TEST BANK FOR FINANCIAL ACCOUNTING FOR MBAS 8TH EDITION EASTON, HALSEY, MC ANNALLY

Financial Accounting for MBAs Learning Objectives – Coverage by question True/False Multiple Choice LO1 – Explain and assess the four main business activities. LO2 – Identify and discuss the users and suppliers offinancial statement information. 1- 4 1, 2 LO3 – Describe and examine the four financial statements, and define the accounting equation. 5-10 3-19 LO4 – Explain and apply the basics of profitability analysis. LO5 – Assess business operations within the contextof a competitive environment. 14 26, 27 LO6 – Access reports filed with the SEC (Appendix 1A). LO7 – Describe the accounting principles and regulations that frame financial statements (Appendix1B). 15 28-30 These questions are available to assign in myBusinessCourse. - 1-1 Financial Accounting for MBAs, 8 th Edition Module 1 True/False Topic: Users of Financial Statement InformationLO: 2 Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to repay loan interest and principal. Answer: True Rationale: While both shareholders and bankers are interested in all the information companies provide, shareholders care about more about a company’s profitability and bankers care more about solvency and creditworthiness. Topic: Publicly Available Financial ReportsLO: 2 Publicly traded companies are required to provide quarterly financial reports directly to the public. Answer: False Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which posts them to the Internet for the public to access them. Topic: Users of Financial Statement InformationLO: 2 Publicly traded companies provide financial information primarily to satisfy the SEC and the tax authorities (that is, the Internal Revenue Service). Answer: False Rationale: Demand for information extends to many users; the regulators such as the SEC and the IRS are only one class of users. Topic: SEC FilingsLO: 2 Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10-K reports) and quarterly audited financial statements (10-Q reports). Answer: False Rationale: Quarterly reports do not need to be audited. Topic: Balance SheetLO: 3 If a company reports retained earnings of $175.3 million on its balance sheet, it must also report $175.3 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal total liabilities plus stockholders’ equity. That does not imply, however, that liability and equity accounts relate directly to specific assets. - Test Bank (T/F & MC), Module 1 1-2 Module 1: Financial Accounting for MBAs Topic: Balance SheetLO: 3 A balance sheet shows a company’s position over a period of time, whereas an income statement, statement of stockholders’ equity, and statement of cash flows show its position at a point in time. Answer: False Rationale: The statement is reversed: A balance sheet shows a company’s position at a point in time, whereas an income statement, statement of equity, and statement of cash flows show its positionover a period of time. Topic: Accounting EquationLO: 3 Assets must always equal liabilities plus equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold. Topic: Income StatementLO: 3 The income statement reports net income which is defined as the company’s profit after all expensesand dividends have been paid. Answer: False Rationale: The statement contains two errors. First, net income does not include any dividends duringthe period; these are a distribution of profits and not part of its calculation. Second, the income statement is prepared on an accrual basis and thus includes expenses incurred (as opposed to paid). Topic: Statement of Cash FlowsLO: 3 A statement of cash flows reports on cash flows for operating, investing and financing activities at apoint in time. Answer: False Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time. Topic: Statement of Stockholders’ EquityLO: 3 An increase in common stock would be reflected in the statement of stockholders’ equity. Answer: True Rationale: The statement of stockholders’ equity reports on changes in the accounts that make up stockholders’ equity. This includes contributed capital, retained earnings, and other equity. - 1-3 Financial Accounting for MBAs, 8 th Edition Topic: Return on AssetsLO: 4 Return on Assets (ROA) measures the profit the company makes on each dollar of total assets ituses. Answer: True Rationale: Return on Assets is a profitability metric that measures how much profit the companymade for each dollar of assets the company holds on average during the year. Topic: Return on AssetsLO: 4 Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover Answer: True Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROAinto its components Topic: Asset TurnoverLO: 4 Consider two companies (A and B) with equal profit margins of 18%. Company A has an asset turnover of 1.2 and Company B has an asset turnover of 1.5. If all else is equal, Company B with its’ higher asset turnover, is less profitable because it requires more revenue to turn its assets over. Answer: False Rationale: Asset turnover is an efficiency metric. The higher the turnover, the more efficient the company is with its assets and thus, the more profitable. Algebraically, ROA = PM × AT. Company A above is less profitable: 18% × 1.2 = 21.6% whereas Company B’s ROA is 18% × 1.5 = 27.0%. Topic: Financial Accounting and Business AnalysisLO: 5 Financial statements are influenced by five important forces that determine a company’s competitive intensity: (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry. Answer: True Rationale: By systematically considering these five business forces, we can gain better insights from financial statements. Topic: Audit ReportLO: 7 A “clean” audit report asserts—among other things—that (a) the auditor has prepared all necessary financial statements and (b) management has expressed its opinion that they are prepared in conformity with GAAP. Answer: False Rationale: The statement is reversed: A “clean” audit report asserts—among other things—that (a) management has prepared all necessary financial statements and (b) the auditor has expressed its opinion that they are prepared in conformity with GAAP