Deck 3: Accounting and Finance

Question 1

Accounting practices are currently standardized across all countries.

Answer 1

False

Question 2

A reduction in accounts receivable uses cash,reducing the firm's net cash balance.

Answer 2

False

Question 3

All items in the common-size balance sheet are expressed as a percentage of total assets.

Answer 3

True

Question 4

The statement of cash flows shows the firm's cash inflows and outflows from operations as well as from its investments and financing activities.

Question 5

Dividends paid are treated as a financing activity on the statement of cash flows.

Question 6

An increase in the accounts receivable balance increases the cash flow of a firm.

Question 7

Based on generally accepted accounting principles,assets are recorded on the balance at their current market value.

Question 8

There is generally a bigger difference between the book value and the market value of fixed assets as compared to cash.

Question 9

Accrual accounting aims to provide a fairer measure of the firm's profitability.

Question 10

The purchase of new equipment is a use of cash,and it reduces the firm's net cash balance.

Question 11

An asset's liquidity is determined by how readily the asset can be converted to an appropriate amount of cash.

Question 12

An increase in inventories uses cash,reducing the firm's net cash balance.

Question 13

The payment of interest expense is considered a cash flow by a financing activity on the statement of cash flows.

Question 14

An expenditure on new capital equipment is a cash payment.

Question 15

If the market value of assets is high,then the market value of liabilities must be high also.

Question 16

One reason for the difference between profits and cash is that the cost of capital equipment is spread over the forecast life.

Question 17

Depreciation charge is a cash payment.

Question 18

The principal reason for excluding many intangible assets from the balance sheet is that they are difficult to value.

Question 19

Fixed assets can be either tangible or intangible.

Question 20

If net income is positive,then cash flow from operations must be positive for that period.

Question 21

Businesses that aggressively exploit any means possible to increase current earnings may cross over into fraudulent account practices.

Question 22

Calculate the EBIT (Operating Income)for a firm with $4 million total revenues,$3.5 million cost of goods sold,$500,000 depreciation expense,and $120,000 interest expense.

A) $500,000
B) $380,000
C) $0
D) ($120,000)

Question 23

To calculate free cash flow,you must deduct capital expenditures from the cash flow from operations.

Question 24

Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period.Based solely on this information,cash flow will increase by:

A) $2,500.
B) $2,000.
C) $1,500.
D) $500.

Question 25

What is the overall change in cash resulting from: $300 increase in inventories,$150 increase in accounts payable,$120 decrease in accounts receivable,$60 decrease in other current assets,$150 decrease in other current liabilities?

A) -$120
B) -$240
C) $180
D) $120

Question 26

You have gathered this information on a firm: $500,000 sales,$10,000 cash dividends,$300,000 cost of goods sold,$20,000 administrative expense,$20,000 depreciation expense,$40,000 interest expense,$10,000 purchase of productive equipment,no changes in working capital,and a tax rate of 35%.What is the free cash flow?

A) $141,000
B) $168,000
C) $78,000
D) $142,000

Question 27

Professor Diehard found an effective antibiotic for the DEPRESS bacteria,and patented the drug.He believes that he can sell the patent for $20 million.He then formed a corporation and invested $400,000 in setting up a production plant.There are 2 million shares of stock outstanding.If the professor's belief is correct,what would be the price per share and the book value per share?

A) $10.20; $.20
B) $10.00; $.20
C) $9.80; $.40
D) $9.80; $.20

Question 28

What is the change in cash for a firm with the following: $10,000 cash flow from operations,$1,600 cash used for new investment,a reduction in the level of debt of $2,000,$1,000 in cash dividends,and $200 in depreciation expense?

A) $5,600
B) $9,600
C) $9,400
D) $5,400

Question 29

The income statement resembles a snapshot of the firm at a specific time.

Question 30

Assume tax rates on single individuals are 10% on taxable income up to $9,075,15% on income of $9,076 to $36,900 and 25% on income of $36,901 to $89,350.What is the tax liability for a single individual with $52,000 of taxable income

A) $8,856.25
B) $9,103.50
C) $8,603.50
D) $8,356.25

Question 31

Book values are "forward-looking" measures of value.

Question 32

The difference between the market values of assets and liabilities is the market value of the shareholders' equity claim.

Question 33

Assume a firm increases its revenue by $100 while increasing its cost of goods sold by $85.How much additional tax will the firm owe if its marginal tax rate is 25%?

A) $3.75
B) $7.50
C) $13.75
D) $25.00

Question 34

Revenue increases by $200 and the cost of goods sold is 78%.What dollar amount of extra taxes will be owed if the marginal tax rate is 35%?

A) $70.00
B) $44.00
C) $54.60
D) $15.40

Question 35

A company may deduct the interest paid to debtholders and the dividends paid to shareholders when calculating its taxable income.

Question 36

According to the Canadian tax code at the beginning of 2013,the highest marginal tax rate for personal taxpayers is:

A) 25.0%.
B) 28.5%.
C) 15.0%.
D) 29%.

Question 37

Both the dividends and interest payments that companies paid to individuals are subject to personal tax.

Question 38

Johnson's Nursery has net income of $42,500,depreciation expense of $1,800,interest expense of $900,taxes of $1,600,additions to net working capital of $2,300,and capital expenditures of $11,700.What is the amount of the free cash flow?

A) $30,300
B) $34,400
C) $31,200
D) $28,700

Question 39

Dhaliwall Groceries has a net loss for the year of $5100,depreciation expense of $25,500,increase in operations (excluding depreciation)of $4,750,and the purchase of capital assets for $3525,there was also a net cash inflow from financing of $7000.What is the amount of net free cash flow?

A) $29,325
B) $35,675
C) $19,125
D) -$20,075

Question 40

The balance sheet presents a snapshot of the firm's assets and liabilities at one particular moment.

Question 41

Which one of the following best explains the combination of a high level of net income combined with a low level of cash flow during an accounting period?

A) high depreciation expense
B) reduction of inventory levels
C) acquisition of capital equipment
D) increase in accounts payable

Question 42

Increases to Retained earnings result from:

A) the sale of additional shares of stock to investors.
B) income not paid to shareholders.
C) an excess of assets over liabilities.
D) market values that exceed book values.

Question 43

A balance sheet may be considered backward-looking from the perspective that it:

A) works backward, starting with net income.
B) records historic, not current values.
C) cannot forecast the future.
D) records costs over many previous periods.

Question 44

Which one of these will increase a firm's cash balance?

A) an increase in inventory
B) a decrease in accounts payable
C) an increase in common stock
D) an increase in new equipment

Question 45

Which of the following items should not be included in a listing of current assets?

A) marketable securities
B) accounts payable
C) accounts receivable
D) inventories

Question 46

An individual's income for the year includes both dividend and interest payments.Which of these statements correctly applies to that individual's tax liability?

A) dividends are taxed; tax on interest payments is paid at the corporate level.
B) interest is taxed; tax on dividend payments is paid at the corporate level.
C) both dividend and interest payments are taxed at the personal level.
D) all taxes on dividend and interest payments are paid at the corporate level.

Question 47

Which of the following is more likely to be correct if market value of equity is less than book value of equity?

A) investors anticipate excellent earning potential.
B) investors anticipate low earning potential relative to the level of risk.
C) assets have been fully depreciated.
D) the company is bankrupt.

Question 48

A balance sheet portrays the value of a firm's assets and liabilities:

A) over an annual period.
B) over any stated period of time.
C) at any stated point in time.
D) only at the end of the calendar year.

Question 49

Which of the following could account for a firm that has a negative net income,yet has a positive amount of cash provided by operations?

A) the net loss was greater than the amount of depreciation expense.
B) inventory increased significantly more than accounts payable.
C) accounts receivable decreased by significantly more than accounts payable.
D) the cash balance increased significantly.

Question 50

What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 18% if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000?

A) 15%
B) 33%
C) 18%
D) 25%

Question 51

Depreciation expense is used to:

A) allocate costs to all departments of the firm.
B) determine when an asset is fully paid off.
C) allocate historical cost over the life of an asset.
D) equate the historical cost and market values of an asset.

Question 52

Which of these statements related to free cash flow is correct?

A) free cash flow must be fully distributed to the firm's debtors and shareholders.
B) free cash flow must be positive for a firm to acquire new fixed assets.
C) all, or part, of free cash flow can be used to increase a firm's cash reserves.
D) when capital expenditures are positive, free cash flow will exceed the cash flow from operations.

Question 53

What is the highest marginal rate at which corporate income is taxed?

A) 15%
B) 34%
C) 35%
D) 39%

Question 54

Which one of the following statements is correct for a corporation with a negative net income in both the present and the last fiscal year?

A) this year's loss can be carried back, but last year's loss cannot be used.
B) neither of the losses can be used to reduce taxes.
C) both losses can be carried forward but not backward.
D) both losses can be carried forward and backward, within certain time limits.

Question 55

The gathering of related revenues and expenses into the same period,regardless of when they were incurred,is:

A) cash-basis accounting.
B) market-value accounting.
C) book-value accounting.
D) accrual accounting.

Question 56

Which of the following is correct for a fully depreciated asset?

A) market value is zero.
B) market value is greater than book value.
C) book value is greater than market value.
D) the relationship between market and book values is indeterminable.

Question 57

Assume a single taxpayer is taxed at 10% on the first $9,075 of taxable income,15% on the next $27,825 of income,and at 25% for the following $52,450 of income.What is the average tax rate for that individual if her taxable income is $41,350?

A) 14.98%
B) 16.67%
C) 16.13%
D) 19.98%

Question 58

Who pays taxes on earnings distributed as dividends?

A) the issuing corporation.
B) the shareholder receiving the dividend.
C) both the issuing corporation and the shareholder.
D) neither the issuing corporation nor the shareholder.

Question 59

Which of the following statements is true for a corporation with $1 million market value of equity,$2 million market value of assets,and 1,000 shares of outstanding stock?

A) market value of liabilities exceeds book value of liabilities.
B) market value of liabilities equals $1 million.
C) book value per share equals $1,000.
D) market value per share equals $2,000.

Question 60

Which of the following assets is likely to be considered the most liquid?

A) marketable securities
B) net fixed assets
C) accounts payable
D) inventories

Question 61

What is the fundamental difference between IFRS and GAAP?

A) GAAP relies more on general principles but ignores the spirit of those principles.
B) GAAP relies more on specific rules and the spirit of the rules.
C) GAAP relies more on specific rules but not the spirit of the rules.
D) GAAP relies more on general principles as well as the spirit of those rules.

Question 62

Net working capital is calculated by taking the difference between:

A) total assets and total liabilities.
B) inventory and accounts payable.
C) current assets and current liabilities.
D) cash and accounts payable.

Question 63

In a statement of cash flows,which category includes depreciation expense as a line item?

A) operations
B) investments
C) financing
D) None of these; depreciation is a noncash expense.

Question 64

Which one of the following is an intangible asset?

A) goodwill
B) retained earnings
C) deferred income taxes
D) treasury stock

Question 65

If a payment of principal is due in 13 months on a long-term liability,that payment will now appear on the balance sheet as:

A) a current liability.
B) long-term debt.
C) cash.
D) interest expense.

Question 66

Market-value balance sheets differ from book-value balance sheets in that market values:

A) are higher than book values.
B) are lower than book values.
C) conform more to GAAP accounting.
D) conform to investors' expectations.

Question 67

Which one of the following does not reduce a firm's net income?

A) income taxes
B) interest expense
C) dividends Paid
D) depreciation expense

Question 68

If a firm's net income is positive and its noncash expenses are positive,which of the following could account for a negative amount of cash provided by operations?

A) current assets decrease more than current liabilities decrease.
B) current assets increase more than current liabilities increase.
C) current assets decrease more than current liabilities increase.
D) a large addition is made to plant and equipment.

Question 69

The net income figure on an income statement is calculated before deducting the:

A) interest expense.
B) depreciation expense.
C) cash dividends.
D) tax liability.

Question 70

Amy wants to know if inventory is increasing as a percentage of total assets.Which one of these statements most easily provides the information she is seeking?

A) statement of cash flows
B) balance sheet
C) common-size balance sheet
D) income statement

Question 71

When subtracting an asset's accumulated depreciation from its historic cost,the resulting value is termed the:

A) book value of the asset.
B) market value of the asset.
C) depreciation expense.
D) current asset value.

Question 72

Which of the following statements about depreciation is correct?

A) depreciation is subtracted from cost of goods sold to calculate net income.
B) when depreciation expense is incurred, cash balances are reduced.
C) depreciation expense does not affect net income.
D) depreciation reduces the book value of assets.

Question 73

Which of the following statements is more likely if cash and marketable securities increase by $5,000 during a period in which cash provided by operations increases by $1,000 and cash used by investments decreases by $500?

A) cash provided by financing increases by $6,500.
B) cash used by financing decreases by $1,000.
C) debt increases by more than cash dividends paid.
D) debt is reduced by more than cash dividends paid.

Question 74

If market interest rates have increased since a company last borrowed long-term funds,the market value of these already borrowed long-term funds will likely be:

A) greater than their book value.
B) less than their book value.
C) equal to their book value.
D) unknown without knowing the maturity of the debt.

Question 75

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?

A) cash flows from operations will increase.
B) cash flows from investments will decrease.
C) cash flows from financing will decrease.
D) cash balances will not be affected.

Question 76

Net working capital is a measure of a company's:

A) goodwill.
B) short-term liabilities.
C) estimated cash reservoir.
D) shareholders' equity.

Question 77

Which of the following categories of a statement of cash flows is affected by the payment of interest expense?

A) cash flows from operations
B) cash flows from noncash expenses
C) cash flows from investments
D) cash flows from financing

Question 78

If a firm pays taxes,which one of these will reduce net income but increase cash flow?

A) depreciation expense
B) income taxes
C) cash sales
D) interest expense

Question 79

ABC Corp.'s balance sheet shows its long-term debt to be $20 million.The debt was issued with a 10% interest rate,and the current interest rate is 7%.Based on this information alone,the market value of this debt is most likely:

A) less than $20 million.
B) more than $20 million.
C) equal to $20 million.
D) unknown without knowing the maturity of the debt.

Question 80

Which type of income is subject to "double taxation"?

A) dividends and wages
B) capital gains
C) dividends
D) wages