Chapter 4

26) Which of the following is a cash inflow? A) a decrease in accounts payable B) a decrease in accounts receivable C) an increase in dividend payment D) a decrease in accrued liabilities

B

4) Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

FALSE

5) Cash budget is a statement of a firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.

FALSE

5) Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

FALSE

5) The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.

FALSE

7) A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.

FALSE

7) Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).

FALSE

8) A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.

FALSE

8) Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges.

FALSE

9) In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.

FALSE

9) Since depreciation and other noncash charges represent a scheduled write-off of an earlier cash outflow, they should not be included in the cash budget.

TRUE

9) The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes. A) tax B) financial reporting C) budget D) cost accounting

A

15) The key outputs of the short-term financial planning process are the ________. A) cash budget, pro forma income statement, and pro forma balance sheet B) sales forecast and capital assets journal C) sales forecast and schedule of changes in working capital D) income statement, balance sheet, and source and use statement

A

17) Once sales are forecasted, ________ must be generated to estimate required raw materials. A) a production plan B) a cash budget C) an operating budget D) a pro forma statement

A

18) Which of the following is an example of noncash charges? A) depreciation B) accruals C) interest expense D) dividends paid

A

20) An external sales forecast is based on ________. A) the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence B) a buildup, or consensus of sales forecasts through a firm's own sales channels C) the prediction of a firm's sales over a given period through the analysis of the sales trends of its competitors. D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

A

21) An internal forecast is based on ________. A) a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities B) the relationships between a firm's sales and certain economic indicators C) the prediction of a firm's sales over a given period through surveys sent to financial analysts D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales

A

23) The cash flows from operating activities section of the statement of cash flows includes ________. A) labor expense B) proceeds from the sale of fixed assets C) principal paid D) dividends paid

A

24) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is ________. A) $220 B) $200 C) $180 D) $140

A

25) In preparing a cash budget, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use. A) more greater B) more fewer C) less greater D) less fewer

A

29) Cash flows directly related to production and sale of a firm's products and services are called ________. A) cash flow from operating activities B) cash flow from investment activities C) cash flow from financing activities D) cash flow from equity activities

A

38) A corporation sold a fixed asset for $100,000. This is ________. A) an investment cash flow and a source of funds B) an operating cash flow and a source of funds C) an operating cash flow and a use of funds D) an investment cash flow and a use of funds

A

47) Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%. A) $0 B) $30,000 C) -$30,000 D) $60,000

A

7) Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively. A) one to two two to ten B) five to ten ten to twenty C) zero to one five to ten D) one to ten ten to fifteen

A

12) ________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing. A) Short-term financial plans B) Long-term financial plans C) Pro forma statements D) Cash budgeting

B

13) ________ generally reflect(s) the anticipated financial impact of planned long-term actions. A) A cash budget B) Strategic financial plans C) Operating financial plans D) A pro forma income statement

B

15) Given a financial manager's preference for faster receipt of cash flows, ________. A) a longer depreciable life is preferred to a shorter one B) a shorter depreciable life is preferred to a longer one C) the manager is not concerned with depreciable life, because depreciation is a noncash expense D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost

B

16) In general, ________. A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life

B

19) Which of the following is a source of cash flows? A) increase in marketable securities B) increase in accounts payable C) decrease in notes payable D) repurchase of stock

B

20) ________ is a noncash charge. A) Labor expense B) Depreciation C) Salaries D) Rent

B

22) The cash flows from operating activities section of the statement of cash flows includes ________. A) principal received B) cost of raw materials C) dividends paid D) stock repurchases

B

28) Which of the following line items of the statement of cash flows must be obtained from the income statement ? A) accruals in current liabilities B) interest expenses C) accounts receivable D) cash dividends paid on both preferred and common stocks

B

3) The ________ is a financial projection of a firm's short-term cash surpluses or shortages. A) operating financial plan B) cash budget C) strategic financial journal D) capital assets journal

B

30) Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________. A) operating activities B) investment activities C) financing activities D) equity activities

B

4) The primary purpose in preparing a cash budget is ________. A) to evaluate the intrinsic value of a financial assets B) to estimate a firm's short-term cash requirements C) for risk analysis D) to estimate sales

B

41) Which of the following represents a cash flow from operating activities? A) dividends paid B) increase or decrease in current liabilities C) increase or decrease in fixed assets D) repurchasing stock

B

43) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________. A) net increase of $5,000 in cash and marketable securities B) net decrease of $5,000 in cash and marketable securities C) net decrease of $15,000 in cash and marketable securities D) net increase of $25,000 in cash and marketable securities

B

45) A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________. A) low profitability B) insolvency C) inability to receive credit D) high leverage

B

49) NICO Corporation had net current assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO's net current asset investment for 2014 was ________. A) $700,000 B) -$300,000 C) $300,000 D) -$700,000

B

42) For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________. A) net decrease of $3,000 in cash and marketable securities B) net decrease of $5,000 in cash and marketable securities C) net increase of $3,000 in cash and marketable securities D) net increase of $5,000 in cash and marketable securities

C

10) A corporation ________. A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes C) can use different depreciation methods for tax and financial reporting purposes D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes

C

10) Which of the following would be the least likely to utilize a cash budget? A) top management B) middle management C) public investors D) lenders

C

11) The depreciable value of an asset, under MACRS, is the ________. A) current cost B) current cost minus salvage value C) the original cost plus installation D) the original cost plus installation costs, minus salvage value

C

14) In general, firms that are subject to a high degree of ________, relatively short production cycles, or both, tend to use shorter planning horizons. A) profitability B) financial certainty C) operating uncertainty D) financial planning

C

16) Key inputs to short-term financial planning are ________. A) cash flow statements and income statement B) pro forma financial statements C) sales forecasts, and operating and financial data D) leverage analysis and pro forma income statement

C

2) Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

FALSE

17) A firm's operating cash flow (OCF) is defined as ________. A) gross profit minus operating expenses B) gross profit minus depreciation C) EBIT times one minus the tax rate plus depreciation D) EBIT plus depreciation

C

17) The depreciable value of an asset, under MACRS, is ________. A) the full cost excluding installation costs B) the full cost minus salvage value C) the full cost including installation costs D) the full cost including installation costs adjusted for the salvage value

C

22) A firm's final sales forecast is usually a function of ________. A) its net income B) the salesperson's estimates of demand C) internal and external factors in combination D) its accounts receivable

C

23) The key input to the short-term financial planning process is ________. A) the audit report B) the pro forma balance sheet C) the sales forecast D) the pro forma income statement

C

27) Which of the following is a cash outflow? A) an increase in accounts payable B) a decrease in notes receivable C) an increase in accounts receivable D) an increase in accrued liabilities

C

31) Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________. A) operating activities B) investment activities C) financing activities D) miscellaneous activities

C

39) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________. A) an investment cash flow B) a financing cash flow C) a financing cash flow and investment cash flow, respectively D) a financing cash flow and operating cash flow, respectively

C

44) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________. A) net decrease of $18,000 in cash and marketable securities B) net decrease of $6,000 in cash and marketable securities C) net increase of $6,000 in cash and marketable securities D) net increase of $2,000 in cash and marketable securities

C

46) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%. A) $35,000 B) $700,000 C) $70,000 D) $45,000

C

8) Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________. A) arbitraging B) securitization C) depreciation D) amortization

C

9) Pro forma financial statements are used for ________. A) cash budgeting B) preparing financial statements C) profit planning D) auditing

C

11) The primary purpose in preparing pro forma financial statements is ________. A) for cash planning B) to ensure the ability to pay dividends C) to reduce risk D) for profit planning

D

21) In the statement of cash flows, retained earnings are handled through the adjustment of ________. A) "Revenue" and "Cost" accounts B) "Current Assets" and "Current Liabilities" accounts C) "Depreciation" and "Purchases" accounts D) "Net Profits After Taxes" and "Dividends Paid" accounts

D

24) The cash flows from financing activities section of the statement of cash flows includes ________. A) labour expense B) cost of raw materials C) purchase of long-term assets D) dividends paid

D

25) The three categories of a firm's statement of cash flows are ________. A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities

D

40) Which of the following is a cash flow from financing activities? A) purchase of a long-term asset B) decrease in accounts payable C) increase in accounts payable D) repurchasing stock

D

48) NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of $200,000 during 2015 and $180,000 during 2014. Using this information, NICO's net fixed asset investment for 2015 was ________. A) $20,000 B) $0 C) $380,000 D) $400,000

D

50) During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is ________. A) -$630,000 B) -$50,000 C) $650,000 D) -$30,000

D

6) The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets. A) short-term long-term B) short-term short-term C) long-term long-term D) long-term short-term

D

8) The key aspects of a financial planning process are ________. A) cash planning and investment planning B) operations planning and investment planning C) investment planning and profit planning D) cash planning and profit planning

D

10) Depreciation is considered to be an outflow of cash.

FALSE

11) The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.

FALSE

12) A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.

FALSE

14) Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.

FALSE

14) The required total financing figures in the cash budget refer to the monthly changes in borrowing.

FALSE

15) If the net cash flow is less than the minimum cash balance, financing is required.

FALSE

16) Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.

FALSE

19) As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.

FALSE

2) A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.

FALSE

2) An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

FALSE

2) Free cash flow (FCF) is the cash flow a firm generates from its normal operations calculated as EBIT minus taxes plus depreciation.

FALSE

1) Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.

TRUE

1) In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

TRUE

1) Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

TRUE

1) The more seasonal and uncertain a firm's cash flows, the greater the number of intervals and the shorter time intervals.

TRUE

10) In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.

TRUE

11) In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales.

TRUE

12) To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.

TRUE

13) It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.

TRUE

13) The excess cash balance is the amount available for investment by a firm if the desired minimum cash balance is less than the period's ending cash.

TRUE

15) Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.

TRUE

16) If the ending cash is greater than the minimum cash balance, excess cash exists.

TRUE

17) Using simulations, a firm can determine the amount of financing needed to protect it adequately against a cash shortage.

TRUE

18) As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.

TRUE

3) A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.

TRUE

3) Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

TRUE

3) Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

TRUE

4) Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both, tend to use shorter planning horizons.

TRUE

4) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.

TRUE

5) The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.

TRUE

6) A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

TRUE

6) Cash planning involves the preparation of a firm's cash budget. Without adequate cash—regardless of the level of profits—any firm could fail.

TRUE

6) For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.

TRUE

7) The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

TRUE