Ch 2 - Business Finance
42 - Lemmon Incorporated lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity. A. $104.50 B. $112.50 C. $156.50 D. $144.50
A. $104.50 Explanation ($140 + $16.50) − $12 − $40 = $104.50
4 - Xin's Tobacco Shop has total assets of $100 million. Fifty percent of these assets are financed with debt of which $37 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $32 million. Using this information what is the balance for long-term debt and retained earnings on Xin's Tobacco Shop's balance sheet? A. $13 million; $18 million B. $12 million; $12 million C. $18 million; $27 million D. $14 million; $29 million
A. $13 million; $18 million Explanation Step 1: Find long-term debt: TL = CL + long-term debt = 0.5 × 100 = 37 + long-term debt; long-term debt = $13 million; Step 2: Find RE: Total equity = 0.5 × 100 = 50 = CS + P + RE = 32 + RE; RE = $18 million.
41 - You have been given the following information for Sherry's Sandwich Corporation: Net sales = $300,000; Gross profit = $100,000; Addition to retained earnings = $30,000; Dividends paid to preferred and common stockholders = $8,500; Depreciation expense = $25,000. The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for Sherry's Sandwich Corporation? A. $200,000, and $20,000, respectively B. $20,000, and $200,000, respectively C. $200,000, and $36,500, respectively D. $100,000, and $20,000, respectively
A. $200,000, and $20,000, respectively
54 - Nickolas's Nut Farms, Incorporated has net cash flows from operating activities for the last year of $25 million. The income statement shows that net income is $15 million and depreciation expense is $6 million. During the year, the change in inventory on the balance sheet was a decrease of $4 million, change in accrued wages and taxes was a decrease of $1 million and change in accounts payable was a decrease of $1 million. At the beginning of the year the balance of accounts receivable was $5 million. What was the end of year balance for accounts receivable? A. $3 million B. $7 million C. $9 million D. $2 million
A. $3 million
31 - Hunt Taxidermy, Incorporated is concerned about the taxes paid by the company in 2022. In addition to $36.5 million of taxable income, the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy, Inc. Calculate Hunt Taxidermy's taxable income. A. $36,620,000 B. $38,150,000 C. $36,900,000 D. $40,250,000
A. $36,620,000 Explanation $36.5 million + (0.3)0.4 million = 36.620 million.
44 - Bike and Hike, Incorporated started the year with a balance of retained earnings of $100 million and ended the year with retained earnings of $128 million. The company paid dividends of $9 million to the preferred stockholders and $22 million to common stock holders. What was Bike and Hike's net income for the year? A. $59 million B. $28 million C. $128 million D. $31 million
A. $59 million
13 - Ramakrishnan Incorporated reported 2022 net income of $20 million and depreciation of $1,500,000. The top part of Ramakrishnan, Incorporated's 2021 and 2022 balance sheets is listed as follows (in millions of dollars). Calculate the 2022 net cash flow from operating activities for Ramakrishnan, Incorporated A. $8,500,000 B. $12,500,000 C. $7,100,000 D. $10,500,000
A. $8,500,000 Explanation $20 + (1.5 + 2 + 5) − (9 + 11) = $8.5 million.
19 - The 2022 income statement for John's Gym shows that depreciation expense is $20 million, EBIT is $80 million, and taxes are $24 million. At the end of the year, the balance of gross fixed assets was $102 million. The increase in net operating working capital during the year was $18 million. John's free cash flow for the year was $41 million. What was the beginning of year balance for gross fixed assets? A. $85 million B. $43 million C. $84 million D. $163 million
A. $85 million
12- Paige's Properties Incorporated reported 2022 net income of $5 million and depreciation of $1,500,000. Paige's Properties, Incorporated's 2021 and 2022 balance sheets are listed as follows (in millions of dollars). What is the 2022 net cash flow from operating activities for Paige's Properties, Incorporated? A. $5,000,000 B. $1,500,000 C. -$13,500,000 D. $6,500,000
B. $1,500,000 Explanation Cash Flows from Operating Activities Net income $ 5,000,000 Additions (sources of cash): Depreciation 1,500,000 Increase accrued wages and taxes 6,000,000 Increase in accounts payable 4,000,000 Subtraction (uses of cash): Increase in accounts receivable −14,000,000 Increase in inventory −1,000,000 Net cash flow from operating activities: $ 1,500,000
5 - Ted's Taco Shop has total assets of $5 million. Forty percent of these assets are financed with debt of which $400,000 is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $1 million. Using this information what is the balance for long-term debt and retained earnings on Ted's Taco Shop's balance sheet? A. $1.6 million, $3 million B. $1.6 million, $2 million C. $400,000, $1 million D. $2 million, $3 million
B. $1.6 million, $2 million Explanation Total current liabilities $ 0.4 Long-term debt: $ 1.6 Total debt: $ 2 Stockholder's equity: Preferred stock $ 0 Common stock and paid-in surplus (2 million shares) 1 Retained earnings 2 Total $ 3 Total liabilities and equity $ 5 Step 1: Total liabilities and equity = Total Assets = $5. Step 2: Total debt = 0.4 × $5 = $2. Step 3: Long-term debt = $2 − $0.4 = $1.6. Step 1: Total Stockholder's Equity = $5 − $2 = $3. Step 2: Retained earnings = $3 − $1 = $2.
2 - Hair Etc. has total assets of $15 million. Twenty percent of these assets are financed with debt of which $1 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $8 million. Using this information what is the balance for long-term debt and retained earnings on Hair Etc.'s balance sheet? A. $1 million, $8 million B. $2 million, $4 million C. $2 million, $8 million D. $3 million, $4 million
B. $2 million, $4 million Explanation Total current liabilities $ 1 Long-term debt: $ 2 Total debt: $ 3 Stockholder's equity: Preferred stock $ 0 Common stock and paid-in surplus (2 million shares) 8 Retained earnings 4 Total $ 12 Total liabilities and equity $ 15 Step 1: Total liabilities and equity = Total Assets = $15. Step 2: Total debt = 0.2 × $15 million = $3. Step 3: Long-term debt = $3 − $1 = $2. Step 1: Total Stockholder's Equity = $15 − $3 = $12. Step 2: Retained earnings = $12 − $8 = $4.
39 - You are considering an investment in Cruise, Incorporated and want to evaluate the firm's free cash flow. From the income statement, you see that Cruise earned an EBIT of $202 million, paid taxes of $51 million, and its depreciation expense was $75 million. Cruise's gross fixed assets increased by $70 million from 2021 to 2022. The firm's current assets decreased by $10 million and spontaneous current liabilities increased by $6 million. What is Cruise's operating cash flow, investment in operating capital, and free cash flow for 2022, respectively, in millions? A. $226, $70, $156 B. $226, $54, $172 C. $226, $74, $152 D. $202, $70, $130
B. $226, $54, $172
29 - A firm has operating income of $1,000, depreciation expense of $185, and its investment in operating capital is $400. The firm is 100 percent equity financed and has a 35 percent tax rate. What is the firm's operating cash flow? A. $795 B. $835 C. $965 D. $725
B. $835 Explanation ($1,000 − $350 + $185) = $835.
56 - If a company reports a large amount of net income on its income statement during a year, the firm could have A. zero cash flow. B. All of these choices are correct. C. negative cash flow. D. positive cash flow.
B. All of these choices are correct.
60 - Within the GAAP framework A. Managers may take steps to over or understate earnings. B. Both options are possible. C. None of the options are possible. D. Managers may smooth earnings to show investors that firm assets are growing.
B. Both options are possible.
16 - Investment in operating capital is A. the change in gross fixed assets plus depreciation. B. None of the options. C. the change in assets plus the change in current liabilities. D. the change in gross fixed assets plus the change in free cash flow.
B. None of the options.
21 - Lemmon Incorporated lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.50. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity. A. $144.50 B. $156.50 C. $104.50 D. $112.50
C. $104.50 Explanation ($140 + $16.50) − $12 − $40 = $104.50
26 - You are evaluating the balance sheet for Ultra Corporation. From the balance sheet you find the following balances: cash and marketable securities = $10,000, accounts receivable = $2,000, inventory = $20,000, accrued wages and taxes = $1,000, accounts payable = $3,000, and notes payable = $10,000. Calculate Ultra's net working capital. A. $32,000 B. $28,000 C. $18,000 D. $ 8,000
C. $18,000 Explanation ($10,000 + 2,000 + 20,000) − (1,000 + 3,000 + 10,000) = $18,000.
47 - You are evaluating the balance sheet for Goodman's Bees Corporation. From the balance sheet you find the following balances: cash and marketable securities = $200,000, accounts receivable = $1,100,000, inventory = $2,000,000, accrued wages and taxes = $500,000, accounts payable = $600,000, and notes payable = $100,000. Calculate Goodman's Bees' net working capital. A. $1,400,000 B. $2,000,000 C. $2,100,000 D. $1,900,000
C. $2,100,000 Explanation (0.2 million + 1.1 million + 2.0 million) − (0.5 million + 0.6 million + 0.1 million) = 2.1 million.
43 - Reed's Birdie Shot, Incorporated's 2022 income statement lists the following income and expenses: EBIT = $555,000, interest expense = $178,000, and taxes = $148,000. Reed's has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2022 earnings per share. A. $3.49 B. $2.79 C. $2.29 D. $3.14
C. $2.29 Explanation (0.555 million − 0.178 million − 0.148 million)/0.1 million = $2.29.
27 - Bullseye, Incorporated's 2021 income statement lists the following income and expenses: EBIT = $900,000, interest expense = $85,000, and net income = $570,000. What are the 2021 taxes reported on the income statement? A. There is not enough information to calculate 2021 taxes. B. $815,000 C. $245,000 D. $330,000
C. $245,000 Explanation Using the setup of an Income Statement in Table 2.2: EBIT $ 900,000 Interest expense −85,000 EBT 815,000 Taxes −245,000 Net income $ 570,000
48 - Epic, Incorporated's 2022 income statement lists the following income and expenses: EBIT = $1,000,000, interest expense = $75,000, and taxes = $277,500. Epic has no preferred stock outstanding and 100,000 shares of common stock outstanding. What are its 2022 earnings per share? A. $9.25 B. $10.00 C. $6.475 D. $7.225
C. $6.475
23 - You have been given the following information for Nicole's Neckties Corporation: Net sales = $2,500,000; Cost of goods sold = $1,300,000; Addition to retained earnings = $30,000; Dividends paid to preferred and common stockholders = $300,000; Interest expense = $50,000. The firm's tax rate is 40 percent. What is the depreciation expense for Nicole's Neckties Corporation? A. $650,000 B. $550,000 C. $600,000 D. $820,000
C. $600,000
33 - ABC Incorporated has $100 in cash on its balance sheet at the end of 2021. During 2022, the firm issued $450 in common stock, reduced its notes payable by $40, purchased fixed assets in the amount of $750, and had cash flows from operating activities of $315. How much cash did ABC Inc. have on its balance sheet at the end of 2022? A. $225 B. −$25 C. $75 D. $140
C. $75 Explanation $100 + 315 − 40 − 750 + 450 = $75.
34 - A firm had EBIT of $1,000, paid taxes of $225, expensed depreciation at $13, and its gross fixed assets increased by $25. What was the firm's operating cash flow? A. $737 B. $813 C. $788 D. $763
C. $788 Explanation $1,000 − $225 + $13 = $788.
36 - A firm has sales of $50,000, EBIT of $10,000, depreciation of $4,000, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there was a $1,000 increase in net operating working capital, what is the firm's free cash flow? A. $10,000 B. $9,000 C. $8,000 D. $1,200
C. $8,000 Explanation [$10,000 − (10,000 × 0.3) + 4,000] − (2000 + 1,000) = FCF = $8,000.
3 - Downtown Development, Incorporated's 2022 income statement lists the following income and expenses: EBIT = $700,000, interest expense = $100,000, and taxes = $168,000. Downtown has no preferred stock outstanding and 50,000 shares of common stock outstanding. What are its 2022 earnings per share? A. $12.00 B. $14.00 C. $8.64 D. $10.64
C. $8.64 Explanation Using the setup of an Income Statement in Table 2.2 as shown: EBIT $ 700,000 Interest expense −100,000 EBT 600,000 Taxes −168,000 Net income 432,000 Thus, Earnings per share (EPS) = $432,000/50,000 = $8.64 EPS.
10 - Oakdale Fashions Incorporated had $255,000 in 2022 taxable income. If the firm paid $82,100 in taxes, what is the firm's average tax rate? A. 28.20% B. 34.70% C. 32.20% D. 29.90%
C. 32.20% Explanation 82,100/255,000 = 32.20%.
30 - When evaluating the statement of cash flows, which of the following statement(s) is/are true? A. Cash expenditures used to expand the firm could drain cash during expansion periods. B. Can assist financial professionals in identifying where cash is generated and dispersed. C. All of the options are true. D. Negative cash flow could be a result of investments in new fixed assets or inventory.
C. All of the options are true.
40 - All of the following are reasons that one should be cautious in interpreting financial statements EXCEPT A. financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings. B. firms can take steps to over- or understate earnings at various times. C. All of these choices are correct. D. it is difficult to compare two firms that use different depreciation methods.
C. All of these choices are correct.
20 - Within the GAAP framework A. Managers may take steps to over or understate earnings. B. None of the options are possible. C. Both options are possible. D. Managers may smooth earnings to show investors that firm assets are growing.
C. Both options are possible.
28 - Which of the following changes are true of the Tax Cut and Jobs Act (TCJA) of 2017? A. Allowable bonus depreciations will phase down over four years. B. Neither of the options are true. C. Both options are true. D. Businesses are allowed to immediately deduct 100% of the cost of eligible property in the year it is placed into service through 2022.
C. Both options are true.
22 - Which of the following statements is NOT true of the Tax Cut and Jobs Act (TCJA) of 2017? A. The act permanently lowers corporate taxes from a progressive schedule to a flat 21% starting in 2018. B. Both of the options are false. C. The act limits the deductibility of net interest expense that exceeds 21% of a firm's adjusted taxable income starting in 2018. D. Neither of the options are false.
C. The act limits the deductibility of net interest expense that exceeds 21% of a firm's adjusted taxable income starting in 2018.
14 - Which of the following is a use of cash? A. The firm takes its depreciation expense. B. The firm issues more long-term debt. C. The firm decreases its accrued wages and taxes. D. The firm sells some of its fixed assets.
C. The firm decreases its accrued wages and taxes.
59 - Which of the following is a use of cash? A. The firm issues more long-term debt. B. The firm takes its depreciation expense. C. The firm decreases its accrued wages and taxes. D. The firm sells some of its fixed assets.
C. The firm decreases its accrued wages and taxes.
45 - On which of the four major financial statements would you find the common stock and paid-in surplus? A. income statement B. statement of cash flows C. balance sheet D. statement of retained earnings
C. balance sheet
9 - For which of the following would one expect the book value of the asset to differ widely from its market value? A. accounts receivable B. notes payable C. equity D. accounts payable
C. equity
49 - For which of the following would one expect the book value of the asset to differ widely from its market value? A. accounts receivable B. inventory C. fixed assets D. cash
C. fixed assets
1 - Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time-generally one year? A. statement of retained earnings B. statement of cash flows C. income statement D. balance sheet
C. income statement
18 - Beauty Cosmetics Incorporated has sales of $900, EBIT of $200, depreciation of $30, and fixed assets increased by $275. If the firm's tax rate is 30 percent and there were no increases in net operating working capital, what is the firm's free cash flow? A . $105 B. $55 C. −$105 D. −$55
C.−$105 Explanation [200 − (200 × 0.3) + 30] − 275 = FCF = −$105
6 - Soccer Starz, Incorporated started the year with a balance of retained earnings of $25 million and ended the year with retained earnings of $32 million. The company paid dividends of $2 million to the preferred stockholders and $6 million to common stockholders. What was Soccer Starz's net income for the year? A. $40 million B. $49 million C. $7 million D. $15 million
D. $15 million
50 - The Ohio Corporation had a 20XX taxable income of $50,000,000 from operations after all operating costs but before 1. interest charges of $500,000, 2. dividends received of $45,000, 3. dividends paid of $10,000,000, and 4. income taxes. Using the tax schedule in Table 2.3, (see attached) what is Ohio's income tax liability? What are Ohio's average and marginal tax rates on taxable income from operations? A. $17,340,750, 34.68%, 35%, respectively B. $13,829,725, 27.66%, 35%, respectively C. $6,416,667, 12.83%, 35%, respectively D. $17,329,725, 34.66%, 35%, respectively
D. $17,329,725, 34.66%, 35%, respectively Explanation The first 70 percent of the dividends received by Ohio Corporation is not taxable. Thus, only 30 percent of the dividends received are taxed, so: Taxable income = $50,000,000 − $500,000 + (0.3)$45,000 = $49,513,500. Now Ohio's Corporation's tax liability will be: Tax liability = $6,416,667 + 0.35 ($49,513,500 − $18,333,333) = $17,329,725.45. Ohio Corporation's resulting average tax rate is now: Average tax rate = $17,329,725.45/$50,000,000 = 34.66%. Finally, if Ohio Corporation earned $1 more of taxable income, it would still pay 35 cents (based upon its marginal tax rate of 35 percent) more in taxes.
7 - Reed's Birdie Shot, Incorporated's 2022 income statement lists the following income and expenses: EBIT = $555,000, interest expense = $178,000, and taxes = $148,000. Reed's has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2022 earnings per share. A. $3.49 B. $2.79 C. $3.14 D. $2.29
D. $2.29 Explanation (0.555 million − 0.178 million − 0.148 million)/0.1 million = $2.29.
55 - The 2022 income statement for Pedro's Pumpkins shows that depreciation expense is $250 million, EBIT is $500 million, EBT is $320 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,600 million and net operating working capital was $640 million. At the end of the year gross fixed assets was $2,000 million. Pedro's free cash flow for the year was $630 million. What is their end of year balance for net operating working capital? A. $1,064 million B. $654 million C. $24 million D. $264 million
D. $264 million Explanation Taxes = $320 million × (0.3) = $96 million => Pedro's operating cash flow was: OCF = EBIT − Taxes + Depreciation = ($500 million − $96 million + $250 million) = $654 million. Pedro's free cash flow for 2010 was: FCF = Operating cash flow − Investment in operating capital. $630 million = $654 million − Investment in operating capital => Investment in operating capital = $654 million − $630 million = $24 million. Accordingly, investment in operating capital for 2010 was: IOC = ΔGross fixed assets + ΔNet operating working capital => $24 million = ($2,000 million − $1,600 million) + (Ending net operating working capital − $640 million) => Ending net operating working capital = $24 million − ($2,000 million − $1,600 million) + $640 million = $264 million.
35 - You are considering an investment in Crew Cut, Incorporated and want to evaluate the firm's free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million. Crew Cut's gross fixed assets increased by $10 million from 2021 to 2022. The firm's current assets increased by $6 million and spontaneous current liabilities increased by $4 million. What is Crew Cut's operating cash flow, investment in operating capital and free cash flow for 2022, respectively in millions? A. $23, $12, $11 B. $27, $10, $17 C. $23, $10, $13 D. $27, $12, $15
D. $27, $12, $15
24 - Tri Cycle, Corporation began the year 2022 with $25 million in retained earnings. The firm earned net income of $7 million in 2022 and paid $1 million to its preferred stockholders and $3 million to its common stockholders. What is the year-end 2022 balance in retained earnings for Tri Cycle? A. $32 million B. $36 million C. $25 million D. $28 million
D. $28 million
46 - Tri Cycle, Corporation began the year 2022 with $25 million in retained earnings. The firm earned net income of $7 million in 2022 and paid $1 million to its preferred stockholders and $3 million to its common stockholders. What is the year-end 2022 balance in retained earnings for Tri Cycle? A.$36 million B. $32 million C. $25 million D. $28 million
D. $28 million
37 - Dogs 4 U Corporation has net cash flow from financing activities for the last year of $10 million. The company paid $8 million in dividends last year. During the year, the change in notes payable on the balance sheet was $9 million, and change in common and preferred stock was $0 million. The end of year balance for long-term debt was $44 million. Calculate the beginning of year balance for long-term debt. A. $33 million B. $37 million C. $34 million D. $35 million
D. $35 million Explanation $10 = $9 − $8 − $0 + Change in long-term debt; => change in long-term debt = $9 = Ending Balance − Change in long-term debt; => Beginning balance of long-term debt = $35.
8 - You are evaluating the balance sheet for Epic Corporation. From the balance sheet you find the following balances: cash and marketable securities = $500,000, accounts receivable = $200,000, inventory = $100,000, accrued wages and taxes = $50,000, accounts payable = $60,000, and notes payable = $200,000. Calculate Epic's net working capital. A. $800,000 B. $690,000 C. $540,000 D. $490,000
D. $490,000 Explanation ($500,000 + 200,000 + 100,000) − (50,000 + 60,000 + 200,000) = $490,000.
25 - You have been given the following information for Kaye's Krumpet Corporation: Net sales = $150,000; Gross profit = $100,000; Addition to retained earnings = $20,000; Dividends paid to preferred and common stockholders = $8,000; Depreciation expense = $50,000. The firm's tax rate is 30 percent. What are the cost of goods sold and the interest expense for Kaye's Krumpet Corporation? A. $10,000, and $50,000, respectively B. $62,000, and $10,000, respectively C. $50,000, and $22,000, respectively D. $50,000, and $10,000, respectively
D. $50,000, and $10,000, respectively
15 - A firm has sales of $50,000, EBIT of $10,000, depreciation of $4,000, and fixed assets increased by $2,000. If the firm's tax rate is 30 percent and there was a $1,000 increase in net operating working capital, what is the firm's free cash flow? A. $9,000 B. $1,200 C. $10,000 D. $8,000
D. $8,000 Explanation [$10,000 − (10,000 × 0.3) + 4,000] − (2000 + 1,000) = FCF = $8,000.
52 - In 2022, Lower Case Productions had cash flows from investing activities of +$50,000 and cash flows from financing activities of +$100,000. The balance in the firm's cash account was $80,000 at the beginning of 2022 and $65,000 at the end of the year. What was Lower Case's cash flow from operations for 2022? A. -$65,000 B. -$150,000 C. -$15,000 D. -$165,000
D. -$165,000
38 - If a company reports a large amount of net income on its income statement during a year, the firm could have A. zero cash flow. B. positive cash flow. C. negative cash flow. D. All of these choices are correct.
D. All of these choices are correct.
51 - When a firm alters its capital structure to include more or less debt (and, in turn, less or more equity), it impacts which of the following? A. the residual cash flows available for stockholders B. the earnings per share (EPS) C. the number of shares of stock outstanding D. All of these choices are correct.
D. All of these choices are correct.
58 - You are considering an investment in Fields and Struthers, Incorporated and want to evaluate the firm's free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $52 million, paid taxes of $10 million, and its depreciation expense was $5 million. Fields and Struthers' gross fixed assets increased by $38 million from 2021 to 2022. The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million. Calculate Fields and Struthers' operating cash flow (OCF), investment in operating capital (IOC), and free cash flow (FCF) for 2022. A. OCF = $42,000,000; IOC = $46,000,000; FCF = −$4,000,000 B. OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000 C. OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000 D. OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000
D. OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000 Explanation OCF = EBIT − Taxes + Depreciation = ($52 million − $10 million + $5 million) = $47 million. Investment in operating capital: ΔGross fixed assets + ΔNet operating working capital = $38 million + ($20 million − $12 million) = $46 million. Accordingly, Fields and Struthers' free cash flow for 2022 was: FCF = Operating cash flow − Investment in operating capital = $47 million − $46 million = $1 million.
53 - Which of the following statements is correct? A. All of these choices are correct. B. If a firm has accounting profit, its cash account will always increase. C. The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet. D. The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.
D. The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.
32 - Is it possible for a firm to have positive net income and yet to have cash flow problems? A. No, this is impossible since net income increases the firm's cash. B. Yes, this is possible if the firm window-dressed its financial statements. C. No, this is impossible since net income and cash are highly correlated. D. Yes, this can occur when a firm is growing very rapidly.
D. Yes, this can occur when a firm is growing very rapidly.
11 - Deferred taxes occur when a company postpones taxes on profits pertaining to A. a loss they intend to carry back or carry forward on their income tax returns. B. funds they have not collected because they use the accrual method of accounting. C. tax years they are under an audit by the Internal Revenue Service. D. a particular period as they end up postponing part of their tax liability on this year's profits to future years.
D. a particular period as they end up postponing part of their tax liability on this year's profits to future years.
17 - Free cash flow is defined as A. cash flows available for payments to stockholders and debt holders of a firm after the firm has made payments necessary to vendors. B. cash flows available for payments to stockholders of a firm after the firm has made payments to all others with claims against it. C. cash flows available for payments to stockholders and debt holders of a firm that would be tax-free to the recipients. D. cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
D. cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
57 - These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets. A. net change in cash and cash equivalents B. cash flows from financing activities C. cash flows from operations D. cash flows from investing activities
D. cash flows from investing activities
