Financial Reporting and Analysis Flashcards

A company reports accounts receivable of $500,000 with an allowance for doubtful accounts of $25,000. What is the net realizable value of accounts receivable?

Answer: $475,000

Net realizable value equals gross accounts receivable minus the allowance for doubtful accounts: $500,000 - $25,000 = $475,000.

Under the indirect method of preparing the cash flow statement, how is depreciation expense treated?

Answer: Added back to net income

Depreciation is a non-cash expense deducted in computing net income, so it is added back to reconcile net income to operating cash flows.

Which financial statement best reflects a company's ability to meet short-term obligations?

Answer: Balance sheet

The balance sheet shows current assets and current liabilities, which are used to assess short-term liquidity at a point in time.

An analyst calculates a company's inventory turnover ratio as 8. What does this indicate?

Answer: Inventory is sold and replaced 8 times per year

Inventory turnover of 8 means the company sells and replaces its average inventory approximately 8 times during the period.

When a company issues bonds at a premium, the carrying value of the bonds will:

Answer: Decrease each period until maturity

When bonds are issued at a premium (above face value), the premium is amortized over the bond's life, reducing the carrying value toward face value at maturity.

Which accounting principle requires that expenses be recorded in the same period as the revenues they help generate?

Answer: Matching principle

The matching principle requires that expenses be recognized in the same period as the related revenues, ensuring accurate period profitability.

A firm's debt-to-equity ratio is 2.5. This means that for every dollar of equity:

Answer: The firm owes $2.50 in debt

A debt-to-equity ratio of 2.5 means there is $2.50 of total debt for every $1.00 of shareholders' equity.