Statement of Cash Flows Quiz
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Statement of Cash Flows Quiz

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Questions and Answers

What is the primary benefit of using relevant information in decision-making?

  • It increases costs
  • It complicates the decision-making process
  • It results in better decisions (correct)
  • It has no impact on the decision

    • Accurate accounting information and audited financial statements are not important for businesses.

    False

    Which section of the statement of cash flows addresses the primary revenue source of providing goods and services?

  • Cash flows from financing activities
  • Cash flows from operating activities (correct)
  • Cash flows from financial activities
  • Cash flows from investing activities

    • What are the five functions of an information system?

    <p>Input, Processing, Output, Storage, and Control.</p> Signup and view all the answers

    Cash flows from investing activities only include the sale of equipment.

    <p>False</p> Signup and view all the answers

    The relationship between buyer behavior and price can be thought of as an __________ that influences marketing strategies.

    <p>information rule</p> Signup and view all the answers

    What does the statement of cash flows help determine when combined with the beginning cash balance?

    <p>Ending cash balance</p> Signup and view all the answers

    Match the following activities with their effects on a business's cash flow:

    <p>Increase in sales = Positive cash flow High operating expenses = Negative cash flow Collecting receivables = Positive cash flow Expanding operations = Negative impact on cash flow</p> Signup and view all the answers

    Which statement best summarizes how managers evaluate the financial health of a business?

    <p>By interpreting balance sheets and income statements</p> Signup and view all the answers

    The statement of cash flows includes cash flows from operating activities, investing activities, and __________ activities.

    <p>financing</p> Signup and view all the answers

    Lowering prices always guarantees increased sales figures.

    <p>False</p> Signup and view all the answers

    Match the following sections of the cash flow statement with their descriptions:

    <p>Cash flows from operating activities = Primary revenue source activities Cash flows from investing activities = Sale and purchase of assets Cash flows from financing activities = Debt and equity changes Statement of Cash Flows = Summary of cash inflows and outflows</p> Signup and view all the answers

    Identify one way information can reduce risk when making a decision.

    <p>By providing relevant intelligence for the decision-making process.</p> Signup and view all the answers

    Which of the following is NOT included in cash flows from financing activities?

    <p>Sale of equipment</p> Signup and view all the answers

    Comparing a company's current financial results with its own historical data can provide valuable insights.

    <p>True</p> Signup and view all the answers

    Why do many businesses include comparisons of financial statements in their annual reports?

    <p>To assess financial performance and industry standing</p> Signup and view all the answers

    What is the main purpose of an audit?

    <p>To ensure financial statements are prepared according to GAAP</p> Signup and view all the answers

    Audited financial statements are not important for business decision-making.

    <p>False</p> Signup and view all the answers

    What does GAAP stand for?

    <p>Generally Accepted Accounting Principles</p> Signup and view all the answers

    The process of systematically collecting, analyzing, and reporting financial information is known as __________.

    <p>accounting</p> Signup and view all the answers

    Match each term with its correct definition:

    <p>Audit = Examination of financial statements Accounting = Systematic collection and reporting of financial data GAAP = Guidelines for financial reporting Financial Statements = Documents that present a company’s financial position</p> Signup and view all the answers

    Which of the following is a benefit of having audited financial statements?

    <p>Improved accuracy of financial information</p> Signup and view all the answers

    Accounting information can only provide insights about the past performance of a business.

    <p>False</p> Signup and view all the answers

    What role do public accounting firms play in the auditing process?

    <p>They conduct audits to ensure financial statements are accurate and conform to GAAP.</p> Signup and view all the answers

    What are retained earnings?

    <p>The portion of profits not distributed to shareholders</p> Signup and view all the answers

    The income statement is a summary of a business's assets and liabilities during an accounting period.

    <p>False</p> Signup and view all the answers

    What is the formula to calculate net income for a business?

    <p>Revenues - Cost of goods sold - Operating expenses</p> Signup and view all the answers

    The difference between income and expenses is referred to as __________.

    <p>profit or loss</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Gross sales = Total amount of all goods and services sold Net sales = Actual amounts received after deductions Sales returns = Products returned by customers Sales discounts = Reduction in selling price for promotional purposes</p> Signup and view all the answers

    What is the primary purpose of an income statement?

    <p>To summarize a business's revenues and expenses</p> Signup and view all the answers

    Net sales are calculated before making any adjustments for returns, allowances, and discounts.

    <p>False</p> Signup and view all the answers

    What are revenues earned by a business from selling goods or providing services called?

    <p>Revenues</p> Signup and view all the answers

    What does the return on sales ratio indicate?

    <p>How effectively a business transforms sales into profits</p> Signup and view all the answers

    A higher current ratio indicates that a firm can struggle to pay its current liabilities.

    <p>False</p> Signup and view all the answers

    What is the formula for calculating the current ratio?

    <p>Current assets divided by current liabilities</p> Signup and view all the answers

    The inventory turnover ratio for Baobab Art Supplies is calculated by dividing the cost of goods sold in one year by the __________.

    <p>average value of the inventory</p> Signup and view all the answers

    What was the return on sales percentage for Baobab Art Supplies?

    <p>6.7 percent</p> Signup and view all the answers

    Reducing expenses has no effect on the return on sales.

    <p>False</p> Signup and view all the answers

    What does an inventory turnover of 8.2 times per year mean for Baobab Art Supplies?

    <p>The company sells its merchandise inventory about once every 45 days.</p> Signup and view all the answers

    Match the following financial ratios with their definitions:

    <p>Return on Sales = Net income after taxes divided by net sales Current Ratio = Current assets divided by current liabilities Inventory Turnover = Cost of goods sold divided by average inventory High Current Ratio = Indicates ability to pay current liabilities</p> Signup and view all the answers

    Study Notes

    Statement of Cash Flows

    • The Statement of Cash Flows has three sections:
      • Cash Flows from Operating Activities: Addresses the business’s primary revenue source - providing goods and services.
      • Cash Flows from Investing Activities: Includes the purchase and sale of equipment, land, and other assets and investments.
      • Cash Flows from Financing Activities: Reports changes in debt obligations and owners' equity accounts.
      • This section includes loans and repayments, the sale and repurchase of the company’s own stock, and cash dividends.
    • The totals of all three cash flow sections are added to the beginning cash balance to determine the ending cash balance.

    Evaluating Financial Statements

    • The balance sheet, the income statement, and the statement of cash flows can provide information about a business’s ability to do business and stay in business, its profitability, and its value as an investment.
    • A business's financial health can be evaluated by comparing its current financial data with its own financial results over recent accounting periods and with other businesses in similar industries.
    • Companies typically include in their annual reports comparisons of the important elements of their financial statements for recent years.

    Information and Risk

    • To improve decision-making, the information used by individuals and businesses must be relevant.
    • Relevant information leads to better intelligence and knowledge, resulting in better decisions.
    • Businesses that have better intelligence and knowledge, which leads to better decisions, may have a competitive edge over competitors and improve their profits.

    Information Rules

    • Marketing research shows that discounts influence car and truck buyers.
    • Lowering prices usually leads to more sales. This relationship between buyer behavior and price is an example of an information rule.

    Why Accounting Information Is Important

    • Accounting is the process of systematically collecting, analyzing and reporting financial information.
    • Accounting information can be used to answer questions about what has happened in the past, and to help make decisions about the future.
    • Businesses rely on audits conducted by accountants employed by public accounting firms to improve the accuracy of their accounting information and financial statements.

    Why Audited Financial Statements Are Important

    • An audit is an examination of a company’s financial statements and the accounting practices that produced them.
    • Audits ensure that financial statements are prepared in accordance with generally accepted accounting principles (GAAPs).
    • If an accountant determines that a company’s financial statements present financial information fairly and conform to GAAPs, then they will issue an opinion statement, confirming that the financial statements present information fairly.

    The Balance Sheet

    • The balance sheet shows a company’s assets, liabilities, and owners' equity at a specific point in time.
    • Assets are resources owned by a business, such as cash, land, and equipment.
    • Liabilities are the obligations that a business owes to others, such as amounts owed to suppliers and banks.
    • Owners' equity represents the owners' claims to the assets of the business.
    • The balance sheet equation shows the relationship between these three components: Assets = Liabilities + Owners' Equity.

    Owners' Equity

    • Owners' equity is usually referred to as shareholders' equity for a company.
    • The amount reported on the balance sheet is the total value of shares plus retained earnings that have accumulated to date.
    • Retained earnings are the portion of a business’s profits not distributed to shareholders.

    The Income Statement

    • The income statement summarizes a business’s revenues and expenses during a specified accounting period.
    • It may be called the earnings statement or the statement of income and expenses.
    • The difference between income and expenses defines profit or loss for a business, or cash surplus or cash deficit for an individual.
    • The income statement formula is: Revenues – Cost of goods sold – Operating expenses = Net income.

    Revenues

    • Revenues are the amounts earned by a business from selling goods, providing services, or performing business activities.
    • Gross sales are the total amount of all goods and services sold during the accounting period.
    • Deductions from gross sales include sales returns, sales allowances, and sales discounts.
    • Net sales are the actual amounts received by a business for the goods and services it has sold after adjustments for returns, allowances, and discounts.

    Financial Ratios

    • A financial ratio shows the relationship between two elements of a business’s financial statements.

    Return on Sales (or Profit Margin)

    • This ratio measures a business’s ability to earn profits.
    • Return on sales is calculated by dividing net income after taxes by net sales.
    • A higher return on sales is more favorable.
    • A low return on sales can be improved by reducing expenses and increasing sales.

    Current Ratio

    • This ratio measures a business’s ability to pay its debts.
    • The current ratio is computed by dividing current assets by current liabilities.
    • A high current ratio indicates that a firm can pay its current liabilities.
    • A low current ratio can be improved by repaying current liabilities, reducing dividend payments to stockholders to increase the firm’s cash balance, or obtaining additional cash from investors.

    Inventory Turnover

    • This ratio measures how well a business manages its inventory.
    • Inventory turnover is calculated by dividing the cost of goods sold in one year by the average value of the inventory.
    • The average value of the inventory is calculated by dividing the sum of beginning inventory and ending inventory by 2.
    • A high inventory turnover indicates that a firm is selling its inventory quickly and efficiently.

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    Description

    This quiz explores the Statement of Cash Flows, covering its three sections: Operating Activities, Investing Activities, and Financing Activities. Additionally, the quiz assesses knowledge on how these statements evaluate a business's financial health and investment potential.

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