FINC 303 test 1 ch 2

Net working capital decreases when:

a dividend is paid to current shareholders.

Production equipment is classified as:

a tangible fixed asset

Net working capital includes:

an invoice from a supplier

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

Net working capital is defined as:

current assets minus current liabilities.

Cash flow to stockholders is defined as:

dividends paid - net new equity raised.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease

Financial leverage:

increases the potential return to the stockholders.

Cash flow to creditors increases when:

long-term debt is repaid

Cash flow from assets is defined as:

operating cash flow - the change in net working capital - net capital spending.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as reven

During the past year, Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors?

Cash flow to creditors = $36,800 -16,000 + 18,400 = $39,200

If a firm has a negative cash flow from assets every year for several years, the firm:

may be continually increasing its size

Dixie's sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the company had an interest expense of $74,000 and a tax rate of 34 percent. What is the operating cash flow for the year?

EBIT = [($1,678,000 -1,141,000 -304,000 -143,000 = $90,000 Tax = ($90,000 -74,000) ×.34 = $5,440 OCF = $90,000 + 143,000 -5,440 = $227,560

Which one of the following is an intangible fixed asset?

copyright

Shareholders' equity is best defined as:

the residual value of a firm

Which one of the following is included in the market value of a firm but not in the book value?

reputation of the firm

Wes Motors has total assets of $98,300, net working capital of $11,300, owners' equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

Current liabilities = $98,300-38,600 -41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400

On December 31, 2015, The Play House had net fixed assets of $812,650 while the December 31, 2016 balance sheet showed net fixed assets of $784,900. Depreciation for 2016 was $84,900. What was the firm's net capital spending for 2016?

Net capital spending = $784,900-812,650 + 84,900 = $57,150

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

increase in accounts payable

Net working capital increases when:

inventory is sold at a profit

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate

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?

non cash item

The market value:

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

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

Dividends paid = $31,800 -24,200 = $7,600

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

Net capital spending = $371,920 -348,200 + 46,080 = $69,800

Which one of these is correct?

Net income is distributed either to dividends or retained earnings.

The Toy Store has beginning retained earnings of $318,423. For the year, the company earned net income of $11,318 and paid dividends of $7,500. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

Retained earnings = $318,423 + 11,318-7,500 = $322,241

Rusty Antiques has a marginal tax rate of 39percent and an average tax rate of 26.9 percent. If the firm owes $37,265 in taxes, how much taxable income did it earn?

Tax = $37,265 / .269 = $138,532

BT Trucking has taxable income of $617,429. How much does it owe in taxes?

Total tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($235,000) + .34($617,429-335,000) = $209,925.86 Because the marginal and average tax rates are the same at this level of income, the tax can also be computed as: Total tax = .34($617,429) = $209,925.86 References

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

average tax rate

Highly liquid assets:

can be sold quickly at close to full value.

All else held constant, the book value of owners' equity will decrease when:

dividends exceed net income for a period.

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement

Given a profitable firm, depreciation:

lowers taxes

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

positive cash flow from assists

An income statement prepared according to GAAP:

records expenses based on the matching principle.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet

Net capital spending is equal to:

ending net fixed assets - beginning net fixed assets + depreciation.

AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is $43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is 33 percent. What is the addition to retained earnings?

Addition to retained earnings = [($513,000 -406,800-43,800 -11,200)(1 -.33)] - $4,500 = Addition to retained earnings = $29,804

Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?

Average tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent

National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?

Cash flow from assets = ($24,615 + 23,800) + ($38,600-20,000) = $67,015

For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the firm's stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

Cash flow to creditors = $38,100 -21,500 = $16,600 Net new borrowing = $2,300 - 16,600 = -$14,300

Suzette's Market had long-term debt of $638,100 at the beginning of the year compared to $574,600 at year-end. If the interest expense was $42,300, what was the firm's cash flow to creditors?

Cash flow to creditors = $42,300 - ($574,600 -638,100) = $105,800

Andre's Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

Change in net working capital = ($82,600 -85,100) - ($67,200 -71,100) = $1,400

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

Current liabilities = $519,300 -380,200 -42,400 = $96,700

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

Long-term debt = $36,400 -18,800 -12,200 = $5,400

Red's Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

Marginal tax rate = ($56,211 -52,311)/($620,424-608,606) = .33, or 33 percent

Lew's Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm's assets?

Market value = $18,600 + 34,500 + 85,000 + 349,000 = $487,100

The concept of marginal taxation is best exemplified by which one of the following?

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

The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year?

Net capital spending = $28,600 + 41,600 = $70,200

The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

Net income = ($398,600 -254,800 -26,400 -1,600) (1 -.34) = $76,428

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324

A balance sheet shows beginning values of $56,300 for current liabilities and$289,200 for long-term debt. The ending values are $61,900 and $318,400, respectively. The income statement shows interest paid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?

Net new borrowing = $318,400-289,200 = $29,200

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital?

Net working capital = $21,100 + 8,600 -19,300 = $10,400

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

an increase in depreciation

Operating cash flow is defined as:

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