Accounting T/F, MC & Ratios

Question 1

Purchased goodwill is not recognized on the balance sheet.

Answer 1

False

Question 2

Investing cash inflows increase equity.

Answer 2

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)

Question 3

A decrease in accounts receivable causes operating profit to be lower than operating cash flow (everything else equal).

Answer 3

True

Question 4

A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.

Answer 4

True (Probable – Provide; Possible – Contingent liability so disclose only; Remote – do nothing)

Question 5

An impairment loss on a company’s inventory reduces its operating cash flows.

Answer 5

False (An impairment loss is not a cash transaction but it’s just an accounting adjustment so there is no impact on cash flow)

Question 6

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

Answer 6

(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

Question 7

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

Answer 7

90 – 10 – 30 = 50, but the question is about “change” of volume of assets. The answer then is a) -40

Question 8

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

Answer 8

Operating profit (?) + Depreciation 80 + Decrease in accounts receivable 40 = 800

Operating profit = 800-80-40 =680

Answer: (b) 680

Question 9

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

Answer 9

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)

Question 10

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

Answer 10

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)

Question 11

A financing cash outflow is a debit to the cash balance.

Answer 11

False

Question 12

Revenue is a credit to equity.

Answer 12

True

Question 13

Inventory is carried in the balance sheet at its market value.

Answer 13

False

Question 14

Free cash flow is equal to Operating Cash Flow After Tax.

Answer 14

False

Question 15

A reduction in working capital implies a reduction in operating cash flow.

Answer 15

False

Question 16

Goodwill must be tested for impairment, but cannot be revalued upwards.

Answer 16

True

Question 17

A parent company does not have to consolidate its subsidiary unless at least 50% of the equity is owned by the parent.

Answer 17

True

Question 18

An issue of shares increases net assets.

Answer 18

True

Question 19

A write-down of inventory reduces a company’s operating cash flows.

Answer 19

False

Question 20

An increase in accounts payable causes operating profit to be higher than operating cash flow (everything else being equal).

Answer 20

False

Question 21

All property plant and equipment is measured at historical cost on the balance sheet.

Answer 21

False

Question 22

A possible obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.

Answer 22

False

Question 23

Purchased intangible assets are not recognized on the balance sheet.

Answer 23

False

Question 24

An increase in accounts receivable causes operating profit to be higher than operating cash flow (all else being equal)

Answer 24

True

Question 25

All financial assets are are measured at fair value on the balance sheet.

Answer 25

False

Question 26

Accrual accounting requires a business to recognize transactions when they occur, not when cash is received or paid.

Answer 26

True

Question 27

An impairment of goodwill reduces a company's operating cash flows.

Answer 27

False

Question 28

Cash inflow of a business always affect it's profits

Answer 28

False

Question 29

Research and Development expenditure is normally capitalised

Answer 29

False

Question 30

An increase in accounts receivable causes operating profit to be higher than operating cash flow.

Answer 30

True

Question 31

Accrual accounting requires a business to recognize economic events when they occur, not when cash is received or paid.

Answer 31

True

Question 32

Software development costs can never be recognized as an asset on a balance sheet.

Answer 32

False

Question 33

Dividends are considered an expense in running the business and reported in the income statement.

Answer 33

False

Question 34

Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase.

Answer 34

False

Question 35

The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.

Answer 35

True

Question 36

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.

Answer 36

False

Question 37

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.

Answer 37

True

Question 38

An impairment of goodwill reduces a company’s operating cash flows

Answer 38

False

Question 39

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.

Answer 39

True

Question 40

All intangible assets are amortised over their useful life.

Answer 40

False

Question 41

A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.

Answer 41

True

Question 42

Accrual accounting requires a business to recognize transactions in financial statements when cash is received or paid.

Answer 42

False

Question 43

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

Answer 43

c. 300

Question 44

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

Answer 44

b. 700

Question 45

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

Answer 45

a. 650

Question 46

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

Answer 46

c. +90

Question 47

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

Answer 47

d. 500

Question 48

A write-down of inventory reduces a company’s operating cash flows

Answer 48

False

Question 49

An increase in accounts payables causes operating profit to be higher than operating cash flow (everything else equal).

Answer 49

False

Question 50

All property plant and equipment is measured at historical cost on the balance sheet.

Answer 50

False

Question 51

A possible obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.

Answer 51

False

Question 52

Goodwill is only recognized on the balance sheet if a company acquires more than 50% of another company.

Answer 52

True

Question 53

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

Answer 53

b. 200

Question 54

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

Answer 54

b. 680

Question 55

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

Answer 55

a. -150

Question 56

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

Answer 56

b. 800

Question 57

Purchased intangible assets are not recognized on the balance sheet.

Answer 57

False

Question 58

An increase in accounts receivable causes operating profit to be higher than operating cash flow (everything else equal).

Answer 58

True

Question 59

All financial assets are measured at fair value on the balance sheet.

Answer 59

False

Question 60

Accrual accounting requires a business to recognize transactions when they occur, not when cash is received or paid.

Answer 60

True

Question 61

An impairment of goodwill reduces a company’s operating cash flows.

Answer 61

False

Question 62

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

Answer 62

b. 700

Question 63

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

Answer 63

a. -50

Question 64

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

Answer 64

a. 700

Question 65

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?

Answer 65

b. 60

Question 66

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?

Answer 66

c. -90

Question 67

Cash inflows of a business always affect its profits.

Answer 67

False

Question 68

Research and Development expenditure is normally capitalised.

Answer 68

False

Question 69

An increase in accounts receivable causes operating profit to be higher than operating cash flow.

Answer 69

True

Question 70

Software development costs can never recognised as an asset on a balance sheet.

Answer 70

False

Question 71

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

Answer 71

c. -250

Question 72

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

Answer 72

c. 380

Question 73

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

Answer 73

d. 100

Question 74

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

Answer 74

b. -40

Question 75

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

Answer 75

a. 50

Question 76

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛=

Answer 76

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 (=𝐸𝐵𝐼𝑇) / 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠

Question 77

Interest Coverage=

Answer 77

EBIT/Interest Expense

Question 78

Average Cash Conversion Cycle=

Answer 78

Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

Question 79

Asset Turnover=

Answer 79

Revenues/Total Assets

Question 80

Current Ratio=

Answer 80

Current Assets/Current Liabilities

Question 81

Return on Equity (ROE)=

Answer 81

Net Income/Equity

Question 82

Receivable Turnover (in days)=

Answer 82

Receivables/Revenue * 365

Question 83

Leverage Ratio=

Answer 83

Total Liabilities / Equity -or- Total Assets / Equity

Question 84

Cash Ratio=

Answer 84

Cash/Current Liabilities

Question 85

Quick Ratio=

Answer 85

Cash+Marketable Securities+Accounts Receivable/Current Liabilities

Question 86

Asset Turnover=

Answer 86

Revenues/Total Assets

Question 87

Net Profit Margin=

Answer 87

Net Income /Revenues

Question 88

Return on Assets=

Answer 88

Net Income/Assets

Question 89

Working Capital=

Answer 89

Current Assets - Current Liabilites

Question 90

Operating Cash Flow=

Answer 90

Net Income + Depreciation - Working Capital

Question 91

Operating Cash Flow Definition (not formula)=

Answer 91

Cash generated from Day to Day Activities of the Company

Question 92

Investing Cash Flow Definition (not formula)=

Answer 92

Cash generated from the Sale and Purchase of Investments

Question 93

Financing Cash Flow Definition (not formula)=

Answer 93

Cash generated from Conducting Financing Activities, such as repaying capital, etc.

Question 94

All financial assets are measured at fair value on the balance sheet.

Answer 94

False

Question 95

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.

Answer 95

True

Question 96

A company’s own brand is recorded as goodwill in its balance sheet.

Answer 96

False

Question 97

A write-down on a company’s inventory increases its operating cash flows.

Answer 97

False

Question 98

When a company issues new shares to investors, it is recorded as positive investing cash flow.

Answer 98

False

Question 99

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

Answer 99

b. 400 (300 for depreciation, 100 for impairment)

Question 100

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

Answer 100

a. -80 (-200+160-40=-80)

Question 101

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

Answer 101

b. 2600 (Operating Lease not a Liability)

Question 102

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

Answer 102

c. 740

Question 103

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

Answer 103

c. 6000

Question 104

Purchased goodwill is not recognized on the balance sheet.

Answer 104

False

Question 105

Investing cash inflows increase equity.

Answer 105

False

Question 106

A decrease in accounts receivable causes operating profit to be lower than operating cash flow (everything else equal).

Answer 106

True

Question 107

A probable obligation of a company resulting from ongoing litigation is recognized as a liability on the company’s balance sheet.

Answer 107

True

Question 108

An impairment loss on a company’s inventory reduces its operating cash flows.

Answer 108

False

Question 109

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

Answer 109

b. 600

Question 110

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

Answer 110

a. -40

Question 111

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

Answer 111

b. 680 (800 -80 - 40)

Question 112

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

Answer 112

a. -120 (only machinery/equipment in this question affect investing cash flow)

Question 113

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

Answer 113

c. 400 (obligation interest +return on assets +service cost)