Module One

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate? $1,951.43 $1,770.00 $2,151.45 $2,049.00 $1,858.50

$1,770.00

Which of the following statements is CORRECT? A. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last. B. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet. C. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. D. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). E. The balance sheet for a given year tells us how much money the company earned during that year.

A. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

Which of the following items cannot be found on a firm's balance sheet under current liabilities? A. Accounts payable. B. Cost of goods sold. C. Short-term notes payable to the bank. D. Accrued payroll taxes. E. Accrued wages.

B. Cost of goods sold

Which of the following statements is CORRECT? A. Typically, a firm's DPS should exceed its EPS. B. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. C. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. D. Typically, a firm's EBIT should exceed its EBITDA. E. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

B. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? A. If the company lost money in 2015, they must have paid dividends. B. The company must have had zero net income in 2015. C. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year. D. The company must have paid out half of its earnings as dividends. E. The company must have paid no dividends in 2015

C. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? A. The company had a sharp increase in its depreciation and amortization expenses. B. The company had a sharp increase in its inventories. C. The company had a sharp increase in its accrued liabilities. D. The company sold a new issue of common stock. E. The company made a large capital investment early in the year.

D. The company sold a new issue of common stock.

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance? A. The company's cost of goods sold increased. B. The company's operating income declined. C. The company's interest expense increased. D. The company's depreciation and amortization expenses declined. E. The company's expenditures on fixed assets declined.

D. The company's depreciation and amortization expenses declined.

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? A. The company's interest expense would remain constant. B. The company's taxable income would fall. C. The company would have to pay less taxes. D. The company's net income would increase. E. The company would have less common equity than before.

D. The company's net income would increase.

In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

False

The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

True