ECON 4 MIDTERM 2
If company X makes an interest payment of $1,000 to creditors, how big of a tax shield is generated if the corporate tax rate is 20%?
$200
The reason why preparing the statement of cash flows is generally more complicated than it needs to be is due to the use of __________ and ___________.
accrual basis... the indirect method
A company's hardware has a book value of $1,200 and will fully depreciate over 36 months. What is the adjustment that needs to be done when using the indirect method to reconcile operating cash flows and net income for a single fiscal year?
add $400 to net income
The step in the accounting cycle that verifies that credits equal debits after making adjusting entries is
adjusted trial balance
Due to distortions caused by growth in assets and sales, analyst typically apply normalizations to each of the financial statements EXCEPT a. Statement of Income b. Statement of Cash Flows c. Balance Sheet d. None of the above since all are used to generate common-size financial statements
b
Each of the following could constitute a reason why a balance sheet item might be unexplained by the statement of cash flows EXCEPT a) Foreign currency translations b) Large cash expenditures on PPE c) Subsidiaries in other industries d) None of the above since all would result in unexplained balance sheet activity
b
GAAP requires that a. The direct method must be used to prepare the operating section of the SCF. b. The indirect method must be used to prepare the operating section of the SCF. c. Both the direct and indirect method must be used to prepare the operating section of the SCF. d. You can use any method you want to prepare the operating section of the SCF.
b
John advises his client to increase the depreciation expense so that the client can show greater operating cash flows using the indirect method. John most likely is ignoring which of the following features when making this advice? a) Depreciation expenses require us to adjust operating cash flows downward, not upward b) Depreciation expenses cause net income to decrease by the same amount so that operating cash flows will not change when increasing the depreciation expense c) Depreciation expenses are noncash expenses d) None of the above
b
Ratios are a. The most informative metric about a businesses operations b. Purely contextual c. Not easy to manipulate d. None of the above
b
Return on sales, asset turnover, and financial leverage decompose the return on equity into metrics that respectively measure a. Efficiency, Leverage, & Profitability b. Profitability, Efficiency, & Leverage c. Efficiency, Profitability, & Leverage d. Leverage, Profitability, & Efficiency
b
Historically, a flat or an inverted yield curve typically is a signal that
Short term interest rates are about to fall
The classical dichotomy is an idea from __________ that suggests there is a separation between ___________ and _____________ variables.
Macroeconomics...real....nominal
A tax shield is created when a firm
Makes interest payments
The indirect and direct method should yield identical
Net operating cash flows
The classical dichotomy is the idea from macroeconomics that suggests
Nominal variables don't influence real variables in the long run
A firm in the startup phase of its lifecycle most likely exhibits a low magnitude of
Operating cash flow
A company raises $100 from shareholders and borrows $50 from the bank to purchase $150 worth of assets that generate $50 of income. The ROE, ROA, and (financial leverage) FLR are then:
ROE=50%; ROA=33.33%; FLR=150%
The financial statement with the most complexities in terms of how it is "put together" according to GAAP compliance is most likely
Statement of Cash Flows
If an analyst requests the financial statements for a firm's past 10 years of filings, then the analyst would be able to use this information to conduct
Time series analysis
If we measure Lebron's performance on the court against his past performance, then we are using
Time series analysis
Since ratios are useful only when given context, this typically requires that we
Use an appropriate benchmark metric
A foreign currency translation is most likely an issue if
You own entities in multiple countries
Closing out a revenue account most likely involves a) Debiting revenues b) Crediting revenues c) Debiting dividends payable d) Crediting dividends payable
a
Closing out a revenue account most likely involves a. Debiting the revenue account b. Debiting retained earnings c. Crediting the revenue account d. None of the above
a
Each of the following are examples of cash outflows EXCEPT: a) Selling stock b) Paying employees c) Buying land d) None of the above since all are cash outflows
a
Each of the following are examples of temporary accounts EXCEPT a) accumulated depreciation b) sales revenues c) expenses d) none of the above
a
Each of the following could distort cross-sectional analysis EXCEPT: a) Major changes occur within a firm b) There are major differences in business strategies across firms c) There are major differences in accounting rules across firms d) There are major differences in capital structure across firms
a
Each of the following is considered to be a working capital account EXCEPT: a) Long term assets b) Inventory c) Prepaid assets d) Accounts receivable
a
Each of the following is/are required to be disclosed as a separate line item on the SCF when complying with GAAP EXCEPT a) EBITDA b) Noncash transactions c) Taxes paid in cash d) Interest paid in cash
a
Karen noticed that for a particular level of net income, taking a larger depreciation expense increases operating cash flows using the indirect method. She advised that the company take as much depreciation expense early on to maximize operating cash flows. Karen most likely neglected the fact that a. When depreciation increases, it has an offsetting effect on net income b. Interest expenses are tax deductible c. She could generate more operating cash flow selling the tangibles that are depreciating d. All of the above
a
Selling PPE requires each of the following EXCEPT a) Debiting the asset's net PPE account b) Crediting the asset account c) Debiting the accumulated depreciation on the asset d) None of the above since all are required
a
The analogy to the income statement with respect to the statement of cash flows is the a. Operating portion b. Investing portion c. Financing portion d. Noncash disclosures portion
a
The direct method is always used for preparing each of the following sections of the statement of cash flows EXCEPT: a. Operating activities b. Investing activities c. Financing activities d. None of the above are correct
a
The direct method should always be used when constructing each of the following portions of the SCF EXCEPT: a) Operating b) Financing c) Investing d) All of the above
a
Under GAAP, interest received is considered a. Operating activities b. Investing activities c. Financing activities d. All of the above are legitimate
a
The direct method must be used to construct each of the following portions of the SCF EXCEPT: a) Financing b) Operating c) Investing d) None of the above since the direct method must be used for all
b
The direct method should always be applied to prepare which of the following sections of the SCF? a. Operating and investing b. Investing and financing c. Operating and financing d. None of the above
b
When a firm decides to finance more asset acquisitions by issuing more bonds, then the firm's a. ROE will decrease b. financial leverage will increase c. Net income will increase d. None of the above
b
FASB classifies cash flows into each of the following categories EXCEPT a) Operating b) Investing c) Liquidating d) Financing
c
Income taxes a. Are classified as operating activities under GAAP b. Could be associated with investing and financing activities c. Must be disclosed on the SCF per FASB regulation d. All of the above
d
One issue with using ratios to incentivize individual behavior within an organization is that a. ratios can be manipulated b. doing so may result in unintended behavioral consequences c. benchmarks and/or goals can be inappropriately chosen d. all of the above
d
One problem with using cross-sectional analysis is that a. Differences in business strategies distort the analysis b. Differences in capital structure distort the analysis c. Differences in accounting methods distort the analysis d. All of the above
d
Per GAAP classifications, paying and receiving dividends are considered to be a) Operating cash flows b) Financing cash flows c) Investing cash flows d) None of the above
d
Per GAAP, when Biz Inc. makes interest payments on a loan, the payments are considered ____________ cash flows. When it makes payments on the principle for the same loan, the payments are considered _______________. a) Operating...Investing b) Investing...Financing c) Financing...Operating d) None of the above
d
ROE can be calculated as the product of a. ROA and the Financial Leverage Ratio (FLR) b. ROS, ATR, Financial Leverage Ratio (FLR) c. Profitability, Efficiency, and Leverage metrics d. All of the above
d
Ratios can be used to identify sources of a. Competitive advantages b. Potential problems c. Profitability d. All of the above
d
Ratios should be used to do each of the following EXCEPT: a. benchmark b. provide context c. help ask questions d. none of the above since all are valid uses
d
The best predictor of future operating cash flows is a. Present operating cash flows b. Past operating cash flows c. Present earnings d. Using all of the above together provide the best prediction
d
The final step in the accounting cycle most likely involves each of the following EXCEPT a) Closing temporary accounts b) Debiting revenue accounts c) Crediting expense accounts d) Preparing financial statements
d
The organizational guideline for listing assets and liabilities on the balance sheet depends critically on the asset's a) Alphabetical order b) Date of acquisition c) Book value d) None of the above
d
Under IFRS, dividends paid can be classified as a. Operating activities b. Investing activities c. Financing activities d. All of the above are legitimate
d
Under IFRS, interest paid can be classified as a. Operating activities b. Investing activities c. Financing activities d. All of the above are legitimate
d
Under IFRS, interest payments could be classified as a) Operating cash flows b) Investing cash flows c) Financing cash flows d) All of the above
d
Under IFRS, interest received can be classified as a. Operating activities b. Investing activities c. Financing activities d. All of the above are legitimate
d
Under IFRS, which of the following could be classified as any of the three types of cash flow classes? a) Paying dividends b) Receiving interest on a loan c) Paying interest on a loan d) All of the above
d
Cash flows that deal primarily with payments made to creditors and firm owners as
financing
The financial statement that should be prepared first in the accounting cycle is the
income statement
The classical dichotomy is an idea in macroeconomics that suggests, in the long run, that _______________ variables don't affect _______________ variables.
nominal... real
According to GAAP, receiving dividend payments is an example of _______ cash flows
operating
Cash flows that deal primarily with furnishing goods and services to the market are generally classified as
operating
If company X receives dividend payments, then under GAAP, this would be classified as a ___________ cash flow.
operating
When Bob Inc. pays its employees their salaries for the month, this would be classified as a(n) __________ cash flow.
operating
Under GAAP, interest payments are classified as
operating cash flows
The return on assets is a general measure of a firm's
operating performance
Deciding to rent out your inventory rather than selling it would result in reclassifying the inventory acquisition from
operating to investing
Bob made an error putting together his financial statements - the amount of depreciation he computed was $100 lower than it was supposed to be. After adjusting for this error across his financial statements and applying the indirect method, this results in operating cash flows
remaining the same
Expenses and Revenues are closed out at the end of the accounting period to
retained earnings
The balance sheet line item that "links" it to the preparation of the income statement is
retained earnings
The key balance sheet line item that links the income statement to the operating portion of the SCF is
retained earnings
When using the common form income statement, we generally normalize all items within a current year by dividing by
sales
The asset turnover ratio is a measure of
Efficiency
The final step in the accounting cycle before starting the next accounting period involves
closing entries
Foreign currency translations represent changes in
exchange rates
The reason why ROA is "contaminated" by the choice of a firm's financing decisions is because it depends on
net income
When using the indirect method for constructing the SCF, the key starting point always begins with
net income
When using the indirect method, the key starting point always begins with
net income
The classical dichotomy is an idea from macroeconomics that suggests that, in the long run, __________ variables behave differently than they would in the short run.
nominal
The size of a tax shield in a given period is equal to
(tax rate) x (interest payment)
3 reasons why analysts like to use EBITDA?
1) Taxes may be associated with investing activities rather than operating activities 2) It removes the interest discrepancy related to differences in classifications between IFRS and GAAP 3) It isn't subject to distortions related to depreciation
If John makes $15 an hour picking apples, and each apple is sold at a price of $0.30 at the market, then John's real wage per hour is
50 apples
If an all-equity financed firm has a 8% return on equity and an asset turnover ratio of 2%, then the return on assets must be?
8%
A restructuring liability is an example of
A large noncash expense
One benefit of increased leverage is
A tax shield
A company's software license has a book value of $3,600 for a three year use horizon. What is the adjustment that needs to be done when using the indirect method to reconcile operating cash flows and net income for a single fiscal quarter?
Add $300 back to net income
The step in the accounting cycle after making adjusting entries involves
Adjusted trial balance
Which describes the cash flow situation early on in the startup phase of a "typical" retail operation?
Large investing outflows
One problem with free cash flows is that
There is no standard definition
A proxy is
a type of variable
The final step in the accounting cycle prior to beginning a new one is
closing accounts
In class, we argued that a key element that explained the difference between the (DuPont) decomposition of the ROE between typical high end (low volume) and low end (high volume) retailers comes down to comparing
Efficiency of sales vs efficiency of assets
A firm's decision of how to finance the purchase of assets is known as
Capital structure
Since total assets generally drive dynamics in all line items, it makes sense to control for changes in these assets by using
Common form balance sheet
A strong empirical result in finance suggests that one of the best individual predictor of future operating cash flow is
Current Earnings
Working capital is considered to be the difference between
Current assets and current liabilities
When constructing the balance sheet, assets and liabilities are ordered according to their
Ease of conversion to cash
Asset turnover is a measure of
Efficiency
In order to remove the effects of financing decisions on the ROA, we should use
De-levered Net Income
If we wanted to look at how much income is returned per dollar of asset acquired without the distortion of the effects of the firm's financing decisions, then an appropriate measure would be
De-levered ROA
Which metric performs poorly at tracing operating cash flows when there are large changes in noncash working capital?
EBITDA
The amount of asset acquired (on average) per the average dollar of shareholders' equity raised measures
Financial Leverage
In the start-up phase, we generally expect investing cash outflows and operating cash outflows to be explained by
Financing cash inflows
When exchange rates change, this may necessitate the use of
Foreign currency translations
The first financial statement out of the "big three" that should be prepared earliest in the accounting cycle is the
Income Statement
When lots of investors try and purchase short term bonds at the same time, this results in the price of the short term bond to _____________ and the yield to maturity (the interest rate) on the bond to ____________.
Increase... decrease
One downside to increasing a leveraged position by taking on more debt to finance asset acquisitions is
Increased risk of default / bankruptcy
When it comes to the disagreement between IFRS and GAAP treatment of cash flow classifications, the main discrepancy comes in when dealing with
Interest and dividends
One problem with using cross-sectional analysis is that
It can't capture dynamic effects within firms
One benefit of increased leverage is
Tax deductible interest payments
The reason why many analysts use EBITDA is because it avoids discrepancies forced by GAAP constraints on classifying
Taxes and interest
A strong empirical result in finance suggests that one of the best individual predictors of future operating cash flow is
The ability to sell a good at a market value above cost
When thinking about the adjustment made using the indirect method when constructing the operating portion of the SCF, what guideline can we use to think about the direction of adjustment related to changes in noncash working capital?
The balance sheet identity
When using the indirect method, a useful relationship for understanding how changes in non cash working capital accounts should translate into adjusting operating cash flows is given by the
The balance sheet identity
Whether or not acquiring an inventory asset is classified as an operating or an investing cash flow most likely has to do with
The duration of benefits conveyed by the asset
The reason why we need to make an adjustment for gains and losses on property when using the indirect method to prepare the operating portion of the SCF is because
The gross sales price is already accounted for in the investing cash flows section
The operating activities portion of the cash flow statement is supposed to be analogous to
The income statement
The reason we utilized a Net PPE account when property was sold in class was because we didn't know
The information on the accumulated depreciation on the specific asset
When Bob renovates his $2 million dollar warehouse, extending the capacity by 50%, and the renovations cost Bob $500,000, then this transaction generally involves a. Debiting the warehouse account $500,000 b. Crediting accumulated depreciation $1,000,000 c. Crediting the warehouse account $500,000 d. Crediting a separate renovation expense account for $500,000
a
When a typical retail operation is exhibiting a relatively large level of investing cash outflows, it is most likely at a. The early growth phase of the operating horizon b. The declining phase of the operating horizon c. The end of the operating horizon d. None of the above
a
When constructing the SCF, selling PPE typically requires you to a) Use the direct method for the investing portion of the SCF and the indirect method for the operating portion of the SCF b) Use only the direct method for the investing portion c) Use only the indirect method for only the operating portion of the SCF d) None of the above
a
Which of the following are classified as financing cash flows per GAAP? a) Dividends paid and principal paid b) Interest paid and interest received c) Dividends received and interest received d) Principal paid and interest paid
a
Which of the following are considered cash outflows? a. Payments to employees b. Dividends paid on investments owned by the company c. Principal received on a loan d. Receipts from customers
a
Which of the following are considered to be a cash inflow related to a financing activity? a. Selling bonds b. Acquisition of PP&E c. Buying stocks in other companies d. Paying dividends
a
Which of the following are done immediately prior to adjusting entries in the accounting cycle? a) Unadjusted trial balance b) Adjusted trial balance c) Post and journalize d) Closing accounts
a
Which of the following are examples of temporary accounts: a. Expenses b. Retained Earnings c. Accumulated Depreciation d. Assets
a
Which of the following categories does IFRS disagree (or provide more flexibility) with respect to classification of cash flows? a) Paying dividends b) Paying principal c) Paying suppliers d) Receipts from customers
a
Which of the following correctly describes the return on equity from the perspective of the DuPont Decomposition? a) ROE=ROSxATRxFLR b) ROE=ROAxATR c) ROE/ROA=ROS d) None of the above
a
Which of the following is an example of a large noncash expense? a) Restructuring liability b) Capital expenditure (CAPEX) c) Payment of long term debt d) Proceeds on short term debt
a
Which of the following is considered a permanent account? a. Retained earnings b. Revenue c. Expenses d. All of the above
a
Which of the following is consistent with a closing account transaction? a) Debiting revenues and crediting retained earnings b) Crediting revenues and debiting retained earnings c) Crediting expense and crediting retained earnings d) Debiting an expense and debiting retained earnings
a
Which of the following is disclosed on the SCF but not in the operating, investing, or financing sections? a) Noncash transactions b) Interest payments made in cash c) Taxes paid in cash d) All of the above
a
Which of the following is/are considered to be a temporary account? a) Expenses b) Any account that shows up on the balance sheet c) Accumulated depreciation d) None of the above
a
One problem with measuring free cash flows is caused by a lack of
a standard definition
When using the indirect method to prepare the SCF, which of the following will generally result in having to adjust operating cash flows upward (relative to net income)? a. Your cost of goods sold (COGS) should include a depreciation expense, which you had not yet accounted for on your income statement, but will correct. b. Your cost of goods sold (COGS) included a depreciation expense, which you had already accounted for in your income statement. c. Your revenues include accounts receivables d. All of the above
b
When using the indirect method, each of the following would require you to make an upward adjustment, adding to net income, EXCEPT? a) You sold some property for a loss b) Some of your recognized revenues from customers are in accounts receivable c) Some of your cost of goods sold included depreciation expenses d) All of the above
b
Which of the following are a reason why one may want to reclassify taxes away from the operating activity classification? a. They are associated with government provision of infrastructure and society b. They are associated with the sale of property c. IFRS considers them to be a financing activity d. None of the above
b
Which of the following are considered cash inflows? a. Payments to employees b. Dividends paid on investments owned by the company c. Taxes d. Dividends paid to the company's shareholders
b
Which of the following are goods for which depreciation should be recorded? a. intangible b. tangible c. short term assets d. long term assets
b
Which of the following is considered to be a cash inflow? a. Payment of interest b. Selling stock c. Paying dividends d. Payment of principal on a loan
b
Which of the following would require you to make a downward adjustment to operating cash flows (relative to net income) when adjusting using the indirect method? a) Some of your payments to suppliers are in accounts payable b) Some of your receipts from customers are in accounts receivable c) Some of your cost of goods sold included depreciation d) All of the above
b
When there is a change in accounts receivable, in order to understand the effect this change has on cash flows, we often look to the
balance sheet equation
A startup phase firm likely has cash flows characterized by relatively high levels of each of the following EXCEPT: a. Investing activities b. Financing activities c. Operating activities d. None of the above
c
A tax shield is created when a firm a. Pays dividends b. Receives interest payments c. Makes interest payments d. All of the above
c
According to GAAP paying dividends is an example of a. Operating cash flows b. Investing cash flows c. Financing cash flows d. None of the above
c
Alice and Bob are each running identical operations from both an operational and investing perspective. They both own identical sets of assets (in terms of quantity and efficiency), but Bob used a loan from the bank to finance part of his operation. Which of the following will be true? a) Alice's operation will have a lower ROA than Bob's b) Alice's operation will have a higher ROE than Bob's c) Bob's operation will have a higher ROE than Alice's d) Bob's operation will have a lower ROA than Alice's
c
Alice and Bob each have the same asset (in terms of profitability and efficiency). However, Bob financed his asset acquisitions with more debt. Which of the following statements is true? a) Bob's operation will have a higher ROA than Alice's operation b) Bob's operation will have a lower ROA than Alice's operation c) Bob's operation will generate a larger tax shield than Alice's operation d) Bob's operation will generate a smaller tax shield than Alice's operation
c
Bob adds a $20,000 bathroom upgrade to his store and pays in full with cash. Which of the following are true regarding the journal entry for this transaction? a) It requires Bob to debit the accumulated depreciation on the store for $20,000 b) It requires Bob to credit the accumulated depreciation on the store for $20,000 c) It requires Bob to debit the book value of the store asset account for $20,000 d) It requires Bob to credit the book value of the store asset account for $20,000
c
Debiting the retained earnings account at the end of an accounting cycle is consistent with each of the following operations EXCEPT a. Paying dividends to shareholders b. Closing out an expense account c. Crediting a revenue account d. None of the above
c
During the startup phase of a company's operating horizon, the company most likely faces the largest magnitude of cash inflows and outflows from each of the following categories EXCEPT: a) Investing b) Financing c) Operating d) None of the above since all are associated with large cash inflows or outflows
c
Each of the following are components of return on assets (ROA) EXCEPT a. Return on sales b. Asset turnover rate c. Financial leverage d. None of these because they are all components of ROA
c
Each of the following are considered investing cash flows EXCEPT a. You purchase a new factory to expand your operations b. You sell some shares of another company's stock c. You sell some shares of your company's stock d. None since all are considered investing cash flows
c
Each of the following are considered measures of free cash flows EXCEPT a. NOPLAT b. NOPAT c. NOLUNCH d. EBITDA
c
Each of the following are correct about EBITDA EXCEPT a. It doesn't measure cash flow well if there are large changes in working capital b. Can be manipulated by "channel stuffing" c. EBITDA must be reported per GAAP regulation on the SCF d. None - all of the above are true
c
Each of the following are examples of temporary accounts EXCEPT: a) Revenues b) Expenses c) Prepaid Assets d) None of the above since all are temporary accounts
c
Each of the following is considered to be a financing cash outflow under GAAP EXCEPT a) Paying dividends b) Paying principal on a loan c) Paying interest on a loan d) None of the above since all are financing cash flows
c
If Bob used the direct method to prepare the operating, investing, and financing sections of the statement of cash flows (SCF), then which of the following actions must Bob take to remain GAAP compliant with his financial document preparation before filing? a. He must prepare the investing section of the SCF using the indirect method b. He must prepare the financing section of the SCF using the indirect method c. He must prepare the operating section of the SCF using the indirect method d. None of the above - Bob is already GAAP compliant
c
In the Relic Spotter case, the purchase of the metal detectors were considered an investing cash flow rather than an operating cash flow had to do with the fact that a. The metal detectors didn't depreciate quickly b. Park purchased land in the same transaction c. They were rented out instead of sold d. All of the above
c
Investing activities tend to dominate a (typical retail) firm's net cash flows during each of the following phases of the life cycle EXCEPT: a. Start-up b. Early Growth c. Mature d. None of the above
c
John decides to use an alternate schedule to make his depreciation expense look larger for the current accounting cycle. One reason John may have done this is to a. Increase operating cash flows b. Increase net income c. Generate a tax shield d. None of the above
c
Ratios are helpful when they are used a) regardless of context b) to report in financial statements c) to help ask the right questions d) without a benchmark comparison
c
Ratios are useful a. For making key financial decisions b. And required for reporting on the three major financial statements for GAAP compliance c. In a purely contextual application d. All of the above
c
Suppose your accountant made an error when reconciling net income with operating cash flows when considering a recent $5 gain on property that was sold for $60. The gain actually turned out to be $10 instead of $5. What effect will correcting this error have? a. Net income will increase by $5 b. Cash flows from operations will decrease by $5 c. Both a) and b) d. None of the above
c
Under GAAP, principal paid can be classified as a. Operating activities b. Investing activities c. Financing activities d. All of the above are legitimate
c
When a typical retail operation is exhibiting a relatively large level of financing cash outflows, it is most likely at a. the start-up phase of the operating horizon b. an early growth stage in the operating horizon c. the mature phase in the operating horizon d. The end of the operating horizon
c
When selling PPE, which of the following statements are correct? a) The gain/loss on the sale is considered an operating cash flow but the total price of the sale is an investing cash flow b) The gain/loss on the sale is recorded separately in the investing section of the SCF c) The total price of the sale is an investing cash flow d) None of the above are correct
c
When selling property, which of the following is correct? a) The total sale and the gain/loss should be tracked in the investing portion of the SCF b) The total sale and the gain/loss should be adjusted for in the operating portion since they both affect net income c) The gain/loss affects net income, and should be accounted for when adjusting operating cash flows with the indirect method, while the total sales price is an investing cash flow d) None of the above are correct
c
When using the indirect method, selling property involves making adjustments to each portion of the SCF EXCEPT a) operating b) investing c) financing d) none of the above since it involves adjustment to all of them
c
When you sell PP&E (plant, property, and equipment), which of the following statements is true regarding the indirect method? a. The entire book value of the PP&E is considered an operating cash flow b. A gain from selling above book value shows up as an operating cash flow and not in net income c. A loss on the PP&E will result in adjusting operating cash flows upward from net income d. None of the above
c
Which of the following correctly describes the DuPont decomposition? a) ROA=ROS x ATR b) ROE=ROA x ATR c) ROS x ATR x FLR = ROE d) None of the above are correct
c
Which of the following examples is referencing a real variable a) Alan makes a wage of $20 per hour b) Bob receives a bonus worth 100,000 Japanese Yen c) Carl pays his auto assembly line employees the equivalent of ½ car each month d) None of the above
c
Which of the following is an example of an investing cash inflow? a) Receipts from customers b) Buying property c) Divesting of a business entity d) Buying stocks
c
Which of the following is considered a working capital account? a. Common stock b. Revenue c. Inventory d. Long term debt
c
Which of the following is true regarding EBITDA? a) It must be shown on the operating portion of the SCF b) It proxies operating cash flows well when there are large changes in noncash working capital accounts c) It isn't subject to distortions related to depreciation d) All of the above
c
Which of the following payments is considered a cash outflow? a. Dividends received b. Receipts from customers c. Buying stock d. All of the above
c
Which of the following transactions is considered to be an operating cash flow? a. Purchasing inventory from a supplier on account b. Bringing in money by selling stock c. receipts from customers d. None of the above
c
Which of the following would be a cause for concern when using time series benchmarking to monitor the performance of Firm A over the past few years? a) Firm A's capital structure has remained constant during the last few years b) Competitors have dramatically shifted the scope of their business model c) Firm A recently acquired a subsidiary in a different line of business d) None of the above
c
A good predictor of future operating cash flow is
current earnings
A long-term asset acquisition is generally considered ___________ because the benefits conveyed last for more than ___________. a. Operating cash flow...one year b. Investing cash flow... one month c. Operating cash flow...one month d. Investing cash flow... one year
d
A non-cash acquisition of property would show up on each of the following statements EXCEPT: a) Income Statement b) Balance Sheet c) Statement of Cash Flows d) None of the above since evidence of such an acquisition would show up on all of these
d
Alice and Bob both have identical operations with identical assets (in terms of both efficiency and profitability). The only difference between Alice and Bob's operations is financing decisions: Alice funded her operation using a combination of selling bonds and selling stock whereas Bob raised funds by selling only stock. Which of the following are true? a. The ROA will be lower for Bob b. The FLR will be higher for Bob c. The FLR will be lower for Alice d. The ROE will be higher for Alice
d
Capital structure is a term used to describe a firm's a. financing activities b. the division of assets between liabilities and equity c. funding strategy d. all of the above
d
Cash flows from operations excludes which of the following income statement items? a. Depreciation b. Amortization c. Gains (losses) on PP&E d. All of the above
d
Each of the following accounts are considered to be working capital accounts EXCEPT: a) Accounts payable b) Inventory c) Notes receivable d) Long term debt
d
Each of the following are a reason why a change in a balance sheet item would not match the corresponding element on the statement of cash flows EXCEPT a. Noncash investing and financing activities b. Acquisitions and divestitures of businesses c. Subsidiaries in different industries d. Large cash transfer between a firm and its supplier
d
Each of the following are correct about EBITDA EXCEPT a. It doesn't measure cash flow well if there are large changes in noncash working capital b. Can be manipulated by "channel stuffing" c. It is a proxy for operating cash flows d. None since all of the above are true
d
Each of the following are examples of cash outflows from investing activities EXCEPT: a. Acquisition of a business b. Acquisition of PP&E c. Buying stocks in other companies d. Paying dividends
d
Each of the following are examples of noncash operating, financing, or investing activities EXCEPT a) Restructuring liability b) Proceeds from sale of property c) An increase in accounts payable d) None of the above since all are examples of both activities
d
Each of the following are examples of working capital EXCEPT a. Accounts receivable b. Accounts payable c. Prepaid expenses d. Revenue
d
Each of the following are examples of working capital EXCEPT a. Accounts receivable b. Inventory c. Prepaid expenses d. None of the above
d
Each of the following are metrics required for reporting per GAAP compliance EXCEPT a. EBITDA b. ROA c. ROE d. All of the above since none are required for reporting
d
Each of the following are metrics that must be reported per GAAP compliance when preparing the three major financial statements EXCEPT a) EBITDA b) Free Cash Flows c) ROE d) All of the above are exceptions
d
Each of the following have their own section on the statement of cash flows EXCEPT: a. Operating activities b. Disclosure of non-cash acquisitions or divestitures c. Financing activities d. None of the above are correct answers
d
Each of the following metrics must be reported on at least one of the three major financial statements to comply with GAAP EXCEPT a. EBITDA b. Free Cash Flows c. EBITDARGLE d. None of the above
d
Each of the following must be disclosed on the statement of cash flows EXCEPT a. Non-cash asset acquisitions b. Cash interest payments c. Cash tax payments d. None of the above since all must be disclosed on the SCF
d
Each of the following will distort attempts at a cross-sectional analysis for GAAP compliant firms EXCEPT a. Changes in business strategy b. Changes in capital structure c. Changes in business segments d. Changes in GAAP rulesets over time
d
Earnings tend to be a better predictor of future operating cash flows than current or past operating cash flows because a) Earnings measure value added, and can capture the generation of net income even when that income hasn't yet been paid b) Initially, operating cash flows tend to be low or negative as the firm starts up, and this tends to happen regardless of if the firm brings in future operating cash flows c) Operating cash flows could be high in the growth/mature phase and won't reflect diminishing future cash flows dear the declining phase of operation d) All of the above
d
GAAP and IFRS could generally disagree on the cash flow classifications of a. Interest payments received b. Dividend payments received c. Interest payments made d. All of the above are sources of potential disagreement
d
If Bob takes a loan from the bank and uses some of the cash funds to acquire a property and the remainder to pay for the last month of accrued salary of his employees, then this transaction has elements that could fall into each of the following categories EXCEPT a. Operating b. Investing c. Financing d. None of the above
d
When Bob purchases inventory with cash for his new business, the cash flow for that transaction would be classified as a. Operating b. Investing c. Financing d. Not enough information provided to make the assessment
d
When benchmarking one firm against other similar firms in the industry the analysis is considered to be a. Time series analysis b. Benchmark analysis c. Dynamic analysis d. None of the above
d
When using the indirect method to prepare the SCF, which of the following result in having to adjust operating cashflows downward (relative to net income)? a) Your operating costs included an amortized depreciation expense b) Your operating costs included expenses covered by accounts payables c) You sold some property for a loss d) None of the above
d
Which of the following accounts are never closed at the end of the accounting cycle? a) Permanent accounts b) Any account that shows up on the balance sheet c) Accumulated depreciation d) All of the above
d
Which of the following are correct regarding EBITDA? a) It proxys cash flows well when there are large changes in noncash working capital. b) It doesn't allow for a proper comparison when there are large differences in tax and interest obligations across firms when making an inter-firm comparison. c) Highly leveraged firms will distort cross-sectional analysis using EBITDA d) None of the above
d
Which of the following are situations that could cause a change in a balance sheet item left unexplained by the statement of cash flows a. Company A undertakes a large amount of non-cash investing and financing activity b. Company B sells a large component of its business to company C c. Company D acquires a real estate company to manage its property holdings d. All of the above
d
Which of the following are true regarding the direct and indirect methods for producing the SCF? a) the indirect and direct method for preparing the operating portion of the SCF may yield different new changes in operating cash flows when there are large changes in noncash working capital accounts b) the direct method must always be completed in compliance with GAAP c) the indirect method applies only to financing activities d) none of the above are true
d
Which of the following could constitute a reason why a balance sheet item might be unexplained by the statement of cash flows? a) Foreign currency translations b) Large noncash investing or financing activity c) Subsidiaries in other industries d) All of the above
d
Which of the following elements account for some of the difference between current assets and current liabilities? a. Inventory b. Accounts payable c. Accounts receivable d. All of the above
d
Which of the following must be disclosed on the SCF? a) Noncash transactions b) Interest payments made in cash c) Taxes paid in cash d) All of the above
d
Which of the following operations is consistent with the final step in the accounting cycle? a. Crediting revenue accounts b. Crediting dividends accounts c. Closing (zero-ing) out permanent accounts d. None of the above
d
Which of the following would cause a change in balance sheet activity that is NOT explained by the statement of cash flows? a) A change in nominal exchange rates b) Acquiring another company in a dramatically different line of business c) Large noncash financing and investing activities d) All of the above
d
Questions #3)- #4) refer to the following roman numerals: I. Debiting a revenue account II. Crediting an expense account III. Debiting retained earnings IV. Crediting retained earnings #3) Closing out an expense account most likely requires which of the following a) I ONLY b) II ONLY c) I & III ONLY d) None of the above #4) Closing out a revenue account most likely requires which of the following: a) I ONLY b) I & IV ONLY c) I & III ONLY d) II & III ONLY
d, b
Financial leverage is a measure of the degree to which a firm's capital structure is dominated by
debt
When a firm is highly leveraged, this means that the firm if financing most of its asset acquisitions using
debt
When preparing the operating portion of the statement of cash flows (SCF), despite not being required for GAAP compliance, the __________ method is a good way to check that you've properly performed the ____________ method.
direct... indirect
ATR is a measure of
efficiency
Like depreciation, __________ are also a tax deductible expense.
interest payments
Cash flows that represent an acquisition of a long term asset are generally classified as
investing
The start up phase is typically dominated by which of the following classification of cash outflows?
investing
When Bob purchases inventory for his new business with the intention of renting the inventory out into perpetuity, then the cash flow classification for the inventory acquisition will most likely be
investing
When a firm uses debt to acquire assets, then we say that the firm has increased
leverage
A firm that uses primarily debt instruments (loans and bonds) to raise funds is said to be highly
leveraged
When listing assets and liabilities on the balance sheet, we typically order them according to
liquidity
Working capital accounts generally refer to a classification of assets over which
management exercises the most control
One rationale for arguing why interest payments should be classified as an operating activity is due to the fact that they are an expense associated with the "service" of
more liquidity
Working capital is the difference between
short term assets and short term liabilities
The financial statement that should be prepared first towards the end part of the accounting cycle is
statement of income
A firm selling a bond is essentially an example of a firm
taking out a loan
An example of a strategic asset for firms that utilize a "leveraged position" in formation of their capital structure is called a
tax shield
When there is a change in a non-cash working capital account, in order to understand the effect this change has on operating cash flows using the indirect method, we often look to
the Balance sheet identity
Using the indirect method, one should generally use __________ when considering the direction of adjustment required to account for changes in noncash working capital accounts.
the balance sheet identity
An important check to make sure you've applied the indirect method correctly involves
the direct method
One difficulty in interpreting free cash flows is that
there is no standard definition applied uniformly by companies that report them
Benchmarking the same firm against its own historical performance is an example of
time series analysis
The non-cash accounts that managers exercise the most control over are referred to as
working capital
