FINA 4315 - Chapter 1

Which of the following formulas describes the calculation of cash flow from operating activities?

Net income + Noncash items +/− Changes in current assets and liabilities

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

Net plant and equipment rises $10 million; cash falls $5 million; bank debt rises $5 million.

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method.

True

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation.

The sources and uses of cash over a stated period of time are reflected in the

cash flow statement

Which one of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

cash flow statement

Which one of the following is a source of cash?

decrease in accounts receivable

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

Which one of the following is a source of cash?

increase in accounts payable

Which one of the following is a use of cash?

increase in inventory

Depreciation expense

reduces both taxes and net income.

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share?

$10

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

$3.50

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, there are no taxes or transaction costs, and all else remains the same, what should the market value of the firm be after the repurchase?

$4,000,000

Which of the following would NOT be considered a use of cash?

Depreciation

An increase in cash and cash equivalents should appear as a source of cash on the sources and uses statement.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

False

The cost of equity is usually reported on the income statement right below interest expense.

False

You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018.

False

Suppose an acquiring firm pays $100 million for a target firm, and the target's assets have a book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

$20 million

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2017. At the end of 2016, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2017, their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2017?

$63 million

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

$750,000

Which of the following statements concerning a firm's cash flows and profits is false?

A company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production.

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

False

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method.

False

Which of the following is NOT a major category on the cash flow statement?

Cash flows from selling activities

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000.

Which of the following is NOT a typical reason for differences between profits and cash flow?

Goodwill

Which of the following statements concerning the cash flow production cycle is true?

The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle.

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities.

True

A reduction in long-term debt is a use of cash.

True

Current liabilities are defined as liabilities with a maturity of less than one year.

True

A balance sheet reports the value of a firm's assets, liabilities, and equity.

at any point in time.

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

balance sheet

The book value of a firm is

based on historical cost