BUS 370 Ch. 3

Parrino Corporation has announced that its net income for the year ended June 30, 2008, is $1,824,214. The company had an EBITDA of $ 5,174,366, and its depreciation and amortization expense was equal to $1,241,790. The company's average tax rate is 34 percent. What is the amount of interest expense for the firm?

$1,168,615 EBITDA $5,174,366.00 Depreciation 1,241,790.00 EBIT $3,932,576.00 Interest 1,168,615.39 EBT $2,763,960.61 Taxes (34%) 939,746.61 Net income $1,824,214.00

During 2008, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities to the tune of $14,215 mature. What is the net cash provided (used) in investing activities?

-$132,085 Cash inflows from investing activities = $14,215 Cash outflows from investing activities = $36,845 + $ 109,455 = $146,300 Net cash flows from investing activities = $14,215 - $146,300 = $(132,085)

Which of the following sections do annual reports typically contain?

1. financial summary related to the past year's performance 2. information about the company, its products, and its activities 3. audited financial statements, including limited historical financial data

The major disadvantages of market-value accounting include

1. the difficulty in estimating the current value for some assets. 2. the difficulty in applying some of the valuation models used to estimate market values. 3. the resulting numbers are potentially open to abuse.

Accounting standards prescribed by GAAP are important because

1. they make the financial statements of all firms standardized. 2. they allow one to examine a firm's performance over time. 3. they make it possible for management or analysts to compare the firm's performance to that of other competitors.

Trident Corporation had the following cash flows in the current year. Which one of the following is a financing activity cash flow?

Preferred dividends to the tune of $330,000 paid to shareholders

(t/f) The balance sheet identity can be stated as Total assets - Total liabilities = Total stockholders' equity.

True

The going concern assumption implies that

a firm will continue to be in business for the foreseeable future.

(t/f) Preparing a market-value balance sheet is rather straightforward because it is easy to obtain market values for all assets and liabilities.

false

(t/f) Rent and insurance are examples of depletion expenses.

false

(t/f) The cost principle assumes that both parties to a transaction are economically rational and are free to act independently of each other.

false

(t/f) The going concern assumption states that a business will be shutting down its operation in the near future.

false

(t/f) The net cash flow from operating activities (NCFOA) is another term for net income.

false

Annual reports are prepared by a firm's management to

provide overview of the firm's financial and operating performance.

The generally accepted accounting principles (GAAP) are

rules and procedures that define how companies are to maintain financial records and prepare financial reports.

Your uncle, who has a second home in Bethany Beach, Delaware, is planning to sell it in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of

the assumption of arm's-length transactions.

(t/f) The balance sheet identifies the productive resources (assets) that a firm uses to generate income, as well as the sources of funding from creditors (liabilities) and owners (shareholders' equity) that were used to buy the assets.

true

(t/f) The balance sheet identity can be stated as Total assets = Total liabilities + Total stockholders' equity.

true

(t/f) The book value of an asset is the historical cost of the asset less the accumulated depreciation.

true

Trekkers Footwear bought a piece of machinery on January 1, 2006 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2008 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2008. The asset's value should be recognized on the balance sheet at

$1.61 million

Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South Carolina. At the end of the current fiscal year, the company had net working capital of $157,903. The company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. What amount of notes payables does the firm have?

$14,571 Total current assets = $12,311 + $83,112 + $171,284 = $266,707 Net working capital = $266,707 - Total current liabilities = $157,903 Total current liabilities = $266,707 - $157,903 = $108,804 Total current liabilities = $108,804 = Accounts payables + Notes payables Notes payables = $108,804 - $94,233 = $14,571

Maddux, Inc., has completed its fiscal year and reported the following information. The company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of $7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. How much retained earnings does the firm have?

$167,918 Total assets = $153,413 + $412,331 + $7,822 = $573,566 Total liabilities = $65,314 + $178,334 = $243,648 Total stockholders' equity = Total assets - Total liabilities = $573,466 - $243,648 = $329,918 Retained earnings = Stockholders' equity - Common stock = $329,918 - $162,000 = $167,918

Galan Associates prepared its financial statement for 2008 based on the information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables of $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained earnings of $14,008. How much long-term debt does the firm have?

$18,334 Current assets = $1,234 + $7,789 + $13,480 = $22,503 Total assets = $22,503 + $42,331 + $1,822 = $66,656 Current liabilities = $9,558 + $2,756 = $12,314 Stockholders' equity = $22,000 + $14,008 = $36,008 Long-term debt = Total assets - Current liabilities - Stockholders' equity = $66,656 - $12,314 - $36,008 = $18,334

Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?

$2,123,612 Total current assets = $335,485 + 1,488,121 + $1,651,599 + $121,427 = $3,596,632 Total current liabilities = $1,159,357 + $313,663 = $1,473,020 Net working capital = $3,596,632 - $1,473,020 = $2,123,612

Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. It had repaid existing debt to the tune of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250. It paid $233,144 in dividends to its shareholders. What is the net cash provided (used) by financing activities?

$28,496 Cash inflows from financing activities = $750,000 Cash outflows from financing activities = $425,110 + $63,250 + $233,144 = $721,504 Net cash flows from financing activities = $750,000 - $721,504 = $28,496

Triumph Trading Company provided the following information to its auditors. For the year ended March 31, 2008, the company had revenues of $1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses equal to $87,125. If the company's tax rate was average 34 percent, what is its net income after taxes?

$43,218 EBIT = $1,122,878 - ($612,663 + $231,415 + $126,193) = $152,607 Earnings before taxes = ($152,607 - $87,125) = $65,482 Net income = $65,482 (1 - 0.34) = $43,218

Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is

$63,510 Total current assets = $21,461 + $47,199 +$63,781 = $132,481 Total current liabilities = $51,369 + $11,417 + $6,145 = $68,931 Net working capital = $132,481 - $68,931 = $63,510

Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes?

$79,292 Earnings before taxes = $1,145,227 - ($812,640 + $131,335 + $81,112) = $120,140 Net income = $120,140 (1 - 0.34) = $79,292

Teakap, Inc., has current assets of $ 1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. How much long-term debt does the firm have?

$803,010 Stockholders' equity = $1,500,000 + $1,468,347 = $2,968,347 Long-term debt = Total assets - Current liabilities - Stockholders' equity = $4,812,369 - $1,041,012 - $2,968,347 = $803,010

Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The firm had revenues of $20,433,770. Their interest expense for the year was $1,122,376, while depreciation expense was $2,079,112. What was the firm's operating expenses excluding depreciation?

$9,032,853 Earnings before taxes = Net income / (1 - Tax rate) = $5,411,623 / (1 - 0.34) = $8,199,429 EBIT = EBT + Interest expense = $8,199,429 + $1,122,376 = $9,321,805 Revenues - Operating expenses - Depreciation = EBIT Operating expenses = Revenues - Depreciation - EBIT = $20,433,770 - $2,079,112 - $9,321,805 = $9,032,853

Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountants. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have?

$94,792 Total assets = $145,332 + 356,190 + $4,176 = $505,698 Stockholders' equity = $200,000 + $134,461 = $334,461 Current liabilities = Total liabilities - Long-term debt - Stockholders' equity = $505,698 - $76,445 - $334,461 = $94,792

Which one of the following is NOT true for a corporation?

Common-stock dividends to be paid this year will be tax deductible if the firm has a net loss for the year.

Which of the following is NOT true about treasury stock?

It lowers the value of the company.

On June 23, 2008, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on

June 23, 2008

Which one of the following is NOT true about goodwill?

When goodwill appears on a firm's balance sheet, it reduces the firm's net worth by that amount.

Which one of the following are NOT all noncash items?

Which one of the following are NOT all noncash items?

The matching principle calls for the accountant of a firm to

associate the revenue generated from a sale to the costs incurred to produce the product.

The cost principle states that an asset should be recognized on the balance sheet at

at its historical cost.

According to the realization principle, revenue from a sale of the firm's products are recognized

at the time of the sale

When prices are falling, valuing inventory using the LIFO method rather than FIFO gives

both inventory and net income a higher value.

When prices are rising, valuing ending inventory using the FIFO method rather than LIFO gives

both inventory and net income a higher value.

The assumption of arm's-length transaction states that

both parties to a transaction can act independently of each other and make economically rational decisions.

Which one of the following is NOT a cash flow from investing activities?

cash payments of dividends to shareholders

Which one of the following is NOT a cash flow from operating activities?

cash payments on the principal of long-term debt

Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

current assets, plant and equipment, and goodwill

(t/f) Cash flows from operating activities relate to the buying and selling of long-term assets.

false

(t/f) Depreciation and amortization are examples of prepaid expenses.

false

(t/f) GAAP principles determine the rules for how a company can issue stock to raise money.

false

(t/f) If a company values its inventory using the FIFO method, when the firm makes a sale in a rising price environment, it assumes the sale is from the newest, highest-cost inventory.

false

(t/f) Making and collecting loans, issuing and paying out on insurance contracts, and buying and selling debt or equity instruments of other firms are examples of financing activities.

false

Which one of the following does NOT belong on an income statement?

goodwill

Cash flows from financing activities include all but one of the following:

issuing and paying out on insurance contracts

The conventional way of preparing a balance sheet is to list all assets in the order of their

liquidity

Dell Computer Corporation has receivables of $2.5 million and inventory worth $1.8 million. The firm plans to borrow $2 million for working capital purposes from Austin First National Bank. In evaluating the loan request, the bank should place the most emphasis on

the going-concern assumption.

Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced in the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate

the inventory acquired on April 23 with the products sold.

Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is

the marginal tax rate

(t/f) Accounting profits include noncash revenues (e.g., prepaid rent) and noncash expenses (e.g., depreciation), whereas cash flows do not include these items.

true

(t/f) Book value is the amount a firm paid for its assets at the time of purchase.

true

(t/f) Cash flows from operations are the net cash flows that support a firm's principal business activities.

true

(t/f) GAAP represents a set of rules and procedures that define accounting practice at a particular point in time.

true

(t/f) In a rising price environment, a company using the LIFO method assumes that the sale of a product is from the newest, highest-cost inventory.

true

(t/f) The average tax rate is the total taxes divided by taxable income. It takes into account the taxes paid at all levels of income, and therefore it will usually be lower than the marginal tax rate, which is the rate that is paid on the last dollar of income earned.

true

(t/f) The current market value of an asset is the amount that a firm would receive for the asset if it was sold on the open market.

true

(t/f) The income statement identifies the major sources of revenues generated by the firm and the corresponding expenses that were needed to generate those revenues.

true

(t/f) The key financial statement that ties the other three statements together is the balance sheet, which summarizes the firm's investment and financing activities at a point in time.

true

(t/f) Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash purchases of treasury stock.

true