FI 352 - Quiz 2

Which one of the following has nearly the same meaning as free cash flow? a. Net income b. Cash flow from assets c. Operating cash flow d. Cash flow to shareholders e. Addition to retained earnings

b. Cash flow from assets

Given a profitable firm, depreciation: a. increases net income. b. increases net fixed assets. c. decreases net working capital. d. lowers taxes. e. has no effect on net income.

d. lowers taxes.

Shareholders' equity is best defined as: a. the residual value of a firm. b. positive net working capital. c. the net liquidity of a firm. d. cash inflows minus cash outflows. e. the cumulative profits of a firm over time.

a. the residual value of a firm.

All else held constant, the book value of owners' equity will decrease when: a. the market value of inventory increases. b. dividends exceed net income for a period. c. cash is used to pay an accounts payable. d. a long-term debt is repaid. e. taxable income increases.

b. dividends exceed net income for a period.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital: a. had to increase. b. had to decrease. c. remained constant. d. could have either increased, decreased, or remained constant. e. was unaffected as the changes occurred in the firm's current accounts.

b. had to decrease.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the: a. statement of cash flows. b. income statement. c. GAAP statement. d. balance sheet. e. net working capital schedule.

b. income statement.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the: a. average tax rate. b. variable tax rate. c. marginal tax rate. d. fixed tax rate. e. ordinary tax rate.

Marginal tax rate

Net working capital includes: a. a land purchase. b. an invoice from a supplier. c. non-cash expenses. d. fixed asset depreciation. e. the balance due on a 15-year mortgage.

b. an invoice from a supplier.

An income statement prepared according to GAAP: a. reflects the net cash flows of a firm over a stated period of time. b. reflects the financial position of a firm as of a particular date. c. distinguishes variable costs from fixed costs. d. records revenue when payment for a sale is received. e. records expenses based on the matching principle.

e. records expenses based on the matching principle.

Which one of the following terms is defined as the total tax paid divided by the total taxable income? a. Average tax rate b. Variable tax rate c. Marginal tax rate d. Absolute tax rate e. Contingent tax rate

a. Average tax rate

Net capital spending is equal to: a. ending net fixed assets minus beginning net fixed assets plus depreciation. b. beginning net fixed assets minus ending net fixed assets plus depreciation. c. ending net fixed assets minus beginning net fixed assets minus depreciation. d. ending total assets minus beginning total assets plus depreciation. e. ending total assets minus beginning total assets minus depreciation.

a. ending net fixed assets minus beginning net fixed assets plus depreciation.

Cash flow to creditors is defined as: a. interest paid minus net new borrowing. b. interest paid plus net new borrowing. c. operating cash flow minus net capital spending minus the change in net working capital. d. dividends paid plus net new borrowing. e. cash flow from assets plus net new equity.

a. interest paid minus net new borrowing.

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year? a. Indirect cost b. Direct cost c. Noncash item d. Period cost e. Variable cost

c. Noncash Item

Cash flow to creditors increases when: a. interest rates on debt decline. b. accounts payables decrease. c. long-term debt is repaid. d. current liabilities are repaid. e. new long-term loans are acquired.

c. long-term debt is repaid.

What is the maximum average tax rate for corporations? a. 38 percent b. 25 percent c. 33 percent d. 39 percent e. 35 percent

e. 35 percent

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm? a. Fixed expenses b. Marginal tax rate c. Net capital spending d. Inventory e. Depreciation

e. Depreciation

A firm's liquidity level decreases when: a. inventory is purchased with cash. b. inventory is sold on credit. c. inventory is sold for cash. d. an account receivable is collected. e. proceeds from a long-term loan are received.

a. inventory is purchased with cash.

If a firm has a negative cash flow from assets every year for several years, the firm: a. may be continually increasing in size. b. must also have a negative cash flow from operations each year. c. is operating at a high level of efficiency. d. is repaying debt every year. e. has annual net losses.

a. may be continually increasing in size.

Paid-in surplus is classified as: a. owners' equity. b. net working capital. c. a current asset. d. a cash expense. e. long-term debt.

a. owners' equity

Market values: a. reflect expected selling prices given the current economic situation. b. are affected by the accounting methods selected. c. are equal to the initial cost minus the depreciation to date. d. either remain constant or increase over time. e. are equal to the greater of the initial cost or the current expected sales value.

a. reflect expected selling prices given the current economic situation.

The market value: a. of accounts receivable is generally higher than the book value of those receivables. b. of an asset tends to provide a better guide to the actual worth of that asset than does the book value. c. of fixed assets will always exceed the book value of those assets. d. of an asset is reflected in the balance sheet. e. of an asset is lowered each year by the amount of depreciation expensed for that asset.

b. of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Operating cash flow is defined as: a. a firm's net profit over a specified period of time. b. the cash that a firm generates from its normal business activities. c. a firm's operating margin. d. the change in the net working capital over a stated period of time. e. the cash that is generated and added to retained earnings.

b. the cash that a firm generates from its normal business activities.

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant? a. An increase in net capital spending b. A decrease in the cash flow to creditors c. An increase in depreciation d. An increase in the change in net working capital e. A decrease in dividends paid

c. An increase in depreciation

Which one of the following statements concerning the balance sheet is correct? a. Total assets equal total liabilities minus total equity. b. Net working capital is equal total assets minus total liabilities. c. Assets are listed in descending order of liquidity. d. Current assets are equal to total assets minus net working capital. e. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

c. Assets are listed in descending order of liquidity.

Which one of the following is an intangible fixed asset? a. Inventory b. Machinery c. Copyright d. Account receivable e. Building

c. Copyright

Based on the recognition principle, revenue is recorded on the financial statements when the: I. payment is collected for the sale of a good or service. II. earnings process is virtually complete. III. value of a sale can be reliably determined. IV. product is physically delivered to the buyer. a. I and II only b. I and IV only c. II and III only d. II and IV only e. I and III only

c. II and III only

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow? a. Increase in depreciation b. Increase in accounts receivable c. Increase in accounts payable d. Decrease in cost of goods sold e. Increase in sales

c. Increase in accounts payable

The concept of marginal taxation is best exemplified by which one of the following? a. Kirby's paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes. b. Johnson's Retreat paid only $45,000 on total revenue of $570,000 last year. c. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes. d. Burlington Centre paid no taxes last year due to carryforward losses. e. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

c. Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Shareholders' equity is equal to: a. total assets plus total liabilities. b. net fixed assets minus total liabilities. c. net fixed assets minus long-term debt plus net working capital. d. net working capital plus total assets. e. total assets minus net working capital.

c. net fixed assets minus long-term debt plus net working capital.

Cash flow from assets is defined as: a. the cash flow to shareholders minus the cash flow to creditors. b. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders. c. operating cash flow minus the change in net working capital minus net capital spending. d. operating cash flow plus net capital spending plus the change in net working capital. e. cash flow to shareholders minus net capital spending plus the change in net working capital.

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

The matching principle states that: a. costs should be recorded on the income statement whenever those costs can be reliably determined. b. costs should be recorded when paid. c. the costs of producing an item should be recorded when the sale of that item is recorded as revenue. d. sales should be recorded when the payment for that sale is received. e. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

c. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Which one of these is correct? a. Depreciation has no effect on taxes. b. Interest paid is a noncash item. c. Taxable income must be a positive value. d. Net income is distributed either to dividends or retained earnings. e. Taxable income equals net income divided by (1 + Average tax rate).

d. Net income is distributed either to dividends or retained earnings.

Which one of the following is included in the market value of a firm but not in the book value? a. Raw materials b. Partially built inventory c. Long-term debt d. Reputation of the firm e. Value of a partially depreciated machine

d. Reputation of the firm

Production equipment is classified as: a. a net working capital item. b. a current liability. c. a current asset. d. a tangible fixed asset. e. an intangible fixed asset.

d. a tangible fixed asset.

The financial statement that summarizes a firm's accounting value as of a particular date is called the: a. income statement. b. cash flow statement. c. liquidity position. d. balance sheet. e. periodic operating statement.

d. balance sheet.

Highly liquid assets: a. increase the probability a firm will face financial distress. b. appear on the right side of a balance sheet. c. generally produce a high rate of return. d. can be sold quickly at close to full value. e. include all intangible assets.

d. can be sold quickly at close to full value.

Firms that compile financial statements according to GAAP: a. record income and expenses at the time they affect the firm's cash flows. b. have no discretion over the timing of recording either revenue or expense items. c. must record all expenses when incurred. d. can still manipulate their earnings to some degree. e. record both income and expenses as soon as the amount for each can be ascertained.

d. can still manipulate their earnings to some degree.

Cash flow to stockholders is defined as: a. cash flow from assets plus cash flow to creditors. b. operating cash flow minus cash flow to creditors. c. dividends paid plus the change in retained earnings. d. dividends paid minus net new equity raised. e. net income minus the addition to retained earnings.

d. dividends paid minus net new equity raised.

Net income increases when: a. fixed costs increase. b. depreciation increases. c. the average tax rate increases. d. revenue increases. e. dividends cease.

d. revenue increases.

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period? a. Positive operating cash flow b. Negative cash flow to creditors c. Positive cash flow to stockholders d. Negative net capital spending e. Positive cash flow from assets

e. Positive cash flow from assets

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? a. Positive operating cash flow b. Negative cash flow from assets c. Positive net income d. Negative operating cash flow e. Positive cash flow to stockholders

e. Positive cash flow to stockholders

Net working capital decreases when: a. a new 3-year loan is obtained with the proceeds used to purchase inventory. b. a credit customer pays his or her bill in full. c. depreciation increases. d. a long-term debt is used to finance a fixed asset purchase. e. a dividend is paid to current shareholders.

e. a dividend is paid to current shareholders.

Net working capital is defined as: a. the depreciated book value of a firm's fixed assets. b. the value of a firm's current assets. c. available cash minus current liabilities. d. total assets minus total liabilities. e. current assets minus current liabilities.

e. current assets minus current liabilities.

Financial leverage: a. increases as the net working capital increases. b. is equal to the market value of a firm divided by the firm's book value. c. is inversely related to the level of debt. d. is the ratio of a firm's revenues to its fixed expenses. e. increases the potential return to the stockholders.

e. increases the potential return to the stockholders.

Net working capital increases when: a. fixed assets are purchased for cash. b. inventory is purchased on credit. c. inventory is sold at cost. d. a credit customer pays for his or her purchase. e. inventory is sold at a profit.

e. inventory is sold at a profit

The market value of a firm's fixed assets: a. will always exceed the book value of those assets. b. is more predictable than the book value of those assets. c. in addition to the firm's net working capital reflects the true value of a firm. d. is decreased annually by the depreciation expense. e. is equal to the estimated current cash value of those assets.

e. is equal to the estimated current cash value of those assets.

A negative cash flow to stockholders indicates a firm: a. had a net loss for the year. b. had a positive cash flow to creditors. c. paid dividends that exceeded the amount of the net new equity. d. repurchased more shares than it sold. e. received more from selling stock than it paid out to shareholders.

e. received more from selling stock than it paid out to shareholders.

The recognition principle states that: a. costs should be recorded on the income statement whenever those costs can be reliably determined. b. costs should be recorded when paid. c. the costs of producing an item should be recorded when the sale of that item is recorded as revenue. d. sales should be recorded when the payment for that sale is received. e. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

e. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.