Deck 2: Financial Statements, Taxes, and Cash Flow

Question 1

Which one of the following is a current asset?

A) Accounts payable
B) Trademark
C) Accounts receivable
D) Notes payable
E) Equipment

Answer 1

Accounts receivable

Question 2

As the degree of financial leverage increases, the:

A) probability a firm will encounter financial distress increases.
B) amount of a firm's total debt decreases.
C) less debt a firm has per dollar of total assets.
D) number of outstanding shares of stock increases.
E) accounts payable balance decreases.

Answer 2

probability a firm will encounter financial distress increases.

Question 3

Which one of the following is classified as a tangible fixed asset?

A) Accounts receivable
B) Production equipment
C) Cash
D) Patent
E) Inventory

Answer 3

Production equipment

Question 4

You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value?

A) A sudden and unexpected increase in inflation
B) The replacement of old inventory items with more desirable products
C) Improvements to the surrounding area by other store owners
D) Construction of a new restricted access highway located between the store and the surrounding residential areas
E) Addition of a stop light at the main entrance to the store's parking lot

Question 5

Which one of the following accounts is the most liquid?

A) Inventory
B) Building
C) Accounts Receivable
D) Equipment
E) Land

Question 6

Which one of the following statements concerning net working capital is correct?

A) Net working capital increases when inventory is purchased with cash.
B) Net working capital excludes inventory.
C) Total assets must increase if net working capital increases.
D) Net working capital may be a negative value.
E) Net working capital is the amount of cash a firm currently has available for spending.

Question 7

Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared?

A) Matching principle
B) Cash flow identity
C) Generally Accepted Accounting Principles
D) Financial Accounting Reporting Principles
E) Standard Accounting Value Guidelines

Question 8

Which one of the following represents the most liquid asset?

A) $100 account receivable that is discounted and collected for $96 today
B) $100 of inventory that is sold today on credit for $103
C) $100 of inventory that is discounted and sold for $97 cash today
D) $100 of inventory that is sold today for $100 cash
E) $100 of accounts receivable that will be collected in full next week

Question 9

Net working capital is defined as:

A) total liabilities minus shareholders' equity.
B) current liabilities minus shareholders' equity.
C) fixed assets minus long-term liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.

Question 10

Shareholders' equity:

A) is referred to as a firm's financial leverage.
B) is equal to total assets plus total liabilities.
C) decreases whenever new shares of stock are issued.
D) includes patents, preferred stock, and common stock.
E) represents the residual value of a firm.

Question 11

Which one of the following is a current liability?

A) Note payable to a supplier in 13 months
B) Amount due from a customer in two weeks
C) Account payable to a supplier that is due next week
D) Loan payable to the bank in 18 months
E) Amount due from a customer that is past due

Question 12

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

A) Income statement
B) Creditor's statement
C) Balance sheet
D) Statement of cash flows
E) Dividend statement

Question 13

Which one of the following will decrease the value of a firm's net working capital?

A) Using cash to pay a supplier
B) Depreciating an asset
C) Collecting an accounts receivable
D) Purchasing inventory on credit
E) Selling inventory at a loss

Question 14

Noncash items refer to:

A) fixed expenses.
B) inventory items purchased using credit.
C) the ownership of intangible assets such as patents.
D) expenses that do not directly affect cash flows.
E) sales that are made using store credit.

Question 15

Which one of the following statements related to liquidity is correct?

A) Liquid assets tend to earn a high rate of return.
B) Liquid assets are valuable to a firm.
C) Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
D) Inventory is more liquid than accounts receivable because inventory is tangible.
E) Any asset that can be sold is considered liquid.

Question 16

The book value of a firm is:

A) equivalent to the firm's market value provided that the firm has some fixed assets.
B) based on historical cost.
C) generally greater than the market value when fixed assets are included.
D) more of a financial than an accounting valuation.
E) adjusted to the market value whenever the market value exceeds the stated book value.

Question 17

Which one of the following statements concerning net working capital is correct?

A) A firm's ability to meet its current obligations increases as the firm's net working capital decreases.
B) An increase in net working capital must also increase current assets.
C) Net working capital increases when inventory is sold for cash at a profit.
D) Firms with equal amounts of net working capital are also equally liquid.
E) Net working capital is a part of the operating cash flow.

Question 18

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

A) Real estate investment
B) Good reputation of the company
C) Equipment owned by the firm
D) Money due from a customer
E) An item held by the firm for future sale

Question 19

The value of which one of the following is included in the market value of a firm but is excluded from the firm's book value?

A) Office equipment
B) Copyright
C) Distribution warehouse
D) Employee's experience
E) Land acquired over 25 years ago

Question 20

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Tax reconciliation statement
E) Market value report

Question 21

For a tax-paying firm, an increase in ________ will cause the cash flow from assets to increase.

A) depreciation
B) net capital spending
C) the change in net working capital
D) taxes
E) production costs

Question 22

Which one of the following statements concerning corporate income taxes is correct for 2018?

A) All corporations are exempt from federal taxation.
B) Corporations pay no tax on their first $50,000 of income.
C) The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income.
D) The marginal tax rate will always be lower than the average tax rate.
E) The first 25 percent of corporate income is exempt from taxation.

Question 23

Which one of these is most apt to be a fixed cost?

A) Raw materials
B) Manufacturing wages
C) Management bonuses
D) Office salaries
E) Shipping and freight

Question 24

Cash flow to stockholders is defined as:

A) the total amount of interest and dividends paid during the past year.
B) the change in total equity over the past year.
C) cash flow from assets plus the cash flow to creditors.
D) operating cash flow minus the cash flow to creditors.
E) dividend payments less net new equity raised.

Question 25

Which one of the following must be true if a firm had a negative cash flow from assets?

A) The firm borrowed money.
B) The firm acquired new fixed assets.
C) The firm had a net loss for the period.
D) The firm utilized outside funding.
E) Newly issued shares of stock were sold.

Question 26

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:

A) operating cash flow.
B) net capital spending.
C) net working capital.
D) cash flow from assets.
E) cash flow to stockholders.

Question 27

Which term relates to the cash flow that results from a company's ongoing, normal business activities?

A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors

Question 28

An increase in the interest expense for a firm with a taxable income of $123,000 will:

A) increase net income.
B) increase gross income.
C) increase the cash flow from assets.
D) decrease the cash flow from equity.
E) decrease the operating cash flow.

Question 29

Which one of the following statements is correct concerning a corporation with taxable income of $125,000?

A) Taxable income minus dividends paid will equal the ending retained earnings for the year.
B) An increase in depreciation will increase the operating cash flow.
C) Net income divided by the number of shares outstanding will equal the dividends per share.
D) Interest paid will be included in both net income and operating cash flow.
E) An increase in the tax rate will increase both net income and operating cash flow.

Question 30

Which one of the following will increase the cash flow from assets, all else equal?

A) Decrease in cash flow to stockholders
B) Decrease in operating cash flow
C) Decrease in the change in net working capital
D) Decrease in cash flow to creditors
E) Increase in net capital spending

Question 31

Which one of the following statements related to corporate taxes is correct?

A) A company's marginal tax rate must be equal to or lower than its average tax rate.
B) The tax for a company is computed by multiplying the marginal tax rate times the taxable income.
C) Additional income is taxed at a firm's average tax rate.
D) The marginal tax rate will always exceed a company's average tax rate.
E) The marginal tax rate for a company can be either higher than or equal to the average tax rate.

Question 32

The percentage of the next dollar you earn that must be paid in taxes is referred to as the ________ tax rate.

A) mean
B) residual
C) total
D) average
E) marginal

Question 33

Which one of the following statements related to an income statement is correct?

A) Interest expense increases the amount of tax due.
B) Depreciation does not affect taxes since it is a non-cash expense.
C) Net income is distributed to dividends and paid-in surplus.
D) Taxes reduce both net income and operating cash flow.
E) Interest expense is included in operating cash flow.

Question 34

Cash flow from assets is also known as the firm's:

A) capital structure.
B) equity structure.
C) hidden cash flow.
D) free cash flow.
E) historical cash flow.

Question 35

Which one of the following is true according to generally accepted accounting principles?

A) Depreciation is recorded based on the market value principle.
B) Income is recorded based on the realization principle.
C) Costs are recorded based on the realization principle.
D) Depreciation is recorded based on the recognition principle.
E) Costs of goods sold are recorded based on the recognition principle.

Question 36

Depreciation for a tax-paying firm:

A) increases expenses and lowers taxes.
B) increases the net fixed assets as shown on the balance sheet.
C) reduces both the net fixed assets and the costs of a firm.
D) is a noncash expense that increases the net income.
E) decreases net fixed assets, net income, and operating cash flows.

Question 37

The ________ tax rate is equal to total taxes divided by total taxable income.

A) deductible
B) residual
C) total
D) average
E) marginal

Question 38

The cash flow related to interest payments less any net new borrowing is called the:

A) operating cash flow.
B) capital spending cash flow.
C) net working capital.
D) cash flow from assets.
E) cash flow to creditors.

Question 39

Which one of the following statements is correct assuming accrual accounting is used?

A) The addition to retained earnings is equal to net income plus dividends paid.
B) Credit sales are recorded on the income statement when the cash from the sale is collected.
C) The labor costs for producing a product are expensed when the product is sold.
D) Interest is a non-cash expense.
E) Depreciation increases the marginal tax rate.

Question 40

Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?

A) Interest expense
B) Taxes
C) Cost of goods sold
D) Labor costs
E) Administrative expenses

Question 41

JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of $12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500. What is the net working capital?

A) $44,600
B) $15,700
C) $12,600
D) $15,800
E) $9,300

Question 42

Galaxy Interiors income statement shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?

A) $2,893
B) $1,282
C) $740
D) $1,611
E) $2,351

Question 43

Andre's Bakery has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?

A) $142,750
B) $123,240
C) $109,000
D) $128,700
E) $134,550

Question 44

The What-Not Shop owns the building in which it is located. This building initially cost $647,000 and is currently appraised at $819,000. The fixtures originally cost $148,000 and are currently valued at $65,000. The inventory has a book value of $319,000 and a market value equal to 1.1 times the book value. The shop expects to collect 96 percent of the $21,700 in accounts receivable. The shop has $26,800 in cash and total debt of $414,700. What is the market value of the shop's equity?

A) $867,832
B) $900,166
C) $695,832
D) $775,632
E) $1,190,332

Question 45

Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?

A) $98,210
B) $81,700
C) $95,200
D) $103,460
E) $121,680

Question 46

A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities?

A) $2,050
B) $2,920
C) $4,130
D) $7,950
E) $6,890

Question 47

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

A) $149,900
B) $93,500
C) $125,600
D) −$47,500
E) $56,500

Question 48

Net capital spending:

A) is equal to ending net fixed assets minus beginning net fixed assets.
B) is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
C) reflects the net changes in total assets over a stated period of time.
D) is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital.
E) is equal to the net change in the current accounts.

Question 49

The River Side Stop has a current market value of $26,400 and owes its creditors $31,300. What is the market value of the shareholders' equity?

A) −$4,900
B) −$5,200
C) $0
D) $4,900
E) $5,200

Question 50

Which one of the following statements related to the cash flow to creditors must be correct?

A) If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid.
B) If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets.
C) A positive cash flow to creditors represents a net cash outflow from the firm.
D) A positive cash flow to creditors means that a firm has increased its long-term debt.
E) If the cash flow to creditors is zero, then a firm has no long-term debt.

Question 51

Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term debt is $102,800. What is the book value of shareholders' equity?

A) $31,400
B) $47,700
C) $35,900
D) $249,400
E) $253,900

Question 52

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?

A) $970
B) $720
C) $640
D) $3,110
E) $2,860

Question 53

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

A) −$100
B) $300
C) $600
D) $1,700
E) $1,800

Question 54

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

A) $6,900
B) $15,300
C) $18,700
D) $23,700
E) $35,500

Question 55

Which one of the following is excluded from the cash flow from assets?

A) Accounts payable
B) Inventory
C) Sales
D) Interest expense
E) Cost of goods sold

Question 56

A positive cash flow to stockholders indicates which one of the following with certainty?

A) The dividends paid exceeded the net new equity raised.
B) The amount of the sale of common stock exceeded the amount of dividends paid.
C) No dividends were distributed, but new shares of stock were sold.
D) Both the cash flow to assets and the cash flow to creditors must be negative.
E) Both the cash flow to assets and the cash flow to creditors must be positive.

Question 57

Jensen Enterprises paid $700 in dividends and $320 in interest this past year. Common stock remained constant at $6,800 and retained earnings decreased by $180. What is the net income for the year?

A) $180
B) $520
C) $1,020
D) $880
E) $1,200

Question 58

Last year, Kaylor Equipment had $15,900 of sales, $500 of net new equity, dividend payments of $75, an addition to retained earnings of $418, depreciation of $680, and $511 of interest expense. What are the earnings before interest and taxes at a tax rate of 21 percent?

A) $589.46
B) $1,135.05
C) $1,331.54
D) $1,560.85
E) $949.46

Question 59

Hayes Bakery has sales of $30,600, costs of $15,350, an addition to retained earnings of $4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent. What is the amount of the depreciation expense?

A) $4,820.13
B) $5,500.89
C) $8,013.29
D) $8,180.01
E) $9,500.00

Question 60

The Widget Co. purchased all of its fixed assets three years ago for $4 million. These assets can be sold today for $2 million. The current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the total assets today is ________ and the market value of those assets is ________.

A) $4,600,000; $3,900,000
B) $4,600,000; $3,125,000
C) $5,000,000; $3,125,000
D) $5,000,000; $3,900,000
E) $6,500,000; $3,900,000

Question 61

Keisler's has cost of goods sold of $11,518, interest expense of $315, dividends of $420, depreciation of $811, and a change in retained earnings of $296. What is the taxable income given a tax rate of 21 percent?

A) $955.38
B) $967.78
C) $906.33
D) $776.41
E) $646.15

Question 62

RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?

A) $108,410
B) $108,320
C) $109,924
D) $106,417
E) $109,085

Question 63

Nu Furniture has sales of $241,000, depreciation of $32,200, interest expense of $35,700, costs of $103,400, and taxes of $14,637. What is the operating cash flow for the year?

A) $108,229
B) $121,367
C) $122,963
D) $117,766
E) $128,037

Question 64

The Daily News has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of  $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

A) −$75,000
B) $1,328
C) $24,623.52
D) $76,328
E) $151,328

Question 65

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What was the amount of the cash flow to stockholders?

A) $5,100
B) $7,830
C) $18,020
D) $19,998
E) $20,680

Question 66

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

A) −$19,679
B) −$11,503
C) $19,387
D) $15,497
E) $21,903

Question 67

What is the average tax rate for a firm with taxable income of $118,740 in 2017?  
$\begin{array}{c}\begin{array}{c}\text { Taxable Income }\\\begin{array}{lll}\$0&\text { - } &50,000 \\50,001 &\text { - } &75,000 \\75,001&\text { - } &100,000 \\100,001&\text { - } &335,000 \\\end{array}\end{array}\begin{array}{c}\text { Tax Rate}\\15 \% \\25 \\34 \\39\end{array}\end{array}$

A) 26.68 percent
B) 34.87 percent
C) 24.89 percent
D) 36.67 percent
E) 39.00 percent

Question 68

For the year, B&K United increased current liabilities by $1,400, decreased cash by $1,200, increased net fixed assets by $340, increased accounts receivable by $200, and decreased inventory by $150. What is the annual change in net working capital?

A) −$2,550
B) −$70
C) $590
D) $550
E) −$2,210

Question 69

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

A) $33,763
B) $40,706
C) $58,218
D) $65,161
E) $67,408

Question 70

In 2017, Boyer Enterprises had $76,700 in taxable income. What was the firm's average tax rate for the year? $\begin{array}{c}\begin{array}{c}\text { Taxable Income }\\\begin{array}{lll}\$0&\text { - } &50,000 \\50,001 &\text { - } &75,000 \\75,001&\text { - } &100,000 \\100,001&\text { - } &335,000 \\\end{array}\end{array}\begin{array}{c}\text { Tax Rate}\\15 \% \\25 \\34 \\39\end{array}\end{array}$

A) 28.25 percent
B) 18.68 percent
C) 26.48 percent
D) 20.14 percent
E) 29.03 percent

Question 71

Up Towne Cleaners has taxable income of $48,900 and a tax rate of 21 percent. What is the change in retained earnings if the firm pays $20,200 in dividends for the year?

A) $18,942
B) $19,948
C) $19,374
D) $18,431
E) $18,574

Question 72

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

A) $1,731
B) −$1,001
C) $11,129
D) $13,861
E) $19,172

Question 73

CBC Industries has sales of $21,415, interest paid of $1,282, costs of $9,740, and depreciation of $1,480. What is the operating cash flow if the tax rate is 22 percent?

A) $10,114.14
B) $9,900.86
C) $8,985.86
D) $8,536.67
E) $9,714.14

Question 74

Winston Industries had sales of $843,800 and costs of $609,900. The company paid $38,200 in interest and $35,000 in dividends. The depreciation was $76,400. The firm has a combined tax rate of 24 percent. What was the addition to retained earnings for the year?

A) $55,668
B) $57,240
C) $61,060
D) $56,200
E) $68,400

Question 75

Williamsburg Markets has an operating cash flow of $4,267 and depreciation of $1,611. Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed assets decreased by $382 during the year. What is free cash flow for the year?

A) $1,732
B) $2,247
C) $2,961
D) $3,915
E) $4,267

Question 76

Ernie's Home Repair had beginning long-term debt of $51,207 and ending long-term debt of $36,714. The beginning and ending total debt balances were $59,513 and $42,612, respectively. The interest paid was $2,808. What is the amount of the cash flow to creditors?

A) −$11,685
B) −$11,272
C) $17,301
D) $17,418
E) $11,174

Question 77

Carlisle Express paid $1,282 in interest and $975 in dividends last year. Current assets increased by $2,700, current liabilities decreased by $420, and long-term debt increased by $2,200. What was the cash flow to creditors?

A) −$530
B) −$918
C) $1,839
D) 2,132
E) $3,094

Question 78

For 2017, Nevada Mining had projected taxable income of $94,800. Its actual taxable income exceeded this projection by $21,000. How much additional tax did the firm owe due to the $21,000 increase in taxable income? $\begin{array}{c}\begin{array}{c}\text { Taxable Income }\\\begin{array}{lll}\$0&\text { - } &50,000 \\50,001 &\text { - } &75,000 \\75,001&\text { - } &100,000 \\100,001&\text { - } &335,000 \\\end{array}\end{array}\begin{array}{c}\text { Tax Rate}\\15 \% \\25 \\34 \\39\end{array}\end{array}$

A) $7,930
B) $8,036
C) $8,150
D) $7,682
E) $8,197

Question 79

For the past year, Galaxy Interiors had depreciation of $2,419, beginning total assets of $23,616, and ending total assets of $21,878. Current assets decreased by $1,356. What was the amount of net capital spending for the year?

A) −$382
B) $2,037
C) $2,801
D) $1,993
E) $1,172

Question 80

TJH, Inc. purchased $145,000 in new equipment and sold equipment with a net book value of $68,400 during the year. What is the amount of net capital spending if the depreciation was $38,600?

A) $115,200
B) $76,600
C) $94,200
D) $38,000
E) −$38,000