Purchased goodwill is not recognized on the balance sheet.
False
Investing cash inflows increase equity.
False (Investing cash inflows is for things like purchase of fixed assets; if it was shareholders funding that increases equity, it would be financing cash flow)
A decrease in accounts receivable causes operating profit to be lower than operating cash flow (everything else equal).
True
A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
True (Probable – Provide; Possible – Contingent liability so disclose only; Remote – do nothing)
An impairment loss on a company’s inventory reduces its operating cash flows.
False (An impairment loss is not a cash transaction but it’s just an accounting adjustment so there is no impact on cash flow)
An item of machinery is purchased for €1000. It is estimated to have an 8-year useful life, with a residual value of €200. Straight-line depreciation is used. At what value is the machine recorded on the balance sheet at the end of year three if the recoverable amount of the machine is estimated to be €600 at the end of that year?
a. 500
b. 600
c. 700
d. 800
(1,000-200)/8 = 100 depreciation charge/ year
At the end of Y3, NBV = 1,000-(100x3) = 700
If recoverable amount is 600, NBV needs to be impaired down to 600
Answer: (b) 600
If a company spends cash of 90 to acquire plant and equipment, and if it also reports depreciation of 10 and an impairment loss of 30, by how much does the total value of its assets change?
a. -40
b. -90
c. +50
d. +80
90 – 10 – 30 = 50, but the question is about “change” of volume of assets. The answer then is a) -40
If a company reports operating cash flow of 800, investing cash flow of -100, financing cash flow of 60, depreciation of 80 and a decrease in accounts receivable of 40, how much profit did it report?
a. 540
b. 680
c. 760
d. 920
Operating profit (?) + Depreciation 80 + Decrease in accounts receivable 40 = 800
Operating profit = 800-80-40 =680
Answer: (b) 680
A company spends 220 on inventory and sells inventory worth 100. It also spends 240 on new machinery, while selling old equipment for 120. The company further spends 150 on repayment of a bank loan, 200 on research and development, 175 on employee wages and 80 on rent. What was the company’s investing cash flow?
a. -120
b. -320
c. -440
d. -470
Purchase of machinery and selling of old equipment are the only two “investing” cash flow items from the question. Net cash flow is therefore (240) + 120 = (120)
Answer: (a) (120)
A company runs a defined benefit pension scheme with a projected benefit obligation of 10,000 and pension plan assets of 6,000 as of the end of the previous financial year. The interest cost is 4% and the expected return on the plan assets is 5%. The service cost is 300 and the company pays 100 into the pension every year. What is the pension expense the company recognizes in its income statement?
a. 0
b. 100
c. 400
d. 700
DB scheme cost is:
Obligation 10,000 x 4% = (400) interest cost
Asset 6,000 x 5% = 300 return on plan assets
Service cost = (300)
Net P&L = (400) charge to the P&L
Note: Annual payment by company into the pension fund is not an expense for the year but it is paying down the net obligation (i.e. like paying down a mortgage balance as opposed to interest payment)
A financing cash outflow is a debit to the cash balance.
False
Revenue is a credit to equity.
True
Inventory is carried in the balance sheet at its market value.
False
Free cash flow is equal to Operating Cash Flow After Tax.
False
A reduction in working capital implies a reduction in operating cash flow.
False
Goodwill must be tested for impairment, but cannot be revalued upwards.
True
A parent company does not have to consolidate its subsidiary unless at least 50% of the equity is owned by the parent.
True
An issue of shares increases net assets.
True
A write-down of inventory reduces a company’s operating cash flows.
False
An increase in accounts payable causes operating profit to be higher than operating cash flow (everything else being equal).
False
All property plant and equipment is measured at historical cost on the balance sheet.
False
A possible obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
False
Purchased intangible assets are not recognized on the balance sheet.
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow (all else being equal)
True
All financial assets are are measured at fair value on the balance sheet.
False
Accrual accounting requires a business to recognize transactions when they occur, not when cash is received or paid.
True
An impairment of goodwill reduces a company’s operating cash flows.
False
Cash inflow of a business always affect it’s profits
False
Research and Development expenditure is normally capitalised
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow.
True
Accrual accounting requires a business to recognize economic events when they occur, not when cash is received or paid.
True
Software development costs can never be recognized as an asset on a balance sheet.
False
Dividends are considered an expense in running the business and reported in the income statement.
False
Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders’ equity to increase.
False
The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.
True
If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000.
False
The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records.
True
An impairment of goodwill reduces a company’s operating cash flows
False
If a company’s reported operating profit is higher than its operating cash flow, it might be the result of an increase in accounts receivables.
True
All intangible assets are amortised over their useful life.
False
A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
True
Accrual accounting requires a business to recognize transactions in financial statements when cash is received or paid.
False
An item of machinery is purchased for €1000. It is estimated to have a 4-year useful life, with a residual value of €200. Straight-line depreciation is used. What is the expense in the income statement in year two related to the machine if the recoverable amount of the machine is estimated to be €500?
a. 100
b. 200
c. 300
d. 400
c. 300
If a company reports operating cash flow of 1000, investing cash flow of -100, financing cash flow of +600, depreciation of 200 and an increase in accounts payable of 100, how much profit did it report?
a. 500
b. 700
c. 900
d. 1100
b. 700
At the start of the year the company has finished-goods inventory of 50 units with a book value of £10 per unit. During the year the company purchases a further 60 units at £15 per unit and sells 80 units at a price of £20 per unit. If the company uses the FIFO method to account for its inventory, what was the company’s gross profit for the year?
a. 650
b. 950
c. 1100
d. 1600
a. 650
During 2017, a company issued shares with a value of 250, reported a net loss of 120, paid a dividend of 40, increased the size of its bank loan by 30, paid interest of 10 and paid taxes payable from the previous year of 90. At the end of 2017 by how much has its shareholder equity changed?
a. -50
b. 0
c. +90
d. +130
c. +90
Company A acquires Company B for 1000. Company B owns cash of 100, property, plant and equipment (PPE) of 350 currently accounted for at cost, and finished goods inventory of 70. The PPE is estimated to be worth 420 at current market values and the inventory is estimated to be worth 80. It also owns licenses and rights currently not recognised on its balance sheet and valued at 100. Company B’s liabilities have a value of 200. It has been suggested that Company B’s brand is worth 200. What is the goodwill that Company A needs to recognise on its balance sheet in relation to its acquisition of Company B?
a. 100
b. 300
c. 400
d. 500
d. 500
A write-down of inventory reduces a company’s operating cash flows
False
An increase in accounts payables causes operating profit to be higher than operating cash flow (everything else equal).
False
All property plant and equipment is measured at historical cost on the balance sheet.
False
A possible obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.
False
Goodwill is only recognized on the balance sheet if a company acquires more than 50% of another company.
True
An item of machinery is purchased for €1000. It is estimated to have an 8-year useful life, with a residual value of €200. Straight-line depreciation is used. What is the expense in the income statement in year three related to the machine if the recoverable amount of the machine is estimated to be €600 at the end of year three?
a. 100
b. 200
c. 300
d. 400
b. 200
If a company reports operating cash flow of 800, investing cash flow of -100, financing cash flow of 60, depreciation of 80 and a decrease in accounts receivable of 40, how much profit did it report?
a. 540
b. 680
c. 760
d. 920
b. 680
A company spends 240 on inventory and sells inventory worth 100. It also spends 250 on new machinery, while selling old equipment for 100. The company further spends 150 on repayment of a bank loan, 200 on research and development, 175 on employee wages and 80 on rent. What was the company’s investing cash flow?
a. -150
b. -290
c. -350
d. -490
a. -150
During 2016, a company issued shares with a value of 2500, made an operating profit of 1200, paid a dividend of 400, increased the size of its bank loan by 300, paid interest of 100 and increased its taxes payable by 300. At the end of 2016 how much wealthier have its shareholders become?
a. 400
b. 800
c. 1200
d. 2900
b. 800
Purchased intangible assets are not recognized on the balance sheet.
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow (everything else equal).
True
All financial assets are measured at fair value on the balance sheet.
False
Accrual accounting requires a business to recognize transactions when they occur, not when cash is received or paid.
True
An impairment of goodwill reduces a company’s operating cash flows.
False
An item of machinery is purchased for €1000. It is estimated to have a 8-year useful life, with a residual value of €200. Straight-line depreciation is used. What is the carrying amount (book value) of the machinery after 3 years?
a. 625
b. 700
c. 725
d. 800
b. 700
A company spends 120 on inventory and sells inventory worth 80. It also spends 150 on new machinery, while selling old equipment for 100. The company further spends 50 on repayment of a bank loan, 75 on employee wages and 50 on rent. What was the company’s investing cash flow?
a. -50
b. -100
c. -150
d. -250
a. -50
At the start of the year the company has finished-goods inventory of 100 units with a book value of £10 per unit. During the year the company purchases a further 50 units at £15 per unit and sells 70 units at a price of £20 per unit. If the company uses the FIFO method to account for its inventory, what was the company’s cost of goods sold during the year?
a. 700
b. 950
c. 1050
d. 1400
a. 700
If a company reports operating cash flow of 100, investing cash flow of -50, financing cash flow of 40, depreciation of 60 and an increase in accounts receivable of 20, how much profit did it report?
b. 60
If a company invests 100 to acquire plant and equipment that it previously rented for 10 and if it now also reports depreciation of 10 for the equipment, everything else equal, by how much does the firm’s total cash flow change?
c. -90
Cash inflows of a business always affect its profits.
False
Research and Development expenditure is normally capitalised.
False
An increase in accounts receivable causes operating profit to be higher than operating cash flow.
True
Software development costs can never recognised as an asset on a balance sheet.
False
A company spends 120 on inventory, 250 on machinery, 60 on repayment of a bank loan, 70 on employee wages and 50 on rent. What was the company’s investing cash flow?
a. -50
b. -60
c. -250
d. -370
c. -250
An item of machinery is purchased for €500. It is estimated to have a 10-year useful life, with a residual value of €100. Straight-line depreciation is used. What is the carrying amount (book value) of the machinery after 3 years?
a. 300
b. 350
c. 380
d. 420
c. 380
If a company reports operating cash flow of 120, investing cash flow of -50, financing cash flow of 40, depreciation of 30 and an increase in accounts receivable of 10, how much profit did it report?
a. 30
b. 50
c. 80
d. 100
d. 100
If a company spends cash of 90 to acquire plant and equipment, and if it also reports depreciation of 10 and an impairment loss of 30, by how much does the total value of its assets change?
a. -10
b. -40
c. -90
d. +50
b. -40
If reported profit is 50, including depreciation expense of 10, an impairment loss of 10 and stock compensation of 20, and if accounts receivable increase by 40, how much is operating cash flow?
a. 50
b. 30
c. 10
d. -10
a. 50
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛=
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 (=𝐸𝐵𝐼𝑇) / 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
Interest Coverage=
EBIT/Interest Expense
Average Cash Conversion Cycle=
Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Asset Turnover=
Revenues/Total Assets
Current Ratio=
Current Assets/Current Liabilities
Return on Equity (ROE)=
Net Income/Equity
Receivable Turnover (in days)=
Receivables/Revenue * 365
Leverage Ratio=
Total Liabilities / Equity -or- Total Assets / Equity
Cash Ratio=
Cash/Current Liabilities
Quick Ratio=
Cash+Marketable Securities+Accounts Receivable/Current Liabilities
Asset Turnover=
Revenues/Total Assets
Net Profit Margin=
Net Income /Revenues
Return on Assets=
Net Income/Assets
Working Capital=
Current Assets - Current Liabilites
Operating Cash Flow=
Net Income + Depreciation - Working Capital
Operating Cash Flow Definition (not formula)=
Cash generated from Day to Day Activities of the Company
Investing Cash Flow Definition (not formula)=
Cash generated from the Sale and Purchase of Investments
Financing Cash Flow Definition (not formula)=
Cash generated from Conducting Financing Activities, such as repaying capital, etc.
All financial assets are measured at fair value on the balance sheet.
False
If a company’s reported operating profit is lower than its operating cash flow, it might be the result of an increase in accounts payables.
True
A company’s own brand is recorded as goodwill in its balance sheet.
False
A write-down on a company’s inventory increases its operating cash flows.
False
When a company issues new shares to investors, it is recorded as positive investing cash flow.
False
An item of machinery is purchased for €2000 at the beginning of the year. It is estimated to have a 4-year useful life, with a residual value of €800. Straight-line depreciation is used. What is the expense in the income statement at the end of year two related to the machine if the recoverable amount of the machine is estimated to be €1300?
a. 300
b. 400
c. 600
d. 700
b. 400 (300 for depreciation, 100 for impairment)
During 2018, a company repurchased shares with a value of 200, reported a net profit of 160, paid a dividend of 40, increased the size of its bank loan by 100, paid interest of 10 and paid taxes payable from the previous year of 90. At the end of 2018 by how much has its shareholder equity changed?
a. -80
b. 0
c. +40
d. +320
a. -80 (-200+160-40=-80)
A company operates plant and equipment with a total value of £4,000 million, of which £800 million was purchased for cash, some £2,000 million came to be employed through a finance lease, £600 million through an operating lease, and the remainder through bank financing. What is the book value of the liability relating to plant and equipment for this company?
a. 600
b. 2600
c. 3200
d. 4000
b. 2600 (Operating Lease not a Liability)
If a company reports operating cash flow of 800, investing cash flow of -200, financing cash flow of 160, depreciation of 80, a decrease in accounts receivable of 40 and a decrease in taxes payable of 60, how much profit did it report?
a. 580
b. 620
c. 740
d. 860
c. 740
A company runs a defined benefit pension scheme with a projected benefit obligation of 200,000 and pension plan assets of 100,000 as of the end of the previous financial year. The interest cost is 4% and the expected return on the plan assets is 5%. The service cost is 3000 and the company pays 2000 into the pension this year. What is the pension expense the company recognizes in its income statement this year?
a. 2000
b. 3000
c. 6000
d. 8000
c. 6000
Purchased goodwill is not recognized on the balance sheet.
False
Investing cash inflows increase equity.
False
A decrease in accounts receivable causes operating profit to be lower than operating cash
flow (everything else equal).
True
A probable obligation of a company resulting from ongoing litigation is recognized as a
liability on the company’s balance sheet.
True
An impairment loss on a company’s inventory reduces its operating cash flows.
False
An item of machinery is purchased for €1000. It is estimated to have an 8-year useful
life, with a residual value of €200. Straight-line depreciation is used. At what value is
the machine recorded on the balance sheet at the end of year three if the recoverable
amount of the machine is estimated to be €600 at the end of that year?
a. 500
b. 600
c. 700
d. 800
b. 600
If a company spends cash of 90 to acquire plant and equipment, and if it also reports
depreciation of 10 and an impairment loss of 30, by how much does the total value of
its assets change?
a. -40
b. -90
c. +50
d. +80
a. -40
If a company reports operating cash flow of 800, investing cash flow of -100,
financing cash flow of 60, depreciation of 80 and a decrease in accounts receivable of
40, how much profit did it report?
a. 540
b. 680
c. 760
d. 920
b. 680 (800 -80 - 40)
A company spends 220 on inventory and sells inventory worth 100. It also spends
240 on new machinery, while selling old equipment for 120. The company further
spends 150 on repayment of a bank loan, 200 on research and development, 175 on
employee wages and 80 on rent. What was the company’s investing cash flow?
a. -120
b. -320
c. -440
d. -470
a. -120 (only machinery/equipment in this question affect investing cash flow)
A company runs a defined benefit pension scheme with a projected benefit obligation
of 10,000 and pension plan assets of 6,000 as of the end of the previous financial
year. The interest cost is 4% and the expected return on the plan assets is 5%. The
service cost is 300 and the company pays 100 into the pension every year. What is the
pension expense the company recognizes in its income statement?
a. 0
b. 100
c. 400
d. 700
c. 400 (obligation interest +return on assets +service cost)
