Deck 17: Projecting Cash Flow and Earnings

Question 1

Which one of the following provides information on a firm's assets and liabilities as of a particular date?

A) cash flow statement
B) pro-forma income statement
C) income statement
D) tax return
E) balance sheet

Answer 1

E

Question 2

Equity is

A) the value of the assets minus the liabilities
B) defined as anything of value owned by a firm
C) the value of a firm to its employees
D) the total value of all items held by a firm
E) all of the above

Answer 2

A

Question 3

The _________ is a summary statement of a firm's revenues and expenses over a specified period.

A) operating cash flow statement
B) balance sheet
C) revenue sheet
D) cash flow statement
E) income statement

Answer 3

E

Question 4

_________ requires that companies disseminate public information to all investors at the same time without preferential recipients.

A) The Securities Act
B) Consumer Agency of Canada
C) Dealers Association of Canada
D) The Canadian Business Corporations Act
E) Disclosure regulation of various provincial prudential regulators such as Ontario Securities Exchange Commission

Question 5

Which of the following are major liability categories?
I Other Liabilities
II Current Liabilities
III Fixed Liabilities
IV Long Term Debt

A) I only
B) II only
C) I and II only
D) I, II and IV only
E) I, II, III and IV

Question 6

The cash flow resulting from the payment of dividends and the issuance and/or repurchase of equity securities is called the _________ cash flow.

A) Revenue
B) operating
C) Financing
D) Investment
E) Income

Question 7

The difference between a firm's revenues and expenses is called _________.

A) net income
B) cash flow
C) gross margin
D) paid-in-capital
E) operating margin

Question 8

Which one of the following is an analysis of a firm's sources and uses of cash over a period of time?

A) cash flow statement
B) pro-forma income statement
C) income statement
D) tax return
E) balance sheet

Question 9

Cash generated by a firm's normal business operations is ________ cash flow.

A) daily
B) operating
C) financing
D) investment
E) income

Question 10

Anything owned by a firm that has value is called

A) an equity
B) a liability
C) a revenue
D) an asset
E) goodwill

Question 11

The total amount of cash generated by a company is known as ________.

A) income
B) cash flow
C) gross margin
D) paid-in-capital
E) operating margin

Question 12

The accounting statement that presents a snapshot of what the company owns and what it owes is the ________.

A) operating cash flow
B) balance sheet
C) revenue sheet
D) cash flow statement
E) income statement

Question 13

Items that reduce the net income of a firm, but do not affect the firms' cash flows are called _________ item.

A) expense
B) intangible
C) noncash
D) paid-in
E) financing

Question 14

Cash flow resulting from the purchase and sale of fixed assets and investments is ________ cash flow.

A) Revenue
B) operating
C) Financing
D) Investment
E) Income

Question 15

Which one of the following is an accounting statement that provides information on a firm's revenues and expenses?

A) cash flow statement
B) pro-forma income statement
C) income statement
D) tax return
E) balance sheet

Question 16

A cash flow statement is an accounting statement that

A) records the differences between a firm's account balance and the actual bank balance
B) captures a firm's cash and credit sales over a period of time
C) shows the revenue and expense of a firm
D) analyzes a firm's operating, investing and financing cash flows
E) reports on transaction between a firm and its bank

Question 17

The _________ that a company files with the OSC has excellent primary source of financial information for stockholders.

A) tender offer
B) annual report
C) tombstone
D) red-liner
E) prospectus

Question 18

In Canada, the electronic archive of company documents filed with the securities regulatory agencies is known as:

A) EDGAR.
B) E-scan.
C) POP.
D) DataStream.
E) SEDAR.

Question 19

Which of the following are major asset categories?
I Other Assets
II Current Assets
III Fixed Assets
IV Goodwill

A) I only
B) II only
C) I and II only
D) I, II and IV only
E) I, II, III and IV

Question 20

The debts and all financial obligations of a firm are classified as:

A) equity.
B) liabilities.
C) revenue.
D) an asset.
E) goodwill.

Question 21

Costs directly related to the production of goods for sale that vary directly with the production level are called

A) Goodwill.
B) Fixed costs.
C) Operating costs.
D) Tangible costs.
E) Cost of goods sold.

Question 22

The _________ approach is a method of projecting future values with the assumption that many financial statement accounts will vary in direct relation to a firm's predicted total revenue.

A) variable cost
B) linear
C) correlated
D) pro forma
E) percentage of sales

Question 23

Operating income is equal to total revenue minus

A) Goodwill.
B) Cost of goods sold.
C) Cost of goods sold, depreciation, operating and general expenses.
D) Cost of goods sold and operating expenses plus depreciation.
E) Cost of goods sold and depreciation.

Question 24

Operating expenses are:

A) costs that vary directly with production and sales.
B) the same as cost of goods sold.
C) the cost of purchasing plant and equipment.
D) indirect costs of administration and marketing.
E) inclusive of interest expense.

Question 25

Financial statements that are compiled based on expected future values are called _______ statements.

A) reconciliation
B) expected financial
C) projected
D) pro forma
E) future

Question 26

Which of the following is a tangible fixed asset?

A) Goodwill.
B) Patents.
C) Inventory.
D) Equipment.
E) Accounts receivable.

Question 27

ABC Inc. recently purchased XYZ Inc. XYZ had a total market value of $6.2 million. However, ABC actually paid $6.4 million for the acquisition. This acquisition created an asset called _________ of an amount of $0.2 million.

A) Goodwill.
B) Depreciation.
C) Gross profit.
D) Acquisition cost.
E) Amortization.

Question 28

A key reason why firms must file financial reports with various prudential regulators and also meet the fair disclosure requirements is the need to

A) Minimize the amount of company information that is made public.
B) Limit the release of information related to publicly-owned firms.
C) Provide information to financial analysts prior to any release to the general public.
D) Regulate the type of information provided and guarantee the accuracy of that information.
E) Provide information to the general public in a fair, timely and accurate manner.

Question 29

_________ is the market value of all a firm's outstanding equity and debt securities divided by the replacement cost of all the firm's assets.

A) Liquidity ratio
B) Payout ratio
C) Z score
D) Tobin's q ratio
E) Par value

Question 30

The amount of assets that a firm must control to generate one dollar in sales is called the

A) return on assets
B) capital intensity ratio
C) turnover rate
D) sales ratio
E) earnings ratio

Question 31

What does a Tobin's Q ratio of greater than 1 indicate?

A) The company has sufficient liquid assets to cover immediate liabilities.
B) The company has sufficient liquid assets, excluding inventory, to cover immediate liabilities.
C) The company presents a significant default risk.
D) The company is poorly managed.
E) The company is well managed.

Question 32

Which of the following is a current asset?

A) License
B) Patent
C) Building
D) Inventory
E) Equipment

Question 33

_________ measures the premium paid by a firm over market value to acquire an asset.

A) Economic depreciation
B) Hurdle rate
C) Net worth
D) Par value
E) Goodwill

Question 34

The ratio of operating cash flow to the number of shares of stock outstanding is _________ per share.

A) net income
B) cash flow
C) Dividends
D) Earnings
E) retained earnings

Question 35

Which of the following would not appear on a balance sheet?

A) Goodwill.
B) Patents.
C) Gross profit.
D) Accumulated depreciation.
E) Paid-in-capital.

Question 36

Net income of a firm dividend by the total value of the firm to its shareholder is known as

A) return on assets
B) dividend payouts
C) return on equity
D) gross margin
E) operating margin

Question 37

Return on assets is defined as the _________ of a firm expressed as a percentage of the firm's _________.

A) net income; total assets
B) net income; current assets
C) net income; fixed assets
D) revenue; gross margin
E) revenue; operating margin

Question 38

Gross profit is equal to

A) Total revenue minus total expenses.
B) Total sales minus sales returns.
C) Sales minus cost of goods sold.
D) Total revenue minus cost of goods sold and depreciation.
E) Total revenue minus cost of goods sold plus depreciation.

Question 39

Which of the following would not appear on an income statement?

A) Investment income.
B) Prepaid expenses.
C) Interest expense.
D) Income taxes.
E) Operating income.

Question 40

ABC Inc. has a note payable to a bank that is due 9 months from today. This note is a

A) Current asset.
B) Current liability.
C) Long-term asset.
D) Accumulated depreciation.
E) Long-term liability.

Question 41

A loan with a maturity loner than a year is:

A) a current asset.
B) goodwill.
C) an administrative asset.
D) an accumulated asset.
E) a long-term liability.

Question 42

Which of the following is true regarding the cash flows of a firm?

A) Depreciation increases the cash flows of a firm.
B) The payment of a loan repayment to a bank is a cash outflow for the firm.
C) The sale of new shares of stocks increases the financing cash flows
D) Operating cash flow equals net income plus depreciation
E) All of the above.

Question 43

Cash flow per share is generally based on the:

A) investing cash flow.
B) operating cash flow.
C) financing cash flow.
D) bottom line cash flow from the cash flow statement.
E) equity cash flow.

Question 44

Which of the following price ratios will generally have the least sensitive projected stock price when using pro forma financial statements?

A) Price-book ratio.
B) Price-cash flow ratio.
C) Price-earnings ratio.
D) All are equally sensitive.
E) Insufficient information.

Question 45

Cost of goods sold vary _________ rate with sales.

A) directly at a linear
B) directly at a decreasing
C) indirectly at a constant
D) indirectly at an increasing
E) indirectly at a decreasing

Question 46

All else the same, which of the following ratios would be unaffected by any change of the depreciation method?

A) Price-sales ratio.
B) Price-earnings ratio.
C) Return on assets.
D) Return on equity.
E) Price-cash flow ratio.

Question 47

A company can normally exempt _________ percent of dividend income received from a publicly traded Canadian company for income taxes.

A) 0
B) 30
C) 50
D) 70
E) 100

Question 48

Which one of the following is income realized in cash form?

A) net income
B) revenue
C) cash flow
D) retained earnings
E) dividends

Question 49

Which of the following balance sheet item can be negative?

A) Fixed assets.
B) Cash.
C) Long-term debt.
D) Equity.
E) None of the above.

Question 50

Excluding shares outstanding, which of the following requires the use of the balance sheet?

A) Price-book ratio.
B) Price-earnings ratio.
C) Price-cash flow ratio.
D) All of the above.
E) None of the above.

Question 51

Which of the following is false regarding interest? Interest payments:

A) are not discretionary.
B) are tax-deductible.
C) do not directly appear in the statement of cash flows.
D) appear on the income statement.
E) none of the above.

Question 52

Which of the following will be required by a firm to include in the annual report filings?
I) Balance sheet
II) Income statement
III) Cash flow statement

A) I only
B) II only
C) I and II only
D) II and III only
E) I, II, and III

Question 53

Cash flow per share (CFPS)

A) Is used by some analysts who are not willing to accept the accountants' definition of EPS.
B) Is generally below a firm's EPS
C) Is not as closely correlated with stock prices as primary EPS
D) Is calculated using the bottom line on the cash flow statement.
E) Must also be adjusted for a change in a firm's depreciation technique.

Question 54

Which of the following is correct?

A) Return on assets = Net income/Current assets
B) Gross margin = Gross profit/Net sales
C) Operating margin = Operating income/Total assets
D) Return on assets = Net income/Fixed assets
E) Return on equity = Net income/Retained earnings

Question 55

Retained earnings are considered as _________ on the balance sheet.

A) a fixed asset
B) a long-term liability
C) a current asset
D) an equity
E) none of the above.

Question 56

Which of the following is unlikely to change in pro forma statements for different scenarios?

A) Operating expenses.
B) Cost of goods sold.
C) Net income.
D) Operating cash flow.
E) Investment cash flow.

Question 57

If you assume that total costs represent a constant percentage of sales, you are automatically assuming that the _________ is constant.

A) Net income
B) Profit margin
C) Operating cash flow
D) Dividend amount
E) Retention ratio

Question 58

When preparing pro forma income statements, which of the following is likely to be the same for all scenarios?

A) Sales.
B) Depreciation.
C) Cost of goods sold.
D) Income tax.
E) Net income.

Question 59

Net income can be computed as:

A) dividends plus the addition to retained earnings.
B) sales minus costs.
C) retained earnings plus depreciation.
D) sales minus cost of goods sold.
E) sales minus taxes.

Question 60

Which of the following accounts is least likely to vary directly with the levels of sales?

A) Accounts receivable.
B) Inventory.
C) Income taxes.
D) Cost of goods sold
E) Long-term debt.

Question 61

Interest payments are considered a(n) _________ cash flow.

A) operating
B) investment
C) pro forma
D) financing
E) sales

Question 62

A company had the following during the year: cost of goods sold = $120,000, investment income = $1,800, sales = $235,000, operating expense = $53,000, interest expense = $4,800, dividends = $8,400, tax rate = 35 percent, and 20,000 shares outstanding. What was the addition to retained earnings?

A) $27,610
B) $32,180
C) $28,460
D) $31,040
E) $29,950

Question 63

The management recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively _________ of the firm.

A) Increased the profit margin
B) Restricted the future growth
C) Lowered the income taxes
D) Maximized the future net income
E) Maximized the future dividends

Question 64

A company has net income of $170,000 and 40,000 shares of stock outstanding. If the company paid a dividend of $1.32 per share, what was the addition to retained earnings?

A) $125,400
B) $52,800
C) $122,600
D) $117,200
E) $112,800

Question 65

What is the operating cash flow, given the following information? $$\begin{array} { | l r | } \hline \text { Net income } & \$ 600 \\\text { Depreciation } & 70 \\\text { Issuance of new stock } & 30 \\\text { Repayment of debt } & 20 \\\text { Sale of old equipment } & 40 \\\text { Purchase of new equipment } & 60 \\\text { Dividend payments } & 70 \\\text { Interest Payments } & 100 \\\hline\end{array}$$

A) $400
B) $470
C) $530
D) $540
E) $670

Question 66

Dividend payments are considered as a(n) _________ cash flow.

A) operating
B) investment
C) pro forma
D) financing
E) sales

Question 67

Last year, a firm had net income of $62,000 on sales of $595,000. The projected sales for next year are $654,500. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?

A) $59,500
B) $65,500
C) $68,200
D) $71,500
E) $71,900

Question 68

A company had earnings per share of $1.65, depreciation expense of $340,000, and 210,000 shares outstanding. What was the price-cash flow ratio given a stock price of $31?

A) 9.04
B) 9.48
C) 7.16
D) 8.23
E) 8.76

Question 69

A company had the following during the year: cost of goods sold = $120,000, investment income = $1,800, sales = $235,000, operating expense = $53,000, interest expense = $4,800, dividends = $8,400, tax rate = 35 percent, and 20,000 shares outstanding. What was net income?

A) $38,350
B) $40,190
C) $43,820
D) $36,010
E) $37,160

Question 70

Which of the following are possible funding sources to meet the external financing need of a firm?
I) Sale of fixed assets
II) Short-term debt
III) Long-term debt
IV) Sale of equity securities

A) I
B) I and II
C) II and III
D) III and IV
E) II, III, and IV

Question 71

A company has a return on equity of 20 percent, 30,000 shares outstanding, and net income of $65,000. What are earnings per share?

A) $2.24
B) $2.11
C) $2.05
D) $2.17
E) $1.98

Question 72

Which of the following would likely NOT increase the projected stock price of a company?

A) An increase in the ROA.
B) Decrease in long term liabilities.
C) The company's decision to buy back shares.
D) A decrease in the gross margin.
E) The analysts using a P/E reflecting a growth stock.

Question 73

Paid-in capital is considered:

A) revenue.
B) a long-term liability.
C) an investment cash flow.
D) a long-term asset.
E) equity.

Question 74

A company had the following during the year: cost of goods sold = $120,000, investment income = $1,800, sales = $235,000, operating expense = $53,000, interest expense = $4,800, dividends = $8,400, tax rate = 35 percent, and 20,000 shares outstanding. What were the earnings per share?

A) $1.62
B) $1.80
C) $1.76
D) $1.67
E) $1.92

Question 75

A company had earnings per share of $1.65, depreciation expense of $340,000, a stock price of $31, and 210,000 shares outstanding. What was the cash flow per share (CFPS)?

A) $1.62
B) $3.61
C) $3.27
D) $3.43
E) $3.78

Question 76

If a company purchases a new plant it would be considered a(n) _________ cash flow.

A) Operating
B) Investment
C) Pro forma
D) Financing
E) Sales

Question 77

A firm has $1,300 of cash, equipment worth $35,600, inventory of $14,900, $12,500 worth of patents, and $10,400 of account receivable. What is the value of the total current assets?

A) $1,300
B) $11,700
C) $26,600
D) $39,100
E) $74,700

Question 78

Accrued taxes are considered:

A) a current liability.
B) equity.
C) a long-term liability.
D) a current asset.
E) a fixed asset.

Question 79

A company has a return on equity of 20 percent, 30,000 shares outstanding, and net income of $65,000. What is the total equity for the company?

A) $325,000
B) $298,000
C) $314,000
D) $341,000
E) $332,000

Question 80

A company had the following during the year: cost of goods sold = $120,000, investment income = $1,800, sales = $235,000, operating expense = $53,000, interest expense = $4,800, dividends = $8,400, tax rate = 35 percent, and 20,000 shares outstanding. What was the dividend per share?

A) $0.37
B) $0.53
C) $0.42
D) $0.47
E) $0.39