Financial & Managerial Accounting for MBAs, 6e
Easton, Halsey, McAnally (Test Bank, 100-
Verified)
Financial Accounting for MBAs
Learning Objectives – Coverage by question
S
True/False Multiple Choice Exercises Problems Essays
R
VE
LO1 – Explain and assess the
1
four main business activities.
LO2 – Identify and discuss the
users and suppliers of financial
statement information.
1- 4 IE
1, 2 2
H
AC
LO3 – Describe and examine
the four financial statements, 5-10 3-19 1-8 1-5, 10 3, 4
and define the accounting
equation.
M
LO4 – Explain and apply the
11-13 20-25 1, 9, 10 6, 7 5
EA
basics of profitability analysis.
LO5 – Assess business
R
operations within the context 14 26, 27 8
of a competitive environment.
D
LO6 – Access reports filed
with the SEC (Appendix 1A).
LO7 – Describe the
accounting principles and 15 28-30 9 6
regulations that frame financial
statements (Appendix 1B).
,Module 1: Financial Accounting for MBAs
True/False
Topic: Users of Financial Statement Information
LO: 2
1. 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.
S
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
R
and creditworthiness.
VE
Topic: Publicly Available Financial Reports
LO: 2
2. Publicly traded companies are required to provide quarterly financial reports directly to the public.
Answer: False IE
Rationale: Companies provide electronic versions of quarterly financial statements to the SEC, which
H
posts them to the Internet for the public to access them.
AC
Topic: Users of Financial Statement Information
LO: 2
3. Publicly traded companies provide financial information primarily to satisfy the SEC and the tax
authorities (that is, the Internal Revenue Service).
M
Answer: False
Rationale: Demand for information extends to many users; the regulators such as the SEC and the IRS
EA
are only one class of users.
Topic: SEC Filings LO:
R
2
4. 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).
D
Answer: False
Rationale: Quarterly reports do not need to be audited.
Topic: Balance Sheet
LO: 3
5. 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.
Topic: Balance Sheet LO:
3
6. 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 position over
a period of time.
S
Topic: Accounting Equation
LO: 3
R
7. Assets must always equal liabilities plus equity.
Answer: True
VE
Rationale: The accounting equation is Assets = Liabilities + Equity. This relation must always hold.
Topic: Income Statement LO:
3
IE
8. The income statement reports net income which is defined as the company’s profit after all expenses
and dividends have been paid.
H
Answer: False
Rationale: The statement contains two errors. First, net income does not include any dividends during
AC
the 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).
M
Topic: Statement of Cash Flows
LO: 3
9. A statement of cash flows reports on cash flows for operating, investing and financing activities at a
EA
point in time.
Answer: False
Rationale: A statement of cash flows reports on cash flows for operating, investing, and financing
R
activities over a period of time.
D
Topic: Statement of Stockholders’ Equity LO:
3
10. 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.
, Return on Assets
4
11. Return on Assets (ROA) measures the profit the company makes on each dollar of total assets it uses.
Answer: True
Rationale: Return on Assets is a profitability metric that measures how much profit the company made
for each dollar of assets the company holds on average during the year.
Topic: Return on Assets
LO: 4
12. Return on Assets (ROA) = (Net Income / Sales) × Asset Turnover
S
Answer: True
Rationale: Return on Assets = Net Income / Average Assets. This is the disaggregation of the ROA into
R
its components
VE
Topic: Asset Turnover LO:
4
13. 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
IE
turnover, is less profitable because it requires more revenue to turn its assets over.
Answer: False
H
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%.
AC
Topic: Financial Accounting and Business Analysis
LO: 5
M
14. 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.
EA
Answer: True
Rationale: By systematically considering these five business forces, we can gain better insights from
financial statements.
R
Topic: Audit Report LO:
D
7
15. 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.
