Chapter 3 Understanding Financial Statements and Cash Flows

 1) An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date.

2) Owners equity increases each period by the amount of the corporation's positive net cash flow.

3) If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

4) Common-sized income statements are used to compare companies that have the same amount of revenues.

5) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.

6) Net profit margin is equal to the gross profit margin times the operating profit margin.

7) Earnings before taxes, or taxable income, is equal to operating income minus financing costs.

8) The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.

9) Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense.

10) Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners.

11) Earnings available to common shareholders is equal to a corporation's positive net cash flow over a given period, typically one year.

12) Profits-to-Sales relationships are defined as profit margins.