FINA Chap. 4

In the statement of cash flows, retained earnings are handled through the adjustment of ________.

"Net Profits After Taxes" and "Dividends Paid" accounts

Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%.

$0

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?

$1,900 (see MACRS rate photos saved on desktop)

A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in January is ________.

$2,100

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, and a beginning cash balance of $500. The ending cash balance for August totals ________.

$2,500

The depreciation expense for 2019 is ________. (See Table 4.1)

$200 (problem 61)

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

$22,000 (see MACRS rate 2 on desktop)

A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is ________.

$220

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________.

$4,000

NICO Corporation had net fixed assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of 2018. In addition, the firm had a depreciation expense of $200,000 during 2019 and $180,000 during 2018. Using this information, NICO's net fixed asset investment for 2019 was ________.

$400,000

Common stock dividends paid in 2019 amounted to ________. (See Table 4.1)

$50 (problem 57)

The firm's cash flow from operating activities is ________. (See Table 4.1)

$50 (problem 60)

Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.

$70,000

NICO Corporation had current assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of 2018. In addition, NICO had accounts payable of $1,000,000 in 2019 and $1,500,000 in 2018. Using this information, NICO's net current asset investment for 2019 was ________.

$700,000

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________.

$9,000

Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of cash flows for the NEW for the year ended December 31, 2019. (a) Operating cash flow (b) Free cash flow (problem 75)

(a) OCF = EBIT - Taxes + Depreciation OCF = $30,000 - $8,000 + $3,000 = $25,000 (b) FCF = OCF - Net fixed asset investment (NFAI) - Net current asset investment (NCAI) NFAI = Change in net fixed assets + Depreciation = ($24,000 -$22,000) + 3,000 = $5,000 NCAI = Change in current assets - change in (Accounts payable + Accruals) = ($99,000 - $87,000) - ($32,000 - $26,000) = $6,000 FCF = $25,000 - $5,000 - $6,000 = $14,000

Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.

(see prob 25)

During 2019, Xeron Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is ________.

-$30,000

The ________ is a financial projection of a firm's short-term cash surpluses or shortages.

Cash budget

Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.

Depreciation

________ is a noncash charge.

Depreciation

A firm's operating cash flow (OCF) is defined as ________.

EBIT times one minus the tax rate plus depreciation

A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.

False

A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.

False

A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.

False

A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.

False

An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

False

As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.

False

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

False

By necessity, building pro forma financial statements requires that managers make many assumptions which will not turn out to be true. Therefore, pro forma financial statements are of little use as a financial management tool.

False

Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).

False

Depreciation is considered to be an outflow of cash.

False

Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT minus taxes plus depreciation.

False

Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

False

If the Tax Cuts and Jobs Act requires a firm to fully deduct the cost of new equipment when it is purchased rather than depreciating that cost over several years, the investment becomes less attractive financially.

False

If the net cash flow is less than the minimum cash balance, financing is required.

False

In the development of pro forma statements, a firm that requires external funds means that its projected level of cash is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.

False

In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.

False

Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.

False

Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

False

Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.

False

Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges.

False

Profit planning's main focus is on the firm's cash receipts and disbursements throughout the year.

False

The cash budget is a statement of a firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.

False

The required total financing figures in the cash budget refer to the monthly changes in borrowing.

False

The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.

False

The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.

False

________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing.

Long-term financial plans

________ are projected financial statements.

Pro forma statements

Cash disbursements include ________.

Rent Payments

________ generally reflect(s) the anticipated financial impact of planned long-term actions.

Strategic financial plans

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.

Tax

The key input to any cash budget is ________.

The sales forecast

A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

True

A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.

True

As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.

True

Compared to the short-term focus of cash planning, profit planning has a broader emphasis that encapsulates the firm's overall financial position.

True

Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.

True

Development of pro forma financial statements helps a financial manager to project the amount of external financing required to support a given level of sales as well as overall financial performance of the firm in the coming year.

True

Firms construct pro forma financial statements by studying past relationships between key accounts on the income statement and balance sheet and making judgments about whether those relationships will continue in the near future.

True

For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.

True

Generally, firms that have cash flows with highly seasonal cash flows or cash flows that are just generally harder to forecast prepare cash budgets more frequently compared to firms with cash flows that are less seasonal and/or more predictable.

True

If the ending cash is greater than the minimum cash balance, excess cash exists.

True

In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales.

True

In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.

True

In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

True

It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.

True

Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.

True

One basic weakness of the simplified pro forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.

True

One basic weakness of the simplified pro forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.

True

Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

True

Pro forma financial statements highlight situations in which actual outcomes deviate from projections, which in turn helps managers understand why a firm's results are not in alignment with its forecasts.

True

Since depreciation and other noncash charges represent a scheduled write-off of an earlier cash outflow, they should not be included in the cash budget, though depreciation charges will affect the taxes that a firm pays.

True

Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

True

Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

True

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

True

The excess cash balance is the amount available for investment by a firm if the desired minimum cash balance is less than the period's ending cash.

True

The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.

True

The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.

True

To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.

True

Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

True

Using simulations, a firm can determine the amount of financing needed to protect it adequately against a cash shortage.

True

An internal forecast is based on ________.

a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities

Which of the following is a cash inflow?

a decrease in accounts receivable

A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________.

a financing cash flow and investment cash flow, respectively

Once sales are forecasted, ________ must be generated to estimate required raw materials.

a production plan

Given a financial manager's preference for faster receipt of cash flows, ________.

a shorter depreciable life is preferred to a longer one

In general, ________.

a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows

The two main inputs required to construct pro forma financial statements are the ________.

actual financial statements from last year and the sales forecast for the next year

The percentage-of-sales method of preparing pro forma income statements assumes that ________.

all costs are variable

In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm had ________.

an excess cash balance of $0

In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had ________.

an excess cash balance of $50,000

Which of the following is a cash outflow?

an increase in accounts receivable

The firm may have increased long-term debts to finance ________. (See Table 4.1)

an increase in current assets (problem 58)

The largest single source of funds for the firm in 2019 is ________.

an increase in long-term debt (problem 56)

A corporation sold a fixed asset for $100,000. This is ________.

an investment cash flow and a source of funds

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________.

arrange for a loan of $230,000

A corporation ________.

can use different depreciation methods for tax and financial reporting purposes

The key outputs of the short-term financial planning process are the ________.

cash budget, pro forma income statement, and pro forma balance sheet

Cash flows directly related to production and sale of a firm's products and services are called ________.

cash flow from operating activities

The three categories of a firm's statement of cash flows are ________.

cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities

The key aspects of a financial planning process are ________.

cash planning and profit planning

The cash flows from operating activities section of the statement of cash flows includes ________.

cost of raw materials

Suppose that under the Tax Cuts and Jobs Act a firm that invests in equipment can immediately deduct the full cost of that equipment or it can depreciate the equipment under the MACRS system. For tax purposes the firm should ________.

deduct the full cost of the asset immediately because doing so reduces taxes and increases cash flow

Which of the following is an example of noncash charges?

depreciation

The cash flows from financing activities section of the statement of cash flows includes ________.

dividends paid

Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the ________.

external financing required

Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.

financing activities

The primary purpose in preparing pro forma financial statements is ________.

for profit planning

When a firm acquires a long-lived asset such as equipment, if the tax law allows it managers would generally prefer to ________.

immediately take a deduction for the full cost of the asset when it is purchased

Which of the following is a source of cash flows?

increase in accounts payable

Which of the following represents a cash flow from operating activities?

increase or decrease in current liabilities

If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.

increase the percentage of transportation costs from the percentage of last year's sales

A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________.

insolvency

Which of the following line items of the statement of cash flows must be obtained from the income statement?

interest expenses

A firm's final sales forecast is usually a function of ________.

internal and external factors in combination

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to ________.

invest in marketable securities totaling $250,000

A projected excess cash balance for the month may be ________.

invested in marketable securities

Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________.

investment activities

The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure.

judgemental

The cash flows from operating activities section of the statement of cash flows includes ________.

labor expense

The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.

long-term; short-term

The Tax Cuts and Jobs Act allows firms to immediately deduct the full cost of many assets rather than depreciating that cost over several years using the MACRS rules. Suppose a firm buys a new assets and immediately deducts its full cost. The firm will have ________.

lower profits and higher cash flows than it would have had under the MACRS system

In preparing a cash budget, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use.

more; greater

For the year ended December 31, 2019, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________.

net decrease of $5,000 in cash and marketable securities

For the year ended December 31, 2019, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________.

net increase of $3,000 in cash and marketable securities

For the year ended December 31, 2019, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________.

net increase of $6,000 in cash and marketable securities

Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.

one to two; two to ten

In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.

overstate costs and understate profits

The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________.

percentage of projected sales

In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.

pro forma balance sheet and cash budget

Pro forma financial statements are used for ________.

profit planning

Which of the following would be the least likely to utilize a cash budget?

public investors

The firm ________ fixed assets worth ________. (See Table 4.1)

purchased; $200 (problem 59)

Which of the following is a cash flow from financing activities?

repurchasing stock

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000,and a beginning cash balance of $500. At the end of August, the firm wants a minimum cash balance of $3,000. At the end of August, the firm ________.

required total financing of $500

The key inputs for preparing pro forma income statements using the percent-of-sales method are the ________.

sales forecast for the coming year and financial statements for the preceding year

Key inputs to short-term financial planning are ________.

sales forecasts, and operating and financial data

If a firm expects short-term cash surpluses, it can plan ________.

short-term investments

A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.

the assumption that the firm's past financial condition is an accurate predictor of its future

The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.

the assumption that the values of certain accounts can be forced to take on desired levels

The depreciable value of an asset, under MACRS, is ________.

the full cost including installation costs

The depreciable value of an asset, under MACRS, is the ________.

the original cost plus installation

An external sales forecast is based on ________.

the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence

The key input to the short-term financial planning process is ________.

the sales forecast

Prior to passage of the Tax Cuts and Jobs Act, most large corporations faced a 35% marginal tax rate. Under the new tax law, the marginal tax rate is 21%. In terms of the effect of this tax change on a firm's decision to purchase assets that it will use for several years ________.

the tax law reduces the tax benefits that a firm obtains when it acquires long-lived assets, whether it immediately deducts the full cost of those assets or depreciates the cost over time

The two main weaknesses of pro forma financial statements are ________.

they assume that the firm's past financial condition is an accurate indicator of its future and that managers can force particular accounts to take on particular desired values

The best way to adjust for the presence of fixed costs when preparing a pro forma income statement is ________.

to break the firm's historical costs into fixed and variable components

The primary purpose in preparing a cash budget is ________.

to estimate a firm's short-term cash requirements

For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________.

underestimate profits when sales are increasing

The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ profits when sales are increasing.

understate

Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.

understate profits when sales are increasing

Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.

understate profits when sales are increasing and overstate profits when sales are decreasing

In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________.

understate retained earnings and overstate the financing needed

Which of the following represents a way of coping with uncertainty in a cash budget?

using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances