Chapter 02 Financial Statements & Cash Flow

21. Which one of the following accounts is generally the most liquid?
A. Patent
B. Accounts receivable
C. Building
D. Equipment
E. Inventory

22. Which one of the following statements concerning liquidity is correct?
A. If you sold an asset today, it is a liquid asset.
B. Balance sheet accounts are listed in order of decreasing liquidity.
C. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.
D. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.
E. Trademarks and patents are highly liquid.

23. Liquidity is:
A. a measure of the use of debt in a firm's capital structure.
B. equal to current assets minus current liabilities.
C. equal to the market value of a firm's total assets minus its current liabilities.
D. valuable to a firm even though liquid assets tend to be less profitable to own.
E. generally associated with intangible assets.

24. Which of the following accounts are included in shareholders' equity?
I. retained earnings
II. interest paid
III. long-term debt
IV. capital surplus
A. I and II only
B. II and IV only
C. I and IV only
D. II and III only
E. I and III only

25. Book value:
A. is based on historical cost.
B. is equivalent to market value for firms with fixed assets.
C. is more of a financial than an accounting valuation.
D. generally tends to exceed market value when fixed assets are included.
E. is adjusted to market value whenever the market value exceeds the stated book value.

26. When making financial decisions related to assets, you should:
A. always consider market values.
B. place more emphasis on book values than on market values.
C. rely primarily on the value of assets as shown on the balance sheet.
D. place primary emphasis on historical costs.
E. only consider market values if they are less than book values.

27. As seen on an income statement:
A. interest is deducted from income and increases the total taxes incurred.
B. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses.
C. depreciation is shown as an expense but does not affect the taxes payable.
D. depreciation reduces both the pretax income and the net income.
E. interest expense is added to earnings before interest and taxes to get pretax income.

28. The earnings per share will:
A. decrease as the total revenue of the firm increases.
B. increase as the number of shares outstanding increase.
C. increase as net income increases.
D. decrease as the costs decrease.
E. increase as the tax rate increases.

29. Dividends per share:
A. increase as the net income increases as long as the number of shares outstanding remains constant.
B. decrease as the number of shares outstanding decrease, all else constant.
C. are inversely related to the earnings per share.
D. are based upon the dividend requirements established by Generally Accepted Accounting Procedures.
E. are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.

30. According to Generally Accepted Accounting Principles,
A. income is recorded based on the matching principle.
B. costs are recorded based on the liquidity principle.
C. income is recorded based on the realization principle.
D. depreciation is recorded as it affects the cash flows of a firm.
E. net income is recorded based on the realization principle.