FIN 311: QUIZ 3
The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
true
The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity.
true
The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
true
The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
true
On 12/31/15, Hite Industries reported retained earnings of $510,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/14, the company had reported $445,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did the firm pay during 2015?
$70,000
Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
Companies' cash positions would decline
Which of the following statements is most correct? 1. Corporations are allowed to exclude 70% of their interest income from corporate taxes. 2. Corporations are allowed to exclude 70% of their dividend income from corporate taxes. 3. Individuals pay taxes on only 30% of the income realized from municipal bonds. 4.Individuals are allowed to exclude 70% of their interest income from their taxes. 5. Individuals are allowed to exclude 70% of their dividend income from their taxes.
Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
The company sold a new issue of common stock
The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.
true
Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.
true
Which of the following factors could explain why Michigan Energy's cash balance increased even though it had a negative cash flow last year?
The company sold a new issue of bonds
Brown Office Supplies recently reported $17,000 of sales, $8,250 of operating costs other than depreciation, and $1,750 of depreciation. It had $9,000 of bonds outstanding that carry a 7.0% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's earnings before taxes (EBT)?
$6,370
Casey Motors recently reported the following information: ∙ Net income = $875,000. ∙ Tax rate = 40%.∙ Interest expense = $200,000. ∙ Total invested capital employed = $9 million. ∙ After-tax cost of capital = 10%. What is the company's EVA?
95,000
Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?
The company issues new common stock.
Which of the following items is NOT normally considered to be a current asset?
bonds
On the balance sheet, total assets must always equal the sum of total liabilities and equity.
true
Scranton Shipyards has $11.0 million in total invested operating capital, and its WACC is 10%. Scranton has the following income statement: Sales $10.0 million Operating costs 6.0 million Operating income (EBIT) $4.0 million Interest expense 2.0 million Earnings before taxes (EBT) $2.0 million Taxes (40%) 0.8 million Net income $1.2 million What is Scranton's EVA? Answer options are provided in whole dollar.
$1,300,000
Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. During last year, the firm had expenditures on fixed assets and net operating working capital that totaled $2,000. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $975. By how much will the depreciation change cause (1) the firm's net income and (2) its free cash flow to change? Note that the company uses the same depreciation for tax and stockholder reporting purposes. Do not round the intermediate calculations. Net Income: Free Cash Flow:
-$633.75; $341.25
Sales$1,850 Costs $1,400 Depreciation250 EBIT$200 Interest expense 70 EBT$130 Taxes (40%) 52 Net income$78 Kwok Enterprises has the following income statement. How much after-tax operating income does the firm have?
120
A bond issued by the State of Pennsylvania provides a 9.50% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?
14.62%
A 5-year corporate bond yields 9.70%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds? (Round your final answer to two decimal places.)
32.99%
Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6%, and Carter's marginal income tax rate is 21.00%, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
4.74%
Which of the following statements is most correct? 1. Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders. 2. 70% of the interest received by corporations is excluded from taxable income. 3. 70% of the dividends received by corporations is excluded from taxable income. 4. Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain. 5. The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.
70% of the dividends received by corporations is excluded from taxable income.
Which of the following statements is CORRECT? Since depreciation increases the firm's net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. Common equity includes common stock and retained earnings, less accumulated depreciation. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
On its 12/31/15 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.
Which of the following statements is CORRECT? 1. The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses. 2. MVA gives us an idea about how much value a firm's management has added during the last year. 3. EVA gives us an idea about how much value a firm's management has added over the firm's life. 4. EVA stands for economic value added, and it is defined as follows: EVA = NOPAT - (Total invested capital)(AT cost of capital %)
EVA stands for economic value added, and it is defined as follows: EVA = NOPAT - (Total invested capital)(AT cost of capital %)
Which of the following statements is CORRECT? 1. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. 2. Changes in working capital have no effect on free cash flow. 3. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation - Capital expenditures required to sustain operations - Required changes in net operating working capital. 4. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Capital expenditures. 5. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors--both creditors and stockholders.
Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation - Capital expenditures required to sustain operations - Required changes in net operating working capital.
The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Nantell's operating income (EBIT) will increase.
Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets: 2015 2014 Common stock 2,000 1,000 Retained earnings 2,000 2,340 Total common equity 4,000 3,340
The firm issued common stock in 2015.
Which of the following statements is CORRECT? 1. Actions that increase reported net income will always increase cash flow. 2. One way to increase EVA is to generate the same level of operating income but with less total invested capital. 3. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. 4. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. 5. If a firm reports positive net income, its EVA must also be positive.
One way to increase EVA is to generate the same level of operating income but with less total invested capital.
Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
The company made large investments in fixed assets.
The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.
True
If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
false
The amount shown on the December 31, 2015 balance sheet as "retained earnings" is equal to the firm's net income for 2015 minus any dividends it paid
false
The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time
false
Byrd Lumber has 2 million shares of common stock outstanding that sell for $17 a share. If the company has $49 million of common equity on its balance sheet, what is the company's Market Value Added (MVA)? Answer options are provided in whole dollar
-15,000,000
A loss incurred by a corporation
Can be carried back 2 years, then carried forward up to 20 years following the loss.
Which of the following statements is CORRECT? 1. The more depreciation a firm reports, the higher its tax bill, other things held constant. 2. People sometimes talk about the firm's cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line." 3. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow. 4. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes. 5. Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.
Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.
Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?
The company's depreciation expense declined.
EBIT stands for earnings before interest and taxes, and it is often called "operating income."
true
Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same.
false
Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.
false
The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
false
The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
false
Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors
false
Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
false
If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.
true
Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no "excess" cash.
true
To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.
true
For 2015, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation). The company has $20,500 of total invested capital, the weighted average cost of that capital (the WACC) was 13%, and the federal-plus-state income tax rate was 40%. What was the firm's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during 2014?
$1,235
Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock outstanding, and it sells at a price of $33.00 per share. How much value has O'Brien's management added to stockholder wealth over the years, i.e., what is O'Brien's MVA?
$13,000,000
Emery Mining Inc. recently reported $110,000 of sales, $75,500 of operating costs other than depreciation, and $10,200 of depreciation. The company had $16,500 of outstanding bonds that carry a 7.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income? The firm uses the same depreciation expense for tax and stockholder reporting purposes. (Round your intermediate and final answers to two decimal places.)
$15,017.44
Brown Fashions Inc.'s December 31, 2014 balance sheet showed total common equity of $4,050,000 and 290,000 shares of stock outstanding. During 2015, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/15, assuming no common stock was either issued or retired during 2015? (Round your final answer to two decimal places.)
$15.17
Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 510,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ? (Round your intermediate and final answer to two decimal places.)
$17.45
Prezas Company's balance sheet showed total current assets of $3,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net operating working capital?
$2,025
Shrives Publishing recently reported $11,000 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on fixed assets and net operating working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow? (Round your intermediate and final answers to whole dollar amount.
$2,463
Vasudevan Inc. recently reported operating income of $5.35 million, depreciation of $1.20 million, and had a tax rate of 40%. The firm's expenditures on fixed assets and net operating working capital totaled $0.6 million. How much was its free cash flow, in millions?
$3.81
Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $198 million, what is the company's stock price? (Round your final answer to two decimal places.)
$83.00
Your corporation has the following cash flows: Operating income $250,000 Interest received $10,000 Interest paid $45,000 Dividends received. $16,000 Dividends paid $50,000 If the applicable income tax rate is 40% (federal and state combined), and if 70% of dividends received are exempt from taxes, what is the corporation's tax liability?
$87,920
Hartzell Inc. had the following data for 2014, in millions: Net income = $600; after-tax operating income [EBIT (1-T)] = $700; and Total assets = $2,000. Information for 2015 is as follows: Net income = $825; after-tax operating income [EBIT (1-T)] = $1,475; and Total assets = $2,500. How much free cash flow did the firm generate during 2015?
$975
Houston Pumps recently reported $207,500 of sales, $140,500 of operating costs other than depreciation, and $9,250 of depreciation. The company had $35,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate future sales and cash flows, the firm was required to spend $15,250 to buy new fixed assets and to invest $6,850 in net operating working capital. What was the firm's free cash flow?
24,688
Which of the following statements is CORRECT? 1. Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. 2. After-tax operating income is calculated as EBIT(1 - T) + Depreciation. 3. Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition. 4. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. 5. Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
Which of the following statements is CORRECT? 1. Typically, a firm's DPS should exceed its EPS. 2. Typically, a firm's net income should exceed its EBIT. 3. If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share. 4. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. 5. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share.
Which of the following statements is CORRECT? 1. An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase, then when they are collected cash will come into the firm. 2. In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows. 3. The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that add to or subtract from cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt. 4. The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line." 5. Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.
In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows.
Which of the following statements is CORRECT? 1. In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section. 2. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. 3.In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. 4. In the statement of cash flows, depreciation is subtracted from net income in the operating activities section. 5. In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.
In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
Which of the following statements is CORRECT? 1. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. 2. Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2015 could go up to 39.6%, but qualified dividends received were taxed at a maximum rate of 15% for individuals earning less than $411,500 and married taxpayers filing jointly earning less than $464,850. 3. The maximum federal tax rate on corporate income in 2015 was 50%. 4. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes. 5. The maximum federal tax rate on personal income in 2015 was 50%.
Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate, which in 2015 could go up to 39.6%, but qualified dividends received were taxed at a maximum rate of 15% for individuals earning less than $411,500 and married taxpayers filing jointly earning less than $464,850.
Which of the following statements is CORRECT? 1. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits. 2. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. 3. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income. 4. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation's income and stockholders were taxed again on this income when it was paid to them as dividends. 5. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income.
Which of the following statements is CORRECT? 1. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. 2. The balance sheet for a given year tells us how much money the company earned during that year. 3. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). 4. If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. 5. The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
The assets section of a typical company's balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
Which of the following statements is CORRECT? 1. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. 2. The balance sheet gives us a picture of the firm's financial position at a point in time. 3. The income statement gives us a picture of the firm's financial position at a point in time. 4. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. 5. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
The balance sheet gives us a picture of the firm's financial position at a point in time
Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)? 1. The company repurchased some of its common stock. 2. The company dramatically increased its capital expenditures. 3. The company retired a large amount of its long-term debt. 4. The company sold some of its fixed assets. 5. The company had high depreciation expenses.
The company sold some of its fixed assets.
The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?
The company's net income would increase.
A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?
The firm's cash flow would increase
Which of the following statements is CORRECT? 1. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." 2. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP). 3. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). 4. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow. 5. The income statement for a given year is designed to give us an idea of how much the firm earned during that year
The income statement for a given year is designed to give us an idea of how much the firm earned during that year
Which of the following statements is CORRECT? 1. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. 2. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. 3. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. 4. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity. 5. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information--audited financial statements.
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
Which of the following statements is CORRECT? 1. Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors. 2. Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books. 3. The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm's reported profits and its actual cash flow for the same period. 4. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. 5. EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS.
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT? 1. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. 2. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors. 3. The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. 4. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP. 5. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.
The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
Which of the following statements is CORRECT? 1. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. 2. The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. 3. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. 4. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. 5. The statement of cash flows shows how much the firm's cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.
The statement of cash flows shows how much the firm's cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.
An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.
true
