Chapter 2 Smart book Finance 3000 MU

A firm has gross profits of $3,200, depreciation of $300, dividends of $200, interest of $500, and addition to retained earnings of $400, What is the net income?

$600 Reason: Net income = Dividends paid + Addition to retained earnings = $200 + $400 = $600

Which one of these formulas best defines an average tax rate?

Average tax rate = Tax liability/Taxable income

How is gross profit defined?

Gross profit = Net sales - Cost of goods sold

Which of these reduce the taxable income of a corporation? Preferred stock dividends Interest expense Common stock dividends Interest expense and all dividends

Interest expense

Which of these assets are generally converted into cash within one year? Select all that apply. Patents and trademarks Inventory Equipment Accounts receivable

Inventory Accounts receivable

Which one of these questions can be answered by monitoring a firm's balance sheets? Market value of firm Level of net working capital Percentage increase in sales Change in profitability

Level of net working capital

Which type of depreciation offers the greatest tax deferral benefit in the early years of an asset's life?

MACRS depreciation

What is the definition of preferred stock?

Preferred stock is a hybrid security that has characteristics of both long-term debt and common stock.

What does a balance sheet do?

Reports a firm's assets, liabilities, and equity at a particular point in time

What is the definition of an average tax rate?

The average tax rate is the percentage of each dollar of taxable income that the firm pays in taxes.

John owed $10,000 in taxes on taxable income of $40,000. If John earns an additional $1,000, he will pay an additional $280. Therefore:

his average tax rate is about 25% Reason: His average tax rate after earning the additional $1,000 would be about 25% (($10,000+$280)/($40,000+$1,000)).

Les' Market has net sales of $1,300, depreciation of $100, cost of goods sold of $600, and other operating expenses of $200. What is the gross profit amount?

$700 Reason: Gross profit = Sales - Cost of goods sold = $1,300 - $600 = $700

A firm has sales of $8,900, depreciation of $200, cost of goods sold of $3,700, other operating expenses of $4,200, and interest of $600. What is the firm's EBIT?

$800 Reason: EBIT = Sales - Cost of goods sold - Depreciation - Other operating expenses = $8,900 - $3,700 -$200 -$4,200= $800

A current asset is an asset that does which one of the following?

A current asset provides liquidity and a low rate of return.

A change in financial leverage does which one of the following? An increase in financial leverage reduces a firm's total debt. An increase in financial leverage can decrease both a firm's profits and its losses. A decrease in financial leverage decreases the amount of a firm financed with equity. A decrease in financial leverage decreases the risks faced by the firm.

A decrease in financial leverage decreases the risks faced by the firm.

How is the fixed nature of an asset determined?

A fixed nature of an asset is determined by its useful life.

What is the definition of a marketable security?

A marketable security is a short-term, low-rate investment security.

If Mary owes the IRS $5,000 for her income taxes and is in the 15% marginal tax bracket, what would be her average tax rate if she had taxable income of $41,667?

About 12% Reason: Average rate is taxes owed divided by taxable income. Her average rate is $5,000/$41,667=12%

Which of one of these statements best illustrates the definition of a marginal tax rate? Fredrico paid no tax on his $16,400 income, or zero percent. Antonio will pay $0.28 more in taxes if his taxable income increases by $1, or 28 percent. Don paid $28,000 in taxes on his $100,000 income, or 28 percent. Suenette paid $13,400 in taxes on a taxable income of $52,000, or 25.8 percent.

Antonio will pay $0.28 more in taxes if his taxable income increases by $1, or 28 percent. Reason: The 28 percent is an average tax rate. The marginal tax rate is the percentage of the next dollar of taxable income that must be paid in tax.

Which one of these relationships regarding liquidity is correct? As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets increase. As the liquidity of assets increases, so does the firm's probability of experiencing financial distress. As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets decrease. As the liquidity of assets increases, so does the firm's profits on those assets.

As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets decrease.

Balance sheets list assets in declining order of liquidity. Which of these orders best illustrates this? Cash, accounts receivable, inventory, plant and equipment Accounts receivable, cash, inventory, plant and equipment Cash, inventory, accounts receivable, plant and equipment Cash, accounts receivable, plant and equipment, inventory

Cash, accounts receivable, inventory, plant and equipment

Which of these characteristics apply to a marketable security? Select all that apply. Convertible to cash within one year or less Provides a low rate of return Long-term in nature Classified as a fixed asset on the balance sheet

Convertible to cash within one year or less Provides a low rate of return

Which one of these formulas correctly computes the value of EBT?

EBT = Net income + Taxes

True or false: An increase in the financial leverage of a firm reduces both the firm's profits and its losses.

False Reason: An increase in the financial leverage of a firm magnifies both the firm's profits and its losses. In other words, profits get larger but losses also get larger.

True or false: All interest payments and dividends are deducted from operating income when the firm calculates taxable income.

False Reason: Only the allowable portion of interest and no dividends are deducted

How is financial leverage defined?

Financial leverage is the extent to which debt securities are used by a firm.

Gross profit is equal to net sales minus cost of goods sold. How else can gross profit be defined?

Gross profit = EBIT + Other operating expenses + Depreciation

Which of these statements regarding the federal taxation of interest income earned by a corporation is(are) correct? Select all that apply. Multiple select question. Interest earned on a bond issued by a state is taxable. Interest earned on a corporate bond is taxable. Interest earned on a bond issued by a city is tax-exempt. Interest earned on a U. S. Treasury bond is tax-exempt.

Interest earned on a corporate bond is taxable. Interest earned on a bond issued by a city is tax-exempt.

Which account is the least liquid of the current asset accounts?

Inventory

Which of these questions can be answered by monitoring a firm's balance sheets for last year and this year? Select all that apply. Did the firm earn more or less profit per dollar of sales than it did last year? Did the firm's taxes increase or decrease since last year? Is the firm more or less liquid than last year? Did the firm issue additional shares of stock this year?

Is the firm more or less liquid than last year? Did the firm issue additional shares of stock this year?

Which one of these is the best explanation of the market value per share (MVPS)? MVPS is the issue value of one share of common stock. MVPS is the price per share based on the latest balance sheet values. MVPS is the current price at which a share of common stock sells in the open market. MVPS is the stated value per share of preferred stock.

MVPS is the current price at which a share of common stock sells in the open market.

Which of the following calculations are made on the income statement? Earnings per share of common stock outstanding equals net income minus the number of shares of common stock outstanding. Gross profit minus selling, general, and administrative expenses equals income from operations. Income before income taxes minus income taxes equals net income. Income from operations minus interest expense equals income before taxes. Net sales minus the cost of goods sold equals gross profit. Gross profit minus the cost of goods sold equals income from operations.

Net sales minus the cost of goods sold equals gross profit. Gross profit minus the cost of goods sold equals income from operations. Income from operations minus interest expense equals income before taxes. Income before income taxes minus income taxes equals net income.

Which of these characteristics apply to the definition of preferred stock? Select all that apply. Increasing dividends Ownership interest in the firm Long-term debt on a balance sheet Fixed periodic payments

Ownership interest in the firm Fixed periodic payments

Which of these characteristics apply to a marketable security? Select all that apply. Provides a low rate of return Long-term in nature Classified as a fixed asset on the balance sheet Convertible to cash within one year or less

Provides a low rate of return Convertible to cash within one year or less

Which one of the following best illustrates a highly liquid asset? Sale of a $100 asset within the hour at a price of $85. Sale of a $100 asset today at a price of $90. Sale of a $100 asset by tomorrow at a price of $100. Sale of a $100 asset within 10 days at a price of $100.

Sale of a $100 asset by tomorrow at a price of $100.

Which one of these statements correctly applies to straight-line depreciation? Straight-line depreciation is most commonly used when computing a firm's taxes. Straight-line depreciation provides a greater tax deduction over the life of an asset than does MACRS depreciation. Straight-line depreciation decreases a firm's taxes more in the early years than does MACRS depreciation. Straight-line depreciation is commonly used when compiling financial statements.

Straight-line depreciation is commonly used when compiling financial statements.

D.O. Co. has a total of $6,500 in total assets and $4,200 in fixed assets on its balance sheet. The fixed assets were just appraised at $4,700. The firm feels it can liquidate its current assets for 96 percent of their book value. What is the book and market value of the firm's assets? The book value is $10,700 and the market value is $11,200. The book value is $6,500 and the market value is $7,000. The book value is $6,500 and the market value is $6,908. The book value is $10,700 and the market value is $10,940.

The book value is $6,500 and the market value is $6,908. Reason: Book value = $6,500 Market value = 0.96($6,500 - $4,200) + $4,700 + $6,908

Which statement correctly defines the book value of a firm's assets as shown in the gross plant and equipment account? The book value of a firm's assets in the gross plant and equipment account is the total amount the firm paid for those assets. The book value of a firm's assets is equal to the cost of the current assets plus the current sales value of the fixed assets. The book value of a firm's assets is defined as the original cost of those assets less any debt related to the asset purchases. The book value of a firm's assets is defined as the value the firm would receive if all the assets were to be sold within one day.

The book value of a firm's assets in the gross plant and equipment account is the total amount the firm paid for those assets.

How is the book value of land defined?

The book value of land is the lower of its original cost or its current sales value.

Which one of these comparisons fits the definition of capital structure? The capital structure of a firm compares the total debt to the total equity. The capital structure of a firm compares the firm's debts to its assets. The capital structure of a firm compares the types of assets owned to those owned by other firms. The capital structure of a firm compares its sales to its profits.

The capital structure of a firm compares the total debt to the total equity.

Which relationship of liquidity is correct? The liquidity of an asset is inversely related to the profitability of that asset. The liquidity of an asset is unrelated to the profitability of that asset. The liquidity of an asset is directly related to the profitability of that asset.

The liquidity of an asset is inversely related to the profitability of that asset.

What is the definition of a marginal tax rate?

The marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.

True or false: Both common stock and paid in surplus represent a fundamental ownership claim in either a private or a public company.

True Reason: Both common stock and paid-in surplus represent the fundamental ownership claim in a public or private company.