JWMI 530 Financial Management I Knowledge Check 3 (2019/20) Complete Solution Guide.

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JWMI – Knowledge check 3 Course Financial Management I • Question 1 The income statement is also commonly referred to as the: : A. Profit and Loss Statement (P&L) ... B. Statement of Cash Flows C. Statement of Financial Condition D. Statement of Changes in Retained Earnings • Question 2 What does the income statement show? A. Assets, liabilities, and equity B. Revenues and expenses C. The amount of cash on hand D. Cash receipts and cash disbursements • Question 3 Under generally accepted accounting principles, revenue is recognized when: A. Services are rendered, or goods are sold and title has passed to the customer. B. Payment is received. • Question 4 1. Select from amongst the following statements that best supports the “Matching Principle” of accounting. *Refer to your Bookboon readings : A. If an expenditure is not clearly linked to revenue, accountants can recognize the expense in any period they choose B. When future benefits of a expenditure are not easily quantifiable (such as R&D, advertising and employee training), the cost is recognized immediately C. Expenses are linked directly to the revenue they help produce D. Expenses are recognized when cash is paid and revenue is recognized when it is earned • Question 5 Determine the Net Profit Margin for Year 3. Income Statement Sales Year1 75 Year2 70 Year3 53 Cost of Goods Sold 60 57 54 Gross Profit 15 13 -1 Operating Expenses 8 8 9 Other Income/(Expense) 0 -1 25 Income Before Taxes 7 4 15 Taxes 3 3 3 Net Income 4 1 12 A. 5% B. 23% C. 43% D. 25% Response Feedback: Net Profit Margin = Net Income / Sales 12 / 53 22.6% • Question 6 How is the income statement often used by management and leadership? A. To determine if the organization is operating at a profit or a loss B. To compare the liquidity of one organization to a similar organization C. To understand the use of debt and equity within a business D. To assess what cash is coming in and going out of the organization • Question 7 For Year 3, if shareholder’s equity from the balance sheet was $183, determine the ROE. Income Statement Sales Year1 75 Year2 70 Year3 53 Cost of Goods Sold 60 57 54 Gross Profit 15 13 -1 Operating Expenses 8 8 9 Other Income/(Expense) 0 -1 25 Income Before Taxes 7 4 15 Taxes 3 3 3 Net Income 4 1 12 A. 15% B. 23% C. 7% D. 22% 12 / 183 6.6% • Question 8 This P&L likely came from a service business, such as a consulting firm. Income Statement Sales Year1 75 Year2 70 Year3 53 Cost of Goods Sold 60 57 54 Gross Profit 15 13 -1 Operating Expenses 8 8 9 Other Income/(Expense) 0 -1 25 Income Before Taxes 7 4 15 Taxes 3 3 3 Net Income 4 1 12 True False • Question 9 Based on the trend of the past 3 years, this is likely a very healthy business. Income Statement Sales Year1 75 Year2 70 Year3 53 Cost of Goods Sold 60 57 54 Gross Profit 15 13 -1 Operating Expenses 8 8 9 Other Income/(Expense) 0 -1 25 Income Before Taxes 7 4 15 Taxes 3 3 3 Net Income 4 1 12 True False • Question 10 Based on the P&L, from a stockholder perspective, which was the "best" year? (Hint: Look beyond the bottom line/net income amounts!) Income Statement Sales Year1 75 Year2 70 Year3 53 Cost of Goods Sold 60 57 54 Gross Profit 15 13 -1 Operating Expenses 8 8 9 Other Income/(Expense) 0 -1 25 Income Before Taxes 7 4 15 Taxes 3 3 3 12 C. Year 1 Monday, January 21, 2019 1:31:03 PM EST [Show More]

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