Chapter 2 Financial Statements, Taxes, and Cash Flows

The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How much additional tax will the firm owe if taxable income increases by $21,000? Taxable Income | Tax Rate 0-50k | 15% 50k-75k | 25% 75k-100k | 34% 100k-335k | 39% a. $8,080 b. $8,130 c. $8,155 d. $8,170 e. $8,190

a. $8,080 Additional tax = .34($100,000 - 97,800) + .39($97,800 + 21,000 - 100,000) = $8,080

Drew owns The What-Not Shop which he is trying to sell so that he can retire and travel. The shop owns the building in which it is located. This building was built at a cost of $647,000 and is currently appraised at $819,000. The counters and fixtures originally cost $148,000 and are currently valued at $65,000. The inventory is valued on the balance sheet at $319,000 and has a retail market value equal to 1.1 times its cost. Jake expects the store to collect 96 percent of the $21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of $414,700. What is the market value of the firm's equity? a. $867,832 b. $900,166 c. $695,832 d. $775,632 e. $1,190,332

a. $867,832 Market value of firm = $819,000 + 65,000 + 1.1($319,000) + .96($21,700) + 26,800 - 414,700 = $867,832

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? a. Income statement. b. Balance sheet. c. Statement of cash flows. d. Tax reconciliation statement. e. Market value report.

a. Income statement.

Which term relates to the cash flow that results from a firm's ongoing, normal business activities? a. Operating cash flow. b. Capital spending. c. Net working capital. d. Cash flow from assets. e. Cash flow to creditors.

a. Operating cash flow.

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital? a. $970 b. $720 c. $640 d. $3,110 e. $2,860

b. $720

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital? a. $149,900 b. $93,500 c. $125,600 d. $-47,500 e. $56,500

b. $93,500 Current liabilities = .40 × $141,000 = $56,400Total assets = $218,700 + 141,000 = $359,700Current assets = $359,700 - 209,800 = $149,900Net working capital = $149,900 - 56,400 = $93,500

The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders? a. -$75,000 b. -$26,360 c. -$2,040 d. $123,640 e. $147,960

b. -$26,360 Cash flow to stockholders = .40($121,600) - $75,000 = -$26,360

Use the below information to answer the following question. Cost of Goods Sold $6409 Interest 315 Dividends 420 Depreciation 811 Change in Retained Earnings 296 Tax Rate 34% What is the taxable income given the above information? a. $1,051.00 b. $1,367.78 c. $1,084.85 d. $2,776.41 e. $636.36

c. $1,084.85 Taxable income = (Change in Retained Earnings+Dividends)/(1-tax rate)Taxable income = (296+420)/(1-34%)Taxable income = $ 1084.85

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity? a. $6,900 b. $15,300 c. $18,700 d. $23,700 e. $35,500

c. $18,700 CLUE: Shareholders' equity = $5,900 + 21,200 - 8,400 = $18,700 (Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $289,740? Taxable Income | Tax Rate $0-50k | 15% 50k-75k | 25% 75k-100k | 34% 100k-335k | 39% a. 26.68 percent b. 35.87 percent c. 33.22 percent d. 34.67percent e. 39.00 percent

c. 33.22 percent Tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($189,740) = $96,248.60Average tax rate = $96,248.60 / $289,740 = .3322, or 33.22 percent

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

c. Balance Sheet

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: a. Operating cash flow. b. Net capital spending. c. Net working capital. d. Cash flow from assets. e. Cash flow to stockholders.

d. Cash flow from assets.

Noncash items refer to: a. Accrued expenses. b. Inventory items purchased using credit. c. The ownership of intangible assets such as patents. d. Expenses which do not directly affect cash flows. e. Sales which are made using store credit.

d. Expenses which do not directly affect cash flows.

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes?I. Interest expense.II. Taxes.III. Cost of goods sold.IV. Depreciation. a. IV only. b. II and IV only. c. I and III only. d. I and IV only. e. I, II, and IV only.

d. I and IV only.

A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities? a. $2,050 b. $2,920 c. $4,130 d. $7,950 e. $6,890

e. $6,890 Current assets = $7,390 - 3,910 = $3,480Current liabilities = $3,480 - 560 = $2,920Total liabilities = $2,920 + 3,970 = $6,890

RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? a. $148,410 b. $68,320 c. $79,924 d. $81,417 e. $99,790

e. $99,790 Earnings before interest and taxes = $911,400 - 787,300 - 52,600 = $71,500Tax = $71,500 ×.34 = $24,310Operating cash flow = $71,500 + 52,600 - 24,310 = $99,790

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. a. Mean. b. Residual. c. Total. d. Average. e. Marginal.

e. Marginal.

Which one of the following will decrease the value of a firm's net working capital? a. Using cash to pay a supplier. b. Depreciating an asset. c. Collecting an accounts receivable. d. Purchasing inventory on credit. e. Selling inventory at a loss.

e. Selling inventory at a loss.