Chapter 4: Measuring Financial Performance

CHAPTER 4
MEASURING FINANCIAL PERFORMANCE
True-False Questions
T. 1. Assets are financial and physical items controlled or owned by the business.
F. . The practice of recording economic acti!ity when reali"ed is #nown as
accrual accounting.
F. $. %ow &uic#ly an asset can be con!erted into cash is called liability.
F. 4. Cash or other assets that are e'pected to be con!erted into cash in less than
one year are #nown as current liabilities.
F. (. The reduction in !alue of a fi'ed asset o!er its e'pected life intended to
reflect the usage or wearing out of the asset is called accumulated depreciation.
F. ). Amounts owed to another for purchase made on credit which come due in
less than one year are #nown as recei!ables.
T. *. +ong,term- non,cancelable leases whereby the owner recei!es payments
that co!er the cost of the e&uipment plus a return on in!estment in the
e&uipment is #nown as a capital lease.
T. .. /perating income- or earnings before interest and ta'es- reflects the firm0s
profits after all operating e'penses- e'cluding financing costs- ha!e been
deducted from net sales.
T. 1. 2et income- or profit- is the bottom line measure of what0s left from the
firm0s net sales after operating e'penses- financing costs- and ta'es ha!e been
deducted.
F. 13. 2et cash burn occurs when the sum of cash flows from operations and
in!esting is positi!e.
F. 11. 2et cash build occurs when the sum of cash flows from operations and
in!esting is negati!e.
F. 1. 4AAP stands for 54eneral American Accounting Principles.6
T. 1$. 4AAP stands for 54enerally Accepted Accounting Principles.6
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Chapter 4: Measuring Financial Performance
T. 14. Accrual accounting is the practice of recording economic acti!ity when
recogni"ed rather than waiting until reali"ed.
F. 1(. The balance sheet e&uation is: Total Assets 7 Total +iabilities 8 2et
9ncome.
T. 1). :uring the de!elopment stage in a new !enture0s life cycle- the balance
sheet reflects the ac&uisition of initial assets and the obtaining of seed
financing.
T. 1*. :uring the de!elopment stage in a new !enture0s life cycle- the income
statement typically shows no sales but e'penses such as rent- utilities- and a
subsistence salary for the entrepreneur.

F. 1.. :uring the startup stage in a new !enture0s life cycle- the income
statement typically shows no sales but e'penses including the production and
mar#et of products or ser!ices.
F. 11. Production assets ;e.g.- in!entories and e&uipment to produce products and
gi!e credit to customers< usually occurs during the de!elopment stage in a new
!enture0s life cycle.
T. 3. =eed financing ;e.g.- financing from the entrepreneur0s assets- family- and
friends< usually occurs during the de!elopment stage in a new !enture0s life
cycle.
F. 1. =tartup financing ;e.g.- financing from business angels and !enture
capitalists< usually occurs during the de!elopment stage in a new !enture0s life
cycle.
F. . 5Cost of goods sold6 is the cost of materials- labor- and ad!ertising
incurred to produce the products that were sold.
T. $. 5>ariable e'penses6 are costs or e'penses that !ary directly with re!enues.
F. 4. 5>ariable e'penses6 are costs that are e'pected to remain constant o!er a
range of re!enues for a specific time period.
F. (. ?@:AT is earnings before interest- ta'es- depreciation- and amorti"ation.
T. ). 5Contribution profit margin6 is the portion of the sale of a product that
contributes to co!ering the cash fi'ed costs-
F. *. 5?conomic !alue added6 ;?>A< measures a firm0s mar#et !alue added
o!er a specified time period.
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Chapter 4: Measuring Financial Performance
Multiple-Coi!e Questions
b. 1. Financial statement that pro!ides a snapshot of a business0 financial
position as of a specific date is called the
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
a. . Financial statement that reports the re!enues generated and e'penses
incurred o!er an accounting period is called the
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
d. $. Financial statement that shows how cash- as reflected in accrual accounting-
flows into and out of a company during a specific period of operation is called
the
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
d. 4. Cash includes all of the following e'cept
a. coins
b. currency
c. chec#ing accounts
d. certificates of deposit
b. (. Ahich of the following is not a characteristic of mar#etable securitiesB
a. short,term
b. illi&uid
c. high,&uality
d. interest,bearing
c. ). Ahich of the following is not a characteristic of in!entoriesB
a. raw materials
b. finished products
c. goods sold but not yet shipped
d. wor#,in,process
e. *. Ahich of the following is not depreciatedB
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Chapter 4: Measuring Financial Performance
a. in!entory
b. machinery
c. land
d. both a and b
e. both a and c
d. .. Ahich of the following is a use of cashB
a. a decrease in in!entory
b. an increase in accrued liabilities
c. the sale of an asset for a gain
d. a drop in the amount owed on a bond
e. an increase is stoc# issued
d. 1. Ahich of the following is a source of cashB
a. an increase in accounts recei!able
b. a decrease in wages payable
c. the ac&uisition of land
d. an increase in the amount owed on a note payable
e. the repurchase of outstanding shares of stoc#
b. 13. Ahich of the following is not a category on the statement of cash flowsB
a. cash flow from operating acti!ities
b. cash flow from e&uity acti!ities
c. cash flow from in!esting acti!ities
d. cash flow from financing acti!ities

Note" Use the following data for the next three problems (11, 12, & 13).
Acme Pest Control has sales of C1$-(33- cost of goods sold of C4-333- selling
e'penses of C$-(33- depreciation of C-333- interest e'pense of C-333- and a
ta' rate of $4D.
a. 11. Ahat is Acme0s operating incomeB
a. C4-333
b. C-333
c. C1-(33
d. C)-333
e. C1-$3
d. 1. Ahat is Acme0s ta'able income and ta' e'penseB
a. C)-333E C-343
b. C-333E C1-$3
c. C4-333E C1-$)3
d. C-333E C).3
e. C1-(33E C$-$3
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Chapter 4: Measuring Financial Performance
e. 1$. Ahat is Acme0s net incomeB
a. C-*3
b. C.1*.)3
c. C)-4)3
d. C-343
e. C1-$3
c. 14. Four !enture has total assets of C)13- net fi'ed assets of C(33- long term
debt of C.3- and stoc#holders0 e&uity of C433. Ahat is the amount of your
!enture0s current liabilitiesB
a. ,C133
b. C133
c. C13
d. C13
e. C1-313
b. 1(. 9n its first year- Goe0s =tart,Hp Company had re!enues of C1(-333 and
cost of goods sold of C.1-(3- which was the only !ariable cost. :epreciation
was C3-333- and cash costs were C(-333 in financing costs- admin e'penses of
C(3-333- and C4(-333 in mar#eting e'penses I all of which were fi'ed. Ahat
is the sur!i!al brea#e!en re!enueB
a. C$4-.(*
b. C.(-*14
c. C*1-41
d. C1.4-)1(
e. C1($-.4)

c. 1). 9n brea#e!en analysis- sol!ing for when ?@T:A is e&ual to "ero gi!es
brea#e!en in terms of:
a. economic re!enues
b. !ariable costs
c. sur!i!al re!enues
d. fi'ed costs
b. 1*. A firm0s net operating profit after ta'es ;2/PAT< is calculated as:
a. net profit
b. ?@9T times one minus the ta' rate
c. ?@T minus interest paid
d. ?@9T times the ta' rate
c. 1.. ?conomic >alue Added ;?>A< is calculated as:
a. 2/PAT plus after,ta' dollar cost of financial capital used
b. J/? minus percentage cost of financial capital
c. 2/PAT minus after,ta' dollar cost of financial capital used
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Chapter 4: Measuring Financial Performance
d. J/? plus the percentage cost of financial capital
d. 11. ?'penses or costs that !ary directly with re!enues are said to be:
a. fi'ed e'penses
b. semi,fi'ed e'penses
c. semi,!ariable e'penses
d. !ariable e'penses
a. 3. The balance sheet e&uation states that 5total assets
a. total liabilities 8 depreciation
b. total liabilities 8 owners0 e&uity
c. owners0 e&uity 8 net income
d. owners0 e&uity 8 current liabilities
e. total liabilities 8 net income
c. 1. A lease that pro!ides maintenance in addition to financing and is also
usually cancelable is called:
a. capital lease
b. liability lease
c. operating lease
d. asset lease
e. e&uity lease
d. . Ahich one of the following is not considered to be a current assetB
a. cash
b. recei!ables
c. in!entories
d. fi'ed assets
a. $. Ahich one of the following is not considered to be an internal operating
scheduleB
a. income statement
b. cost of production schedule
c. cost of goods sold schedule
d. in!entories schedule
c. 4. 52et cash burn6 occurs when the sum of which of the following items is
negati!eB
a. cash flows from operations and financing
b. cash flows from in!esting and financing
c- cash flows from operations and in!esting
d. cash flows from net income and depreciation
e. cash flows from operations and net income
a. (. ?@:AT is e&ual to:
a. re!enues I !ariable costs I cash fi'ed costs
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Chapter 4: Measuring Financial Performance
b. re!enues 8 !ariable costs 8 cash fi'ed costs
c. re!enues I !ariables costs I total fi'ed costs
d. re!enues 8 !ariable costs I cash fi'ed costs
d. ). 2/PAT is defined as:
a. re!enues times ;1 8 ta' rate<
b. re!enues times ;1 I ta' rate<
c. ?@9T:A times ;1 I ta' rate<
d. ?@9T times ;1 I ta' rate<
e. net income times ;1 8 ta' rate<
c. *. Ahat is the sur!i!al re!enues brea#e!en based on: cash fi'ed costs 7
C433-333 and a !ariable cost re!enue ratio 7 .)(B
a. C4)3-(33
b. C)1(-$.(
c. C1-14-.(*
d. C-333-$$4
e. C4-333-))*
b. .. Hse the following information to determine the cash fi'ed costs:
Administrati!e e'penses 7 C33-333E Mar#eting e'penses 7 C1.3-333E
:epreciation e'penses 7 C133-333E and 9nterest e'penses 7 C3-333.
a. C$.3-333
b. C433-333
c. C4.3-333
d. C(33-333
e. C)3-333
c. 1. Find the 5contribution profit margin6 based on the following information:
cash fi'ed costs 7 C)3-333E !ariable costs 7 C*3-333E and sales 7 C133-333.
a. *3D
b. )3D
c. $3D
d. 43D
e. 133D
d. $3. Find the 5sur!i!al re!enues6 ;=J<- also #nown as the ?@:AT brea#e!en<
based on the following information: cash fi'ed costs 7 C)3-333E !ariable costs
7 C*3-333E and sales 7 C133-333.
a. C.(-*14
b. C133-333
c. C11)-))*
d. C33-333
e. C$33-333
$3
Chapter 4: Measuring Financial Performance
a. $1. Find the 2/PAT gi!en the following information: sales 7 C(3-333-
earnings before interest 7 C133-333E interest 7 C3-333E and the ta' rate 7
$3D.
a. C*3-333
b. C()-333
c. C$3-333
d. C4-333
e. C13-333
c. $. Find the 2/PAT brea#e!en re!enues ;2J< gi!en the following
information: total operating fi'ed costs 7 C*(-333E !ariable costs 7 C1(3-333E
and sales 7 C33-333.
a. C133-333
b. C43-333
c. C$33-333
d. C433-333
e. C4)3-333
d. $$.. :etermine the total operating fi'ed costs ;T/FC< based on the following:
Administrati!e e'penses 7 C33-333E Mar#eting e'penses 7 C1.3-333E
:epreciation e'penses 7 C133-333E and 9nterest e'penses 7 C3-333.
a. C33-333
b. C$.3-333
c. C433-333
d. C4.3-333
e. C(33-333
c. $4. Ahat is the sur!i!al re!enues brea#e!en based on the following:
Administrati!e e'penses 7 C33-333E Mar#eting e'penses 7 C1.3-333E
:epreciation e'penses 7 C133-333E and 9nterest e'penses 7 C3-333E and a
!ariable cost re!enue ratio 7 .(3B
a. C433-333
b. C)33-333
c. C.33-333
d. C1-333-333
e. C1-33-333
$1