Finance 303 Ch. 2

Financial leverage

increases the potential return to the stockholders.

Net working capital increases when

inventory is sold at a profit.

Cash flow to creditors increases when

long-term debt is repaid.

Given a profitable firm, depreciation:

lowers taxes.

Shareholders' equity is best defined as

the residual value of a firm.

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?

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

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?

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

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?

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

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?

$70,200 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?

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

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?

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

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

An increase in depreciation

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

Average tax rate

Which one of the following is an intangible fixed asset?

Copyright

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

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.

Which one of these is correct?

Net income is distributed either to dividends or retained earnings.

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?

Noncash item

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 assets

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

Reputation of the firm

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.

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

balance sheet.

Highly liquid assets

can be sold quickly at close to full value.

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

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

dividends exceed net income for a period.

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised.

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation.

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.

An income statement prepared according to GAAP

records expenses based on the matching principle.

Operating cash flow is defined as:

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

The matching principle states that:

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

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.

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

may be continually increasing in size.

The market value

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

Cash flow from assets is defined as:

operating cash flow minus the change in net working capital minus net capital spending

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?

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

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?

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

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?

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

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

$209,925.86 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

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?

$227,560 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

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?

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

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?

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

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?

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

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?

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

The Plaza Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes paid of $21,590. A partial listing of its balance sheet accounts is as follows: What is the amount of the cash flow from assets?

$47,949 Cash flow from assets = $83,770- ($597,913-599,608 + 43,514) - [($129,204-139,827) - ($138,590-143,215)] = $47,949

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?

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

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?

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

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?

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

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?

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

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?

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

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?

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

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?

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

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?

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

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?

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

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?

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

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

income statement.

Net working capital is defined as

current assets minus current liabilities.