FIN 310 Chapter 2 HW Questions

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity. Net working capital is equal total assets minus total liabilities. Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt.

Assets are listed in descending order of liquidity.

Which one of the following relates to a negative change in net working capital? Increase in the inventory level Sale of net fixed assets Purchase of net fixed assets Increase in current assets and decrease in current liabilities for the period Increase in current liabilities with no change in current assets for the period

Increase in current liabilities with no change in current assets for the period

Which one of the following will increase cash flow from assets but not affect the operating cash flow?

Sale of a fixed asset

Rondo, Inc., has current assets of 1,664, net fixed assets of 9500, current liabilities of 1360, and LT of debt of 4000. What is its Net Working Capital balance?

304

Which one of the following terms is defined as the total tax paid divided by the total taxable income? Average tax rate Variable tax rate Marginal tax rate Absolute tax rate Contingent tax rate

Average tax rate

Firms that compile financial statements according to GAAP: Record income and expenses at the time they affect the firm's cash flows. Have no discretion over the timing of recording either revenue or expense items. Must record all expenses when incurred. Can still manipulate their earnings to some degree. Record both income and expenses as soon as the amount for each can be ascertained.

Can still manipulate their earnings to some degree.

Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

Marginal tax rate

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

Cash Flow from Assets

Total cash flow to creditors and cash flow to stockholders, consisting of the following: Operating cash flow, capital spending, and change in net working capital.

If a firm has a negative cash flow from assets every year for several years, the firm: may be continually increasing in size. must also have a negative cash flow from operations each year. is operating at a high level of efficiency. is repaying debt every year. has annual net losses.

may be continually increasing in size.

Andersen's Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 34 percent. The firm paid out $16,500 in dividends. What is the addition to retained earnings?

Addition to retained earnings = [($318,400 - $199,400 - $28,600 - $1,100)(1 - 0.34)] - $16,500 = $42,438

Which one of the following statements concerning the balance sheet is correct? Total assets equal total liabilities minus total equity. Net working capital is equal total assets minus total liabilities. Assets are listed in descending order of liquidity. Current assets are equal to total assets minus net working capital. Shareholders' equity is equal to net working capital minus net fixed assets plus long-term debt

Assets are listed in descending order of liquidity.

Daniel's Market has sales of $36,600, costs of $28,400, depreciation expense of $3,100, and interest expense of $1,500. If the tax rate is 34 percent, what is the operating cash flow, OCF?

EBIT = $36,600 - $28,400 - $3,100 = $5,100 Tax = ($5,100 - $1,500) × 0.34 = $1,224 OCF = $5,100 + $3,100 - $1,224 = $6,976

Formula to memorize: Free Cash Flow (FCF)

FCF = (EBIT-Taxes + Deprecitation) - CapEx - Change in NWC

Arredondo, Inc., has current assets of 2,033, net fixed assets of 9500, current liabilities of 1360, and LT of debt of 4000. What is the value of the shareholders' equity account for this firm?

6,173

Roscoe's purchased new machinery three years ago for $1.8 million. The machinery can be sold to Stewart's today for $1.2 million. Roscoe's current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm's assets today is _____ and the market value is _____.

Book value = $960,000 + $348,000 + $121,000 = $1,429,000 Market value = $1,200,000 + $518,000 = $1,718,000

Operating Cash Flow

Cash generated from a firm's normal business activities. Revenues - costs. DONT include depreciation and interests. Negative is bad sign

The Play House's December 31, 2009 balance sheet showed net fixed assets of $1,238,000 and the December 31, 2010 balance sheet showed net fixed assets of $1,416,000. The company's 2010 income statement showed a depreciation expense of $214,600. What was the firm's net capital spending for 2010?

Net capital spending = $1,416,000 - $1,238,000 + $214,600 = $392,600

Forumula to memorize: DePont breakdown of ROE

Profit Margin * Asset Turnover * Equity Multiplier

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?

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

Precision Manufacturing had the following operating results for 2010: sales = $38,900; cost of goods sold = $24,600; depreciation expense = $1,700; interest expense = $1,400; dividends paid = $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate for 2010 was 34 percent. What is the cash flow from assets for 2010?

OCF = [($38,900 - $24,600 - $1,700 - $1,400) (1 - 0.34)] + $1,700 + $1,400 = $10,492 CFA = $10,492 - ($13,900 - $14,300 + $1,700) - [(($9,200 - $7,400) - $8,700 - $6,600)] = $9,492 EOC #: 2.21

Which one of the following statements is correct? Shareholders' equity is the residual value of a firm. Net working capital must be a positive value. An increase in cash reduces the liquidity of a firm. Equipment is generally considered a highly liquid asset. Depreciation increases total assets.

Shareholders' equity is the residual value of a firm.