Smartbook ch1 & 2A

Buster's owns a machine which cost $110,000 initially. The latest financial statement shows depreciation expense of $22,000 and accumulated depreciation of $77,000. What is the book value of the firm's net plant and equipment?

$110,000 - $77,000 = $33,000

A firm has net income of $2,200, depreciation of $500, taxes of $600, other operating expenses of $800, interest of $200, and sales of $5,900. What is the value of EBT?

$2,800 Reason: EBT = Net income + Taxes = $2,200 + $600 = $2,800

A firm has fixed assets of $28,000, long-term debt of $12,000, current liabilities of $4,000, current assets of $5,000 and equity of $17,000. What is the total of the assets side of the balance sheet of the firm?

$33,000

Delta's has operating income of $128,000 and a 35 percent tax rate and is all-equity financed. Sigma's has operating income of $128,000, a 35 percent tax rate, and has $15,000 in interest expense since it is partially debt-financed. What is the difference in the income available for asset funders between these two firms?

$5,250 Reason: Asset funders includes both bondholders and stockholders so the difference = Tax savings on interest = 0.35($15,000) = $5,250

One change brought by TCJA is that only the interest on the first $( ) of mortgage debt is deductible.

$750,000

The TCJA established a flat corporate tax rate of:

21 percent

Which one of these accounts is a long-term debt?

5-year bonds

Which one of these is a current liability?

6-month note payable

Which one of these statements correctly applies to a balance sheet?

A balance sheet reports assets, liabilities and equity accounts in descending order of liquidity.

Which one of these statements correctly applies to a balance sheet?

A balance sheet shows what a firm owns, what it owes, and what it is worth.

A change in financial leverage does which one of the following?

A decrease in financial leverage decreases the risks faced by the firm.

How is a public corporation defined?

A public corporation is a firm owned by a large number of stockholders from the general public.

Which of these accounts are included in net working capital? Select all that apply.

Accounts payable Cash Accounts receivable

Which one of these is a current asset?

Accounts receivable

What is the definition of an income statement?

An income statement reports total revenues and expenses over a specific period of time.

Which of these best illustrates how funds flow in a financial system?

An individual invests in a bank savings account and the bank lends money to companies.

Which of these parties monitor corporate activities from outside as part of corporate governance? Select all that apply.

Auditors Investment analysts Credit analysts Not - chief financial officer

Which one of these formulas best defines an average tax rate?

Average tax rate = Tax liability/Taxable income

Book value per share (BVPS) is based on which one of the following?

BVPS is based on the equity of a firm that is attributable to the common shareholders.

Which of these is a monitor of corporate governance? Select all that apply.

Board of directors SEC

Which of these features could accurately be included in the definition of a corporation? Select all that apply.

Double taxation Division of ownership and control Separate legal entity

Which of these features could accurately be included in the definition of a corporation? Select all that apply.

Double taxation Split ownership and management

The net impact of the lower individual income tax rates brought by TCJA is expected to be (choose all that apply):

Downward pressure on housing sales in the high-value market More free cash for consumers to spend More potential savings on the part of investors

Which one of these correctly defines EBIT?

EBIT is the earnings a firm generates prior to paying interest to its creditors or income taxes to the government.

What is the definition of EBT?

EBT is the taxable income of a firm.

Which of these factors are credited for providing financial institutions with high profit margins?

Expertise and unique assets

How can financial leverage be defined?

Financial leverage is the degree to which a firm finances its total assets with debt securities.

How is financial leverage defined?

Financial leverage is the extent to which debt securities are used by a firm.

Financial management relates to which one of the following?

Financial management relates to a firm's decisions regarding the acquisition and use of funds.

Gross profit is equal to net sales minus cost of goods sold. How else can gross profit be defined?

Gross profit = EBIT + Other operating expenses + Depreciation

Which of these reduce the taxable income of a corporation?

Interest expense

Which of the following are finance functions that fall under the supervision of the treasurer?

Interest rate hedging Capital spending Managing cash not : managing taxes this falls under controller

Financial institutions contribute to the dynamics of which one of the following rates?

Interest rates

Which account is the least liquid of the current asset accounts?

Inventory

Which of these accounts are included in net working capital? Select all that apply.

Inventory Notes payable

Which of these correctly defines a role of investments?

Investments address the timing of cash flows most desired by investors.

Which firm is a borrower of funds in the financial markets?

Ken's has a new product that it is ready to market to the public as soon as financing can be arranged.

Which of these are fixed assets? Select all that apply.

Land owned by a retail outlet Sewing machines owned by a clothing manufacturer

What is the definition of liabilities?

Liabilities are funds provided by lenders to a firm.

Which one of these is the best explanation of the market value per share (MVPS)?

MVPS is the current price at which a share of common stock sells in the open market.

Which one of these is NOT a financial decision made within a firm?

Multiple choice question. The personnel department decides to switch its employee health insurer due to changes in costs. -( The president decides to fire the company treasurer for ethical violations. )- Correct The sales department decides to cancel newspaper advertising due to low sales generation from that advertising. Operations decides to pay overtime rather than hire another employee.

What is the definition of net income?

Net income is the aftertax profit or loss earned over a specified period of time.

What is the definition of net working capital?

Net working capital is the difference between a firm's current assets and current liabilities.

Current liabilities are debts of a firm that must be paid within what time frame?

One year

What is the definition of preferred stock?

Preferred stock is a hybrid security that has characteristics of both long-term debt and common stock.

Which of these characteristics apply to a marketable security? Select all that apply.

Provides a low rate of return Convertible to cash within one year or less

Corporate governance is the set of laws, policies, incentives, and monitors designed to handle issues arising from which one of these?

Separation of ownership and control

An agency problem is defined as a situation where a firm's managers fail to put the interests of which one of these parties first when making decisions?

Shareholders

Which one of these is an advantage of a general partnership?

Single taxation

What are the two key characteristics of a hybrid organization?

Single taxation and limited liability

Stockholders' equity can be defined by which one of these formulas?

Stockholders' equity = Assets - Liabilities

Which one of these is an investments activity?

Sue has $200 a month deposited into a stock mutual fund.

How is the time value of money (TVM) theory best defined?

TVM is the theory and application of valuing cash flows at various points in time.

What is the definition of an average tax rate?

The average tax rate is the percentage of each dollar of taxable income that the firm pays in taxes.

D.O. Co. has a total of $6,500 in total assets and $4,200 in fixed assets on its balance sheet. The fixed assets were just appraised at $4,700. The firm feels it can liquidate its current assets for 96 percent of their book value. What is the book and market value of the firm's assets?

The book value is $6,500 and the market value is $6,908.

Which statement correctly defines the book value of a firm's assets as shown in the gross plant and equipment account?

The book value of a firm's assets in the gross plant and equipment account is the total amount the firm paid for those assets.

The current value of a financial asset is determined by which of the following cash flows?

The value of a financial asset is determined by the asset's expected future cash flows.

A financial statement provides an _______-based picture of a firm's financial condition.

accounting

( ) holders have first claim to the cash flows of the firm.

debt

Another name for the bottom line of an income statement is

net income

Dalton Bros. has 5,000 shares of common stock outstanding, earnings before taxes of $3,000, preferred dividends of $1,000, common dividends of $500, and taxes of $900. What is the earnings per share (EPS) amount?

$0.22 Reason: EPS = Income available to common stockholders/Total shares outstanding = ($3,000 - $900 - $1,000)/5,000 = $0.22

A firm has sales of $8,900, depreciation of $200, cost of goods sold of $3,700, other operating expenses of $4,200, and interest of $600. What is the firm's EBIT?

$800 Reason: EBIT = Sales - Cost of goods sold - Depreciation - Other operating expenses = $8,900 - $3,700 -$200 -$4,200= $800

Which one of these best defines a general partnership?

A brother and sister form a business. Both share jointly unlimited personal liability for the debts of the firm.

A current asset is an asset that does which one of the following?

A current asset provides liquidity and a low rate of return.

What is the definition of a fiduciary relationship?

A fiduciary relationship is a legal duty between two parties where one party must act in the interest of the other party.

What is the definition of a sole proprietorship?

A sole proprietorship is a business entity that is not legally separate from its owner.

Which one of these assets is considered to be the most liquid?

Cash and marketable securities

When computing book value per share (BVPS) which of these balance sheet values is used as the total book value?

Common stock + Paid in surplus + Retained earnings

What is the definition of common stock and paid in surplus?

Common stock and paid in surplus represent the fundamental ownership claim in a public or private company.

Which one of these reports the amount of money a firm owes its creditors within the next year?

Current liabilities

Which one of these best explains how debt financing affects the income available to a firm's asset funders?

Debt increases the income available to asset funders by an amount equal to the interest on the debt times the tax rate.

Which three decisions have the most effect on shareholder wealth? Select all that apply.

Deciding how to return profits to owners Deciding between debt and equity financing Deciding which project to accept

Which of these statements regarding the structure of an income statement is (are) correct? Select all that apply.

EBT = Dividends paid + Addition to retained earnings + Taxes Gross profit = Net sales - Cost of goods sold EBIT= Gross profit - Depreciation - Other operating expenses

Which one of these statements is a correct interpretation of an income statement?

Earnings per share = Net income available to common stockholders / Total shares of common stock outstanding

Which one of the following is an advantage of a sole proprietorship?

Ease of formation

Which of these best defines ethics?

Ethics is the study of values, morals, and morality.

True or false: All interest payments and dividends are deducted from operating income when the firm calculates taxable income.

False

True or false: Finance is more concerned about the past while accounting is more concerned about the future.

False

True or false: An increase in the financial leverage of a firm reduces both the firm's profits and its losses.

False Reason: An increase in the financial leverage of a firm magnifies both the firm's profits and its losses. In other words, profits get larger but losses also get larger.

Which of these is an example of how finance is used throughout a firm?

Finance can be used for cost/benefit analysis.

Which one of these features would be considered the most advantageous benefit of a general partnership?

Increased capital financing as compared to a sole proprietorship

Which of these assets have useful lives exceeding one year and are classified as fixed assets? Select all that apply.

Machinery Building Land

Which one of these functions is a treasury function?

Managing the firm's pension plan not: Overseeing the accounting functions Reason: This is a function of the controller. Pension plans are a treasury function. Overseeing the data processing functions Reason: This is a function of the controller. Pension plans are a treasury function. Managing the firm's taxes Reason: This is a function of the controller. Pension plans are a treasury function.

Which of the following are the well-developed viewpoints that have arisen regarding the goal of a firm?

Maximize shareholder wealth Emphasize social responsibility

A fixed asset is an asset that is defined as having a useful life in excess of which one of these time periods?

One year

Long-term debt is defined as the obligations of the firm that are due after what period of time?

One year

Which characteristic is an advantage of a hybrid organization?

Owners' liability

Which group has individual investors as participants and is a lender of funds to the financial markets?

People with money and no ideas lend funds to the financial markets.

Which of these are personal financial decisions?

Samantha financed her mortgage for 20 rather than 30 years to save on interest. Marie decided that leasing a car was cheaper for her than buying a car. Kendyll moved money from her checking account to her savings account to earn interest.

Which of these definitions of stockholders' equity is correct?

Stockholders' equity is defined as the funds provided by the firm's preferred and common stock owners.

The profitability of financial market intermediaries depends upon which of these?

Successful execution of unique professional services

Which aspect of a corporation is viewed as a disadvantage?

Taxation

What is the definition of a marginal tax rate?

The marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.

How is the market value of an asset defined?

The market value of an asset is the amount the firm would receive if it sold the asset.

The Keyser Corporation owns 1,000 shares of Mountain Top Industries. How are the dividends paid by Mountain Top to Keyser treated for federal tax purposes?

Thirty percent of the dividend income received is taxable, the other seventy percent is tax-exempt.

Which one of these formulas correctly defines retained earnings?

Total net earnings for all years - Total dividends paid for all years

Which one of these is an intangible long-term asset?

Trademark

Travis owns a bakery and Mia is a baker. How could an agency relationship exist between these two individuals?

Travis could hire Mia to work for him. Travis would be the principal and Mia would be the agent.

The operating profit is equal to earnings before interest and taxes.

True

What result should you expect from firms that make wise financial decisions?

You should expect the wealth of individuals to increase in the future.