Cash Flows and Financial Statements Quiz

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Key concepts in cash flow and value

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Heba Adel

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Cash Flows and Financial Statements Quiz


Cash Flows and Financial Statements QuizOnline version Key concepts in cash flow and value by Heba Adel 1 Liquidity True or false: All assets are liquid at some price. Explain. a Liquidity means there is no price; assets are either cash or not. b False — not all assets can be converted to cash at any price. c All assets are equally liquid regardless of asset type. d True — all assets have some price at which they can be converted to cash, though liquidity varies by asset. 2 Accounting and Cash Flows Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period? a Because cash flows are reported separately and are always higher than income. b Because income statements include only cash transactions. c Because GAAP recognizes revenue when earned and expenses when incurred, not necessarily when cash is received or paid. d Because cash flows are always equal to net income in the period. 3 Accounting Statement of Cash Flows Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company? a The bottom line is the total revenues for the period and is the most important measure of profitability. b The bottom line is the cash flow from financing activities only and is not useful for analysis. c The bottom line is the change in cash for the period and is useful for understanding liquidity; it may differ from net income. d The bottom line shows depreciation but not taxes and is therefore not useful. 4 Cash Flows How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company? a Financial cash flow only considers debt payments and ignores equity effects. b Financial cash flow focuses on cash flow from assets available to creditors and owners, while the accounting statement summarizes cash flows by activity; financial cash flow is generally more useful for analysis. c They are the same thing; both are just cash flow figures. d The accounting statement is more useful because it ignores noncash items. 5 Book Values versus Market Values Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not? a No; market values cannot force liabilities to exceed assets in the same way because market value of assets would adjust, and equity becomes positive with any positive asset value. b Market values always equal book values, so negative equity cannot occur. c Yes; market values can make liabilities exceed assets just as book values can. d Market values are irrelevant to the balance sheet and do not affect equity. 6 Firm Values Referring back to the D. R. Horton example at the beginning of the chapter, note that we suggested that D. R. Horton’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion? a Reported losses always imply negative future cash flows and stockholder losses. b Market value immediately drops to zero with any loss. c The cash flow from assets and the expectation of future cash flows can be positive even when reported losses occur in a period. d A loss means the company is bankrupt and stockholders always suffer.

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Cash Flows and Financial Statements Quiz

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Cash Flows and Financial Statements QuizOnline version

by Heba Adel

Liquidity True or false: All assets are liquid at some price. Explain.

Accounting and Cash Flows Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?

Accounting Statement of Cash Flows Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?

Cash Flows How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?

Book Values versus Market Values Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

Firm Values Referring back to the D. R. Horton example at the beginning of the chapter, note that we suggested that D. R. Horton’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?