FIN 320-Exam 1
Last year, Denver Mountain Gear had net income of $135,800. The firm had 63,000 shares of stock outstanding and added $56,700 to its retained earnings. What was the dividend per share?
$1.26 Dividends per share = ($135,800 - $56,700) / 63,000 = $1.26
The Night Raider purchased $111,000 worth of equipment when it started into business two years ago. Today, that equipment has been depreciated down to $86,400 but it could be sold for $95,000. The firm's balance sheet has total assets of $106,900. The net working capital is $4,310. The firm could liquidate its current assets today for $20,100. The book value of the firm's assets is _____ while the market value of those assets is _____.
$106,900; $115,100 Book value = $106,900; Market value = $95,000 + $20,100 = $115,100
Gladiators, Inc. has a marginal tax rate of 34 percent and an average tax rate of 23 percent. How much additional tax will the firm owe if its taxable income increases by $40?
$13.60 Additional tax = $40 × 0.34 = $13.60
The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?
$32,055 Net income = retained earnings + dividends Net income = (retained earnings end period - retained earnings beginning period) + dividends Retained earnings end period = Net income + retained earnings beginning period - dividends Retained earnings end period = $28,975 + $4,680 - $1,600 = $32,055
Brown Stone Mills has total assets of $44,000, total equity of $26,400, net fixed assets of $31,780, and long-term debt of $12,220. What is the net working capital?
$6,840 NWC = CA - CL = ($44,000 - $31,780) - ($44,000 - $12,220 - $26,400) = $6,840
Benson's Trucking has sales for the year of $428,300 and costs of $263,100. The tax rate is 34 percent. For the year, the firm paid $29,000 in dividends and added $33,600 to retained earnings. What is the amount of the depreciation expense? (Round your taxable income and final answer to the nearest whole number.)
$70,352 Net income = $29,000 + $33,600 = $62,600 Taxable income = $62,600 / (1 - 0.34) = $94,848 Depreciation = $428,300 - $263,100 - $94,848 = $70,352
ACE, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $10,100. The tax rate was 40 percent. What was the amount of the costs incurred by the firm?
$738,500.00 EBIT = sales - costs - depreciation Costs are unknown here and we have to calculate EBIT Because we are given dividends and addition to retained earnings, we can calculate net income: Net income = dividends + addition to retained earnings = 10,100 +14,680 = 24,780 We can apply the tax rate to net income to calculate taxable income: Net income = Taxable income - (tax rate * taxable income) = Taxable income (1- tax rate) Taxable income = net income / (1- tax rate) = 24,780 / 0.6 = 41,300 EBIT = taxable income + interest = 41,300 + 9,700 = 51,000 Costs = sales - EBIT - depreciation = 811,400 - 51,000 - 21,900 = $738,500
Given the tax table below, what is the amount of tax due on taxable income of $248,700? Taxable Income Tax Rate $ 0 - 50,000 15% 50,001 -75,000 25% 75,001 - 100,000 34% 100,001 -335,000 39%
$80,243 Tax = ($50,000 × 0.15) + ($25,000 × 0.25) + ($25,000 × 0.34) + ($148,700 × 0.39) = $80,243
You have the following financial statements for a firm. What is the cash flow from assets?
$84,079 OCF = $115,053 + $46,783 - $33,794 = $128,042 NCS = $381,247 - $381,830 + $46,783 = $46,200 Change in NWC = ($52,215 - $24,272) - ($55,170 - $24,990) = -$2,237 CFA = $128,042 - $46,200 - (-$2,237) = $84,079
At the beginning of the year, a firm had total assets of $361,000, current liabilities of $28,800, and total equity of $230,000. At the end of the year, the total assets were $412,000, current liabilities were $31,700, and total equity was $247,000. The firm paid $6,810 in interest expense. What is the cash flow to creditors for the year?
-$24,290 Cash flow to creditors = Interest paid - Net new debt. Beginning long-term debt = $361,000 - $28,800 - $230,000 = $102,200 Ending long-term debt = $412,000 - $31,700 - $247,000 = $133,300 Cash flow to creditors = $6,810 - ($133,300 - $102,200) = -$24,290
Red Roofs, Inc. has current liabilities of $24,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners' equity has a book value of $21,400. What is the amount of the net working capital?
-4,900 NWC = current assets - current liabilities Current liabilities = 24,300, but current assets? Total assets = current assets + net fixed assets or current assets = total assets - net fixed assets = $43,100 - $23,700 = 19,400 NWC = 19,400 - 24,300 = -$4,900
At the beginning of the year, a firm has current assets of $328 and current liabilities of $232. At the end of the year, the current assets are $493 and the current liabilities are $272. What is the change in net working capital?
125 ΔNWC = ($493 - 272) - ($328 - 232) = $125
What is the average tax rate for a firm with taxable income of $130,013?
26.12% Taxes paid = 0.15($50,000) + 0.25($75,000 - 50,000) + 0.34($100,000 - 75,000) + 0.39($130,013 - 100,000) = $33,955.07 Average tax rate = $33,955.07 / $130,013 = 26.12%
The Pier Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $107,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm's assets?
307,700 Total assets book value = current assets + fixed assets - depreciation Current assets = cash + account receivables + inventory Total assets book value = $34,600 + $54,200 + $92,300 + $234,500 - $107,900 = $307,700
Ivan's, Inc. paid $460 in dividends and $575 in interest this past year. Common stock increased by $185 and retained earnings decreased by $111. What is the net income for the year?
349 Net income = Dividends paid + Change in retained earnings Net income = $460 - $111 = $349
Holly Farms has sales of $581,600, costs of $479,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 42 percent. How much net income did the firm earn for the period?
35,612 Net income = EBIT - interest - taxes EBIT = sales - costs -depreciation = $581,600 - $479,700 - $32,100 = 69,800 Taxable income = EBIT - interest = 69,800 - 8,400 = 61,400 Net income = taxable income - taxes = 61,400 - (61,400 * 0.42) = 35,612
At the beginning of the year, long-term debt of a firm is $276 and total debt is $323. At the end of the year, long-term debt is $253 and total debt is $333. The interest paid is $19. What is the amount of the cash flow to creditors?
42 CFTC = interest paid - net new borrowing = $19 - ($253 - 276) = $42
Peggy Grey's Cookies has net income of $450. The firm pays out 30 percent of the net income to its shareholders as dividends. During the year, the company sold $90 worth of common stock. What is the cash flow to stockholders?
45.00 Dividends = 450 * 0.3 = 135 CFTS = dividends paid - net new equity = 135 - $90 = $45.00
Your firm has net income of $357 on total sales of $1,380. Costs are $760 and depreciation is $110. The tax rate is 30 percent. The firm does not have interest expenses. What is the operating cash flow?
467 EBIT = Sales - Costs - Depreciation = $1,380 - $760 - $110 = $510 Taxes = Tax rate × EBIT = 0.30 × $510 = $153 OCF = EBIT + Depreciation - Taxes = $510 + $110 - $153 = $467
The owners' equity for The Deer Store was $58,900 at the beginning of the year. During the year, the company had after-tax income of $4,200, of which $3,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners' equity at year end?
53,400 Owner's equity = common stock and paid-in surplus + retained earnings Owner's equity end period - Owner's equity beginning period = common stock and paid-in surplus + retained earnings Owner's equity end period = Owner's equity beginning period common stock and paid-in surplus + retained earnings Retained earnings? Net income = dividends + retained earnings Retained earnings = net income - dividends = 4,200 - 3,200 = 1,000 Ending owners' equity = $58,900 - $6,500 = $53,400
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
A balance sheet reflects a firm's:
Accounting value on a specific date and economic value at a specific time
A customer has yet to pay the bill for products purchased on credit. The customer's trade credit is recorded in which balance sheet account?
Accounts Receivable
The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?
Agency
Galatica has made an offer to purchase Free World, Inc. for $22 a share. The shareholders of Free World want to accept the offer but the managers of Free World are fighting against selling the firm for fear they will lose their jobs. This is an example of which one of the following?
Agency problem
Which one of the following statements applies to a limited partnership?
All general partners have unlimited liability for the partnership's debts.
Which one of the following statements concerning the balance sheet is correct?
Assets are listed in descending order of liquidity.
Liquidity refers to the ease of changing
Assets to cash
On the statements of financial position, assets are listed at their ___ value.
Book
Under GAAP, assets are generally carried on a firm's balance sheet at
Book value and historical cost
_____ is the process of planning and managing a firm's long-term assets
Capital
Liza is trying to decide whether her firm should acquire more debt or issue additional shares of stock. Which type of decision is Liza making?
Capital Structure
If you are in charge of all fixed asset purchases, it means that you are in charge of:
Capital budgeting
Suppose a firm is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:
Capital structure
Which term applies to the mixture of debt and equity maintained by a firm?
Capital structure
Non-cash items do not affect:
Cash Flow
Rank the ease of turning the following assets into cash
Cash equivalents, A/R, Inventory, Plant and equipment
Which one of the following will decrease the liquidity level of a firm?
Cash purchase of inventory
Working capital includes
Cash, inventory and short term assets
Which of the following are components of cash flow from assets?
Change in net working capital, capital spending, operating cash flow
The Sarbanes-Oxley Act in 2002 was prompted by which one of the following from the 1990s?
Corporate accounting and financial fraud
The federal government taxes
Corporate earnings and shareholder dividends
Assets can be categorized as
Current and fixed, tangible and intangible
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5.3 million. The machinery can be sold to the Romulans today for $7.5 million. Klingon's current balance sheet shows net fixed assets of $4.1 million, current liabilities of $840,000, and net working capital of $143,000. If all the current assets were liquidated today, the company would receive $955,000 cash. What is the book value of Klingon's assets today? What is the market value?
Current assets = $143,000 + 840,000 = $983,000 983,000 + 4,100,000= 5,083,000 Current Assets + Fixed Assets = Market Value 955,000 + 7,500,000 = 8,455,000
Net working capital equals
Current assets minus current liabilities
Which one of the following statements related to securities dealers is correct?
Dealers buy and sell from their own inventory.
Net capital spending is equl to the change in net fixed assets plus
Depreciation
Which of the following are consider non-owner stakeholders in a company?
Employees, government and suplliers
Marginal tax rates are the most important tax rates because:
Financial decisions are usually based on new cash flows and incremental cash flows are taxed at marginal tax rates
Depreciation is the accountant's estimate of the cost of ___ used in the production process matched with the benefits produced from owning it.
Fixed assets and equipment
What should you keep i mind when examining an income statement?
GAAP, cash vs non cash items, time and costs
A treasurer's responsibilities typically include:
Handling cash flows, making financial plans, managing capital expenditure decisions
Which one of the following is a working capital decision?
How much cash should the firm keep in reserve?
A good financial decision will do what?
Increase the value of the firm's SE and existing stock
Which one of the following best matches the primary goal of financial management?
Increasing the market value of the firm
Marginal tax rates are the most important tax rates because
Incremental cash flows are taxed at marginal tax rates and financial decisions are usally based on new cash flows
Which of the following is a current asset?
Inventory
A general partnership has which of the following characteristics?
It is difficult to transfer ownership, and each owner has unlimited liability for all firm debts
Which of the following are true of a sole proprietorship?
It is the simplest form of business, and it has a limited life
Which one of the following is an advantage of being a limited partner?
Losses limited to capital invested
In a shareholder manager relationship, who is the agent?
Managers (shareholders are the principal and managers are the agent)
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
The price at which willing buyers and sellers would trade is called ____ value.
Market
What is the goal of financial management for a sole proprietorship?
Maximize the market value of the equity
The corporate tax structure in the U.S. is based on a:
Modified flat-rate tax
Which one of the following statements correctly applies to a sole proprietorship?
Obtaining additional equity is dependent on the owner's personal finances.
Arredondo, Inc., has current assets of $2,350, net fixed assets of $11,100, current liabilities of $1,440, and long-term debt of $4,160. What is the value of the shareholders' equity account for this firm? How much is net working capital?
Owner's equity = Total liabilities & equity - Current liabilities - Long-term debt Owner's equity = $13,450 - 1,440 - 4,160 Owner's equity = $7,850 NWC = Current assets - Current liabilities NWC = $2,350 - 1,440 NWC = $910
In an over-the-counter market,
Participants are called dealers, and they buy/sell from their own inventory
Which of the following is NOT one of the basic areas of finance?
Person finance
Toni's Toy Store is a relatively new firm that has been very successful to date. The firm has been privately owned but as of this morning, the owners are issuing new shares of stock for sale to the general public. These shares are being sold in which type of market?
Primary
What are two ways in which financial accountants usually classify costs?
Product and period costs
Corporations in other countries are often called
Public limited companies and Joint stock companies
Which one of the following situations is most apt to create an agency conflict?
Rejecting a profitable project to protect employee jobs
Which one of the following is most apt to create a situation where an agency conflict could arise?
Separating management from ownership
A ____ gets paid after employees, suppliers and creditors
Shareholders
Capital budgeting includes the evaluation of which of the following?
Size, timing, and risk of future cash flows
Les is the sole owner of Les' Meat Market. The net profits of the Meat Market are taxed as personal income to Les. Which type of entity is Les' Meat Market?
Sole proprietorship
The federal government has a tax claim on the cash flows of The Window Store. This claim is defined as a claim by one of the firm's:
Stakeholders
Increasing the current value of which one of the following best matches the goal of financial management?
Stock Price
________ can be used to encourage managers to maximize the value of the stock
Stock option
The controller is responsible for
Tax reporting and financial accounting
When a corporation is formed, it is granted which of the following rights?
The ability to issue stock, legal powers to sue, provincial citizenship for jurisdictional purposes
A shareholder's liability is limited to what?
The amount the shareholder invested in the corporation
What is the most important item that can be extracted from financial statements?
The firm's actual cash flows
What is the primary objective of an auction market?
To bring buyers and sellers together
What is the purpose of the income statement?
To measure performance over a set period of time
How is the average income tax rate computed?
Total tax bill / Total taxable income
Which one of the following is a general characteristic of a securities broker?
Trades listed securities in an auction market
Which of the following positions report to the CFO?
Treasurer and controller
Which of the following question can be answered by reviewing a firm's balance sheet?
What is the total amount of assets the firm owns, and how much debts is used to finance the firm?
According to GAAP, when is income reported?
When it is earned or accrued
When is revenue recognized on an income statements?
When the earnings process is virutally completed and when the exchange of goods or services is completed
The short run is
an imprecise period of time
The cash flow identity states that cash flows from ___ should equal cash flows to creditors and equity investors
assets
Shareholders' equity equals
assets minus liabilities
A corporation receives cash from financial markets by selling
bonds and stock
"Increasing shareholder wealth" means increasing the
current common stock value
The more debt a firm has, the greater its:
degree of financial leverage
A decision to increase which one of the following accounts would be classified as a capital budgeting decision?
equipment
Which one of the following is the best example of an agency cost?
foregoing a profitable project because managers fear they may lose their jobs as a result
A sole proprietorship
has its profits taxed as personal income
Corporate shareholders:
have the ability to change the corporation's bylaws
Financial managers are responsible for
how suppliers will be paid, the appropriate level of debt for a firm, which projects a firm should undertake, how to invest the firm's cash.
Cash flow to creditors equals:
interest paid minus net new borrowing
Period costs are the costs that are allocated to a specific
interval of time
A corporation
is a legal entity separate from its owners.
Operating cash flow:
is a sign of trouble if negative and is usually positive
The Sarbanes-Oxley Act of 2002 has:
made officers of publicly traded firms personally responsible for the firm's financial statements
For financial decision-making purposes, the most important tax rate is the ___ tax rate.
marginal
What is the primary function of an auction market?
match buyers with sellers
Which one of the following statements best matches the primary goal of financial management?
maximizing the value of a firm for its current owners while conducting business in a legal and ethical manner
The last item on the income statement is typically the
net income
Non-cash items are expenses that directly affect ___ but do not directly affect ___.
net income; cash flow
Cash flow from assets is defined as:
operating cash flow minus the change in net working capital minus net capital spending.
Which one of the following is an equity account?
paid-in-surplus
A positive operating cash flow indicates that the firm is generating enough cash to:
pay operating costs
The owners of a corporation are called
shareholders
A(n) ____ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm
stakeholder
Physical assets are termed ____ assets.
tangible
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 primary responsibility of financial managers is to increase the value of
the existing shares of stock
Changes in capital spending can be negative if
the firm sold more assets than it purchased
In a general partnership, each partner is personally liable for:
the total debts of the partnership, even if he or she was unaware of those debts.
Free cash flow is better described as
total distributable cash flow
Financial leverage refers to a firm's
use of debt in its capital structure
_____ costs change as the output of the firm changes
variable
Ensuring that the firm has sufficient funds to continue operations of day-to-day basis comes under the heading of _____ management
working capital
Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:
working capital
