Question

Question 1

(a) An income statement details how much cash a company earned during a specific period. TRUE OR FALSE?

(b) Depreciation reduces the cash on a firms balance sheet.TRUE OR FALSE ?

(c) We can create a cash flow statement by reversing out non-cash flow items on the income statement. TRUE OR FALSE ?

(d) Is a firms net income usually the best way to measure a managers performance ? If so, why? And if not what might be a better method?

(f) IF a firm has $2 million in total assets, $1.5 million in total liabilities, 0 preferred stock outstanding, and retained earnings of $100,000, what is the common stock on balance sheet.

Answer 1

a)The statement is False

Income statement shows the amount of net income (gain) earned or expense (loss)incurred during the period .

b)The statement is False

Depreciation is a non cash expense thus it does not reduces cash on firms balance sheet .It is a contra asset which is reported by way of subtraction from Gross asset (and not from cash).

c)The statement is True.

Income statement is prepared using accrual basis of accounting which considers both cash as well as non cash items in its preparation .Thus cash flow from operating activity can be computed using income statement(indirect method) by reversing out non cash items in preparation of cash flow statement

d)No,Net income is not a best measure to evaluate management performance .The best way is to conduct ratio analysis which evaluate the management effectiveness .Ratios such as Return on equity ,Return on asset ,Debt ratio and profit margin ratios and many more.

e)Total asset =Total liabilities + total equity

2000000 = 1500000 + total equity

Total equity = 2000000 - 1500000

                    = 500000

Now ,

Total equity = Common stock +retained earning

     500000 = common stock +100000

common stock = 500000 -100000

                            = $ 400000