BA385 CH2 Questions

62. Pete's Boats has beginning long-term debt of $180 and ending long-term debt of $210. The beginning and ending total debt balances are $340 and $360, respectively. The interest paid is $20. What is the amount of the cash flow to creditors? A. -$10 B. $0 C. $10 D. $40 E. $50 Cash flow to creditors = $20 - ($210 - $180) = -$10

A

9. Your _____ tax rate measures the total taxes you pay divided by your taxable income. A. average B. marginal C. total D. deductible E. residual

A

42. Under GAAP, a firm's assets are reported at: A. market value. B. liquidation value. C. intrinsic value. D. cost. E. None of the above.

D

5. A(n) ____ asset is one which can be quickly converted into cash without significant loss in value. A. current B. fixed C. intangible D. liquid E. long-term

D

58. Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34 percent. The firm does not have interest expenses. What is the operating cash flow? A. $93 B. $241 C. $340 D. $383 E. $485 Earnings before interest and taxes = $1,200 - $715 - $145 = $340; Tax = [$198 (1 -.34)] - $198 = $102; Operating cash flow = $340 + $145 - $102 = $383

D

8. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn. A. deductible B. residual C. total D. average E. marginal

E

18. Which of the following are included in current assets? I. equipment II. Inventory III. accounts payable IV. cash A. II and IV only B. I and III only C. I, II, and IV only D. III and IV only E. II, III, and IV only

A

21. Which one of the following accounts is generally the most liquid? A. Patent B. Accounts receivable C. Building D. Equipment E. Inventory

B

12. _____ 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

C

28. The earnings per share will: A. decrease as the total revenue of the firm increases. B. increase as the number of shares outstanding increase. C. increase as net income increases. D. decrease as the costs decrease. E. increase as the tax rate increases.

C

25. Book value: A. is based on historical cost. B. is equivalent to market value for firms with fixed assets. C. is more of a financial than an accounting valuation. D. generally tends to exceed market value when fixed assets are included. E. is adjusted to market value whenever the market value exceeds the stated book value.

A

11. _____ refers to the changes in net capital assets. A. Cash flow from assets B. Net working capital C. Cash flow from investing D. Operating cash flow E. Cash flow to creditors

C

17. Dividends per share is equal to dividends paid: A. multiplied by the total number of shares outstanding. B. divided by total shareholders' equity. C. divided by the total number of shares outstanding. D. multiplied by the par value of the common stock. E. divided by the par value of common stock.

C

24. Which of the following accounts are included in shareholders' equity? I. retained earnings II. interest paid III. long-term debt IV. capital surplus A. I and II only B. II and IV only C. I and IV only D. II and III only E. I and III only

C

30. According to Generally Accepted Accounting Principles, A. income is recorded based on the matching principle. B. costs are recorded based on the liquidity principle. C. income is recorded based on the realization principle. D. depreciation is recorded as it affects the cash flows of a firm. E. net income is recorded based on the realization principle.

C

31. According to Generally Accepted Accounting Principles, costs are: A. recorded as incurred. B. recorded when paid. C. matched with revenues. D. matched with production levels. E. expensed as management desires.

C

33. 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

C

36. The cash flow to creditors includes the cash: A. received by the firm when payments are paid to suppliers. B. outflow of the firm when new debt is acquired. C. outflow when interest is paid on outstanding debt. D. inflow when accounts payable decreases. E. received when long-term debt is paid off.

C

50. Which of the following are all components of the statement of cash flows? A. Cash flow from internal activities, cash flow from external activities, and cash flow from financing activities B. Cash flow from operating activities, cash flow from investing activities, and cash flow from divesting activities C. Cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities D. Cash flow from brokering activities, cash flow from profitable activities, and cash flow from non-profitable activities E. None of the above.

C

56. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500? A. 21.38% B. 23.88% C. 25.76% D. 34.64% E. 39.00% Tax = .15($50,000) + .25($25,000) + .34($25,000) +.39($126,500 - $100,000) = $32,585; Average tax rate = $32,585 $126,500 = .2576 = 25.76 percent

C

61. At the beginning of the year, long-term debt of a firm is $270 and total debt is $340. At the end of the year, long-term debt is $290 and total debt is $390. The interest paid is $40. What is the amount of the cash flow to creditors? A. -$50 B. -$20 C. $20 D. $50 E. $60 Cash flow to creditors = $40 - ($290 - $270) = $20

C

26. When making financial decisions related to assets, you should: A. always consider market values. 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. place primary emphasis on historical costs. E. only consider market values if they are less than book values.

A

44. According to generally accepted accounting principles (GAAP), revenue is recognized as income when: A. the transaction is complete and the goods or services are delivered. B. a contract is signed to perform a service or deliver a good. C. payment is requested. D. income taxes are paid. E. All of the above.

A

49. The cash flow of the firm must be equal to: A. cash flow to equity plus cash flow to debtholders. B. cash flow to debtholders minus cash flow to equity. C. cash flow to governments plus cash flow to equity. D. cash flow to equity minus cash flow to debtholders. E. None of the above.

A

6. The financial statement summarizing a firm's accounting performance over a period of time is the: A. income statement. B. balance sheet. C. statement of cash flows. D. tax reconciliation statement. E. shareholders' equity sheet.

A

63. Peggy Grey's Cookies has net income of $360. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders? A. $64 B. $136 C. $144 D. $224 E. $296 Cash flow to stockholders = .40($360) - $80 = $64

A

19. Which of the following are included in current liabilities? I. note payable to a supplier in eighteen months II. debt payable to a mortgage company in nine months III. accounts payable to suppliers IV. loan payable to the bank in fourteen months A. I and III only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, and III only

B

22. Which one of the following statements concerning liquidity is correct? A. If you sold an asset today, it is a liquid asset. B. Balance sheet accounts are listed in order of decreasing liquidity. C. If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid. D. The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties. E. Trademarks and patents are highly liquid.

B

32. Depreciation: A. reduces both the net fixed assets and the costs of a firm. B. is a non-cash expense that is recorded on the income statement. C. is a non-cash expense which decreases the net operating income. D. decreases net fixed assets, net income, and operating cash flows. E. increases the net fixed assets as shown on the balance sheet.

B

38. Which equality is the basis for the balance sheet? A. Fixed Assets = Stockholder's Equity + Current Assets B. Assets = Liabilities + Stockholder's Equity C. Assets = Current Long-Term Debt + Retained Earnings D. Fixed Assets = Liabilities + Stockholder's Equity E. None of the above.

B

39. Assets are listed on the balance sheet in order of: A. decreasing size. B. decreasing liquidity. C. relative life. D. increasing size. E. None of the above.

B

45. Which of the following is not included in the computation of operating cash flow? A. Earnings before interest and taxes B. Interest paid C. Depreciation D. Current taxes E. All of the above are included.

B

47. Cash flow to stockholders is defined as: A. interest payments. B. cash dividends plus repurchases of equity minus new equity financing. C. cash flow from financing less cash flow to creditors. D. repurchases of equity less cash dividends paid plus new equity sold. E. None of the above.

B

51. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivables, $100 in accounts payable, and $50 in cash. What is the amount of the current assets? A. $500 B. $550 C. $600 D. $1,150 E. $1,200 Current assets = $300 + $200 + $50 = $550

B

52. The total assets are $1200, the fixed assets are $700, long-term debt is $600, and short-term debt is $400. What is the amount of net working capital? A. $0 B. $100 C. $200 D. $300 E. $400 Net working capital = $1200 - $700 - $400 = $100

B

55. Art's Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income? A. $20,400 B. $39,600 C. $50,400 D. $79,600 E. $99,600 Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax = .34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600

B

57. The tax rates are as shown. Your firm currently has taxable income of $74,000. How much additional tax will you owe if you increase your taxable income by $20,000? A. $6,460 B. $6,710 C. $6,940 D. $7,160 E. $7,174 Additional tax = .25($1,000) + .34($19,000) = $6,710

B

64. Thompson's Jet Skis has operating cash flow of $258. Depreciation is $45 and interest paid is $53. A net total of $79 was paid on long-term debt. The firm spent $210 on fixed assets and increased net working capital by $48. What is the amount of the cash flow to stockholders? A. -$104 B. -$26 C. $28 D. $114 E. $142 Cash flow of the firm = $258 - $48 - $210 = $0; Cash flow to creditors = $53 - (-$79) = $26; Cash flow to stockholders = $0 - $26 = -$26

B

1. The financial statement showing a firm's accounting value on a particular date is the: A. shareholders' equity sheet. B. tax reconciliation statement. C. statement of cash flows. D. balance sheet. E. income statement.

D

10. _____ refers to the cash flow that results from the 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 to creditors

D

13. _____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities. A. Total cash flow B. Capital spending C. Net working capital D. Cash flow from operations E. Cash flow to creditors

D

16. Earnings per share is equal to: A. net income divided by total shareholders' equity. B. net income divided by the par value of the common stock. C. gross income multiplied by the par value of the common stock. D. net income divided by the total number of shares outstanding. E. operating income divided by the par value of the common stock.

D

2. A current asset is: A. the market value of all items currently owned by the firm. B. an item that the firm expects to own within the next year. C. the amount of cash on hand the firm currently shows on its balance sheet. D. cash or an item currently owned by the firm that will convert to cash within the next 12 months. E. an item currently owned by the firm.

D

20. An increase in total assets: A. means that net working capital is also increasing. B. requires an investment in fixed assets. C. means that shareholders' equity must also increase. D. must be offset by an equal increase in liabilities and shareholders' equity. E. can only occur when a firm has positive net income.

D

23. 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. valuable to a firm even though liquid assets tend to be less profitable to own. E. generally associated with intangible assets.

D

27. As seen on an income statement: A. interest is deducted from income and increases the total taxes incurred. B. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses. C. depreciation is shown as an expense but does not affect the taxes payable. D. depreciation reduces both the pretax income and the net income. E. interest expense is added to earnings before interest and taxes to get pretax income.

D

37. 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. the dividends paid exceed the net new equity raised. E. both the cash flow to assets and the cash flow to creditors are positive.

D

41. The carrying value or book value of assets: A. is always the best measure of the company's value to an investor. B. represents the true market value according to GAAP. C. is always higher than the replacement cost of the assets. D. is determined under GAAP and is based on the cost of the asset. E. None of the above.

D

48. Free cash flow is: A. without cost to the firm. B. net income plus taxes. C. an increase in net working capital. D. cash that the firm is free to distribute to creditors and stockholders. E. None of the above.

D

53. Brad's Company has equipment with a book value of $500 that could be sold today at a 50 percent discount. Its inventory is valued at $400 and could be sold to a competitor for that amount. The firm has $50 in cash and customers owe them $300. What is the accounting value of its liquid assets? A. $50 B. $350 C. $700 D. $750 E. $1,000 Liquid assets = $400 + $50 + $300 = $750

D

54. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $2,000 on today's balance sheet but could actually be sold for $2,000. Net working capital is $300 and long-term debt is $900. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity? A. $200 B. $800 C. $1,200 D. $1,400 E. The answer cannot be determined from the information provided. Book value of shareholders' equity = $2,000 + $300 - $900 = $1,400

D

59. Teddy's Pillows has beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50. What is the amount of net capital spending? A. $130 B. $150 C. $165 D. $180 E. $330 Net capital spending = $530 - $480 + $40 = $90

D

14. _____ refers to the firm's interest payments less any net new borrowing. A. Operating cash flow B. Capital spending C. Net working capital D. Cash flow from shareholders E. Cash flow to creditors

E

15. _____ refers to the firm's dividend payments less any net new equity raised. A. Operating cash flow B. Capital spending C. Net working capital D. Cash flow from creditors E. Cash flow to stockholders

E

29. Dividends per share: A. increase as the net income increases as long as the number of shares outstanding remains constant. B. decrease as the number of shares outstanding decrease, all else constant. C. are inversely related to the earnings per share. D. are based upon the dividend requirements established by Generally Accepted Accounting Procedures. E. are equal to the amount of net income distributed to shareholders divided by the number of shares outstanding.

E

3. The long-term debts of a firm are liabilities: A. owed to the firm's shareholders. B. the firm expects to incur within the next 12 months. C. owed to the firm's suppliers. D. that come due within the next 12 months. E. that do not come due for at least 12 months.

E

34. An increase in which one of the following will cause the operating cash flow to increase? A. Change in net working capital B. Taxes C. Net working capital D. Costs E. Depreciation

E

35. A firm starts its year with a 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 will be negative. 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 can be positive, negative, or equal to zero.

E

4. Net working capital is defined as: A. total liabilities minus shareholders' equity. B. current liabilities minus shareholders' equity. C. fixed assets minus long-term liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

E

40. Debt is a contractual obligation that: A. requires the payout of residual flows to the holders of these instruments. B. requires a repayment of a stated amount and interest over the period. C. allows the bondholders to sue the firm if it defaults. D. Both A and B. E. Both B and C.

E

43. Which of the following statements concerning the income statement is true? A. It measures performance over a specific period of time. B. It determines after-tax income of the firm. C. It includes deferred taxes. D. It treats interest as an expense. E. All of the above.

E

46. Net capital spending is equal to: A. net additions to net working capital. B. total cash flow to stockholders less interest and dividends paid. C. net income plus depreciation. D. the change in total assets. E. the net change in fixed assets.

E

60. At the beginning of the year, a firm has current assets of $360 and current liabilities of $190. At the end of the year, the current assets are $510 and the current liabilities are $240. What is the change in net working capital? A. -$30 B. -$10 C. $0 D. $10 E. $100 Change in net working capital = ($510 - $240) - ($360 - $190) = $100

E

7. 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.

E