Chapter 2--Analysis of Fina - Copy

False 3 an increase in an asset account is a source

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FALSE 3. An increase in an asset account is a source of cash, whereas an increase in a liability account is a use of cash. FALSE 4. Depreciation, as shown on the income statement, is regarded as a use of cash because it is an expense. FALSE 5. When a firm pays off a loan using cash, the source of funds is the decrease in the asset account, cash, while the use of funds involves a decrease in a liability account, debt. TRUE 6. Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books. TRUE 7. Taxes, payment patterns, and reporting considerations, as well as credit sales and non-cash costs, are reasons why operating cash flows can differ from accounting profits. TRUE
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8. Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm. TRUE 9. The current ratio and inventory turnover ratio measure the liquidity of a firm. The current ratio measures the relation of a firm's current assets to its current liabilities and the inventory turnover ratio measures how rapidly a firm turns its inventory back into a "quick" asset or cash. FALSE 10. If a firm has high current and quick ratios, this always is a good indication that a firm is managing its liquidity position well. FALSE 11. A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving. FALSE 12. The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios. TRUE 13. Profitability ratios show the combined effects of liquidity, asset management, and debt management on operations. TRUE 14. Determining whether a firm's financial position is improving or deteriorating requires analysis of more than one set of financial statements. Trend analysis is one method of measuring a firm's performance over time. TRUE 15. The information contained in the annual report is used by investors to form expectations about future earnings and dividends. TRUE
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16. The balance sheet presents a summary of the firm's revenues and expenses over an accounting period. FALSE 17. On the balance sheet, total assets must equal total liabilities plus stockholders equity. TRUE 18. One of the biggest noncash items on the income statement is depreciation which needs to be subtracted from net income to determine cash flows for the firm. FALSE 19. A firm's net income reported on its income statement must equal the operating cash flows on the statement of cash flows. FALSE 20. A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows.
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