Question

Regarding financial statements, which of the following statements is CORRECT? a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.c. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders.d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity.e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information--audited financial statements.

Answer 1

a. False.

b. True.

c. False.

d. False.

e. True.

Step-by-step explanation:

a. Assets other than cash are expected to produce cash in future at some point but it is not necessary that every asset produces exactly the same amount at which it is carried in the financial statements. For example there is account receivable balance of $100,000, but it is not mandatory that all receivable will be converted into cash overtime as there can be bad debts expense also which will result in reducing accounts receivable balance.

b. Annual reports are often used by existing and potential investors for decision making purpose whether it is beneficial to invest in a certain company based on its financial statements analysis, to identify the risks that the company is exposed, the ability of a company to generate cash flows, potential future earning capability of a company and going concern status.

c. The annual report is not solely used by its creditors/lenders, it is prepared for a wide range of users. For example: shareholders, directors, investors, etc.

d. Cash budget is not a financial statement and it is not mandatory in the annual report, four most important financial statements which are required in the annual reports are balance sheet, income statement, cash flow statements, and statement of stockholders' equity.

e. After the Enron scandal annual reports cannot contain managements verbal reasoning’s, they needs quantitative and reasoning’s based on facts and figures which can be verified and audited to avoid misleading information provided in the annual reports and reduce chances of window dressing in the financial statements.