Chapter 2: Introduction to Financial Statement Analysis

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

The cash flow of a firm which 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.

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending? A. $33,763 B. $40,706 C. $58,218 D. $65,161 E. $67,408

A. $33,763

The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____. A. $4,600,000; $3,900,000 B. $4,600,000; $3,125,000 C. $5,000,000; $3,125,000 D. $5,000,000; $3,900,000 E. $6,500,000; $3,900,000

A. $4,600,000; $3,900,000

Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings? A. $76,320 B. $81,700 C. $95,200 D. $103,460 E. $121,680

A. $76,320

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? A. $8,080 B. $8,130 C. $8,155 D. $8,170 E. $8,190

A. $8,080

The 2008 balance sheet of Global Tours showed current assets of $1,360 and current liabilities of $940. The 2009 balance sheet showed current assets of $1,640 and current liabilities of $1,140. What was the change in net working capital for 2009? A. $80 B. $170 C. $190 D. $880 E. $920

A. $80

Adelson's Electric had beginning long-term debt of $42,511 and ending long-term debt of $48,919. The beginning and ending total debt balances were $84,652 and $78,613, respectively. The interest paid was $4,767. What is the amount of the cash flow to creditors? A. -$1,641 B. -$1,272 C. $1,272 D. $7,418 E. $11,175

A. -$1,641

Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate? A. 32.83 percent B. 33.33 percent C. 38.17 percent D. 43.39 percent E. 48.87 percent

A. 32.83 percent

Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months A. I and III only B. II and III only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

A. I and III only

A positive cash flow to stockholders indicates which one of the following with certainty? A. The dividends paid exceeded the net new equity raised. B. The amount of the sale of common stock exceeded the amount of dividends paid. C. No dividends were distributed but new shares of stock were sold. D. Both the cash flow to assets and the cash flow to creditors must be negative. E. Both the cash flow to assets and the cash flow to creditors must be positive.

A. The dividends paid exceeded the net new equity raised.

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase. A. depreciation B. net capital spending C. change in net working capital D. taxes E. production costs

A. depreciation

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

A. higher the probability that the firm will encounter financial distress.

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 which 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

Depreciation: A. reduces both taxes and net income. 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 which increases the net income. E. decreases net fixed assets, net income, and operating cash flows.

A. reduces both taxes and net income.

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? A. $589.46 B. $1,269.46 C. $1,331.54 D. $1,951.54 E. $1,949.46

B. $1,269.46

Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital? A. $25,300 B. $30,300 C. $75,600 D. $86,300 E. $111,500

B. $30,300

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital? A. -$100 B. $300 C. $600 D. $1,700 E. $1,800

B. $300

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? A. $710 B. $780 C. $990 D. $2,430 E. $2,640

B. $780

Jake owns The Corner Market which he is trying to sell so that he can retire and travel. The Corner Market 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 1.2 times its cost. Jake expects the store to collect 98 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 this firm? A. $857,634 B. $900,166 C. $919,000 D. $1,314,866 E. $1,333,700

B. $900,166

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? A. -$210 B. $990 C. $1,610 D. $1,910 E. $2,190

B. $990

The 2008 balance sheet of The Sports Store showed $800,000 in the common stock account and $6.7 million in the additional paid-in surplus account. The 2009 balance sheet showed $872,000 and $8 million in the same two accounts, respectively. The company paid out $600,000 in cash dividends during 2009. What is the cash flow to stockholders for 2009? A. -$1,372,000 B. -$772,000 C. -$628,000 D. $372,000 E. $1,972,000

B. -$772,000

Boyer Enterprises had $200,000 in 2008 taxable income. What is the firm's average tax rate based on the rates shown in the following table? A. 28.25 percent B. 30.63 percent C. 32.48 percent D. 36.50 percent E. 39.00 percent

B. 30.63 percent

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.

Which of the following are current assets? I. patent II. Inventory III. accounts payable IV. cash A. I and III only B. II and IV only C. I, II, and IV only D. I, II and III only E. II, III, and IV only

B. II and IV only

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 within the next year is considered liquid.

B. Liquid assets are valuable to a firm.

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.

Which one of the following costs is most apt to be a fixed cost? A. production labor cost B. depreciation C. raw materials D. utilities E. sales commissions

B. depreciation

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

Net capital spending: A. is equal to ending net fixed assets minus beginning net fixed assets. B. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. C. reflects the net changes in total assets over a stated period of time. D. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. E. is equal to the net change in the current accounts.

B. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

Dee Dee's Marina is obligated to pay its creditors $6,400 today. The firm's assets have a current market value of $5,900. What is the current market value of the shareholders' equity? A. -$600 B. -$500 C. $0 D. $500 E. $600

C. $0

The Blue Bonnet's 2008 balance sheet showed net fixed assets of $2.2 million, and the 2009 balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a depreciation expense of $900,000. What was the amount of the net capital spending for 2009? A. -$500,000 B. $400,000 C. $1,300,000 D. $1,700,000 E. $1,800,000

C. $1,300,000

Four years ago, Velvet Purses purchased a mailing machine at a cost of $176,000. This equipment is currently valued at $64,500 on today's balance sheet but could actually be sold for $58,900. This is the only fixed asset the firm owns. Net working capital is $57,200 and long-term debt is $111,300. What is the book value of shareholders' equity? A. $4,800 B. $7,700 C. $10,400 D. $222,600 E. $233,000

C. $10,400

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors? A. -$18,348 B. -$1,001 C. $11,129 D. $13,861 E. $19,172

C. $11,129

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

During 2009, RIT Corp. had sales of $565,600. Costs of goods sold, administrative and selling expenses, and depreciation expenses were $476,000, $58,800, and $58,800, respectively. In addition, the company had an interest expense of $112,000 and a tax rate of 32 percent. What is the operating cash flow for 2009? Ignore any tax loss carry-back or carry-forward provisions. A. $17,920 B. $21,840 C. $30,800 D. $52,600 E. $77,840

C. $30,800

Webster World has sales of $12,900, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 32 percent? A. $4,704 B. $5,749 C. $5,404 D. $7,036 E. $7,100

C. $5,404

The 2008 balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, and the 2009 balance sheet showed long-term debt of $2.3 million. The 2009 income statement showed an interest expense of $250,000. What was the cash flow to creditors for 2009? A. -$200,000 B. -$150,000 C. $50,000 D. $200,000 E. $450,000

C. $50,000

Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense? A. $4,820 B. $5,500 C. $7,000 D. $8,180 E. $9,500

C. $7,000

Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income? A. $42,750 B. $44,450 C. $82,550 D. $86,450 E. $124,550

C. $82,550

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $311,360? A. 28.25 percent B. 31.09 percent C. 33.62 percent D. 35.48 percent E. 39.00 percent

C. 33.62 percent

As of 2008, 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.

Which one of the following statements related to the cash flow to creditors is correct? A. If the cash flow to creditors is positive then the firm must have borrowed more money than it repaid. B. If the cash flow to creditors is negative then the firm must have a negative cash flow from assets. C. A positive cash flow to creditors represents a net cash outflow from the firm. D. A positive cash flow to creditors means that a firm has increased its long-term debt. E. If the cash flow to creditors is zero, then a firm has no long-term debt.

C. A positive cash flow to creditors represents a net cash outflow from the firm.

The common set of standards and procedures by which audited financial statements are prepared is known as the: A. matching principle. B. cash flow identity. C. Generally Accepted Accounting Principles. D. Financial Accounting Reporting Principles. E. Standard Accounting Value Guidelines.

C. Generally Accepted Accounting Principles.

Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital the greater 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.

Which one of the following accounts is the most liquid? A. inventory B. building C. accounts receivable D. equipment E. land

C. accounts receivable

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

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

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 must be a positive value. C. Total assets must increase if net working capital increases. D. A decrease in the cash balance also decreases net working capital. E. Net working capital is the amount of cash a firm currently has available for spending.

D. A decrease in the cash balance also decreases net working capital.

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. interest expense II. taxes III. costs 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? 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

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.

Which one of the following must be true if a firm had a negative cash flow from assets? A. The firm borrowed money. B. The firm acquired new fixed assets. C. The firm had a net loss for the period. D. The firm utilized outside funding. E. Newly issued shares of stock were sold.

D. The firm utilized outside funding.

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

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.

Cash flow from assets is also known as the firm's: A. capital structure. B. equity structure. C. hidden cash flow. D. free cash flow. E. historical cash flow.

D. free cash flow.

Which one of the following is NOT included in cash flow from assets? A. accounts payable B. inventory C. sales D. interest expense E. cash account

D. interest expense

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 is classified as an intangible fixed asset? A. accounts receivable B. production equipment C. building D. trademark E. inventory

D. trademark

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders? A. $5,100 B. $7,830 C. $18,020 D. $19,998 E. $20,680

E. $20,680

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital? A. -$19,679 B. -$11,503 C. -$9,387 D. $1,809 E. $21,903

E. $21,903

Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? A. $129,152 B. $171,852 C. $179,924 D. $281,417 E. $309,076

E. $309,076

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities? A. $2,050 B. $2,690 C. $4,130 D. $5,590 E. $5,860

E. $5,860

Which one of the following is true according to Generally Accepted Accounting Principles? A. Depreciation may or may not be recorded at management's discretion. B. Income is recorded based on the matching 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.

E. Costs of goods sold are recorded based on the matching principle.

Which of the following are included in the market value of a firm but 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

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 corporate tax structure in 2008, the highest marginal tax rate is equal to the highest average tax rate. E. The marginal tax rate for a firm can be either higher or lower than the average tax rate.

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

The cash flow related to interest payments less any net new borrowing is called the: A. operating cash flow. B. capital spending cash flow. C. net working capital. D. cash flow from assets. E. cash flow to creditors.

E. cash flow to creditors.

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 one of the following will increase the cash flow from assets, all else equal? A. decrease in cash flow to stockholders B. decrease in operating cash flow C. increase in the change in net working capital D. decrease in cash flow to creditors E. decrease in net capital spending

E. decrease in net capital spending

Cash flow to stockholders is defined as: A. the total amount of interest and dividends paid during the past year. B. the change in total equity over the past year. C. cash flow from assets plus the cash flow to creditors. D. operating cash flow minus the cash flow to creditors. E. dividend payments less net new equity raised.

E. dividend payments less net new equity raised.

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

Shareholders' equity: A. increases in value anytime total assets increases. B. is equal to total assets plus total liabilities. C. decreases whenever new shares of stock are issued. D. includes long-term debt, preferred stock, and common stock. E. represents the residual value of a firm.

E. represents the residual value of a firm.

Which one of the following will increase 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 profit

E. selling inventory at a profit