Finance Exam 1 Question Review

Which of the following statements is false

Acorns is a creative crowdfunding app, allowing smaller investors to join together to fund design ventures

Pyri Flours, a sole proprietorship, owes $9,741 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $22 in taxes. What is the average tax rate on income of $61,609?

Average Tax Rate = (9,741 + 22) / 61,609 = .1585, 15.85% 15.85%

Which one of the following situations is most apt to create an agency conflict

Basing management bonuses on the length of employment

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

Cash flow from assets

Swearingen 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 5,400

Nikki Heart Photography has total assets of $31,300, long-term debt of $8,600, net fixed assets of $25,600, and owners' equity of $20,540. What is the value of the net working capital?

Current Assets = 31,300 - 25,600 = 5,700 Current Liabilities = 31,300 - 20,540 - 8,600 = 2,160 NWC - 5,700 -2,160 = 3,540 3,540

Working capital management includes which one of the following

Determining which customers will be granted credit

Security dealers:

buy and sell from their own inventory

High 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.

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firms

capital structure

Nishaa has been prompted and is now in charge of all external financing. In other words, she is in charge of

capital structure management

When conducting a financial analysis of a firm, financial analysts

frequently used accounting information

An auction market

has a physical trading floor

A sole proprietorship:

has its profit taxed as personal income

Corporate shareholders:

have the ability to change the corporation's bylaws.

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002

increase the protections against corporate fraud

a corporation:

is a legal entity separate from its owners

A private placement is most apt to involve

life insurance company

Which one of the following is an advantage of being a limited partner

losses limited to capital invested

The primary goal of financial management is most associated with increasing the:

market value of the firm

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

may be continually increasing in size

Cash flow from assets is defined as

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

A limited liability company (LLC)

prefers its profits be taxed as personal income to its owners.

The issuer of a security must be involved in all___ transactions involving that security

primary market

One advantage of the corporate form of organization is the

ability to raise larger sums of equity capital than others organizational forms

Probably the least effective means of aligning management goals with shareholder interests is:

automatically increasing management salaries on an annual basis

A negative cash flow to stockholders indicates a firm:

received more from selling stock than it paid out to shareholders

An income statement prepared according to GAAP

records expenses based on the matching principle.

Shareholder's equity is best defined as

the residual value of a firm.

The daily financial operations of a firm are primarily controlled by managing the

working capital

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management

Gracie Art Gallery has total assets of $236,450, net working capital of $28,523, owners' equity of $128,659, and long-term debt of $105,000 What is the value of the current assets?

Current Liabilities= $236,450 - 105,000 - 128,659 = 2,791 Current Assets: 28,523 + 2,791 = 31,314

Raymonds's sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the company had an interest expense of $74,000 and a tax rate of 21 percent. What is the operating cash flow for the year?

EBIT= (1,678,000-304,000-143,000= 90,000) Tax= (90,000-74000) x .21 (21%) = 3,360 OCF= 90,000 + 143,000 - 3,360) = 229,640 229,640

Girabaldi's Pretzels, general partnership, has a 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 21 percent

EBIT= 821,300 - 698,500 -28,400 =94,400 Tax= (94,400 - 8,400) x .21 =18,060 OCF = 94,400 +28,400 - 18,060 = 104,740 104,740

LaMarcus Photography, a sole proprietorship owes $190,874 in taxes on a taxable income of $608,606. The company has determined that it will owe $195,246 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

Marginal tax rate= (195,246 -190,874) / (620,424 -608,606) = .37 or 37% 37%

Paid-in surplus is classified as:

owner's equity

Limited liability companies are primarily designed to

provide limited liability while avoiding double taxation

The Sarbanes-Oxley Act

requires the corporate officers to personally attest that the financial statements are a fair representation of the company's financial results

In a general partnership, each partner is personally liable for

the total debts of the partnership, even if he or she was unaware of those debts

Which one of the following statements about a limited partnership is correct

there must be at least one general partner

Norris Company incurred depreciation of $28,900 last year. The sales were $755,000 and the addition to retained earnings was $10,200. The firm paid interest 0f 6,200 and dividends of $5,000. The tax rate was 21 percent. What was the amount of the costs incurred by the company?

Earnings before interest and taxes= [( 5,000 + 10,200) / (1 - .21)] + 6,200 = 25,440.51 Costs: =755,000 - 28,900 -25,440.51= 700,659 $700,659

Which one of the following is a capital structure decision

Establishing the preferred debt-equity level

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

Assets are listed in descending order of liquidity

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

Average Tax Rate

Which one of the following is most apt to align management's priorities with shareholders' interest

Compensating managers with shares of stock that must be held for a minimum of three years

The Sarbanes-Oxley Act in 2002 was primarily prompted by which of the following from the 1990s

Corporate accounting and financial fraud

Kat Outfitting currently has $22,500 in cash. The company owes $49,500 to suppliers for merchandise and $52,500 to the bank for a long-term loan. Customers owe the company $41,000 for their purchases. The inventory has a book value of $76,800 and an estimated market value of $72,000. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

Current Assets= 22,500 + 41,000 + 76, 800 = 140,300 140,300

St. Louis Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

Current Liabilities = 519,300 - 380,200 - 42,400 = 96,700 96,700

Which one of the following parties can sell shares of ABC stock in the primary market

ABC company

Which of the following is not a basic area of finance as described by the text

Accounting

In 2021, what was the maximum average tax rate for corporations?

21%

Which one of the following functions is generally a responsibility assigned to the corporate treasurer

Capital expenditures

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 -14,300

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller

Cash management

Deandre and Mason both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Deandre and Mason will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

General partnership

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve

Silvia is employed as a currency trader in the Japanese yen market. Her job falls into which one of the following areas of finance?

International finance

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas

Investments

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners

Limited Partnership

Which one of the following statements correctly applies to a sole proprietorship

Obtaining additional equity is dependent on the owner's personal finances

Which one of the following correctly defines a common chain of command within a corporation?

The controller reports directly to the chief financial officer

The goal of financial management is to increase the:

current market value per share

Cash flow to stockholders is defined as

dividends paid minus net new equity raised

The Sarbanes-Oxley Act of 2002 has

essentially made officers of publicly traded firms personally responsible for the firm's financial statements.

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

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the

secondary market

Levi had unexpected surprise when he returned home this morning. He found that a chemical spill from a local manufacturer had spilled onto his property. The potential claim that he ahs against this manufacturer is that of a(n):

stakeholder

An employee has a claim on the cash flow of Westlake Machines. This claim is defined as a claim by one of the firm's

stakeholders

An agency issue is most apt to develop when:

the control of a firm is separated from the firm's ownership

Maria is the sole proprietor of an antique store that is located in a rented warehouse. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and apply the proceeds to the debt II. Sell the lighting fixtures from the building and apply the proceeds to the debt III. Withdraw funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

1, 3, and 4 only

Based on the recognition principle, revenue is recorded on the financial statements when the: 1. payments is collected for the sales of a good or service 2. earnings process is virtually complete 3. value of a sale can be reliably determined 4. product is physically delivered to the buyer

2 and 3 only

Prospect Avenue 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 21 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

Addition to retained earnings= [(318,400 - 199,400 - 28,600 -1,100) x (1 -.21)] -23,400 Addition to retained earnings = 47,147 47,147

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

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 applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt

Zhang's fixed assets were purchased three years ago for $1.8 million. These assets 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 _____________blank and the market value is _____________blank.

Book Value= 121,000 +348,000 +960,000 =1,429,000 Market Value= 518,000 + 1,2000,000 = 1,718,000 1,429,000; 1,718,000

Lester's Fried Chick'n purchased its building 11 years ago at a cost of $189,000. The building is currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at $32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the firm's assets?

Book value = $189,000 + 56,000 − 49,000 + 18,400 + 36,600 = $251,000 251,000

National Importers paid 38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of cash flow from assets

Cash flow from assets = ($24,615 + 23,800) + ($38,600 − 20,000) = $67,015 67,015

The Riverside Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: Current Assets: Beginning Balance: 138,590 Ending Balance: 129,204 Net Fixed Assets: Beginning Balance: 599,608 Ending Balance: 597,913 Current Liabilities Beginning Balance: 143, 215 Ending Balance: 139,827 Long-term Debt: Beginning Balance: 408,660 Ending Balance: 402,120 What is the amount of cash flow from assets?

Cash flow from assets: 83,770 - (597,913 - 599,608 + 43,514) - (129,204 - 139,827) - (138,590 - 143,215)] = 47,949 47,949

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 − 47,900 − (−$28,000)] − $71,400 = $95,700 95,700

Kahlil'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 1,400

Which of the following occupations best fits into the corporate area of finance

Chief financial officer

A firm has earnings before interest and taxes of $27,130, net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

Interest = $27,130 - 16,220 - 5,450 = 5,460 Cash flow to creditors = 5,460 + 31,600 - 42,000 = -4,940 - 4,940

Vera opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Vera own if she is personally liable for all the store's debts?

Sole proprietorship

Devante's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm's assets?

Market Value: 18,600 + 34,500 +85,00 +349,00 = 487,100 487,100

What is the primary goal of financial management for a sole proprietorship?

Maximize the market value of the equity

Which one of the following statements is correct?

NASDAQ has more listed stocks than does the NYSE.

The balance sheet of a firm shows beginning 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 69,800

McKendree Industries has current liabilities of $54,900 and accounts receivable of $88,700. The firm has total assets of $395,000 and net fixed assets of $265,100. The owners' equity has a book value of $147,500. What is the amount of the net working capital?

Net working capital = $395,000 − 265,100 − 54,900 = $75,000 75,000

Assume a company has sales of $423,800, production cost of $297,400, other expenses of $18,500, depreciation expense of $36,300, interest expense of $21,100, taxes of $23,600, and dividends of $12,000. In addition, you're told that during the year the firm issued $4,500 in new equity 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 = 423,800 - 297,400 - 18,500 - 23,600 = 84,300 NCS = 7,400 +36,300 = 43,700 CFA= CFC +CFS [ 2,100 - (6,500)] + 12,000 - 4,500] =16,100 Add to NWC= OCF -NCS - CFA = 84,300 -43,700 -16,100 = 24,500 24,500

Donegal's has compiled the following information: Sales$406,300 Interest paid 21,200 Long-term debt 248,700 Owners' equity 211,515 Depreciation 23,800 Accounts receivable 24,400 Other costs 38,600 Inventory 41,500 Accounts payable 22,600 Cost of goods sold 218,900 Cash 16,300 Taxes 34,100 What is the operating cash flow for the year?

Operating Cash Flow = 406,300 - 218,900 - 38,600 - 34,100 = 114,700

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

Which one of the following is contained in the corporate bylaws

Procedures for electing corporate directors

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

Reputation of the firm

Earley Construction has beginning retained earnings of $284,300. For the year, the company earned net income of $13,700 and paid dividends of $9,000. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

Retained Earnings= 284,300 + 13,700 - 9,000= 289,000 289,000

Capital Budgeting includes the evaluation of which of the following

Size, timing, and risk of future cash flows

Medeiros Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm's assets?

Total book value= 41,100 + 54,200 + 82,300 +234,500 - 118,900 = 293,200 293,200

The shareholders of Qiang's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:

an agency conflict

One example of a primary market transaction would be the:

sale of 1,000 shares of newly issued stock by Alt Company to Miquel