Deck 2: Financial Statements and Cash Flow

Question 1

As seen on an income statement,

A)interest is deducted from income and increases the total taxes incurred.
B)depreciation reduces both the pretax income and the net income.
C)depreciation is shown as an expense but does not affect the taxes payable.
D)the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses.
E)both dividends and interest expense reduce corporate income taxes.

Answer 1

depreciation reduces both the pretax income and the net income.

Question 2

Book value is

A)based on historical cost.
B)equivalent to market value for firms with fixed assets.
C)more of a financial than an accounting valuation.
D)the amount a willing buyer will pay for an asset.
E)adjusted to market value whenever the market value exceeds the stated book value.

Answer 2

based on historical cost.

Question 3

A current asset is best defined as

A)the market value of all assets currently owned by the firm.
B)an asset the firm expects to purchase within the next year.
C)the amount of cash on hand the firm currently shows on its balance sheet.
D)cash and other assets owned by the firm that should convert to cash within the next year.
E)the value of fixed assets the firm expects to sell within the next year.

Answer 3

cash and other assets owned by the firm that should convert to cash within the next year.

Question 4

Depreciation

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

Question 5

Current assets include

A)inventory and accounts receivable.
B)accounts payable and cash.
C)cash and intangible assets.
D)inventory and accounts payable.
E)buildings and equipment.

Question 6

When making financial decisions related to assets,you should

A)place primary emphasis on historical costs.
B)place more emphasis on book values than on market values.
C)rely primarily on the value of assets as shown on the balance sheet.
D)always consider market values.
E)only consider market values if they are less than book values.

Question 7

Which one of the following accounts is generally the most liquid?

A)Patent
B)Building
C)Accounts receivable
D)Equipment
E)Inventory

Question 8

Assume both current and deferred taxes are positive values.Given this,deferred taxes will

A)reduce the current tax expense and thus increase net income.
B)increase expenses and increase operating cash flows.
C)increase expenses and lower operating cash flows.
D)reduce net income but not affect the operating cash flows.
E)reduce both net income and operating cash flows.

Question 9

Liquidity is

A)a measure of the use of debt in a firm's capital structure.
B)equal to current assets minus current liabilities.
C)equal to the market value of a firm's total assets minus its current liabilities.
D)generally associated with intangible assets.
E)valuable to a firm even though liquid assets tend to be less profitable to own.

Question 10

Which one of these,all else held constant,will increase the value of stockholders' equity?

A)Decrease in accounts receivable
B)Increase in long-term debt
C)Decrease in retained earnings
D)Increase in accounts payable
E)Increase in fixed assets

Question 11

The income statement

A)measures a firm's performance as of a specific date.
B)determines the aftertax income of a firm.
C)excludes deferred taxes.
D)includes dividends as an expense.
E)determines the value of a firm to its stockholders.

Question 12

Which one of the following statements concerning liquidity is correct?

A)Fixed assets are more liquid than current assets.
B)Balance sheet accounts are listed in order of decreasing liquidity.
C)Liquid assets tend to be highly profitable.
D)The less liquidity a firm has,the lower the probability the firm will encounter financial difficulties.
E)Trademarks and patents are highly liquid.

Question 13

Stockholders' equity is equal to

A)net working capital plus long-term liabilities.
B)current assets plus fixed assets minus long-term liabilities.
C)total assets plus total liabilities.
D)current assets minus total liabilities plus fixed assets.
E)net working capital plus total fixed assets.

Question 14

Noncash items refer to

A)the credit sales of a firm.
B)the accounts payable of a firm.
C)all accounts on the balance sheet other than cash on hand.
D)the costs incurred for the purchase of intangible fixed assets.
E)expenses charged against revenues that do not directly affect cash flow.

Question 15

Which one of these will increase earnings per share?

A)Decreasing deferred taxes
B)Increasing depreciation expense
C)Lowering the operating income
D)Increasing the average corporate tax rate
E)Increasing the addition to retained earnings by reducing dividends paid

Question 16

The long-term debts of a firm are liabilities

A)owed to the firm's stockholders.
B)that do not come due for at least 12 months.
C)owed to the firm's suppliers.
D)that come due within the next 12 months.
E)the firm expects to incur within the next 12 months.

Question 17

Which one of these statements is correct?

A)Long-term debt is the residual difference between assets and liabilities.
B)Net income that is not paid out in dividends decreases retained earnings.
C)Long-term debt requires a payout of cash within a stated time period.
D)Stockholders' equity is stated at market value on the balance sheet.
E)Stockholders' equity increases as the liquidity of a firm increases.

Question 18

A(n)________ asset is one that can be quickly converted into cash without significant loss in value.

A)tangible
B)fixed
C)intangible
D)liquid
E)long-term

Question 19

The carrying value or book value of assets

A)is always the best measure of a company's value to an investor.
B)represents an average market value over time.
C)is always higher than the replacement cost of the assets.
D)is determined under GAAP and is based on the cost of the assets.
E)is determined under GAAP and is based on the current market value of the assets.

Question 20

An example of a current liability is

A)a loan secured by a mortgage and payable in 8 months.
B)any loan payable to a bank.
C)all accounts due from customers within the next year.
D)a note payable in full in 18 months.
E)an account due from a customer that is past due.

Question 21

Your ________ tax rate is the percentage of the next taxable dollar of income you earn that is payable as a tax.

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

Question 22

________ refers to a firm's interest payments minus any net new borrowing.

A)Operating cash flow
B)Distributable cash flow
C)Net working capital
D)Cash flow to stockholders
E)Cash flow to creditors

Question 23

The cash flow of a firm,also referred to as cash flow from assets,must be equal to the cash flow to

A)debt holders minus the cash flow to equity holders.
B)equity holders plus the cash flow to debt holders.
C)the government plus the cash flow to equity holders.
D)equity holders minus the cash flow to debt holders.
E)the government,the debt holders,and the equity holders.

Question 24

Cash flow to stockholders must be positive when

A)the net sale of common stock exceeds the amount of dividends paid.
B)no income is distributed but new shares of stock are sold.
C)both the cash flow to assets and the cash flow to creditors are negative.
D)both the cash flow to assets and the cash flow to creditors are positive.
E)the dividends paid exceed the net new equity raised.

Question 25

Al's has a positive net income and a marginal tax rate of 34 percent.Given this,an increase in which one of the following will cause the operating cash flow to increase?

A)Fixed assets
B)Taxes
C)Net working capital
D)Cost of goods sold
E)Depreciation

Question 26

________ refers to the difference between a firm's current assets and its current liabilities.

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

Question 27

Cash flow to stockholders is best defined as

A)the total dividends paid.
B)the cash flow from assets plus the cash flow to creditors.
C)cash dividends plus repurchases of equity minus new equity financing.
D)repurchases of equity less cash dividends paid plus new equity sold.
E)the net change in common stock and capital surplus.

Question 28

When you are making a financial decision,the most relevant tax rate is the ________ rate.

A)average
B)fixed
C)marginal
D)total
E)variable

Question 29

Your ________ tax rate measures the total taxes you pay divided by your total taxable income.

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

Question 30

Expenses are recorded on an income statement based on

A)their payment dates.
B)the date the expenses are expected.
C)the matching principle.
D)their invoice dates.
E)the average time principle.

Question 31

Capital spending is equal to

A)the net purchases and sales of fixed assets.
B)total cash flow to stockholders less interest and dividends paid.
C)net income plus depreciation.
D)the net change in total assets.
E)the change in current assets minus the change in current liabilities.

Question 32

The cash flow to creditors increases when

A)cash is used to reduce accounts payable.
B)new shares of stock are sold for cash.
C)interest is paid on outstanding debt.
D)an asset is sold for cash.
E)a long-term debt is incurred.

Question 33

Free cash flow is

A)equal to net income.
B)equal to net income plus taxes.
C)a term used to describe an increase in net working capital.
D)cash that is available to distribute to creditors and equity holders.
E)another term for operating cash flow.

Question 34

Revenue is recorded on an income statement when

A)payment for a sale has been received in full.
B)an order for goods is placed.
C)an exchange of goods or services has occurred and the earnings process is completed.
D)an order for goods or services is placed and an initial payment is received.
E)goods are placed in inventory and ready for future delivery.

Question 35

A firm starts its year with positive net working capital.During the year,the firm acquires more short-term debt than it does short-term assets.This means that

A)the ending net working capital might be positive,negative,or equal to zero.
B)both accounts receivable and inventory decreased during the year.
C)the beginning current assets were less than the beginning current liabilities.
D)accounts payable increased and inventory decreased during the year.
E)the ending net working capital will be negative.

Question 36

What is the formula for computing operating cash flow?

A)EBIT + Depreciation − Current taxes
B)EBIT + Depreciation − Interest expense − Current taxes
C)EBIT + NWC − Depreciation
D)EBIT − Depreciation + Current taxes
E)EBIT − Change in NWC + Depreciation − Current taxes

Question 37

________ is calculated by adding back noncash expenses to earnings before interest and taxes,subtracting taxes,and adjusting for any changes in total assets or current liabilities that affect cash flows.

A)Distributable cash flow
B)Capital spending
C)Cash flow from assets
D)Cash flow from investing activities
E)Cash flow to creditors

Question 38

Which one of these is both a product cost and a fixed cost in the short run?

A)Monthly electric bill for manufacturing facility
B)Salary for company CEO
C)Overtime pay for production employees
D)Sales commission paid based on monthly sales
E)Monthly lease payment for production equipment

Question 39

Earnings per share is computed as

A)net income divided by total stockholders' equity.
B)EBIT divided by total stockholders' equity.
C)pretax income minus current taxes divided by total shares outstanding.
D)the addition to retained earnings divided by total shares outstanding.
E)net income divided by total shares outstanding.

Question 40

________ refers to a firm's dividend payments minus any net new equity raised.

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

Question 41

MLM Enterprises has net income of $984,interest expense of $146,sales of $6,320,addition to retained earnings of $495,selling and general expenses of $1,210,and depreciation of $1,140.What is the amount of dividends paid if the tax rate is 34 percent?

A)$1,479
B)$1,162
C)$489
D)$507
E)$783

Question 42

A change in which one of these accounts is treated as a cash flow from operating activities in an accounting statement of cash flows?

A)Long-term debt
B)Inventory
C)Dividends
D)Fixed assets
E)Depreciation

Question 43

Brewster's has annual sales of $11,800,dividends of $270,interest expense of $320,cost of goods sold of $7,230,addition to retained earnings of $510,selling and administrative expenses of $1,940,and a tax rate of 34 percent.What is the amount of the depreciation expense?

A)$584.18
B)$1,385.82
C)$1,128.18
D)$1,215.00
E)$1,474.24

Question 44

Assume sales are $1,100,cost of goods sold is $510,depreciation expense is $80,interest paid is $40,selling and general expenses are $230,dividends paid is $45,and the tax rate is 34 percent.What is the addition to retained earnings?

A)$203.40
B)$113.40
C)$166.20
D)$109.60
E)$158.40

Question 45

Art's Boutique has sales of $610,000 and costs of $480,000.Interest expense is $40,000,dividends paid is $37,000,and depreciation is $60,000.The tax rate is 34 percent and there are 8,500 shares of stock outstanding.What is the earnings per share?

A)$1.99
B)$2.33
C)$3.53
D)$4.28
E)$2.67

Question 46

A firm has beginning retained earnings of $4,200 and ending retained earnings of $4,150.What is the amount of dividends paid if the firm earned a net income of $1,950?

A)$1,500
B)$1,950
C)$1,900
D)$2,000
E)$2,100

Question 47

Which one of these is handled differently in calculating cash flows for accounting versus financial purposes?

A)Change in net working capital
B)Depreciation expense
C)Interest expense
D)Deferred taxes
E)Dividends paid

Question 48

The Down Towner has annual costs of goods sold of $42,600,interest expense of $650,selling and administrative expenses of $7,800,dividends paid of $1,200,depreciation of $1,100,and a tax rate of 34 percent.What is the firm's taxable income if it added $2,500 to retained earnings during the year?

A)$2,181.30
B)$8,711.18
C)$3,700.00
D)$5,606.06
E)$10,882.35

Question 49

The cash flow from operating activities decreases when

A)fixed assets are sold.
B)interest expense increases.
C)dividends increase.
D)depreciation increases.
E)accounts receivables decrease.

Question 50

Assume sales are $2,220; cost of goods sold is $1,055,general expenses are $630,depreciation expense is $210,and the tax rate is 35 percent.What is the net income amount if the firm paid $40 in interest expense?

A)$171.25
B)$99.75
C)$185.25
D)$120.25
E)$270.75

Question 51

Atlantic Fisheries has an EBIT of $3,280,depreciation of $1,850,cost of goods sold of $6,920,dividends paid of $750,interest expense of $860,and sales of $6,500.What is the taxable income?

A)$2,376
B)$1,805
C)$1,610
D)$1,670
E)$2,420

Question 52

Brad's Company has equipment with a book value of $1,380 that could be sold today at a 20 percent discount.Its inventory is valued at $360 and could be sold to a competitor for 90 percent of that value.The firm has $45 in cash and customers owe them $240,of which 97 percent is collectible.What is the accounting value of its liquid assets?

A)$601.80
B)$350.00
C)$2,025.00
D)$645.00
E)$1,705.80

Question 53

A change in which one of these accounts will appear as an investing activity in an accounting statement of cash flows?

A)Accounts payable
B)Inventory
C)Interest expense
D)Fixed assets
E)Sales

Question 54

________ refers to the cash flow resulting from a firm's ongoing,normal business activities.

A)Cash flow from assets
B)Net working capital
C)Capital spending
D)Cash flow from operating activities
E)Cash flow from investing activities

Question 55

Lester's has $33,600 in sales,$17,200 in cost of goods sold,$2,300 in depreciation,$980 in interest expense,and $5,800 in selling,general,and administrative expenses.The firm owes no taxes for this year.What is the amount of the period costs that are included in the operating cash flow?

A)$25,300
B)$3,280
C)$23,980
D)$23,000
E)$5,800

Question 56

A firm has $480 in inventory,$1,860 in fixed assets,$520 in accounts receivables,$190 in net working capital,and $120 in cash.What is the amount of the current liabilities?

A)$550
B)$770
C)$820
D)$760
E)$930

Question 57

Given the tax rates as shown,what is the average tax rate for a firm with taxable income of $228,610?

A)36.38%
B)33.88%
C)31.67%
D)34.64%
E)39.00%

Question 58

A firm has total equity of $2,011,net working capital of $175,long-term debt of $890,and current liabilities of $420.What is the amount of the net fixed assets?

A)$2,325
B)$2,974
C)$2,726
D)$3,075
E)$2,825

Question 59

________ refers to the changes in net fixed assets.

A)Cash flow from assets
B)Net working capital
C)Cash flow from investing activities
D)Cash flow from operating activities
E)Cash flow to creditors

Question 60

Martha's Enterprises spent $3,300 to purchase equipment 2 years ago.This equipment is currently valued at $2,357 on today's balance sheet but could actually be sold for $2,750.Net working capital is $860 and long-term debt is $1,650.Assuming this equipment is the firm's only fixed asset,what is the book value of shareholders' equity?

A)$1,960
B)$1,800
C)$1,567
D)$2,510
E)$1,633

Question 61

School House Antiques has current assets of $340 and current liabilities of $190 at the end of the year.At the beginning of the year,the current assets were $415 and the current liabilities were $210.What is the change in net working capital?

A)-$95
B)$0
C)$55
D)$95
E)-$55

Question 62

You have compiled the following information on Winslow,Inc.:

What is the cash flow to creditors for 2017?

A)$3,650
B)-$4,040
C)$3,350
D)-$4,270
E)-$3,810

Question 63

The financial information on Lazy Day,Inc.is as follows:

What is the operating cash flow for 2017?

A)$3,690
B)$4,203
C)$2,645
D)$5,331
E)$4,807

Question 64

The financial information on Lazy Day,Inc.is as follows:

What is net capital spending for 2017?

A)$1,115
B)$1,028
C)$80
D)$210
E)$946

Question 65

You are given the following balance sheets.

What is the change in the net working capital from 2016 to 2017?

A)$45
B)-$35
C)$50
D)-$50
E)$35

Question 66

Nel's Place has total sales of $1,456,costs are $782,and depreciation is $115.The tax rate is 34 percent.The firm does not have any interest expense.What is the operating cash flow?

A)$393.08
B)$524.40
C)$501.38
D)$483.94
E)$427.82

Question 67

The tax rates are as shown.Lasseter's currently has taxable income of $163,400.What is the firm's average tax rate?

A)34.00%
B)36.03%
C)28.75%
D)39.00%
E)30.32%

Question 68

You have compiled the following information on Winslow,Inc.:

What is the cash flow of the firm,or CF(A),for 2017?

A)-$1,273
B)-$3,581
C)$1,273
D)$2,160
E)$3,414

Question 69

Total assets are $2,630,fixed assets are $1,825,long-term debt is $1,015,and short-term debt is $530.What is the amount of net working capital?

A)$1,295
B)$275
C)$1,085
D)$350
E)$400

Question 70

Peggy Grey's Cookies has net income of $2,918.The firm pays out 35 percent of the net income to its shareholders as dividends.During the year,the company sold $150 worth of common stock.What is the cash flow to the stockholders?

A)$1,171.30
B)$871.30
C)$2,046.70
D)$1,224.20
E)$1,746.70

Question 71

You have compiled the following information on Winslow,Inc.:

What is the amount of net new borrowing for 2017?

A)$3,750
B)$3,250
C)$3,360
D)$4,040
E)$3,480

Question 72

The tax rates are as shown.Your firm currently has taxable income of $73,900.How much additional tax will the firm owe if it increases its taxable income by $10,000?

A)$3,400
B)$3,500
C)$2,500
D)$2,950
E)$3,301

Question 73

Thompson's Jet Skis has operating cash flow of $994.Depreciation is $102,taxes are $298,and interest paid is $65.A net total of $82 was paid on long-term debt.The firm spent $481 on fixed assets and increased its net working capital by $32.What is the amount of the cash flow to stockholders?

A)−$104
B)$334
C)$464
D)-$114
E)$138

Question 74

Teddy's Pillows had beginning net fixed assets of $648 and ending net fixed assets of $621.Assets valued at $285 were sold during the year.Depreciation was $76.What is the amount of net capital spending?

A)$334
B)$236
C)$115
D)$49
E)$66

Question 75

Murphy's Outlet has the following balance sheets:

What is the change in net working capital?

A)-$65
B)$91
C)$65
D)-$91
E)$57

Question 76

Frederick Antiques has the following balance sheets:

What is the change in net working capital?

A)-$118
B)$34
C)$12
D)$144
E)-$112

Question 77

At the beginning of the year,Malek Farm's had long-term debt of $687 and total debt of $911.At the end of the year,the long-term debt is $579 and total debt is $898.If $58 of interest was paid during the year,what is the cash flow to the creditors?

A)-$50
B)-$166
C)$71
D)$166
E)$50

Question 78

Charter Tours has the following balance sheets:

What is the amount of net working capital for 2017?

A)$751
B)$1,057
C)$1,128
D)$1,734
E)$826

Question 79

You have compiled the following information on the Shoe Store:

What is the amount of the net capital spending for 2017?

A)$224
B)$639
C)-$224
D)$362
E)$191

Question 80

Pete's Boats has beginning long-term debt of $647 and ending long-term debt of $749.The beginning and ending total debt balances are $801 and $768,respectively.The interest paid is $54.What is the amount of the cash flow to the creditors?

A)-$10
B)-$48
C)$21
D)$156
E)$87