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Chapter 10Understanding a Firm's Financial Statements TRUE/FALSE 1. The income statement shows a firm's financial position on a specific date. ANS: F The income statement indicates the amount of profit or loss generated by a firm over a given period of time, often one year. PTS: 1 REF: p. 297 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 2. The income statement shows the profit or loss from a firm's operations over a given period of time. ANS: T PTS: 1 REF: p. 297 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 3. The income statement answers the question: "How profitable is the business?" ANS: T PTS: 1 REF: p. 300 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 4. The terms earnings, profits and income refer to different amounts on the income statement. ANS: F All three terms can be interchangeable. PTS: 1 REF: p. 297 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 5. The money that owners invest in the business is called owners' equity. ANS: T PTS: 1 REF: p. 306 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 6. Dividends to a firms owners are not considered an expense in the income statement. ANS: T PTS: 1 REF: p. 300 OBJ: 10-1 TYPE: D NAT: Analytic | Finance 7. A profitable company may not have positive cash flows. ANS: T PTS: 1 REF: p. 297 OBJ: 10-1 TYPE: C NAT: Analytic | Finance 8. Total assets less outstanding debt equals ownership equity. ANS: F Total assets less total debt equals owners equity. PTS: 1 REF: p. 301 OBJ: 10-1 TYPE: C NAT: Analytic | Finance 9. Depreciation is the cost of a firms equipment and building allocated over its useful life. ANS: T PTS: 1 REF: p. 298 OBJ: 10-1 TYPE: C NAT: Analytic | Finance 10. Profits reward owners for investing in a company, but they do little to promote future growth. ANS: F Profits can be used for dividends or kept in the business as retained earnings for financing future growth. PTS: 1 REF: p. 299 OBJ: 10-1 TYPE: C NAT: Analytic | Finance 11. The balance sheet shows a firm's assets, liabilities, and owners' equity at a specific point in time. ANS: T PTS: 1 REF: p. 301 OBJ: 10-2 TYPE: D NAT: Analytic | Finance 12. Accounts payable consist of payments due from a firm's customers. ANS: F Accounts receivables are payments due from a firm's customers; accounts payable is money owed by the firm to suppliers PTS: 1 REF: p. 304 OBJ: 10-2 TYPE: D NAT: Analytic | Finance 13. Accounts payable, accrued expenses, 2-year notes payable, and 90-day notes are all short-term liabilit- ies. ANS: F All of the above liabilities are short term liabilities except for the 2-year notes payable. Since this debt is due after 12 months, it is considered long-term debt. PTS: 1 REF: p. 305 OBJ: 10-2 TYPE: D NAT: Analytic | Finance 14. Assets that can be converted to cash relatively quickly are said to be liquid .... View Full Document

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