Chapter 2 SmartBook Summer 2024 FIN 215 - V1 Financial Management

As of January 1, 2014, the company has $300,000 in retained earnings. During the year the company had earnings/net income of $150,000 and paid cash dividends of $50,000. What is the amount of retained earnings as of December 31, 2014?

$300,000-$50,000=250,000 $250,000+$150,000=400,000 $400,000

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

(False)

True or false: Investments made for more than a year are current assets.

(False) Reason: Investments made for more than a year are long-term assets, not current assets

The two major categories of accrued expenses for most firms are:

-income taxes payable -wages payable

Property, plant and equipment includes

-land -equipment -buildings

Total assets are financed through

-liabilities -stockholders' equity

Which of the following sections are included in the statement of cash flows

-operating activities -financing activities -investing activities

Which of the following represents an attempt to allocate the initial cost of an asset over its useful life.

Depreciation

A measure of the earnings available to common stockholders per share of stock owned.

Earnings per share

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

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.

Depreciation is a non-cash expense that is deducted from revenues to arrive at net income; therefore, it must be ______ net income to determine the actual amount of funds on hand.

added to

Firms expected to provide returns greater than those for the market, with equal or less risk, often have P/E ratios that are ______ the market P/E ratio.

higher than

Depreciation is purely an accounting entry that does not directly involve the movement of funds. It is an attempt to match the annual expenses of plant and equipment ownership against the ______ being produced.

revenues

The income statement provides a detail of the firm's ______ over a period of time.

revenues and expenses

Gross profit is equal to

sales minus cost of goods sold

Depreciation is considered to be a ______ of funds

source

The sale of investments represents a ______ of funds in determining cash flows from investing activities.

source

Using the following information, determine the cash flow from operating activities. Net income is $75,000 and depreciation expense for the year is $50,000. (Enter the nearest whole number and include the dollar sign and comma(s), as appropriate) Account Year-end 2013 Year-end 2014 Cash $20,000 $40,000 Accounts receivable (net) $150,000 $180,000 Inventory $180,000 $160,000 Accounts payable $30,000 $20,000 Salaries payable $5,000 $0 Notes payable (current) $10,000 $15,000 Bonds payable $50,000 $60,000 The cash flow from operating activities is

$105,000

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 ______.

$20,000 Reason: $210,000 + $50,000 = $260,000 $260,000 vs. $240,000 $20,000

A firm has earnings after taxes of $200,000, depreciation expense of $50,000, accounts receivable increased by $25,000, inventory increased by $10,000, accounts payable increased by $15,000, and accrued expenses decreased by $5,000. The firm's cash flow from operating activities is

$225,000 Net Earnings $200000 (+/- ) to reconcile net earnings to net cash flow provided by operating activities Depreciation Expense $50000 Increase in accounts receivable -$25000 Increase in Inventory -$10000 Increase in accounts payable $15000 Decrease in accrued expenses -$5000 Net Cash provided by ( used in ) operating activites $225,000

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?

$25,000 Reason: Net loss of -$50K + noncash depreciation expense of $75K = cash flow = $25K

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

$28,000 (80,000) * (.35) = 28000

Given the following information, the company's free cash flow is _________________ (Enter the dollar sign and commas, as appropriate). Cash flows from operating activities $1,000 Capital expenditures required $600 Dividends required $100

$300 1000-600-100=300

A building cost the firm $500,000, has a fair value of $800,000, and accumulated depreciation of $200,000. The book value of the building is

$300,000

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?

$45

The firm has total assets of $2,500,000, total liabilities of $1,500,000, preferred stock obligation of $75,000, and 100,000 shares of common stock outstanding. What is the firm's book value (or net worth) per share? (Enter the dollar sign and commas, as appropriate)

$9.25 Reason: Shareholders' equity = $1.0M = $2.5M - $1.5M. Common stockholders' equity = $925K = $1.0M - $75K BV/sh $9.25/sh = $925K/100K sh

A company sells 500 shirts at a price of $15 each with a cost of goods sold of $2 per shirt. The company has selling and administrative expenses of $2,500, depreciation expenses of $500, interest expenses of $1,000, and a tax rate of 35%. Calculate the EAT?

($1,625) Reason: GP @ $6,500 =(500 X (15 - 2)) : Less Operating Expenses @ $3,000 = 2,500 + 500; EBIT = $3,500; Less Int @ $1,000; EBT = $2,500; Less Taxes @ $875; EAT = $1,625

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:

($15,000) Reason: The cash account has decreased by $15K from $20K to $5K.

The free cash flow calculation should deduct all capital expenditures incurred by the firm. T or F

(False)

The potential impact of federal income taxes should not be an issue considered in financial decisions due to their volatile nature. T or F

(False)

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. T or F

(True)

True or false: Cash flows that result from debt and equity financing transactions are cash flows from financing activities.

(True)

True or false: Expectations of returns and P/E ratios change over time. True false question.

(True)

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

(True) Reason: One application of special financing activities is the funding of leveraged buyouts.

Given the following information, XYZ Corporation's cash flow from investing activities is equal to negative ___________ (Enter the dollar sign and commas, as appropriate)? Equipment was sold for $50,000; investments in ABC Corporation's stocks, purchased for $125,000 one year ago, were sold for $150,000; land costing $500,000 was purchased for speculative purposes; bonds in XYZ Corporation were sold for $200,000.

-$300,000, or ($300,000)

Which of the following are current liabilities?

-Accounts payable -Accrued expenses

Which of the following would be classified as an investment?

-Common stocks in other corporations -Bonds in other corporations

Which of the following are examples of primary financial decisions that would be likely to be influenced by income tax considerations?

-Decisions on whether to replace assets. -Lease verses purchase decisions. -Issuance of common stock verses debt decisions.

Which of the following items are included in total stockholders' equity?

-Par value of the outstanding common stock. -Retained earnings -Capital paid in excess of par

Items that would fall in the investing activities section of the statement of cash flows include:

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

Which of the following factors influence the price-earnings (P/E) ratio?

-Quality of management -Volatility in performance -Earnings and sales growth

Items that would fall in the financing activities section of the statement of cash flows include:

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

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.

-bankers -analysts

In the statement of cash flows, cash flows from financing activities include which of the following?

-cash paid to purchase treasury stock -proceeds from short-term borrowings -cash paid in dividends to stockholders -cash received from the sale of stock to stockholders

The P/E ratio can be used by the investor to

-compare relative market values of companies -indicate expectations about the future of a company

While the income statement purports to show the profitability of the firm, the balance sheet delineates the firm's

-holdings -obligations

The firm has a tax rate of 40% and interest expense of $200,000. The after-tax cost of the interest is _________________ (Enter the dollar sign and commas, as appropriate)

200,000 * .40 = 80,000 200,000 - 80,000 = 120,000 $120,000.

A company's earnings after taxes are $200,000 and the firm pays preferred stockholders $18,000 in dividends. The company has 91,000 shares of common stock outstanding. Earnings per share is equal to_________ dollars. (Round to the nearest whole number and do not include

200,000 - 18,000 = 182,000 182,000 / 91,000 = 2 $2 dollars per share

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

21

As of January 1, 2014, the company has $500,000 in retained earnings. During the year the company had a net loss of $50,000 and paid cash dividends of $100,000. What is the amount of retained earnings as of December 31, 2014?

500,000-50,000 450,000-100,000 $350,000

Which of the following is correct for net worth?

Assets minus debt and preferred stock obligation

A financial statement that measures a firm's worth as of one day in time.

Balance sheet

Which method(s) translates income from operations from an accrual to cash basis?

Both the direct and indirect methods

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

Reinvested funds, also known as retained earnings, belong to whom?

Common stockholders

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?

EPS

Which of the following processes can give the appearance of an increasing P/E ratio of a firm under adversity?

Earnings of a firm are falling more rapidly more as compared to the stock price Reason: When a firm's earnings are dropping rapidly or perhaps even approaching zero, its stock price, though declining too, may not match the magnitude of the falloff in earnings. This process can give the appearance of an increasing P/E ratio under adversity.

______ is defined by economists as the change in real worth that occurs between the beginning and the end of a specified period of time.

Income

A financial statement that measures a firm's profitability over a period of time.

Income statement

What impact would a net loss have on a firm's retained earnings.

It would decrease retained earnings

What impact would the payment of a cash dividend have on a firm's retained earnings? Assume that the cash dividends are paid out of the existing balance of retained earnings.

It would decrease retained earnings

Tax deductible expenses, such as interest, end up costing the business substantially (more or less) ______ than the amount expended on an after-tax basis.

Less

measure of how efficient management is in generating revenues and controlling expenses.

Operating profit

The multiplier applied to earnings per share to determine current value of the common stock.

Price-earnings ratio

Identify the steps in the order necessary to compute net cash flow from operating activities using the indirect method. step 1- step 5

Step 1= Net Income step 2= Add back depreciation step 3= Subtract increases in current assets and add decreases in current assets step 4= Add increase in current liabilities and subtract decreases in current liabilities step 5= Net cash flow from operating activities

The total contribution and ownership interest of preferred and common stockholders is referred to as which of the following?

Stockholders' equity

Which of the following questions can be answered by examining a firm's balance sheet?

What is the worth of the firm?

A disadvantage of the ______ method of accounting is that attention is not given to the actual cash flow position of the firm.

accrual

The income statement and the balance sheet use the ______ method of accounting.

accrual

The ability to match revenues and expenses in the period in which they occur in order to appropriately measure profit is a primary _____ of the accrual method of accounting.

advantage

The balance sheet provides a detail of the firm's ______ as of one day in time.

assets, liabilities, and equity

The statement of cash flows accounts for changes in the firm's Blank______.

cash and cash equivalent items

Classifying items on the balance sheet on a historical or original cost may be problematic because it may not reflect the ______ value of the item.

current

The current year's depreciation expense charge is referred to as:

depreciation expense

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

differing measurements of income

Profits reinvested into the firm theoretically belong to the stockholders, who hope is that they will provide future

earnings and dividends

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?

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 or financial

After the new tax law was enacted in December 2017, the corporate tax rate changed to a ______ rate, meaning all income levels were taxed at the same rate irrespective of the income levels.

flat

The difference between the cost of purchased or manufactured goods and the revenue generated by such costs is called

gross profit

Earnings before taxes (EBT) is equal to

gross profit minus operating expenses and interest expense

Depreciation is a non-cash expense that shields some of a firm's ______ from taxes.

income

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.

increasing

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

liabilities or liability

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

liquidity The relative convertibility of short-term assets to cash. Thus, marketable securities are highly liquid assets, while inventory may not be.

The XYZ Corporation purchased plant and equipment of $200,000 and sold its long-term investment in ABS Corporation's bonds for $100,000. What is the firm's cash flows from investing activities?

negative $100,000 Reason: $100,000 cash inflow from the sale of the bond investment - $200,000 cash outflow from the purchase of plant and equipment = negative $100,000

Depreciation is considered to be a ______ deduction or expenditure.

noncash

In the indirect method, depreciation is added back to net income in order to determine net cash flow from operating activities because depreciation is a ______________ expense.

noncash or non-cash

The statement of cash flows provides a detail of the firm's

operating activities, investing activities, and financing activities

The debt-equity structure of the firm, the dividend payment policy, the quality of management, and the earnings and sales growth of the firm are a few of the factors that influence the

price-earnings ratio.

The financial statement that emphasizes a firm's inflows and outflows of cash over a period of time is the

statement of cash flows

The accrual method of accounting records revenues and expenses when

they occur.

A company's profit can be

used to pay dividends retained for subsequent investments used to purchase an acquisition

Accounting income is a function of

verifiable transactions