CMA 4 ALL SE

CMA 4 ALL SE Question 1 1.A.1.b tb.fin.inc.010_1805 LOS: 1.A.1.b Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: hard Bloom Code: 4 The most likely use of an income state ...

CMA 4 ALL SE Question 1 1.A.1.b tb.fin.inc.010_1805 LOS: 1.A.1.b Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: hard Bloom Code: 4 The most likely use of an income statement prepared by a business enterprise is its use by which of the following? Labor unions to examine earnings closely as a basis for salary discussions. Government agencies to formulate tax and economic policy. Customers to determine a company's ability to provide needed goods and services. Rationale  Investors interested in the financial performance of the entity. The FASB's conceptual framework identifies potential investors and creditors as the primary focus of financial statements. An income statement provides information about a business's profitability. Whether a business is profitable is likely to influence an investor's decision to invest in that business as it is one aspect of its financial performance. Therefore, this is the correct answer. Rationale  Labor unions to examine earnings closely as a basis for salary discussions. While labor unions may examine earnings as a basis for salary discussions, it is just one factor in those discussions. In addition, the FASB conceptual framework identifies potential investors and creditors, not labor unions, as the primary focus of financial statements. Therefore, this is an incorrect answer. Rationale  Government agencies to formulate tax and economic policy. An income statement provides information about one business and is not likely to be very useful to formulate tax and economic policy. It is based on accrual accounting, which is different from tax accounting. Therefore, this is an incorrect answer. Rationale  Customers to determine a company's ability to provide needed goods and services. A customer may use an income statement to assess a company's financial performance as a company in poor financial condition may not be reliable supplier. However, it is not likely to be the major factor in the decision. Therefore, this is an incorrect answer. Investors interested in the financial performance of the entity. CorrectQuestion 2 1.A.1.a tb.fin.inc.001_1805 LOS: 1.A.1.a Lesson Reference: Overview of Financial Statements and the Income Statement Difficulty: medium Bloom Code: 4 Which aspect of a firm's statement of cash flows most interests potential stockholders? Changes in the firm's inventory balance The firm's gains and losses from selling plant assets Rationale  The firm's investments in new plant assets Potential shareholders are generally most interested in a firm's ability to increase its stock price and pay dividends. While investment in new plant assets may give some information about a firm's growth potential, it does not provide the most useful information to potential shareholders because it does not involve dividends. Therefore, this is an incorrect answer. Rationale  Changes in the firm's inventory balance A change in a firm's inventory balance is important information. However, potential shareholders are more interested in cash flow generated. Additionally, the change in inventory is better seen by looking at the balance sheet. Therefore, this is an incorrect answer. Rationale  The firm's gains and losses from selling plant assets Gains and losses from selling plant assets is important information. However, potential shareholders are more interested in cash flow generated. Therefore, this is an incorrect answer. Rationale  The firm's ability to pay dividends Potential shareholders are generally interested in a firm's ability to increase its stock price and pay dividends. The statement of cash flows provides information about cash generated (that can be used for future dividends) and cash used to pay dividends in the past. Therefore, this is the correct answer.