Deck 2: Financial Statements, Taxes, and Cash Flow

Question 1

All else held constant, the book value of owners' equity will decrease when:

A)the market value of inventory increases.
B)dividends exceed net income for a period.
C)cash is used to pay an accounts payable.
D)a long-term debt is repaid.
E)taxable income increases.

Answer 1

dividends exceed net income for a period.

Question 2

Shareholders' equity is best defined as:

A)the residual value of a firm.
B)positive net working capital.
C)the net liquidity of a firm.
D)cash inflows minus cash outflows.
E)the cumulative profits of a firm over time.

Answer 2

the residual value of a firm.

Question 3

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

A)income statement.
B)cash flow statement.
C)liquidity position.
D)balance sheet.
E)periodic operating statement.

Answer 3

balance sheet.

Question 4

Production equipment is classified as:

A)a net working capital item.
B)a current liability.
C)a current asset.
D)a tangible fixed asset.
E)an intangible fixed asset.

Question 5

Operating cash flow is defined as:

A)a firm's net profit over a specified period of time.
B)the cash that a firm generates from its normal business activities.
C)a firm's operating margin.
D)the change in the net working capital over a stated period of time.
E)the cash that is generated and added to retained earnings.

Question 6

Paid-in surplus is classified as:

A)owners' equity.
B)net working capital.
C)a current asset.
D)a cash expense.
E)long-term debt.

Question 7

Net working capital includes:

A)a land purchase.
B)an invoice from a supplier.
C)non-cash expenses.
D)fixed asset depreciation.
E)the balance due on a 15-year mortgage.

Question 8

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

A)statement of cash flows.
B)income statement.
C)GAAP statement.
D)balance sheet.
E)net working capital schedule.

Question 9

Cash flow to stockholders is defined as:

A)cash flow from assets plus cash flow to creditors.
B)operating cash flow minus cash flow to creditors.
C)dividends paid plus the change in retained earnings.
D)dividends paid minus net new equity raised.
E)net income minus the addition to retained earnings.

Question 10

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

A)average tax rate.
B)variable tax rate.
C)marginal tax rate.
D)fixed tax rate.
E)ordinary tax rate.

Question 11

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

A)Indirect cost
B)Direct cost
C)Noncash item
D)Period cost
E)Variable cost

Question 12

Which one of the following has nearly the same meaning as free cash flow?

A)Net income
B)Cash flow from assets
C)Operating cash flow
D)Cash flow to shareholders
E)Addition to retained earnings

Question 13

Which one of the following is an intangible fixed asset?

A)Inventory
B)Machinery
C)Copyright
D)Account receivable
E)Building

Question 14

Shareholders' equity is equal to:

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

Question 15

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A)Average tax rate
B)Variable tax rate
C)Marginal tax rate
D)Absolute tax rate
E)Contingent tax rate

Question 16

Over the past year, a firm decreased its current assets and increased its current liabilities.As a result, the firm's net working capital:

A)had to increase.
B)had to decrease.
C)remained constant.
D)could have either increased, decreased, or remained constant.
E)was unaffected as the changes occurred in the firm's current accounts.

Question 17

Net working capital is defined as:

A)the depreciated book value of a firm's fixed assets.
B)the value of a firm's current assets.
C)available cash minus current liabilities.
D)total assets minus total liabilities.
E)current assets minus current liabilities.

Question 18

Cash flow from assets is defined as:

A)the cash flow to shareholders minus the cash flow to creditors.
B)operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C)operating cash flow minus the change in net working capital minus net capital spending.
D)operating cash flow plus net capital spending plus the change in net working capital.
E)cash flow to shareholders minus net capital spending plus the change in net working capital.

Question 19

Net working capital increases when:

A)fixed assets are purchased for cash.
B)inventory is purchased on credit.
C)inventory is sold at cost.
D)a credit customer pays for his or her purchase.
E)inventory is sold at a profit.

Question 20

Cash flow to creditors is defined as:

A)interest paid minus net new borrowing.
B)interest paid plus net new borrowing.
C)operating cash flow minus net capital spending minus the change in net working capital.
D)dividends paid plus net new borrowing.
E)cash flow from assets plus net new equity.

Question 21

Which one of the following is included in the market value of a firm but not in the book value?

A)Raw materials
B)Partially built inventory
C)Long-term debt
D)Reputation of the firm
E)Value of a partially depreciated machine

Question 22

Given a profitable firm, depreciation:

A)increases net income.
B)increases net fixed assets.
C)decreases net working capital.
D)lowers taxes.
E)has no effect on net income.

Question 23

Which one of these is correct?

A)Depreciation has no effect on taxes.
B)Interest paid is a noncash item.
C)Taxable income must be a positive value.
D)Net income is distributed either to dividends or retained earnings.
E)Taxable income equals net income × (1 + Average tax rate).

Question 24

The market value:

A)of accounts receivable is generally higher than the book value of those receivables.
B)of an asset tends to provide a better guide to the actual worth of that asset than does the book value.
C)of fixed assets will always exceed the book value of those assets.
D)of an asset is reflected in the balance sheet.
E)of an asset is lowered each year by the amount of depreciation expensed for that asset.

Question 25

An income statement prepared according to GAAP:

A)reflects the net cash flows of a firm over a stated period of time.
B)reflects the financial position of a firm as of a particular date.
C)distinguishes variable costs from fixed costs.
D)records revenue when payment for a sale is received.
E)records expenses based on the matching principle.

Question 26

The recognition principle states that:

A)costs should be recorded on the income statement whenever those costs can be reliably determined.
B)costs should be recorded when paid.
C)the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
D)sales should be recorded when the payment for that sale is received.
E)sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Question 27

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

A)An increase in net capital spending
B)A decrease in the cash flow to creditors
C)An increase in depreciation
D)An increase in the change in net working capital
E)A decrease in dividends paid

Question 28

Net working capital decreases when:

A)a new 3-year loan is obtained with the proceeds used to purchase inventory.
B)a credit customer pays his or her bill in full.
C)depreciation increases.
D)a long-term debt is used to finance a fixed asset purchase.
E)a dividend is paid to current shareholders.

Question 29

The market value of a firm's fixed assets:

A)will always exceed the book value of those assets.
B)is more predictable than the book value of those assets.
C)in addition to the firm's net working capital reflects the true value of a firm.
D)is decreased annually by the depreciation expense.
E)is equal to the estimated current cash value of those assets.

Question 30

A negative cash flow to stockholders indicates a firm:

A)had a net loss for the year.
B)had a positive cash flow to creditors.
C)paid dividends that exceeded the amount of the net new equity.
D)repurchased more shares than it sold.
E)received more from selling stock than it paid out to shareholders.

Question 31

The concept of marginal taxation is best exemplified by which one of the following?

A)Kirby's paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B)Johnson's Retreat paid only $45,000 on total revenue of $570,000 last year.
C)Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.
D)Burlington Centre paid no taxes last year due to carryforward losses.
E)The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

Question 32

The matching principle states that:

A)costs should be recorded on the income statement whenever those costs can be reliably determined.
B)costs should be recorded when paid.
C)the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
D)sales should be recorded when the payment for that sale is received.
E)sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Question 33

Firms that compile financial statements according to GAAP:

A)record income and expenses at the time they affect the firm's cash flows.
B)have no discretion over the timing of recording either revenue or expense items.
C)must record all expenses when incurred.
D)can still manipulate their earnings to some degree.
E)record both income and expenses as soon as the amount for each can be ascertained.

Question 34

Highly liquid assets:

A)increase the probability a firm will face financial distress.
B)appear on the right side of a balance sheet.
C)generally produce a high rate of return.
D)can be sold quickly at close to full value.
E)include all intangible assets.

Question 35

Net income increases when:

A)fixed costs increase.
B)depreciation increases.
C)the average tax rate increases.
D)revenue increases.
E)dividends cease.

Question 36

A firm's liquidity level decreases when:

A)inventory is purchased with cash.
B)inventory is sold on credit.
C)inventory is sold for cash.
D)an account receivable is collected.
E)proceeds from a long-term loan are received.

Question 37

Which one of the following statements concerning the balance sheet is correct?

A)Total assets equal total liabilities minus total equity.
B)Net working capital is equal total assets minus total liabilities.
C)Assets are listed in descending order of liquidity.
D)Current assets are equal to total assets minus net working capital.
E)Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

Question 38

Market values:

A)reflect expected selling prices given the current economic situation.
B)are affected by the accounting methods selected.
C)are equal to the initial cost minus the depreciation to date.
D)either remain constant or increase over time.
E)are equal to the greater of the initial cost or the current expected sales value.

Question 39

Based on the recognition principle, revenue is recorded on the financial statements when the:
I.payment is collected for the sale of a good or service.
II.earnings process is virtually complete.
III.value of a sale can be reliably determined.
IV.product is physically delivered to the buyer.

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

Question 40

Financial leverage:

A)increases as the net working capital increases.
B)is equal to the market value of a firm divided by the firm's book value.
C)is inversely related to the level of debt.
D)is the ratio of a firm's revenues to its fixed expenses.
E)increases the potential return to the stockholders.

Question 41

Donner United has total owners' equity of $18,800.The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400.What is the value of the long-term debt?

A)$5,400
B)$12,500
C)$13,700
D)$29,800
E)$43,000

Question 42

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank.During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest.The company also borrowed $11,000.What is the value of the ending long-term debt?

A)$45,100
B)$53,300
C)$58,200
D)$63,300
E)$85,900

Question 43

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

A)Positive operating cash flow
B)Negative cash flow to creditors
C)Positive cash flow to stockholders
D)Negative net capital spending
E)Positive cash flow from assets

Question 44

Taylor Industries has current liabilities of $54,900 and accounts receivable of $88,700.The firm has total assets of $395,000 and net fixed assets of $265,100.The owners' equity has a book value of $147,500
)What is the amount of the net working capital?

A)$77,400
B)$75,000
C)$33,800
D)$8,500
E)-$2,400

Question 45

Cash flow to creditors increases when:

A)interest rates on debt decline.
B)accounts payables decrease.
C)long-term debt is repaid.
D)current liabilities are repaid.
E)new long-term loans are acquired.

Question 46

Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900.During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in depreciation expense.How much did the company spend to buy new fixed assets?

A)-$23,900
B)$9,200
C)$36,800
D)$40,700
E)$37,400

Question 47

Jackson Automotive has net working capital of $22,600, current assets of $56,500, equity of $62,700, and long-term debt of $31,900.What is the amount of the net fixed assets?

A)$9,300
B)$49,400
C)$94,600
D)$103,900
E)$72,000

Question 48

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100.What is the value of the net working capital?

A)$9,800
B)$10,400
C)$18,900
D)$21,300
E)$23,200

Question 49

Marenelle Construction has beginning retained earnings of $284,300.For the year, the company earned net income of $13,700 and paid dividends of $9,000.The company also issued $25,000 worth of new stock.What is the value of the retained earnings account at the end of the year?

A)$287,204
B)$289.454
C)$294,134
D)$289.000
E)$314,000

Question 50

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200.What is the value of the current liabilities?

A)$61,700
B)$88,40000
C)$102,900
D)$96,700
E)$111,500

Question 51

If a firm has a negative cash flow from assets every year for several years, the firm:

A)may be continually increasing in size.
B)must also have a negative cash flow from operations each year.
C)is operating at a high level of efficiency.
D)is repaying debt every year.
E)has annual net losses.

Question 52

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900.What is the amount of the current assets?

A)$46,700
B)$56,000
C)$783,400
D)$975,000
E)$699,700

Question 53

Michael's Bakery had $236,400 in net fixed assets at the beginning of the year.During the year, the company purchased $53,200 in new equipment.It also sold, at a price of $22,000, some old equipment that had a book value of $5,900.The depreciation expense for the year was $13,400.What is the net fixed asset balance at the end of the year?

A)$260,000
B)$283,700
C)$276,200
D)$270,300
E)$289,600

Question 54

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend.The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

A)Positive operating cash flow
B)Negative cash flow from assets
C)Positive net income
D)Negative operating cash flow
E)Positive cash flow to stockholders

Question 55

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600.What is the value of the current assets?

A)$21,600
B)$18,100
C)$28,900
D)$29,400
E)$6,800

Question 56

What is the maximum average tax rate for corporations?

A)38 percent
B)25 percent
C)33 percent
D)39 percent
E)35 percent

Question 57

Net capital spending is equal to:

A)ending net fixed assets minus beginning net fixed assets plus depreciation.
B)beginning net fixed assets minus ending net fixed assets plus depreciation.
C)ending net fixed assets minus beginning net fixed assets minus depreciation.
D)ending total assets minus beginning total assets plus depreciation.
E)ending total assets minus beginning total assets minus depreciation.

Question 58

Mahalo Tours currently has $10,500 in cash.The company owes $26,900 to suppliers for merchandise and $47,500 to the bank for a long-term loan.Customers owe the company $33,000 for their purchases.The inventory has a book value of $62,400 and an estimated market value of $65,600.If the store compiled a balance sheet as of today, what would be the book value of the current assets?

A)$100,700
B)$79,500
C)$85,700
D)$105,900
E)$117,500

Question 59

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

A)Fixed expenses
B)Marginal tax rate
C)Net capital spending
D)Inventory
E)Depreciation

Question 60

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

A)Increase in depreciation
B)Increase in accounts receivable
C)Increase in accounts payable
D)Decrease in cost of goods sold
E)Increase in sales

Question 61

Kahlan Opinion Surveys had beginning retained earnings of $24.600.During the year, the company reported sales of $105,700, costs of $78,300, depreciation of $9.000, dividends of $1,200, and interest paid of $$635.The tax rate is 30 percent.What is the retained earnings balance at the end of the year?

A)$38,835.50
B)$36,082.15
C)$36,121.44
D)$37,671.44
E)$35,721.45

Question 62

Use the following tax table to answer this question: Stacey's Fabrics, a sole proprietorship earned $260.000 in taxable income for the year.How much tax does the company owe?

A) $$96,220
B)$91,000
C)$66.690
D)$62,400
E)$57,200

Question 63

For the year, Uptowne Furniture had sales of $818,790, costs of $748,330, and interest paid of $24,450.The depreciation expense was $56,100 and the tax rate was 34 percent.At the beginning of the year, the firm had retained earnings of $172,270 and common stock of $260,000.At the end of the year, retained earnings was $158,713 and common stock was $280,000.Any tax losses can be used.What is the amount of the dividends paid for the year?

A)$5,266
B)$6,466
C)$7,566
D)$7,066
E)$6,898

Question 64

Marcie's has sales of $179,600,depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400.The tax rate is 35 percent.What is the net income?

A)-$1,235
B)$382
C)$1,204
D)$14,660
E)$13,665

Question 65

Neiger Flours owes $9,741 in taxes on taxable income of $61,509.If the firm earns $100 more in income, it will owe an additional $22 in taxes.What is the average tax rate on income of $61,609?

A)15.00 percent
B)30.33 percent
C)33.33 percent
D)35.00 percent
E)15.85 percent

Question 66

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $189,000.The building is currently valued at $209,000.The firm has other fixed assets that cost $56,000 and are currently valued at $32,000.To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns.Current liabilities are $36,600 and net working capital is $18,400.What is the total book value of the firm's assets?

A)$251,000
B)$241,000
C)$232,600
D)$214,400
E)$379,000

Question 67

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400.The tax rate is 28 percent.How much net income did the firm earn for the period?

A)$7,778
B)$9,324
C)$10,380
D)$8,671
E)$5,886

Question 68

Victoria Photography, a sole proprietorship owes $190,874in taxes on a taxable income of $608,606.The company has determined that it will owe $$195,246 in tax if its taxable income rises to $620,424.What is the marginal tax rate at this level of income?

A)39 percent
B)38 percent
C)37 percent
D)35 percent
E)32 percent

Question 69

The Plaza Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590.A partial listing of its balance sheet accounts is as follows: What is the amount of the cash flow from assets?

A)$26,359
B)$47,949
C)$61,487
D)$43,909
E)$35,953

Question 70

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200.What is the amount of the dividends paid?

A)$100
B)$7,500
C)$7,600
D)$15,100
E)$16,700

Question 71

Ezmerelda Jewelers has a marginal tax rate of 32 percent and an average tax rate of 20.9percent.If the firm owes $$34,330 in taxes, how much taxable income did it earn?

A)$127,584
B)$116,649
C)$164,500
D)$157,500
E)$168,500

Question 72

Lew's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800.The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000.The firm could collect 100 percent of its receivables as they are secured.What is the market value of the firm's assets?

A)$332,800
B)$458,200
C)$374,200
D)$495,500
E)$487,100

Question 73

Use the following tax table to answer this question: Andrews Dried Fruit, LLC has taxable income of $630,000.How much does it owe in taxes?

A)$141,750
B)$154,800
C)$198,790
D)$220,500
E)$233,100

Question 74

Leslie Printing has net income of $26,310 for the year.At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420.At the end of the year, the firm had total equity of $142,430.The firm paid dividends of $32,500.What is the amount of the net new equity raised during the year?

A)$34,000
B)$42,500
C)$25,000
D)$21,500
E)$0

Question 75

Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected.The inventory cost $82,300 and can be sold today for $116,500.The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated.The fixed assets can be sold today for $138,000.What is the total book value of the firm's assets?

A)$327,800
B)$293,200
C)$346,800
D)$412,100
E)$415,600

Question 76

AV Sales has net revenue of $513,000 and costs of $406,800.The depreciation expense is $43,800,interest paid is $11,200, and dividends for the year are$4,500.The tax rate is 33 percent.What is the addition to retained earnings?

A)$38,804
B)$34,304
C)$28,120
D)$29,804
E)$30,450

Question 77

Bleu Berri Farms had equity of $58,900 at the beginning of the year.During the year, the company earned net income of $8,200 and paid $2,500 in dividends.Also during the year, the company repurchased $3,500 of stock from one of its shareholders.What is the value of the owners' equity at year end?

A)$61,100
B)$67,600
C)$64,900
D)$64,400
E)$68,100

Question 78

Thorkfeld Company incurred depreciation expenses of $28,900 last year.The sales were $755,000 and the addition to retained earnings was $10,200.The firm paid interest of $6,200 and dividends of $5,000.The tax rate was 33 percent.What was the amount of the costs incurred by the company?

A)$691.013
B)$707,413
C)$704,700
D)$697,213
E)$719,900

Question 79

Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650.The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620.Given a tax rate of 34 percent, what was the amount of the depreciation expense?

A)$2,407
B)$1,908
C)$2,503
D)$3,102
E)$3,414

Question 80

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000.What is the value of the owners' equity?

A)$36,900
B)$66,700
C)$71,600
D)$89,400
E)$106,300