Chapter 2 Smartbook Questions -- Finance

Company A has depreciation of $50,000 and earnings after taxes of $210,000. Company B has no depreciation and earnings after taxes of $240,000. Company A enjoys a higher level of cash flows from operations than company B by the amount of Blank______. Multiple choice question. $20,000 $30,000 $50,000 $260,000

$20,000

If the firm has depreciation expense of $75,000 and a net loss of $50,000, what is the amount of cash flow for the period? Multiple choice question. $0 $25,000 $100,000 $125,000

$25,000

The company has a price-earnings ratio of 15 times and earnings per share were $3. What is the market value of each share of stock? Multiple choice question. $45 $5 $3 $15

$45

The beginning balance in a firm's cash account is $20,000 and the ending balance is $5,000. So, the net change in cash flows is: Multiple choice question. +$15,000 ($5,000) ($15,000) +$5,000

($15,000)

Beginning in 2018, one of the major changes is the reduction of the corporate tax rate from as high as 35 percent to a flat rate of Blank______ percent. Multiple choice question. 25 40 21 30

21

A company has $80,000 in depreciation expense and a tax rate of 35%. The amount of the tax shield benefit is

Tax Shield Benefit = Depreciation Expense × Tax Rate Tax Shield Benefit = $80,000 × 0.35 Tax Shield Benefit = $28,000 So, the tax shield benefit is $28,000.

An example of a limitation of the income statement is when an increase in the value of an asset is not reflected in the income statement. TrueFalse

True

Free cash flow is the balance available for special financing activities. True false question.

True

Which of the following questions can be answered by examining a firm's balance sheet? Multiple choice question. How much did the firm earn? What is the worth of the firm? What amount of overhead expenses were incurred by the firm? How much interest did the firm pay?

What is the worth of the firm?

Current assets include of the following except Multiple choice question. marketable securities accounts receivable accounts payable inventory

accounts payable

A disadvantage of the Blank______ method of accounting is that attention is not given to the actual cash flow position of the firm. Multiple choice question. cash accrual

accrual

The income statement and the balance sheet use the Blank______ method of accounting. Multiple choice question. economic cash basis non-traditional accrual

accrual

The book value of an asset is measured by its original value minus Multiple choice question. depreciation expense. net present value. accumulated depreciation. book value.

accumulated depreciation.

Depreciation is Blank______ to net income (or loss) to determine cash flow. Multiple choice question. not added back or deducted from deducted from added back

added back

The ability to match revenues and expenses in the period in which they occur in order to appropriately measure profit is a primary Blank______ of the accrual method of accounting. Multiple choice question. disadvantage advantage

advantage

The balance sheet provides a detail of the firm's Blank______ as of one day in time. Multiple choice question. assets, liabilities, and equity changes in retained earnings revenues and expenses operating activities, investing activities, and financing activities

assets, liabilities, and equity

Which of the following entities would normally look at free cash flows to determine whether there are sufficient excess funds to pay back a loan associated with a leveraged buyout. Multiple select question. government agencies customers bankers analysts

bankers analysts

The statement of cash flows accounts for changes in the firm's Blank______. Multiple choice question. long and short-term debt current assets and current liabilities equity cash and cash equivalent items

cash and cash equivalent items

The sum of operating, investing, and financing activities represents the net increase or decrease in _______, ________for the company. (Enter one word per blank.)

cash flow

Classifying items on the balance sheet on a historical or original cost may be problematic because it may not reflect the Blank______ value of the item. Multiple choice question. combined prior future current

current

The current year's depreciation expense charge is referred to as: Multiple choice question. depreciation expense book value net present value accumulated depreciation

depreciation expense

Which of the following are current liabilities? Multiple select question. Accounts payable Bonds payable in five years Investments Accrued expenses

Accounts payable Accrued expenses

A financial statement that measures a firm's worth as of one day in time. Multiple choice question. Balance sheet Income statement Statement of retained earnings Statement of cash flows

Balance sheet

Items that would fall in the investing activities section of the statement of cash flows include: Multiple select question. Sale of the firm's common stock Bonds purchased from other companies Stocks purchased from other companies Sale of the firm's preferred stock Payoff of firm's own bonds Payment of a cash dividend Purchases of plant and equipment

Bonds purchased from other companies Stocks purchased from other companies Purchases of plant and equipment

Before issuing new shares of stock, the financial manager must ensure that the additional shares will generate sufficient earnings to avoid a reduction in which of the following? Multiple choice question. Liquidity Depreciation Dividends paid to preferred stockholders EPS

EPS

Which of the following processes can give the appearance of an increasing P/E ratio of a firm under adversity? Multiple choice question. Earnings of a firm are falling more rapidly more as compared to the stock price Stock price of a firm is dropping more rapidly as compared to the earnings of the firm Earnings of a firm are falling at the same pace as the stock price

Earnings of a firm are falling more rapidly more as compared to the stock price

True or false: The U.S. accounting community is moving away from International Financial Reporting Standards (IFRS). True false question.

False

Match the account on the left with its definition on the right. Instructions

Marketable security A temporary investment of excess cash Accounts receivable Includes an allowance for bad debts to determine their collection value. Inventory Finished goods, goods in process, or raw materials. Prepaid expenses Future expense items that are already paid for.

A measure of how efficient management is in generating revenues and controlling expenses. Multiple choice question. Earnings after taxes Operating profit Gross profit Earnings before taxes

Operating profit

Items that would fall in the financing activities section of the statement of cash flows include: Multiple select question. Purchase of plant and equipment Sale of another firm's bonds Purchase of another firm's stock Payment of cash dividends Retirement of the firm's bonds Sale of the firm's stock

Payment of cash dividends Retirement of the firm's bonds Sale of the firm's stock

The multiplier applied to earnings per share to determine current value of the common stock. Multiple choice question. Price-earnings ratio Liquidity ratio Return on capital Earnings per share

Price-earnings ratio

Total assets are financed through Multiple select question. accumulated depreciation stockholders' equity liabilities accounts receivable

stockholders' equity liabilities

A limitation of the income statement is the flexibility in the reporting of transactions. For example, a company can choose to value inventory using FIFO, LIFO, or the weighted average. Therefore, similar events may result in Multiple choice question. insider trading differing measurements of leverage differing turnover ratios differing measurements of income

differing measurements of income

Which of the following is determined by subtracting selling and administrative expenses and depreciation expense from the gross profit in the income statement of a company? Multiple choice question. earnings after interest and taxes. earnings before taxes. gross profit. earnings before interest and taxes.

earnings before interest and taxes.

The repurchase or retirement of the firm's securities represents a use of funds in determining cash flows from _________activities.

financing

Which of the following sections are included in the statement of cash flows Multiple select question. financing activities historical activities investing activities operating activities

financing activities investing activities operating activities

After the new tax law was enacted in December 2017, the corporate tax rate changed to a Blank______ rate, meaning all income levels were taxed at the same rate irrespective of the income levels. Multiple choice question. progressive regressive flat average

flat

The difference between the cost of purchased or manufactured goods and the revenue generated by such costs is called Multiple choice question. earnings before taxes earnings before interest and taxes gross profit operating profit

gross profit

Depreciation is a non-cash expense that shields some of a firm's Blank______ from taxes. Multiple choice question. income dividends liabilities expenses

income

The two major categories of accrued expenses for most firms are: Multiple select question. notes payable. income taxes payable. bonds payable. wages payable.

income taxes payable. wages payable.

When a firm's earnings are dropping rapidly, its stock price, though declining too, may not match the magnitude of the falloff in earnings. This process can give the appearance of an ______ P/E ratio under adversity. Multiple choice question. increasing decreasing

increasing

Short and long-term financial obligations of the firm are referred to as

liabilities

Asset accounts are listed on the balance sheet in order of . (Enter one word per blank.)

liquidity

While the income statement purports to show the profitability of the firm, the balance sheet delineates the firm's Multiple select question. obligations holdings net cash flows from investing activities net cash flows from financing activities

obligations holdings

The statement of cash flows provides a detail of the firm's Blank______ over a period of time. Multiple choice question. revenues and expenses assets, liabilities, and equity changes in retained earnings and shareholders equity operating activities, investing activities, and financing activities

operating activities, investing activities, and financing activities

Gross profit is equal to Multiple choice question. sales minus operating profit sales minus selling and administrative expenses sales minus cost of goods sold, operating profit, and interest and taxes sales minus cost of goods sold

sales minus cost of goods sold

The sale of investments represents a Blank______ of funds in determining cash flows from investing activities. Multiple choice question. source use

source

The sale of the firm's securities represents a (use or source) of funds in determining cash flows from financing activities.

source

The financial statement that emphasizes a firm's inflows and outflows of cash over a period of time is the Blank______. Multiple choice question. statement of cash flows balance sheet statement of retained earnings income statement

statement of cash flows

Common stockholders are sensitive to the number of shares outstanding because the greater the shares outstanding Multiple choice question. the lower the dividends available to preferred stockholders the lower the earnings per share the higher the earnings per share the higher the dividends available to preferred stockholders

the lower the earnings per share

The accrual method of accounting records revenues and expenses when Multiple choice question. they occur as long as they financed with credit. they occur. cash actually changes hands. management determines the time is right.

they occur.