FIN 3403- Chapter 2

24. The higher the degree of financial leverage employed by a firm is, the: A. Higher is the probability that the firm will encounter financial distress. B. Lower is the amount of debt incurred. C. Less debt a firm has per dollar of total assets. D. Higher is the number of outstanding shares of stock. E. Lower is the balance in accounts payable.

A. Higher is the probability that the firm will encounter financial distress.

4. 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.

Depreciation for a tax-paying firm: A. Increases expenses and lowers taxes. B. Increases the net fixed assets as shown on the balance sheet. C. Reduces both the net fixed assets and the costs of a firm. D. Is a noncash expense that increases the net income. E. Decreases net fixed assets, net income, and operating cash flows.

A. Increases expenses and lowers taxes.

Which one of the following statements is correct concerning a corporation with taxable income of $125,000? A. Net income minus dividends paid will equal the ending retained earnings for the year. B. An increase in depreciation will increase the operating cash flow. C. Net income divided by the number of shares outstanding will equal the dividends per share. D. Interest paid will be included in both net income and operating cash flow. E. An increase in the tax rate will increase both net income and operating cash flow.

B. An increase in depreciation will increase the operating cash flow.

25. The book value of a firm is: A. Equivalent to the firm's market value provided that the firm has some fixed assets. B. Based on historical cost. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation. E. Adjusted to the market value whenever the market value exceeds the stated book value.

B. Based on historical cost.

15. Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Real estate investment. B. Good reputation of the company. C. Equipment owned by the firm. D. Money due from a customer. E. An item held by the firm for future sale.

B. Good reputation of the company.

14. Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable A. II and III only. B. I and III only. C. I, II, and IV only. D. I, II, and IV only. E. II, III, and IV only.

B. I and III only.

16. Which of the following are included in current liabilities? I. Note payable to a supplier in 13 months II. Amount due from a customer last week. III. Account payable to a supplier that is due next week. IV. Loan payable to the bank in 10 months. A. I and III only. B. III and IV only. C. I, II, and III only. D. I, III, and IV only. E. I, II, III, and IV.

B. III and IV only.

Which one of the following is true according to generally accepted accounting principles? A. Depreciation is recorded based on the market value principle. B. Income is recorded based on the realization principle. C. Costs are recorded based on the realization principle. D. Depreciation is recorded based on the recognition principle. E. Costs of goods sold are recorded based on the matching principle.

B. Income is recorded based on the realization principle.

22. Which one of the following statements related to liquidity is correct? A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold is considered liquid.

B. Liquid assets are valuable to a firm

13. Which one of the following is classified as a tangible fixed asset? A. Accounts receivable. B. Production equipment. C. Cash. D. Patent. E. Inventory.

B. Production equipment.

As of 2015, which one of the following statements concerning corporate income taxes is correct? A. The largest corporations have an average tax rate of 39 percent. B. The lowest marginal rate is 25 percent. C. A firm's tax is computed on an incremental basis. D. A firm's marginal tax rate will generally be lower than its average tax rate once the firm's income exceeds $50,000. E. When analyzing a new project, the average tax rate should be used.

C. A firm's tax is computed on an incremental basis.

20. Which one of the following accounts is the most liquid? A. Inventory. B. Building. C. Accounts Receivable. D. Equipment. E. Land.

C. Accounts Receivable.

1. 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.

3. Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared? A. The Matching Principle. B. The Cash Flow Identity. C. Generally Accepted Accounting Principles. D. Financial Accounting Reporting Principles E. Standard Accounting Value Guidelines.

C. Generally Accepted Accounting Principles.

19. Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital is, the greater is the ability of a firm to meet its current obligations. B. An increase in net working capital must also increase current assets. C. Net working capital increases when inventory is sold for cash at a profit. D. Firms with equal amounts of net working capital are also equally liquid. E. Net working capital is a part of the operating cash flow.

C. Net working capital increases when inventory is sold for cash at a profit.

Which one of the following statements related to an income statement is correct? Assume accrual accounting is used. A. The addition to retained earnings is equal to net income plus dividends paid. B. Credit sales are recorded on the income statement when the cash from the sale is collected. C. The labor costs for producing a product are expensed when the product is sold. D. Interest is a non-cash expense. E. Depreciation increases the marginal tax rate.

C. The labor costs for producing a product are expensed when the product is sold.

21. Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today. B. $100 of inventory which is sold today on credit for $103. C. $100 of inventory which is discounted and sold for $97 cash today. D. $100 of inventory that is sold today for $100 cash. E. $100 accounts receivable that will be collected in full next week.

D. $100 of inventory that is sold today for $100 cash.

7. The _____ tax rate is equal to total taxes divided by total taxable income. A. Deductible. B. Residual C. Total. D. Average. E. Marginal.

D. Average.

You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value? A. A sudden and unexpected increase in inflation. B. The replacement of old inventory items with more desirable products. C. Improvements to the surrounding area by other store owners. D. Construction of a new restricted access highway located between the store and the surrounding residential areas. E. Addition of a stop light at the main entrance to the store's parking lot.

D. Construction of a new restricted access highway located between the store and the surrounding residential areas.

5. 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.

An increase in the depreciation expense will do which of the following for a firm with taxable income of $80,000? I. Increase net income. II. Decrease net income. III. Increase the cash flow from assets. IV. Decrease the cash flow from assets. A. I only. B. II only. C. I and III only. D. II and III only. E. II and IV only.

D. II and III only.

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

D. Net working capital may be a negative value.

Which one of these is most apt to be a fixed cost? A. Raw materials. B. Manufacturing wages. C. Management bonuses. D. Office salaries. E. Shipping and freight.

D. Office salaries.

Which one of the following statements related to an income statement is correct? A. Interest expense increases the amount of tax due. B. Depreciation does not affect taxes since it is a non-cash expense. C. Net income is distributed to dividends and paid-in surplus. D. Taxes reduce both net income and operating cash flow. E. Interest expense is included in operating cash flow.

D. Taxes reduce both net income and operating cash flow.

2. Net working capital is defined as: A. Total liabilities minus shareholders' equity. B. Current liabilities minus shareholders' equity. C. Fixed assets minus long-term liabilities. D. Total assets minus total liabilities. E. Current assets minus current liabilities.

E. Current assets minus current liabilities.

Which of the following is (are) included in the market value of a firm but is (are) excluded from the firm's book value? I. Value of management skills. II. Value of a copyright. III. Value of the firm's reputation. IV. Value of employee's experience. A. I only. B. II only. C. III and IV only. D. I, II, and III only. E. I, III, and IV only.

E. I, III, and IV only.

6. 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.

23. Shareholders' equity: A. Is referred to as a firm's financial leverage. B. Is equal to total assets plus total liabilities. C. Decreases whenever new shares of stock are issued. D. Includes patents, preferred stock, and common stock. E. Represents the residual value of a firm.

E. Represents the residual value of a firm

17. 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.

Which one of the following statements related to taxes is correct? A. The marginal tax rate must be equal to or lower than the average tax rate for a firm. B. The tax for a firm is computed by multiplying the firm's current marginal tax rate times the taxable income. C. Additional income is taxed at a firm's average tax rate. D. Given the tax structure in 2014, the highest average corporate tax rate is 34 percent. E. The marginal tax rate for a firm can be either higher than or the same as the average tax rate.

E. The marginal tax rate for a firm can be either higher than or the same as the average tax rate.