Accounting 2037 Exam 3

Investing activities are affected by

changes in long-term assets.

Information on the statement of cash flows helps users answer all of the following questions except:

Why did the company invest in long-term assets?

Current liabilities _____ operations, including short-term notes payable and dividends payable are categorized as financing activities.

unrelated to

A student purchases a concert ticket for $50. Before entering the concert, the student is offered $75 for the ticket. If the student decides to keep the ticket and attend the concert, the opportunity cost is:

$75

The statement of cash flows explains the difference between beginning and ending balances of cash and cash equivalents. A cash equivalent must satisfy which of the following criteria? (Check all that apply.)

-Be close to maturity -Be readily convertible to a known amount of cash

Information about cash flows can influence decision makers in important ways. Which of the following questions could be answered by the statement of cash flows? (Check all that apply.)

-Can the company pay its debts? -Does the company have the resources to pursue opportunities? -How does a company spend its cash?

Which of the following transactions would be reported under cash flows from operating activities? Select all that apply.

-Cash paid for salaries and wages -Cash paid to lenders for interest -Cash received from sales

Which of the following transactions would be reported under investing activities in the statement of cash flows? (Check all that apply.)

-Cash paid to purchase plant assets -Cash paid to purchase investments in securities

Which of the following items would be reported under financing activities on the statement of cash flows?

-Cash paid to repay cash loans -Cash dividends paid to shareholders -Cash received from issuing notes payable

Which of the following are correct statements about the internal rate of return? (Check all that apply.)

-IRR reflects the time value of money. -The higher the IRR, the better.

Which of the following items are classified as noncash investing and financing activities? (Check all that apply.)

-Issuance of common stock in exchange for land -Retirement of debt by issuing stock -Purchase of a building with a note

Which of the following statements about the statement of cash flows are correct? (Check all that apply.)

-It is a detailed disclosure of cash flows. -The purpose is to report cash receipts and cash payments during a period.

Identify which of the following items is not a noncash investing and financing activity that must be reported in a note to the statement of cash flows. (Check all that apply.)

-Purchase of a plant asset with cash -Repayment of a note with cash

Of the four capital budgeting methods, which two reflect the time value of money?

-internal rate of return -net present value

If a company uses straight-line depreciation, the annual average investment can be calculated as: (Check all that apply.)

-sum of individual years' average book values/number of years of planned investment -(beginning book value + ending book value)/2. -(beginning book value + salvage value)/2.

Consider the following projects: Project A: cost = $30,000, NPV of cash flows = $10,000; Project B: cost = $45,000, NPV of cash flows = $10,000; Project C: cost = $30,000, NPV of cash flows = $20,000; Project D: cost = $40,000, NPV of cash flows = $5,000. Using profitability index as the evaluation method, rank the projects in order of preference with the best choice on top.

1. Project C 2. Project A 3. Project B 4. Project D

List the steps involved in capital budgeting process, with the first step on top.

1. Submit proposals 2. Evaluate proposals 3. Approve or reject proposals

Place the following cash flows in the order that they would occur in a capital investment:

1. acquisition 2. use 3. disposal

There are five important steps to preparing a statement of cash flows. Rank the steps in order from first to last.

1. compute the net increase or decrease in cash. 2. compute and report the net cash provided or used by operating activities. 3. compute and report the net cash provided or used by investing activities. 4. compute and report the net cash provided or used by financing activities. 5. compute the net cash flow by combining net cash provided or used by operating, investing, and financing activities and prove the change.

Which of the following is the approximate internal rate of return for an investment that costs $12,680 and has net cash flows of $4,000 for 4 years?

10%

A company is considering an investment opportunity with a cost of $5,000 that will provide future cash flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $2,000, $3,000 and $2,000. Assume a required rate of return of 10%. The NPV is _______$ (rounded to nearest dollar).

1182

A company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Calculate the payback period for Investment B.

2.25 years

A company is considering a capital investment of $16,000 in new equipment which will improve production and increase cash flows for the next five years at the following amounts: Year 1: $8,000; Year 2: $6,000; Year 3: $5,000; Year 4: $6,000; Year 5: $5,000. The payback period is ________ years.

2.4

An investment that costs $5,000 will produce annual cash flows of $3,000 for 3 years. Using a required return of 8%, the investment will generate a NPV of ______$ (rounded to nearest dollar).

2731

A company is considering a capital investment of $45,000 in new equipment which will improve production and increase cash flows by $15,000 per year for 6 years. The payback period is _____ years.

3

A company is considering two capital investments. Each requires an initial investment of $15,000 and has a 4 year useful life. Investment A has expected cash inflows of $5,000 each year for the 4 years for total cash inflows of $20,000. Investment B has the following expected cash flows: Year 1: $8,000; Year 2: $6,000; Year 3: $4,000; Year 4: $2,000; Total cash flows: $20,000. Calculate the payback period for Investment A.

3 years

Which of the following is the approximate internal rate of return for an investment that costs $45,880 and has net cash flows of $4,000 for 20 years?

6%

Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000 with salvage value of $200,000 after 4 years. After-tax net income is expected to be $55,000, $40,000, $35,000, and $30,000 during the 4 years. Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.

6.7%

Assume straight-line depreciation and even cash flows. A company plans to purchase equipment for $25,000. The equipment will have $0 salvage value and increase after-tax income by $7,500 annually during its 5-year life. The accounting rate of return is _____%.

60

A company is considering an investment opportunity with a cost of $5,000 that will provide future cash flows of $8,000. The cash flows for the investment for the next 4 years are: $1,000, $1,000, $2,000 and $4,000. Assume a required rate of return of 10%. The NPV is $_____ , (rounded to nearest dollar).

970

In a make or buy decision, management should consider: (Check all that apply.)

Available capacity Incremental costs Employee morale product quality

Which of the following transactions would not be reported under investing activities in the statement of cash flows?

Cash paid for interest on long-term notes

A company's cash receipts and cash payments are recorded in the cash account in its general ledger. Which of the following can be determined by analyzing the cash account? (Check all that apply.)

Cash receipts from customers Cash payments on notes Cash payments for equipment

Which of the following would not be reported under financing activities on the statement of cash flows?

Cash received from sales of plant assets

Which of the following is not one of the five important steps to preparing a statement of cash flows?

Compute the net income

The information needed to prepare a statement of cash flows could come from which of the following sources? (Check all that apply.)

Income statement Comparative balance sheets Cash account

A company reported total assets at the end of 2017 of $95,000; including cash of $35,000, accounts receivable of $20,000, and inventory of $40,000. It reported total assets at the end of 2018 of $110,000; including cash of $44,000; accounts receivable of $29,000, and inventory of $37,000. Compute the net increase or decrease in cash in 2018.

Increase of $9,000

A company's cash receipts and cash payments are recorded in the cash account in its general ledger. Identify which of the following could not be determined by analyzing the cash account?

Payment for land by issuing a note

A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 5 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?

Product A should be produced because it will provide greater contribution margin per machine hour.

A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 2 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?

Product B should be produced because it will create greater profits.

A company needs to choose between two investment opportunities. Project 1 has a cost of $500,000 and expected NPV of cash flows of $450,000. Project 2 has a cost of $800,000 and expected NPV of cash flows of $750,000. Using profitability index as the evaluation method, the company should choose:

Project 2 because it has a higher index

A company currently makes a component used in production. The per unit costs incurred to make the component include: Direct materials: $5; Direct labor: $2; Overhead: $4; Total cost: $11. Twenty-five percent of the overhead costs are considered incremental. The company can purchase the component from another source for $10. The company should do which of the following?

The company should make the components because incremental costs are $2 less than the purchase price.

A company produces two products. Product A sells for $25, has variable costs of $15, requires 2 machine hours to produce, and the market is limited to 8,000 units. Product B sells for $35, has variable costs of $20, requires 5 machine hours to produce, and the market is limited to 6,000 units. 40,000 machine hours are available. Which statement is true?

The company should produce 8,000 units of Product A and 4,800 units of Product B.

A student purchased a used car for $5,000. Three months later, the student discovers the car needs major repairs which will cost $2,000. The student must decide whether to repair the car or purchase another car. Which statement is correct?

The relevant costs are $2,000.

Which of the following questions could not be answered from the statement of cash flows?

What are the earnings-per-share of common stock?

Capital budgeting is used to evaluate the purchase of:

a machine

The statement of cash flows reports noncash investing and financing transactions in

a note or separate schedule

The formula to calculate the accounting rate of return is:

annual after-tax net income/annual average investment

The statement of cash flows does not report the following transactions

between cash and cash equivalents

A cash ______ must satisfy two criteria: (1) be readily convertible to a known amount of cash and (2) be sufficiently close to maturity so its market value is unaffected by interest rate changes.

equivalent

All of the following are outflows of cash over the life of an asset except:

salvage value

________ activities include those transactions and events that affect long-term liabilities and equity, such as obtaining cash from issuing debt and distributing cash to owners.

financing

_________ activities include those transactions and events that affect long-term liabilities and equity, such as obtaining cash from issuing debt and distributing cash to owners.

financing

When resources are constrained and products use different inputs, the company should produce the product with the:

highest contribution margin per "input unit"

When production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:

highest contribution margin per unit of scarce resources

When comparing investment opportunities with approximately the same cost and risk level, choose the investment with the:

highest positive net present value

When analyzing the noncash accounts to assist in preparing the statement of cash flows, the changes in liabilities, equity and noncash asset accounts are analyzed along with the

income statement accounts

At the beginning of 2018, Rex Co. showed a debit balance in the cash account of $20,500. Total debits to this account during the year were $45,000, and total credits during the year were $35,000. The net (increase/decrease) __________ in cash for 2018 equals $__________.

increase and 10,000

A net cash (inflow/outflow) _________ occurs when the receipts in a category exceed the payments.

inflow

The rate of return that results in a net present value of $0 is the:

internal rate of return

Collecting money for notes receivable would be reported on the statement of cash flows as a(n) ________ activity.

investing

_________ activities include those transactions and events that affect long-term assets, such as lending and collecting money for notes receivable and cash receipts from sale of long-term plant assets.

investing

The format of a statement of cash flows includes reporting cash flows from three activities including:

investing financing operating

A company purchased manufacturing equipment 5 years ago for $50,000. Accumulated depreciation is currently $45,000 and the remaining useful life is 3 years. The equipment incurs annual operating costs of $30,000. The company is considering replacing the equipment. The new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 to operate each year. The vendor is willing to accept the old equipment with a trade-in allowance of $10,000. The company should:

keep the old equipment because the total net decrease in income will be $5,000 if they purchase the new equipment

Characteristics of capital budgeting include: (Check all that apply.)

long-term planning. high risk investments. large cash investments.

A(n) _______ occurs when the receipts in a category exceed the payments.

net cash inflow

The capital investment evaluation method that compares the present value of the net cash flows to the initial amount invested is the:

net present value

In addition to analyzing the cash account, a second approach to preparing the statement of cash flows is to explain changes in cash by analyzing changes in

noncash asset accounts liability accounts equity accounts

A(n) _____________ activity includes those transactions and events that determine net income, including the purchase of merchandise, the sale of goods and services to customers, and expenditures to operate the business.

operating

The purchase of merchandise, the sale of goods and services to customers, and expenditures to operate the business are all reported on the statement of cash flows under ________ activities.

operating

__________ activities include those transactions and events that determine net income.

operating

A student is deciding whether to take an additional class or work extra hours. Which amounts are relevant to this decision? (Check all that apply.)

out-of-pocket costs opportunity costs

A net cash ______ occurs when the payments in a category exceed the receipts.

outflow

Lakeview, Inc.'s statement of cash flows reports financing activities with payments that exceed receipts. This means that Lakeview had a net cash (inflow/outflow) _______ from financing activities.

outflow

The capital budgeting evaluation method that considers only the recovery of the initial investment and ignores additional cash flows and the timing of the cash flows is the:

payback period

The formula to calculate the profitability index is:

present value of net cash flows/investment

The information needed to prepare a statement of cash flows could come from all of the following sources, except the:

statement of retained earnings.

It is appropriate to use the profitability index to evaluate investment decisions when:

the amounts invested differ substantially

When products use the same inputs, the company should produce the product with:

the highest contribution margin per constrained resource

When making keep or replace equipment decisions, management should consider the: (Check all that apply.)

trade-in allowance on the old equipment. operating cost of the new equipment. operating cost of the old equipment.