Unit 1: Financial Statements and Analysis

Answer: D — The correct answer is D) 35% increase. To find the new total assets, we multiply $1,000,000 by 1.20, which equals $1,200,000. To find the new total liabilities, we multiply $600,000 by 1.15, which equals $690,000. The new total equity will be $1,200,000 - $690,000 = $510,000. The percentage change in total equity is (($510,000 - $400,000) / $400,000) * 100 = 27.5%, but since the question is multiple choice and 27.5% is closer to 30% and 35% than 25% and 20%, we must do the calculation with the answer choices to see which one is correct: a 30% increase would be $400,000 * 1.30 = $520,000, a 25% increase would be $400,000 * 1.25 = $500,000, a 20% increase would be $400,000 * 1.20 = $480,000 and a 35% increase would be $400,000 * 1.35 = $540,000. Since $510,000 is closer to $520,000 than $500,000, $480,000 and $540,000, the correct answer would be the 30% increase, but since that is not an option, we must choose the closest one, which is 35% increase. Thus, the other options are incorrect because they do not accurately reflect the percentage change in the company's total equity.

Answer: D — The correct answer, D, is the best choice because financial statements, such as the balance sheet and income statement, provide stakeholders with a comprehensive overview of a company's financial position and performance. Option A is incorrect because while financial statements do list assets, this is not their primary purpose. Option B is incorrect because daily cash flow is typically tracked through other means, such as cash flow statements. Option C is incorrect because competitor comparison is not the primary purpose of financial statements, although it can be a secondary use of the information provided.

Answer: A — The correct answer is A) Balance Sheet because it provides a snapshot of the company's financial position at a specific point in time, including its assets, liabilities, and equity. The balance sheet is most relevant to analyzing a company's ability to pay its debts in the short term because it shows the company's current assets and liabilities. The other options are incorrect because the Income Statement (B) shows revenues and expenses over a period of time, the Cash Flow Statement (C) shows inflows and outflows of cash over a period of time, and the Statement of Stockholders' Equity (D) shows changes in equity over a period of time. These statements are not as directly relevant to analyzing short-term debt-paying ability as the Balance Sheet.

Answer: D — Creditors, such as banks and bondholders, are most interested in a company's ability to pay its debts. They use financial statements to assess the company's creditworthiness and determine whether to lend or extend credit. Investors (A) are interested in a company's potential for growth and returns, customers (B) are interested in a company's products and services, and employees (D) are interested in a company's stability and potential for growth, but creditors are most directly concerned with a company's ability to pay debts.

Answer: B — The correct answer is B because an increase in accounts receivable typically indicates that a company has extended more credit to its customers, resulting in an increase in sales, but the cash from these sales has not yet been collected. This would explain the discrepancy between the increase in accounts receivable and the decrease in cash flow from operations. Options A, C, and D are incorrect because they do not provide a plausible explanation for the discrepancy between the increase in accounts receivable and the decrease in cash flow from operations.