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Unformatted text preview: b/ A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments, c. Common equity includes common stock and retained earnings, less accumulated depreciation. . The retained earnings account as reported on the balance sheet whous the amount of cash that is available for paying dividends. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative. 10. Which of the following statements is CORRECT? -Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors. b. Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the C. amounts at which the assets are carried on the books. The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm's reported profits and its actual cash flow for the same period. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. e. EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS. 11. The market/book (M/B) ratio tells us how much investors are willing to pay for a dollar of accounting book value. In general, investors regard A companies with higher M/B ratios as being less risky and/or more likely to enjoy higher growth in the future. True b. False A firm wants to strengthen its financial position. Which of the 12. following actions would increase its current ratio? A a. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. b. Use cash to repurchase some of the company's own stock. c./ Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. Use cash to increase inventory holdings Which of the following statements is CORRECT? 13....
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