1. Which of the following statements is TRUE?

The finance manager uses the framework of the income statement to find the operating income of the company (an accounting measure), which is also the true cash flow from operations.

In accrual-based accounting, revenue is recorded at the time of sale if the revenue has been received in cash.

Three fundamental issues separate net income and cash flow: accrual accounting, non-cash expense items, and interest expense.

Generally Accepted Accounting Principles (GAAP) in the United States do not allow the use of accrual accounting to record revenue.

2. Which of the statements below is FALSE?

When the current ratio is greater than one, we are also saying that net working capital is positive as current assets are greater than current liabilities.

Financial leverage ratios deal with long-term solvency and the use of debt as a financing tool.

The debt ratio is total assets minus total equity divided by equity.

Times interest earned equals EBIT divided by interest expense.