FIN323 EX1 CH2

Plato's Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets?

$32,900

Which one of the following statements is correct concerning a firm's fixed assets?

The market value is the expected selling price in today's economy

Use the following tax table to answer this question: Bait and Tackle has taxable income of $411,562. How much does it owe in taxes?

Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($235,000)(0.39) + ($411,562 - $335,000)(0.34) = $139,931.08

Highly liquid assets:

can be sold quickly at close to full value.

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

The Brown Jug has compiled the following information: Picture What is the operating cash flow for 2014?

2014 operating cash flow = $198,500 - $27,100 - $128,300 - $1,000 = $42,100

Which one of the following is included in net working capital?

Accounts payable

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 34 percent. The firm paid out $16,500 in dividends. What is the addition to retained earnings?

Addition to retained earnings = [($318,400 - $199,400 - $28,600 - $1,100)(1 - 0.34)] - $16,500 = $42,438

Chevelle, Inc. has sales of $487,000 and costs of $394,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings?

Addition to retained earnings = [($487,000 - $394,500 - $43,800 - $18,200)(1 - 0.35)] - $6,500 = $13,325

Which one of the following has nearly the same meaning as free cash flow?

Cash flow from assets

During the past year, Arther Anderson Services paid $360,800 in interest along with $48,000 in dividends. The company issued $230,000 of stock and $200,000 of new debt. The company reduced the balance due on the old debt by $225,000. What is the amount of the cash flow to creditors?

Cash flow to creditors = $360,800 - $200,000 + $225,000 = $385,800

The Paint Ball Range, Inc. paid $30,500 in dividends and $7,600 in interest over the past year. Sales totaled $211,800 with costs of $167,900. The depreciation expense was $16,500. The applicable tax rate is 34 percent. What is the amount of the operating cash flow?

EBIT = $211,800 - $167,900 - $16,500 = $27,400; Tax = ($27,400 - $7,600) × 0.34 = $6.732; OCF = $27,400 + $16,500 - $6,732 = $37,168

Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle? I. Payment is collected for the sale of a good or service. II. The earnings process is virtually complete. III. The value of a sale can be reliably determined. IV. The product is physically delivered to the buyer.

II and III only

All else equal, an increase in which one of the following will decrease owners' equity?

Increase in accounts payable

Which one of the following relates to a negative change in net working capital?

Increase in current liabilities with no change in current assets for the period

The Play House's December 31, 2013, balance sheet showed net fixed assets of $1,238,000 and the December 31, 2014, balance sheet showed net fixed assets of $1,416,000. The company's 2014 income statement showed a depreciation expense of $214,600. What was the firm's net capital spending for 2014?

Net capital spending = $1,416,000 - $1,238,000 + $214,600 = $392,600

The balance sheet of a firm shows current liabilities of $56,300 and long-term debt of $289,200 as of last year. Current liabilities are $76,900 and long-term debt is $248,750 as of today, which is the end of the current year. The financial statements for the current year reflect an interest paid amount of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?

Net new borrowing = $248,750 - $289,200 = -$40,450

Gorman Distributors shows the following information on its 2014 income statement: sales = $317,800; costs = $211,400; other expenses = $18,500; depreciation expense = $31,200; interest expense = $2,100; taxes = $18,600; dividends = $12,000. In addition, you're told that the firm issued $4,500 in new equity during 2014, and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital?

OCF - $317,800 - $211,400 - $18,500 - $18,600 = $69,300; NCS = $7,400 + $31,200 = $38,600; CFA = CFC + CFS = [$2,100 - (-$6,500)] + [$12,000 - $4,500] = $16,100; Add to NWC = OCF - NCS - CFA = $69,300 - $38,600 - $16,100 = $14,600

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement.

Financial leverage:

increases the potential return to the shareholders.

The market value of a firm's fixed assets:

is equal to the estimated current cash value of those assets.

A negative cash flow to stockholders indicates a firm:

received more from selling stock than it paid out to shareholders.

If a firm has a negative cash flow from assets every year for several years, the firm:

may be continually increasing in size.

The corporate tax structure in the U.S. is based on a:

modified flat-rate tax.

Shareholders' equity is equal to:

net fixed assets minus long-term debt plus net working capital. (longest)

Cash flow from assets is defined as:

operating cash flow minus the change in net working capital minus net capital spending.

Which one of the following is an intangible fixed asset?

Copyright

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

Depreciation

The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income?

Net income = ($79,600 - $48,200 - $18,700 - $8,300)(1 - 0.34) = $2,904

An increase in which one of the following will increase net income?

Revenue

Which one of the following will increase cash flow from assets but not affect the operating cash flow?

Sale of a fixed asset

Which one of the following statements is correct?

Shareholders' equity is the residual value of a firm.

Use the following tax table to answer this question: The Holiday Inn earned $177,284 in taxable income for the year. How much tax does the company owe on this income?

Total tax = ($50,000)(0.15) + ($25,000)(0.25) + ($25,000)(0.34) + ($177,284 - $100,000)(0.39) = $52,390.76

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

Bama & Co. owes a total of $21,684 in taxes for this year. The taxable income is $61,509. If the firm earns $100 more in income, it will owe an additional $56 in taxes. What is the average tax rate on income of $61,609?

Average tax rate = ($21,684 + $56)/$61,609 = 35.29 percent

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm's assets?

Book value = $139,000 + $66,000 - $79,000 + $18,400 + $36,600 = $181,000

Miser Materials paid $27,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $21,000 in long-term debt. What is the amount of the cash flow from assets?

Cash flow from assets = ($28,311 + $21,000) + ($27,500 - $25,000) = $51,811

The December 31, 2013, balance sheet of Suzette's Market showed long-term debt of $638,100 and the December 31, 2014, balance sheet showed long-term debt of $574,600. The 2010 income statement showed an interest expense of $42,300. What was the firm's cash flow to creditors during 2014?

Cash flow to creditors = $42,300 - ($574,600 - $638,100) = $105,800

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. During that time, the firm invested $28,000 in net working capital and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year?

Cash flow to stockholders = ($187,000 - $28,000 - $47,900) - $71,400 = $39,700

Which one of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

Baugh and Essary reports the following account balances: inventory of $17,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets?

Current assets = $17,600 + $11,900 + $31,900 = $61,400

The Draiman, Inc. currently has $3,600 in cash. The company owes $41,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Draiman $18,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $61,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

Current assets = $3,600 + $18,000 + $53,300 = $74,900

Which one of the following will decrease the net working capital of a firm?

Making a payment on a long-term debt

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

Noncash item

Precision Manufacturing had the following operating results for 2014: sales = $38,900; cost of goods sold = $24,600; depreciation expense = $1,700; interest expense = $1,400; dividends paid = $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate for 2014 was 34 percent. What is the cash flow from assets for 2014?

OCF = [($38,900 - $24,600 - $1,700 - $1,400) (1 - 0.34)] + $1,700 + $1,400 = $10,492; CFA = $10,492 - ($13,900 - $14,300 + $1,700) - [($9,200 - $7,400) - $8,700 - $6,600)] = $9,492

Gino's Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

Owners' equity = $29,800 + $64,800 - $23,000 = $71,600

Which one of the following is an equity account?

Paid-in surplus

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

Which one of the following is included in the market value of a firm but not in the book value?

Reputation of the firm

The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

Retained earnings = $28,975 + $4,680 - $1,600 = $32,055

Which one of the following statements concerning market and book values is correct?

The market value tends to provide a better guide to the actual worth of an asset than does the book value.

The Pier Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $107,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets?

Total book value = $34,600 + $54,200 + $92,300 + $234,500 - $107,900 = $307,700

Delivery trucks are classified as:

tangible fixed assets.

Operating cash flow is defined as:

the cash that a firm generates from its normal business activities.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Able Co. has $218,000 in taxable income and Bravo Co. has $5,600,000 in taxable income. Suppose both firms have identified a new project that will increase taxable income by $12,000. The additional project will increase Able Co.'s taxes by _____ and Bravo Co.'s taxes by ____.

$4,680; $4,080

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

An increase in depreciation

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

Daniel's Market has sales of $36,600, costs of $28,400, depreciation expense of $3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the operating cash flow, OCF?

EBIT = $36,600 - $28,400 - $3,100 = $5,100; Tax = ($5,100 - $1,500) × 0.34 = $1,224; OCF = $5,100 + $3,100 - $1,224 = $6,976

During the year, The Dalton Firm had sales of $3,210,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $2,540,000, $389,000, and $112,000, respectively. In addition, the company had an interest expense of $118,000 and a tax rate of 34 percent. (Ignore any tax loss carryback or carryforward provisions.) What is its operating cash flow?

EBIT = [($3,210,000 - $2,540,000 - $389,000 - $112,000 = $169,000; Tax = ($169,000 - $118,000) × 0.34 = $17,340; OCF = $169,000 + $112,000 - $17,340 = $263,660

ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $10,100. The tax rate was 40 percent. What was the amount of the costs incurred by the firm?

Earnings before interest and taxes = [($14,680 + $10,100)/(1 - 0.40)] + $9,700 = $51,000; Costs = $811,400 - $21,900 - $51,000 = $738,500

A firm has earnings before interest and taxes of $25,380 with a net income of $14,220. The taxes amounted to $5,400 for the year. During the year, the firm paid out $43,800 to pay off existing debt and then later borrowed an additional $24,000. What is the amount of the cash flow to creditors?

Interest = $25,380 - $14,220 - $5,400 = $5,760; Cash flow to creditors = $5,760 + $43,800 - $24,000 = $25,560

Which one of the following is included in net working capital?

Invoice from a supplier for inventory purchased

Cash flow to creditors is defined as:

interest paid minus net new borrowing.

Depreciation does which one of the following for a profitable firm?

Lowers taxes

Net working capital is defined as:

current assets minus current liabilities.

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

Dividends paid = $31,800 - $24,200 = $7,600

Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income did the firm earn for the period?

Net income = ($581,600 - $479,700 - $32,100 - $8,400)(1 - 0.42) = $35,612

Roscoe's purchased new machinery three years ago for $1.8 million. The machinery can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is ____.

Book value = $960,000 + $348,000 + $121,000 = $1,429,000; Market value = $1,200,000 + $518,000 = $1,718,000

The Plaza Cafe has an operating cash flow of $78,460, depreciation expense of $8,960, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows:

Cash flow from assets = $78,460 - ($703,411 - $687,810 + $8,960) - [($138,509 - $91,516) - ($141,680 - $87,340)] = $61,246

For the past year, LP Gas, Inc. had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

Cash flow to creditors = $38,100 - $21,500 = $16,600; Net new borrowing = $2,300 - $16,600 = -$14,300

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

Change in net working capital = ($82,600 - $85,100) - ($67,200 - $71,100) = $1,400

Pete's Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities?

Current liabilities = $19,300 - $10,200 - $2,400 = $6,700

Kroeger Exporters has total assets of $74,300, net working capital of $22,900, owners' equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

Current liabilities = $74,300 - $38,600 - $23,900 = $11,800; Current assets = $11,800 + $22,900 = $34,700

Bridgewater Furniture has sales of $811,000, costs of $658,000, and interest paid of $21,800. The depreciation expense is $56,100 and the tax rate is 34 percent. At the beginning of the year, the firm had retained earnings of $318,300 and common stock of $250,000. At the end of the year, the firm has retained earnings of $322,500 and common stock of $280,000. What is the amount of the dividends paid for the year?

Dividends paid = [($811,000 - $658,000 - $56,100 - $21,800)(1 - 0.34)] - ($322,500 - $318,300) = $45,366

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent?

EBIT = $821,300 - $698,500 - $28,400 = $94,400; Tax = ($94,400 - $8,400) × 0.34 = $29,240; OCF = $94,400 + $28,400 - $29,240 = $93,560

Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense?

Earnings before interest and taxes = [($4,100 + $2,500)/(1 - 0.34)] + $1,400 = $11,400; Depreciation = $93,600 - $74,400 - $11,400 = $7,800

The Braxton Co. has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

Ending long-term debt = $64,500 - $16,300 + $4,100 + $11,000 = $63,300

Early Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $3,700. What is the net fixed asset balance at the end of the year?

Ending net fixed assets = $87,600 + $6,400 - $1,100 - $3,700 = $89,200

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

Net income = ($83,490 - $68,407 - $8,200 - $478) × (1 - 0.35) = $4,163.25; Ending retained earnings = $18,670 + $4,163.25 - $950 = $21,883.25

Which one of the following statements related to the income statement is correct?

Net income is distributed either to dividends or retained earnings.

Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm does not pay dividends. What is the amount of the net new equity raised during the year?

Net new equity = $142,430 - $26,310 - $55,000 - $11,200 - $48,420 = $1,500

Paddle Fans & More has a marginal tax rate of 34 percent and an average tax rate of 23.7 percent. If the firm earns $138,500 in taxable income, how much will it owe in taxes?

Tax = ($138,500)(0.237) = $32,824.50

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

Cash flow to creditors is equal to:

beginning long-term debt minus ending long-term debt plus interest paid.

Home Supply, Inc. has compiled the following information:

2014 operating cash flow = $511,500 - $61,100 - $289,300 - $39,400 = $121,700; Change in net working capital = ($34,900 + $56,800 - $32,900 + $36,700) - ($38,200 + $58,800 - $36,800 + $41,500) = -$6,200; Net capital spending = $392,200 - $336,900 + $23,500 = $78,800; Cash flow from assets = $121,700 - (-$6,200) - $78,800 = $49,100; Cash flow to creditors = $21,600 - ($295,000 - $260,000) = -$13,400; Addition to retained earnings = $32,700 - $28,600 = $4,100; Net income = $511,500 - $289,300 - $61,100 - $23,500 - $21,600 - $39,400 = $76,600; Dividends paid = $76,600 - $4,100 = $72,500; Cash flow to stockholders = $72,500 - ($160,000 - $150,000) = $62,500; Cash flow from assets = -$13,400 + $62,500 = $49,100

Six months ago, Benders Gym repurchased $20,000 of its common stock. The company pays regular quarterly dividends totaling $8,500 per quarter. What is the amount of the cash flow to stockholders for the past year if no additional shares were issued?

Cash flow to stockholders = ($8,500 × 4) + $20,000 = $54,000

The balance sheet of Binger, Inc. has the following balances: Picture What is the amount of the change in net working capital?

Change in net working capital = ($16,800 + $52,300 + $77,400 - $56,900) - ($21,400 + $47,400 + $83,800 - $54,900) = -$8,100

The owners' equity for The Deer Store was $58,900 at the beginning of the year. During the year, the company had aftertax income of $4,200, of which $3,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners' equity at year end?

Ending owners' equity = $58,900 + $4,200 - $3,200 - $6,500 = $53,400

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

Long-term debt = $36,400 - $18,800 - $12,200 = $5,400

Redneck Farm Equipment owes $48,329 in tax on a taxable income of $549,600. The company has determined that it will owe $56,211 in tax if its taxable income rises to $565,000. What is the marginal tax rate at this level of income?

Marginal tax = ($56,211 - $48,329)/($565,000 - $549,600) = 51.18 percent

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

Marginal tax rate

The financial statements of Jame's Auto Repair reflect cash of $14,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $35,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets?

Market value = $14,600 + $11,500 + $35,000 + $49,000 = $110,100

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

The financial statements of Backwater Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year?

Net capital spending = $28,600 + $41,600 = $70,200

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

Net capital spending = $371,920 - $348,200 + $46,080 = $69,800

Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets?

Net fixed assets = $11,600 + $53,400 - $11,300 = $53,700

The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

Net income = ($398,600 - $254,800 - $26,400 - $1,600) (1 - 0.34) = $76,428

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital?

Net working capital = $21,100 + $8,600 - $19,300 = $10,400

Red Roofs, Inc. has current liabilities of $24,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners' equity has a book value of $21,400. What is the amount of the net working capital?

Net working capital = $43,100 - $23,700 - $24,300 = -$4,900

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

Positive cash flow to stockholders

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation.

An income statement prepared according to GAAP:

records expenses based on the matching principle.

The recognition principle states that:

sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.