Finance Quiz 2

Net working capital represents current assets plus current liabilities. True or False

False

Which one of the following accounts is the most liquid? Inventory Building Accounts Receivable Equipment Land

Accounts Receivable

An income statement prepared using GAAP will show revenue when it is: Received. Collected. Accrued. Matched. Produced.

Accrued

Based on the tax table below, what is the average tax rate for a sole proprietor with taxable income of $155,000? Ignore any standard or itemized deductions. Taxable Income Tax Rate $ 0 − 9,875. 10% 9,875 − 40,125 12% 40,125 − 85,525. 22% 85,525 − 163,300 24%

Income Tax = [($9,875 − 0) × 10%] + [($40,125 − 9,875) × 12%] + [($85,525 − 40,125) × 22%] + [($155,000 − 85,525) × 24%] = $31,279.50Average tax rate = $31,279.50/$155,000 Average tax rate = .2018, or 20.18%

What is the Net Working Capital for Capella Corporation? Current assets 300 Current liabilities 110 Net fixed assets 1,200 Long-term debt 500 Shareholders' equity 890 Total assets 1,500 Total liabilities and shareholders' equity 1,500

Net Working Capital = Current Assets − Current Liabilities Net Working Capital = $300 − $110 = $190

At the beginning of the year, Smidovec Plumbing had current liabilities of $15,932 and total debt of $68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the amount of net new borrowing for the year?

Net new borrowing = ($72,415 − 13,870) − ($68,847 − 15,932) Net new borrowing = $5,630

The first thing reported on an income statement would usually be: Depreciation Financing expenses Interest paid Taxes paid Revenues.

Revenues

The book value of a firm is: equivalent to the firm's market value minus its liabilities. a financial, rather than an accounting, valuation. generally greater than the market value when fixed assets are included. based on historical transactions. adjusted to the market value whenever the market value exceeds the stated book value.

based on historical transactions.

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: operating cash flow. net capital spending. net working capital. cash flow from assets. cash flow to stockholders.

cash flow from assets.

Cash flow from assets equals: The same as the Net Working Capital cash flow to creditors + cash flow to stockholders cash flow to creditors − cash flow to stockholders cash flow to creditors × cash flow to stockholders cash flow to creditors / cash flow to stockholders

cash flow to creditors + cash flow to stockholders

The ______ tax rate is the percentage of the last dollar you earned that must be paid in taxes. marginal residual total average standard

marginal

As the degree of financial leverage increases, the: probability a firm will encounter financial distress increases. amount of a firm's total debt decreases. less debt a firm has per dollar of total assets. number of outstanding shares of stock increases. accounts payable balance decreases.

probability a firm will encounter financial distress increases.

The cash flow related to interest payments less any net new borrowing is called the: operating cash flow. capital spending cash flow. net working capital. cash flow from assets. cash flow to creditors.

cash flow to creditors.

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

CFC = $6,430 − ($68,219 − 72,918) CFC = $11,129

Cookies by Casey has sales of $487,000 with costs of $263,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 21 percent. What is the net income?

Net income = ($487,000 − 263,000 − 26,000 − 42,000)(1 − .21) Net income = $123,240

The Balance Sheet Identity is: The value of the Owners Equity The same as the Net Working Capital The Sum of all assets minus the liabilities Assets = Liabilities + Owners Equity Assets + Liabilities = Owners Equity

Assets = Liabilities + Owners Equity

Barnett Saddlery had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

Net capital spending = $209,411 − 218,470 + 42,822 Net capital spending = $33,763

The Somerville Corporation has cost of goods sold of $11,518, interest expense of $315, dividends of $420, depreciation of $811, and a change in retained earnings of $296. What is the taxable income given a tax rate of 21 percent?

Net income = $296 + 420 Net income = $716 Taxable income = $716/(1 − .21) Taxable income = $906.33

The ABC Corporation has the following information. How much is the Cash Flow to Creditors? Earnings before interest & taxes 1,588 Depreciation 130 Beginning net fixed assets 1,650 Interest paid 150 Net new equity raised 450 Net new borrowing 110 Taxes 424

Cash Flow to Creditors = Interest Paid - Net New Borrowing Cash Flow to Creditors = $150 − 110 Cash Flow to Creditors = $40

Lewis & Price Corporation paid $700 in dividends and $320 in interest this past year. Common stock remained constant at $6,800 and retained earnings decreased by $180. What is the net income for the year?

Net income = $700 − 180 Net income = $520

Shareholders' equity: is referred to as a firm's financial leverage. is equal to total assets plus total liabilities. represents the residual value of a firm. includes patents, preferred stock, and common stock. decreases whenever new shares of stock are issued

represents the residual value of a firm.

Franklin Corporation just paid taxes of $152,000 on taxable income of $512,000. The marginal tax rate is 35% for the company. What is the average tax rate for the Franklin Corporation?

Average tax rate: total taxes paid divided by total taxable income.$152,000/$512,000=30%

Ryu and Fowler Attorneys has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

NWC = $4,900 − 3,200 − 1,400 NWC = $300

You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value? A sudden and unexpected increase in inflation The replacement of old menu items with more desirable products A pandemic that required restaurants to limit the number customers allowed inside Construction of new sidewalks and street lighting Addition of a movie theater and music venues nearby

A pandemic that required restaurants to limit the number customers allowed inside

Riggs Company has current assets of $10,406, long-term debt of $4,780, and current liabilities of $9,822 at the beginning of the year. At year end, current assets are $11,318, long-term debt is $5,010, and current liabilities are $9,741. The firm paid $277 in interest and $320 in dividends during the year. What is the cash flow to creditors for the year?

CFC = $277 − ($5,010 − 4,780)CFC = $47

Herrera Corporation has total sales of $3,110,400 and costs of $2,776,000. Depreciation is $258,000 and the tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?

EBIT = $3,110,400 − 2,776,000 − 258,000EBIT = $76,400Tax = $76,400(.21)Tax = $16,044OCF = $76,400 + 258,000 − 16,044 OCF = $318,356

The balance sheet of Perez Printing shows $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. How much net working capital does the company have?

NWC = $680 + 210 + 80 − 250 NWC = $720

Which one of the following statements concerning net working capital is correct? Net working capital increases when inventory is purchased with cash. Net working capital may be a negative value. Total assets must increase if net working capital increases. Net working capital excludes inventory. Net working capital is the amount of cash a firm currently has available for spending.

Net working capital may be a negative value.

Running Gear has sales of $316,000, depreciation of $47,200, interest expense of $41,400, costs of $148,200, and taxes of $16,632. The firm has net capital spending of $36,400 and a decrease in net working capital of $14,300. What is the cash flow from assets for the year?

OCF = $316,000 − 148,200 − 16,632OCF = $151,168CFA = $151,168 − 36,400 − (−$14,300) CFA = $129,068

For a firm that must pay income taxes, depreciation expense: increases expenses and lowers taxes. increases the net fixed assets as shown on the balance sheet. reduces both the net fixed assets and the costs of a firm. is a noncash expense that increases the net income. decreases net fixed assets, net income, and operating cash flows.

increases expenses and lowers taxes.

Net capital spending: is equal to ending net fixed assets minus beginning net fixed assets. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. reflects the net changes in total assets over a stated period of time. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. is equal to the net change in the current accounts.

is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

Hinojosa Music has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. The company will sell $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?

CFS = .28($272,600) − $75,000 CFS = $1,328

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? Income statement Creditor's statement Balance sheet Statement of cash flows Dividend statement

Balance sheet

An equity owner of McKissick and Khan Consulting, LLC earned $145,000 in taxable income from the firm. Based on the tax table below, how much will the owner owe in income taxes? Ignore any standard or itemized deductions. $ 0 − 9,875. 10% 9,875 − 40,125 12% 40,125 − 85,525. 22% 85,525 − 163,300 24%

Income Tax = [($9,875 − 0) × 10%] + [($40,125 − 9,875) × 12%] + [($85,525 − 40,125) × 22%] + [($145,000 − 85,525) × 24%] = $28,879.50

Which one of the following is classified as a current asset? Accounts payable Patent Inventory Notes payable Office furniture

Inventory

Net working capital is defined as: total liabilities minus shareholders' equity. current liabilities minus shareholders' equity. fixed assets minus long-term liabilities. current assets minus current liabilities. total assets minus total liabilities.

current assets minus current liabilities.

Cash flow from assets is also known as the firm's: capital structure. equity structure. hidden cash flow. free cash flow. historical cash flow.

free cash flow.

Total income taxes divided by total taxable income equals the ______ tax rate. deductible average total residual marginal

average

A _________ __________ is one that has a life of less than one year, meaning they must be paid within the year. current liability owners equity fixed asset total asset liquid equity

current liability

Bianchi Crafts has an operating cash flow of $4,267 and depreciation of $1,611. Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed assets decreased by $382 during the year. What is free cash flow for the year?

Change in NWC = −$1,356 − (−$2,662)Change in NWC = $1,306NCS = −$382 + 1,611NCS = $1,229FCF = CFA = $4,267 − 1,306 − 1,229F CF = $1,732

The size of a company's tax bill is determined by the tax _______. Practice Laws Process Economics Code

Code

Which one of the following describes a noncash item? Fixed expenses Inventory items purchased using credit Ownership of intangible assets such as patents Expenses that do not consume cash Sales that are made using store credit

Expenses that do not consume cash

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time? Income statement Balance sheet Statement of cash flows Tax reconciliation statement Market value report

Income statement

_________ tax rate is the amount of tax payable on the next dollar earned. Average Extra Marginal Weighted Planned

Marginal

The cash flow that results from a company's ongoing, normal business activities is called: operating cash flow. capital spending. net working capital. cash flow from assets. cash flow to creditor.

operating cash flow.

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

Change in NWC = ($122,418 − 103,718) − ($121,306 − 124,509) Change in NWC = $21,903

The balance sheet of XYZ Company is shown below. What is the Net Working Capital for the company? Current assets $300 Current liabilities $240 Net fixed assets 1,500 Long-term debt 700 Owners' equity 860 Total assets $1,800 Total liabilities and equity $1,800

Net Working Capital = Current Assets - Current Liabilities Net Working Capital = $300 − $240 Net Working Capital = $60

Cash flow to stockholders is defined as: the total amount of interest and dividends paid during the past year. the change in total equity over the past year. cash flow from assets plus the cash flow to creditors. operating cash flow minus the cash flow to creditors. dividend payments less net new equity raised

dividend payments less net new equity raised.

When considering Net Working Capital, a project will generally need all of the following, except: Some cash on hand to pay any expenses that arise. An initial investment in inventories and accounts receivables. Some financing in the form of accounts payable. A balance that represents the investment in net working capital. Only long-term assets to get the project started.

Only long-term assets to get the project started.

The ABC Corporation has the following information. How much is the Operating Cash Flow? Earnings before interest & taxes 1,588 Depreciation 130 Beginning net fixed assets 1,650 Net new equity raised 450 Taxes 424

Operating Cash flow = EBIT + Depreciation − Taxes Operating Cash flow = $1,588 + 130 − 424 Operating Cash flow = $1,294