be included in annual reports. Profitability ratios are the most popular ratios with management. Ratios related to
11- 8. (a) Financial summary (b) Financial highlights (c) Financial review (d) President's letter (e) Management discussion
11- 7. According to the study reported in this book, financial ratios are not used extensively in annual reports to interpret and explain financial statements. Likely reasons for this are that
11- 6. The CPAs gave the highest significance rating to two liquidity ratios. These ratios are the current ratio and the accounts receivable turnover days. The highest-rated profitability ratio was
11- 5. (a) Return on equity (b) Return on assets (c) Net profit margin (d) Earnings per share (e) Return on capital Each of these ratios would be considered a measure of profitability.
11- 4. Based on the study reported in the text, financial executives do regard profitability ratios as the most significant ratios.
11- 3. The dividend payout ratio does not primarily indicate liquidity, debt, or profitability. It is a ratio that is of interest to investors because it indicates the percentage of earnings that is
11- 2. (a) Debt/equity, current ratio (b) Debt/equity, current ratio
11- 1. Based on the study reported in the text, liquidity and debt ratios are regarded as the most significant ratios by commercial loan officers.
10-20. Since cash flow from operating activities is substantially greater than the cash paid out for dividends, it appears that the company can maintain and possibly increase dividend payments in the
10-19. Cash flow per share is not as good an indicator of profitability as earnings per share. In the short-run, cash flow per share is a better indicator of liquidity and ability to pay dividends.
10-18. This is an example of noncash investing and financing. As such, it should be disclosed on a schedule that accompanies the statement of cash flows.
10-16. Depreciation is not a source of funds. Depreciation has been deducted on the income statement in arriving at income. Since depreciation is a non-fund charge to the income statement, it is
10-15. Investments in receivables, inventories, fixed assets, and the paying off of debt are examples of situations where cash will be used but will not reduce profits.
10-14. An increase in accounts payable would be considered to be an increase in cash from operations.
10-13. This may be the result of non-cash charges for depreciation, amortization, and depletion. Also, receivables or inventory may have decreased or accounts payable may have increased.
10-12. Discarding a fully depreciated asset with no salvage value will not result in cash flow.
10-11. No. The write-off of uncollectible accounts against allowance for doubtful accounts would reduce accounts receivable and the allowance for doubtful accounts. It would relate to operations and
10-10. These transactions represent significant investing and/or financing activities and one purpose of the statement of cash flows is to present investing and financing activities.
10- 9. The purpose of the statement of cash flows is to provide information on why the cash position of the company changed during the period.
10- 8. Cash and short-term highly liquid investments. This would include cash on hand, cash on deposit, and investments in short-term highly liquid investments.
10- 7. Items have been included in income that did not provide cash and items have been deducted from income that did not use cash. Net income must be converted to a cash from operations figure for
10- 6. For the direct approach, the revenue and expense accounts on the income statement are presented on a cash basis. For this purpose, the accrual basis income statement is adjusted to a cash
10- 5. 1. Visual method 2. T-account method 3. Worksheet method
10- 4. This statement is not correct. The land account may contain an explanation of a source and use of cash.
10- 3. The cash inflows (outflows) will be determined by analyzing all balance sheet accounts other than the cash and cash equivalent accounts. The cash inflows will be generated from the following
10- 2. 1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities
10- 1. The basic justification for a statement cash flows is that the balance sheet and the income statement do not adequately indicate changes in cash. The balance sheet indicates the position of
9- 9. Financial leverage is the use of financing with a fixed charge. Financial leverage will magnify changes in earnings available to the common shareholder. Its use is advantageous when a firm
9- 8. Many firms try to maintain a stable percentage because they have a policy on the percentage of earnings that they want retained for internal growth.
9- 7. Stock dividends and stock splits do not provide the firm with more funds; they only change the number of outstanding shares. Earnings per share should be related to the outstanding common stock
9- 6. Less preferred dividends will be subtracted from net income in the numerator of the earnings per share computation. This will increase earnings per share. In practice, whether earnings per
9- 5. Since earnings pertain to an entire year, they should be related to the common shares outstanding during the year. The year-end common shares outstanding may not be representative of the shares
9- 4. Earnings per share is a concept that only applies to common stock. The earnings per common share computation only uses earnings available to common stockholders. To arrive at the income that
9- 3. Keller & Fink is a partnership. Earnings per share is a concept that only applies to corporate income statements.
9- 2. The Financial Accounting Standards Board suspended the reporting of earnings per share for nonpublic companies.
9- 1. Earnings per share is the amount of income earned on a share of common stock during an accounting period.
8-16. Pro forma financial information is hypothetical or projected amount. Used improperly pro forma financial information can be a negative contribution to financial reporting.
8-15. Comprehensive income includes net changes in (a) foreign currency translation adjustments, (b) unrealized holding gains and losses on available-for-sale marketable securities, and (c) changes
8-14. An objective of this opinion is timeliness rather than completeness. Full statements would take too long and involve too much cost to product.
8-13. Interim reports are less reliable because they are not audited, but they can be very meaningful in indicating trends before the end of the year.
8-12. This cannot be determined based only upon the absolute measures. It is necessary to compare these dollar figures to a base, such As investment or sales. Also, it is necessary to know if
8-11. Return on investment is a profitability measure comparing income to capital utilized by the firm. Some measures are return on assts, return on equity, or income available to all capital
shareholders. Return on common equity is return only to common shareholders. Net income is reduced by preferred dividends in the numerator, and only common equity is in the denominator.
8-10. Return on investment measures return to all long-term supplies of funds. It includes net income plus taxadjusted interest in the numerator and all long-term funds in the denominator. Return on
8- 9. Return on assets is a function of net profit margin and total asset turnover. Return on assets could decline, given an increase in net profit margin, if the total asset turnover declined
8- 8. Equity earnings are the owner’s proportionate share of the non-consolidated subsidiary.
8- 7. Operating income is sales minus cost of sales and operating expenses. It does not include non-operating items, such as other income, interest, and taxes. Operating assets are basically current
8- 6. DuPont analysis relates return on assets to turnover and margin. It allows for further analysis of return on assets by this breakdown.
8- 5. A drop in profits or a rise in the asset base could cause a decline in the ratio. For example, higher cost of sales could cause a decline; or, a substantial investment in fixed assets that are
8- 4. Profit margin in jewelry is usually much higher than in groceries. Groceries generate total profits based on volume of sales rather than high markup.
8- 3. Expenses as a percent of sales must have increased if profits as a percent of sales declined.
8- 2. Extraordinary items are by nature nonrecurring. They should be segregated in order to concentrate on profit that will be expected again the next period. Recurring earnings should be used in
8- 1. Profits can be compared to the sales from which they are the residual. They can be compared to the assets that generate sales. Or, they can be viewed as return to the owner. Each measure looks

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