Download Chapter 002 Financial Statements, Taxes, and Cash

Chapter 002 Financial Statements, Taxes, and Cash Flow
Multiple Choice Questions
1. Net working capital is defined as:
a. cash, accounts receivable, and inventory.
b. current assets.
c. cash minus current liabilities.
d. current assets plus current liabilities.
E. current assets minus current liabilities.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: DEFINITIONS
2. GAAP is:
a. the generally accepted accounts payable credit terms.
b. the general agreement between a firm and its short-term creditors.
c. a commonly accepted method of depreciating fixed assets.
D. a common set of standards and procedures for preparing audited financial statements.
e. the procedure for expensing variable costs of production.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: GAAP
TYPE: DEFINITIONS
3. The financial statement that summarizes a firm's operations over a period of time is called
a(n):
A. income statement.
b. cash flow statement.
c. production report.
d. balance sheet.
e. periodic operating statement.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: DEFINITIONS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
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Chapter 002 Financial Statements, Taxes, and Cash Flow
4. An expense that lowers net income but does not affect a firm's cash flow is referred to as
a(n):
a. indirect cost.
b. direct cost.
C. noncash item.
d. period cost.
e. variable cost.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: NONCASH ITEMS
TYPE: DEFINITIONS
5. The average tax rate is defined as the:
a. amount of tax due on the next dollar of taxable income.
b. total tax paid divided by total revenue.
c. amount of tax due on the next dollar of revenue.
d. total tax paid divided by total assets.
E. total taxes divided by total taxable income.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: AVERAGE TAX RATE
TYPE: DEFINITIONS
6. The tax rate applicable to the next dollar of taxable income is called the _____ tax rate.
a. total
B. marginal
c. absolute
d. average
e. next
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: MARGINAL TAX RATE
TYPE: DEFINITIONS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
7. Cash flow from assets can be defined as:
a. cash flow to shareholders minus the cash flow to creditors.
b. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C. operating cash flow minus the change in net working capital minus net capital spending.
d. net capital spending plus the change in net working capital.
e. cash flow to shareholders minus net capital spending minus the change in net working
capital.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW FROM ASSETS
TYPE: DEFINITIONS
8. The cash generated from a firm's normal business activities is referred to as the firm's:
a. net profit.
b. addition to retained earnings.
c. operating margin.
d. addition to net working capital.
E. operating cash flow.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: DEFINITIONS
9. Free cash flow is equal to:
a. net income plus depreciation.
B. cash flow from assets.
c. earnings before interest and taxes plus depreciation minus taxes.
d. cash flow to shareholders.
e. the addition to retained earnings.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: FREE CASH FLOW
TYPE: DEFINITIONS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
10. When net new borrowings are subtracted from the interest payments a firm pays to its
creditors the result is called the:
A. cash flow to creditors.
b. free cash flow.
c. cash flow from assets.
d. operating cash flow.
e. change in net working capital.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
TYPE: DEFINITIONS
11. Cash flow to stockholders is defined as:
a. cash flow from assets plus cash flow to creditors.
b. operating cash flow minus cash flow to creditors.
c. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
e. net income minus the addition to retained earnings.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: DEFINITIONS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
12. Which of the following are classified as tangible fixed assets?
I. inventory
II. machinery
III. patents
IV. building
a. I and IV only
b. II and III only
C. II and IV only
d. I and III only
e. II, III, and IV only
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: TANGIBLE FIXED ASSETS
TYPE: CONCEPTS
13. Trademarks are classified as:
a. short-term assets.
b. current liabilities.
c. long-term debt.
d. tangible fixed assets.
E. intangible fixed assets.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: INTANGIBLE FIXED ASSETS
TYPE: CONCEPTS
14. Which one of the following is classified as a current asset?
a. land
b. accounts payable
c. equipment
D. inventory
e. note payable
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: CURRENT ASSET
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
15. Over the past year, a firm increased its current assets and decreased its current liabilities. As
a result, the firm's net working capital:
A. had to increase.
b. had to decrease.
c. could have remained constant.
d. could have either increased, decreased, or remained constant.
e. was unaffected as the changes occurred in the firm's current accounts.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
16. Which one of the following is included in net working capital?
a. mortgage on a building payable over the next thirty years
B. bill payable to a supplier for the purchase of inventory
c. equipment with a useful life of six years
d. five-year bonds issued to the general public
e. depreciation on a fixed asset
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
17. Shareholders' equity is equal to:
a. total assets plus total liabilities.
b. net fixed assets minus total liabilities.
C. fixed assets minus long-term debt plus net working capital.
d. net working capital plus total assets.
e. total assets minus net working capital.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: SHAREHOLDERS' EQUITY
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
18. Shareholders' equity includes which of the following?
I. paid in surplus
II. bonds payable
III. common stock
IV. retained earnings
a. II and III only
b. I and IV only
c. III and IV only
D. I, III, and IV only
e. I, II, III, and IV
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: SHAREHOLDERS' EQUITY
TYPE: CONCEPTS
19. Which one of the following statements is correct?
a. Accounts payable is the amount due from customers.
B. Net working capital can be positive, negative, or zero.
c. Bonds are included in net working capital.
d. The amount of retained earnings is found on the income statement.
e. Depreciation increases total assets.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
20. All else equal, which one of the following will increase owners' equity?
a. decrease in inventory
b. increase in accounts payable
C. increase in accounts receivable
d. decrease in net working capital
e. increase in notes payable
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: OWNERS' EQUITY
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
21. Which one of the following will increase the net working capital of a firm?
A. obtaining a 3-year loan to purchase inventory
b. collecting payment from a customer
c. obtaining a 5-year loan to buy equipment
d. paying a supplier for a recent purchase
e. making a payment on a long-term debt
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
22. Which of the following will increase the liquidity level of a firm?
I. the purchase of inventory for cash
II. the sale of inventory on credit
III. the sale of inventory for cash
IV. the collection of accounts receivable
a. III only
b. IV only
c. III and IV only
d. I, II, and III only
E. II, III, and IV only
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: LIQUIDITY
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
23. Highly liquid assets:
I. increase the probability a firm will face financial distress.
II. decrease the probability a firm will face financial distress.
III. generally produce a high rate of return.
IV. generally produce a low, if any, rate of return.
a. I only
b. II only
c. I and III only
d. II and III only
E. II and IV only
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: LIQUIDITY
TYPE: CONCEPTS
24. Financial leverage:
I. decreases the potential returns to shareholders.
II. increases the potential returns to shareholders.
III. decreases the likelihood the firm will face financial distress.
IV. increases the likelihood the firm will face financial distress.
a. I only
b. IV only
c. I and III only
d. I and IV only
E. II and IV only
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: FINANCIAL LEVERAGE
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
25. Which one of the following statements concerning market and book values is correct?
a. The market value of accounts receivable is generally much lower than the book value of
those receivables.
B. The market and book values of current assets tend to be relatively equal.
c. The market value of fixed assets will always exceed the book value of those assets.
d. Book values represent the amount of cash that will be received if an asset is sold.
e. The current book value of equipment purchased last year is equal to the initial cost of the
equipment.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: MARKET AND BOOK VALUES
TYPE: CONCEPTS
26. Which of the following are included in the market value of a firm but not in the book value?
I. technical knowledge of the employees
II. quality of the management team
III. experience of the employees
IV. reputation of the firm
a. IV only
b. I and III only
c. II and IV only
d. I, II, and III only
E. I, II, III, and IV
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: MARKET AND BOOK VALUES
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
27. Which one of the following statements is correct concerning market and book values?
a. Market values must be greater than or equal to book values.
b. Both the book value and the market value of land decrease over time.
c. The book value of an asset can increase over time.
D. Book values are affected by the depreciation method used.
e. Market values are more predictable than book values.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: MARKET AND BOOK VALUE
TYPE: CONCEPTS
28. Which one of the following statements is correct?
a. Market value is the amount of cash the owner hopes to receive if an asset is sold.
b. Market value is equal to the replacement value of an asset.
C. Book value is equal to the initial cost minus the depreciation to date.
d. Book value is the greater of the depreciated cost or the current market value.
e. Book value is the greater of the initial cost or the current market value.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: BOOK AND MARKET VALUES
TYPE: CONCEPTS
29. Which one of the following statements concerning the balance sheet is correct?
a. Total assets equal total liabilities minus total equity.
b. Net working capital is equal total assets minus current liabilities.
c. Net fixed assets are equal to the initial cost of all the firm's long-term assets.
d. Current assets are equal to total assets minus net working capital.
E. Shareholders' equity is equal to net working capital plus net fixed assets minus long-term
debt.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: SHAREHOLDERS' EQUITY
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
30. An income statement:
a. reveals the net cash flows of a firm over a stated period of time.
b. reflects the financial position of a firm as of a particular date.
C. shows the revenue and expenses based upon selected accounting methods.
d. records revenue only when cash is received for the product or service provided.
e. records expenses based on the recognition principle.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: CONCEPTS
31. Which of the following will increase the net income of a profitable firm?
I. decreasing the depreciation
II. increasing the variable cost per unit
III. decreasing fixed costs
IV. increasing revenue
a. III and IV only
b. I and IV only
C. I, III, and IV only
d. II, III, and IV only
e. I, II, and III only
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: NET INCOME
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
32. Which two of the following determine when revenue is recorded on the financial statements
based on the recognition principle?
I. when payment is collected for the sale of a good or service
II. when the earnings process is virtually completed
III. when the value of a sale can be reliably determined
IV. when a product is physically delivered to the buyer's location
a. I and II only
b. I and IV only
C. II and III only
d. II and IV only
e. I and III only
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: RECOGNITION PRINCIPLE
TYPE: CONCEPTS
33. Depreciation:
a. increases the net income.
b. increases the net fixed assets.
c. affects cash but not the net income.
d. is a revenue item.
E. is a noncash expense.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: DEPRECIATION
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
34. The matching principle advocates that:
a. costs should be recorded on the income statement whenever those costs can be reliably
determined.
b. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as
revenue.
d. sales should be recorded only when the sale is matched with a cash receipt.
e. sales should be recorded when the earnings process is virtually completed and the value of
the sale can be determined.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: MATCHING PRINCIPLE
TYPE: CONCEPTS
35. The matching principle advocates:
a. recording inventory purchases as soon as payment occurs.
b. recording costs when the liability for those costs occurs.
c. matching cash flows with net income.
D. matching costs with revenues.
e. matching current assets with current liabilities.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: MATCHING PRINCIPLE
TYPE: CONCEPTS
36. The income statement reflects:
a. income and expenses at the time when those items affect the cash flows of a firm.
B. income and expenses in accordance with GAAP.
c. the cash flows in accordance with GAAP.
d. the flow of cash into and out of a firm during a stated period of time.
e. the flow of cash into and out of a firm as of a particular date.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
37. The income statement for Martin Industries had a negative net income for last year. Given
this, you can assume the:
a. cash flow from assets was also negative.
b. operating cash flow was also negative.
c. cash flow to shareholders was negative.
d. cash flow to shareholders was zero.
E. operating cash flow was either negative, positive, or zero, but you cannot determine which
one.
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: CONCEPTS
38. The cost of goods sold:
a. is equal to the variable cost per unit multiplied by the number of units sold.
b. is equal to the fixed costs of production for the time period.
c. includes all manufacturing costs incurred during the income statement period.
d. includes period costs only.
E. includes both the fixed and the variable costs of producing the items included in revenue.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: COST OF GOODS SOLD
TYPE: CONCEPTS
39. The selling, general, and administrative costs are:
A. period costs.
b. included in cost of goods sold.
c. treated as variable production costs.
d. capitalized and expensed over time.
e. all fixed amounts incurred on a monthly basis.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
40. Firms that compile financial statements according to GAAP:
a. must record income and expenses whenever cash flows are affected.
B. still have some discretion over the timing of recording both revenue and expense items.
c. must record all expenses when incurred.
d. only record income when payment in full is received.
e. record both income and expenses as soon as the amount for each can be ascertained.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: INCOME STATEMENT
TYPE: CONCEPTS
41. Which one of the following best exemplifies the concept of a marginal tax?
a. Southern Mills paid $3.2 million more in taxes last year than its competitor, Eastern Mills.
b. Jefferson-Knight paid $2.1 million in taxes last year on revenue of $6.8 million.
C. As the result of opening a new store, Northern Lights owed an additional $1.1 million in
taxes.
d. Alpha Industries received a tax refund due to an error in its tax return that the IRS discovered.
e. High Water Adventures paid $0.18 in tax for every $1 in taxable income last year.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: MARGINAL TAX
TYPE: CONCEPTS
42. Which one of the following will increase the cash flow from assets, all else constant?
a. an increase in net capital spending
b. a decrease in the cash flow to creditors
C. an increase in depreciation
d. an increase in the change in net working capital
e. a decrease in dividends paid
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: CHALLENGE
SECTION: 2.4
TOPIC: CASH FLOW FROM ASSETS
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
43. A positive cash flow to creditors indicates a firm:
a. borrowed more than it repaid for the period.
b. repaid more principal on its loans than it borrowed for the period.
c. has less debt at the end of the period than it had at the beginning of the period.
d. has more debt at the end of the period than it had at the beginning of the period.
E. paid more cash to its creditors than it received from them for the period.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
TYPE: CONCEPTS
44. If a firm has a negative cash flow from assets every year for several years, the firm:
A. is probably either financially distressed or continuously increasing in size.
b. is downsizing.
c. must be operating at a high level of efficiency.
d. must be reducing a heavy debt load on an annual basis.
e. has to be incurring net losses on an annual basis.
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW FROM ASSETS
TYPE: CONCEPTS
45. Operating cash flow increases when:
A. depreciation increases.
b. period costs increase.
c. interest paid decreases.
d. revenues decrease.
e. the cost of goods sold increases.
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
46. A non-dividend paying firm sold 10,000 additional shares of stock this last year. No shares
were repurchased. The cash flow statement for the year must have a:
a. positive operating cash flow.
b. negative cash flow from assets.
C. negative cash flow to stockholders.
d. negative operating cash flow.
e. positive cash flow to stockholders.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: CONCEPTS
47. Net capital spending is equal to:
A. ending net fixed assets minus beginning net fixed assets plus depreciation.
b. beginning net fixed assets minus ending net fixed assets plus depreciation.
c. ending net fixed assets minus beginning net fixed assets minus depreciation.
d. ending total assets minus beginning total assets plus depreciation.
e. ending total assets minus beginning total assets minus depreciation.
BLOOMS TAXONOMY QUESTION TYPE: KNOWLEDGE
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: NET CAPITAL SPENDING
TYPE: CONCEPTS
48. A decrease in net working capital for the period:
a. decreases the cash flow from assets.
b. indicates a firm has sold some of its long-term assets.
c. is caused by a firm purchasing additional fixed assets.
d. is generally caused by an increase in the inventory level.
E. is a cash inflow for the firm.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
49. All else equal, which of the following will decrease net working capital?
I. decrease in accounts receivable
II. increase in inventory
III. decrease in cash
IV. increase in accounts payable
a. I and III only
b. II and IV only
c. I and II only
d. III and IV only
E. I, III, and IV only
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: NET WORKING CAPITAL
TYPE: CONCEPTS
50. Operating cash flow is equal to:
a. Earnings before interest and taxes Depreciation + Taxes.
b. Cash flow from assets Change in net working capital + Net capital spending.
C. Cash flow from assets + Net capital spending + Change in net working capital.
d. Earnings before interest and taxes Change in net working capital Net capital spending.
e. Earnings before interest and taxes Depreciation Taxes.
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: CONCEPTS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
51. Cash flow to creditors is equal to interest paid minus:
a. net working capital.
b. beginning total debt minus ending total debt.
c. beginning long-term debt minus ending long-term debt.
d. ending total debt minus beginning total debt.
E. ending long-term debt minus beginning long-term debt.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
TYPE: CONCEPTS
52. Cash flow to stockholders:
a. is equal to the cash flow from assets plus the cash flow to creditors.
b. measures the cash flow between a firm and its debtors.
c. should be negative when the number of shares of stock issued remains constant for the
period.
D. is positive when the amount of the dividends paid exceeds the amount of net new equity
raised.
e. is negative when a firm increases its borrowing to finance a new business venture.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: CONCEPTS
53. A negative cash flow to stockholders indicates a firm has:
a. increased both its debt and its equity borrowing.
b. reduced owners' equity.
c. issued dividends.
D. sold additional shares of stock.
e. incurred net losses.
BLOOMS TAXONOMY QUESTION TYPE: COMPREHENSION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: CONCEPTS
2-21
Chapter 002 Financial Statements, Taxes, and Cash Flow
54. Highland, Inc. has total assets of $16,200, net working capital of $3,900, owner's equity of
$8,500, and long-term debt of $6,000. What is the value of the current assets?
a. $2,500
B. $5,600
c. $6,300
d. $9,900
e. $10,200
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: CURRENT ASSETS
TYPE: PROBLEMS
55. Anderson Enterprises currently has $400 in cash. The company owes $1,200 to suppliers
for merchandise and $4,500 to the bank for a long-term loan. Customers owe Anderson's
$1,900. The inventory has a book value of $3,700 and an estimated market value of $4,400. If
Anderson's compiled a financial statement today, how much would it show as the value of the
current assets?
a. $5,200
b. $5,600
C. $6,000
d. $6,300
e. $6,700
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: CURRENT ASSETS
TYPE: PROBLEMS
2-22
Chapter 002 Financial Statements, Taxes, and Cash Flow
56. The Bake Shoppe has net working capital of $6,100, long-term debt of $10,400, total
debt of $15,200, and owners' equity of $18,900. What is the value of The Bake Shoppe's net
fixed assets?
a. $12,800
b. $16,500
c. $18,900
d. $21,300
E. $23,200
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: NET FIXED ASSETS
TYPE: PROBLEMS
57. Conway & Sons had $26,500 in net fixed assets at the beginning of the year. During the
year, the company purchased $5,700 in new equipment. It also sold, at a price of $1,000, some
old equipment with a book value of $850. The depreciation expense for the year was $4,300.
What is the net fixed asset balance at the end of the year?
a. $15,650
b. $20,800
c. $26,900
D. $27,050
e. $31,200
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: NET FIXED ASSETS
TYPE: PROBLEMS
2-23
Chapter 002 Financial Statements, Taxes, and Cash Flow
58. The Furnishings Co. has ending net fixed assets of $67,100 and beginning net fixed assets
of $43,800. During the year, the firm sold assets with a total book value of $9,500 and also
recorded $7,000 in depreciation expense. How much did The Furnishings Co. spend to buy new
fixed assets?
a. $6,800
b. $16,300
c. $23,300
d. $32,800
E. $39,800
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: FIXED ASSETS
TYPE: PROBLEMS
59. Grandel, Inc. has current liabilities of $10,200 and accounts receivable of $14,800. The firm
has total assets of $39,700 and net fixed assets of $18,900. The owners' equity has a book value
of $16,500. What is the amount of the net working capital?
A. $10,600
b. $20,800
c. $23,200
d. $25,400
e. $31,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: PROBLEMS
2-24
Chapter 002 Financial Statements, Taxes, and Cash Flow
60. Joe's Store has net working capital of $1,800, total assets of $12,600, and net fixed assets of
$9,700. What is the value of the current liabilities?
A. $1,100
b. $2,900
c. $4,700
d. $7,900
e. $10,800
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: CURRENT LIABILITIES
TYPE: PROBLEMS
61. Smith Motors reports the following account balances: inventory of $33,100, equipment of
$84,400, accounts payable of $16,900, cash of $5,000, and accounts receivable of $22,600.
How much does the firm have in net working capital?
a. $38,800
B. $43,800
c. $55,700
d. $67,500
e. $72,600
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: NET WORKING CAPITAL
TYPE: PROBLEMS
2-25
Chapter 002 Financial Statements, Taxes, and Cash Flow
62. Equitable Sales has total owner's equity of $14,500. The firm has current assets of $4,900,
current liabilities of $1,200, and total assets of $20,100. What is the value of the long-term
debt?
a. $700
b. $2,500
c. $3,700
D. $4,400
e. $5,600
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: LONG-TERM DEBT
TYPE: PROBLEMS
63. Southside, Inc. has beginning long-term debt of $47,500, which is the principal balance of a
loan payable to The North Savings Bank. During the year, the company paid a total of $19,000
to the bank, including $3,800 of interest. The company also borrowed $7,000. What is the value
of the ending long-term debt?
a. $25,500
b. $35,500
C. $39,300
d. $62,700
e. $66,500
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: LONG-TERM DEBT
TYPE: PROBLEMS
2-26
Chapter 002 Financial Statements, Taxes, and Cash Flow
64. Unique Pottery has beginning retained earnings of $24,000. For the year, the company
earned net income of $3,000 and paid dividends of $1,000. The company also issued $5,000
worth of new stock. What is the value of the retained earnings account at the end of the year?
A. $26,000
b. $27,000
c. $29,000
d. $30,000
e. $31,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: RETAINED EARNINGS
TYPE: PROBLEMS
65. Cindy's Crafts had beginning retained earnings of $51,200. During the year, the company
reported sales of $112,400, costs of $75,800, depreciation of $9,100, dividends of $1,500, and
interest paid of $2,300. The tax rate is 34 percent. What is the retained earnings balance at the
end of the year?
a. $64,832
b. $65,342
C. $66,332
d. $67,850
e. $69,350
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: RETAINED EARNINGS
TYPE: PROBLEMS
2-27
Chapter 002 Financial Statements, Taxes, and Cash Flow
66. The owners' equity in Jack's Taylor Shop was $31,300 at the beginning of the year. During
the year, the company had aftertax income of $4,900, of which $1,600 was paid in dividends.
Also during the year, the company repurchased $2,000 of stock from one of the shareholders.
What is the value of the owners' equity at year end?
A. $32,600
b. $34,600
c. $35,800
d. $36,200
e. $37,800
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: OWNERS' EQUITY
TYPE: PROBLEMS
67. Farm Fresh Vegetables, Inc. has net working capital of $3,400, net fixed assets of $30,100,
current liabilities of $4,700, and long-term debt of $11,500. What is the value of the owners'
equity?
a. $13,900
b. $17,300
c. $20,700
D. $22,000
e. $25,400
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: OWNERS' EQUITY
TYPE: PROBLEMS
2-28
Chapter 002 Financial Statements, Taxes, and Cash Flow
68. Bella's Boutique has cash of $2,900 and accounts receivable of $4,200. The inventory cost
$6,300 and can be sold today for $8,800. The fixed assets were purchased at a cost of $50,500
of which $23,200 has been depreciated. The fixed assets can be sold today for $25,000. What is
the total book value of the assets of Bella's?
a. $17,700
b. $18,400
c. $38,900
D. $40,700
e. $63,900
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: BOOK VALUE
TYPE: PROBLEMS
69. Alfonzo's Pizzeria purchased its building 8 years ago at a cost of $76,000. The building is
currently valued at $212,000. Alfonzo's has other fixed assets that cost $58,000 and are
currently valued at $69,000. To date, Alfonzo's has recorded a total of $83,000 in depreciation
on the various assets. The company has current liabilities of $43,000 and net working capital of
$32,000. What is the total book value of the assets of Alfonzo's Pizzeria?
a. $40,000
b. $94,000
C. $126,000
d. $155,000
e. $187,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: BOOK VALUE
TYPE: PROBLEMS
2-29
Chapter 002 Financial Statements, Taxes, and Cash Flow
70. The financial statements of Classic Collectables reflect cash of $15,800, accounts
receivable of $31,600, accounts payable of $40,100, inventory of $54,700, long-term debt of
$60,000, and net fixed assets of $99,500. The firm estimates that if it wanted to cease operations
today it could sell the inventory for $39,000 and the fixed assets for $77,000. What is the
market value of the assets?
a. $63,300
b. $101,500
C. $163,400
d. $181,700
e. $201,600
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.1
TOPIC: MARKET VALUE
TYPE: PROBLEMS
71. Premium Pet Supplies has sales of $98,400. The costs of goods sold are $55,000 and the
other costs are $21,000. Depreciation is $12,000 and the tax rate is 35 percent. What is the net
income of the company?
a. $2,560
b. $3,640
C. $6,760
d. $10,400
e. $14,560
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: NET INCOME
TYPE: PROBLEMS
2-30
Chapter 002 Financial Statements, Taxes, and Cash Flow
72. Precious Gems Jewelry has sales of $267,400 and costs of $200,800. The depreciation
expense is $36,100. Interest paid equals $19,700 and dividends paid equal $4,500. The tax rate
is 34 percent. What is the amount of the addition to retained earnings?
a. $828
b. $1,142
C. $2,628
d. $3,672
e. $4,158
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: ADDITION TO RETAINED EARNINGS
TYPE: PROBLEMS
73. Last year, Sally's Studio added $2,300 to retained earnings from sales of $66,800. The
company had costs of $52,300, dividends of $1,000, and interest paid of $900. The tax rate was
34 percent. What was the amount of the depreciation expense?
a. $4,200
b. $6,800
C. $8,600
d. $9,500
e. $14,500
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: DEPRECIATION
TYPE: PROBLEMS
2-31
Chapter 002 Financial Statements, Taxes, and Cash Flow
74. Douglass, Inc. has sales of $132,000, costs of $103,000, depreciation expense of $11,000,
and interest paid of $4,100. The tax rate is 34 percent. How much net income did Douglass, Inc.
earn for the period?
a. $5,434
B. $9,174
c. $11,800
d. $16,434
e. $18,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: NET INCOME
TYPE: PROBLEMS
75. Bluff, Inc. incurred depreciation expenses of $48,500 last year. The sales were $358,900
and the addition to retained earnings was $39,400. The firm paid interest of $14,300 and
dividends of $10,000. The tax rate was 35 percent. What was the amount of the costs incurred
by the firm for last year?
a. $215,100
B. $220,100
c. $245,800
d. $248,700
e. $286,100
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: COSTS
TYPE: PROBLEMS
2-32
Chapter 002 Financial Statements, Taxes, and Cash Flow
76. Donovan, Inc. owes a total of $17,129 in taxes for this year. The taxable income is $68,556.
If Donovan earns $100 more in income, it will owe an additional $35 in taxes. What is
Donovan's average tax rate on income of $68,656?
a. 15 percent
b. 21 percent
C. 25 percent
d. 34 percent
e. 35 percent
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.3
TOPIC: AVERAGE TAX RATE
TYPE: PROBLEMS
77. Sea Harbor, Inc. has a marginal tax rate of 35 percent and an average tax rate of 22 percent.
If the firm earns $79,500 in taxable income, how much will it owe in taxes?
a. $10,335
b. $16,695
C. $17,490
d. $27,030
e. $27,825
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: AVERAGE TAX RATE
TYPE: PROBLEMS
2-33
Chapter 002 Financial Statements, Taxes, and Cash Flow
78. Phillip's Painting owes $24,780 in tax on a taxable income of $99,870. The company has
determined that it will owe $27,060 in tax if its taxable income rises to $105,870. What is the
marginal tax rate at this level of income?
a. 15 percent
b. 25 percent
c. 34 percent
D. 38 percent
e. 39 percent
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: MARGINAL TAX RATE
TYPE: PROBLEMS
79. Use the following tax table to answer this question:
Andrew's Pro Shop has taxable income of $389,745. How much does Andrew's owe in taxes?
a. $113,900
b. $132,013
c. $132,251
D. $132,513
e. $152,001
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: TOTAL TAX
TYPE: PROBLEMS
2-34
Chapter 002 Financial Statements, Taxes, and Cash Flow
80. Use the following tax table to answer this question:
Riddell, Inc. earned $144,320 in taxable income for the year. How much tax does the company
owe on this income?
A. $39,535
b. $49,069
c. $51,285
d. $56,285
e. $78,535
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: TOTAL TAX
TYPE: PROBLEMS
2-35
Chapter 002 Financial Statements, Taxes, and Cash Flow
81. Crabtree, Inc. has an operating cash flow of $164,900, depreciation expense of $93,100, and
taxes paid of $80,400. A partial listing of its balance sheet accounts is as follows:
What is the amount of Crabtree's cash flow from assets?
a. $49,100
b. $69,800
c. $107,200
D. $120,400
e. $200,300
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW FROM ASSETS
TYPE: PROBLEMS
82. Baldwin, Inc. paid $18,500 in dividends and $44,600 in interest over the past year while net
working capital increased from $10,200 to $28,200. The company purchased $30,000 in net
new fixed assets and had depreciation expenses of $15,700. During the year, the firm issued
$45,000 in net new equity and paid off $16,000 in long-term debt. What is the amount of
Baldwin's cash flow from assets?
a. $3,700
b. $18,000
c. $30,200
D. $34,100
e. $48,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW FROM ASSETS
TYPE: PROBLEMS
2-36
Chapter 002 Financial Statements, Taxes, and Cash Flow
83. Solomon, Inc. has net sales of $745,100 and costs of $590,800. The depreciation expense is
$82,600 and the interest paid is $15,500. What is the amount of the firm's operating cash flow if
the tax rate is 35 percent?
a. $46,605
b. $52,030
c. $71,700
d. $105,720
E. $134,630
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: PROBLEMS
84. United Enterprises paid $12,000 in dividends and $21,300 in interest over the past year.
Sales totaled $139,700 with costs of $101,400. The depreciation expense was $10,500. The
applicable tax rate is 34 percent. What is the amount of the operating cash flow?
a. $25,590
b. $27,072
c. $32,928
D. $36,090
e. $38,300
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: PROBLEMS
2-37
Chapter 002 Financial Statements, Taxes, and Cash Flow
85. The balance sheet of a firm shows beginning net fixed assets of $410,200 and ending net
fixed assets of $364,600. The depreciation expense for the year is $35,800. What is the amount
of the net capital spending for the year?
a. $45,600
B. $9,800
c. $9,800
d. $45,600
e. $81,400
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: NET CAPITAL SPENDING
TYPE: PROBLEMS
86. The financial statements of The Equipment Outlet reflect depreciation expenses of $41,800
and interest expenses of $35,200 for the year. The current assets increased by $19,700 and the
net fixed assets increased by $34,900. What is the amount of the net capital spending for the
year?
a. $34,900
b. $54,600
c. $61,500
D. $76,700
e. $96,400
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: NET CAPITAL SPENDING
TYPE: PROBLEMS
2-38
Chapter 002 Financial Statements, Taxes, and Cash Flow
87. Fallway, Inc. had current assets of $121,800 and current liabilities of $114,300 last year.
This year, the current assets are $118,600 and the current liabilities are $100,400. The
depreciation expense for the past year is $13,500 and the interest paid is $3,000. What is the
amount of the change in net working capital?
a. $18,200
b. $7,700
c. $5,800
D. $10,700
e. $21,200
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CHANGE IN NET WORKING CAPITAL
TYPE: PROBLEMS
88. The balance sheet of Retailers, Inc. has the following balances:
What is the amount of the change in net working capital?
A. $13,000
b. $4,200
c. $4,200
d. $13,000
e. $23,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CHANGE IN NET WORKING CAPITAL
TYPE: PROBLEMS
2-39
Chapter 002 Financial Statements, Taxes, and Cash Flow
89. During the past year, the Rawlins Co. paid $234,800 in interest along with $75,000 in
dividends. The company issued $50,000 of stock and $200,000 of new debt. The company
reduced the balance due on the old debt by $325,000. What is the amount of the cash flow to
creditors for the year?
a. $125,000
b. $325,000
C. $359,800
d. $384,800
e. $434,800
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
TYPE: PROBLEMS
90. A firm has earnings before interest and taxes of $77,960 with a net income of $18,580. The
taxes amounted to $21,310 for the year. During the year, the firm paid out $60,000 to pay off
existing debt and then later borrowed an additional $125,000. What is the amount of the cash
flow to creditors?
a. $43,690
B. $26,930
c. $56,650
d. $103,070
e. $121,650
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
TYPE: PROBLEMS
2-40
Chapter 002 Financial Statements, Taxes, and Cash Flow
91. The balance sheet of a firm shows current liabilities of $62,400 and long-term debt of
$205,900 as of last year. Current liabilities are $50,600 and long-term debt is $216,300 as of
today, which is the end of the current year. The income statement for the current year displays
an interest paid amount of $8,200. What is the amount of the net new borrowing for the current
year?
a. $1,400
b. $2,200
c. $3,600
D. $10,400
e. $11,800
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: NET NEW BORROWING
TYPE: PROBLEMS
92. For the past year, the XYZ Co. had cash flow from assets of $45,700, of which $19,800
flowed to the firm's stockholders. The interest paid was $1,200. What is the amount of the net
new borrowing for the year?
a. $27,100
b. $25,900
C. $24,700
d. $24,700
e. $25,900
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: NET NEW BORROWING
TYPE: PROBLEMS
2-41
Chapter 002 Financial Statements, Taxes, and Cash Flow
93. Six months ago, Tuchman Industries repurchased $50,000 of its common stock. The
company pays regular semiannual dividends totaling $13,000 per period. What is the amount of
the cash flow to stockholders for the past year if no additional shares were issued?
a. $37,000
b. $50,000
c. $63,000
D. $76,000
e. $102,000
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: PROBLEMS
94. Somerset, Inc. has an operating cash flow of $331,000 and a cash flow to creditors of
$79,500 for the past year. During that time, the firm invested $40,000 in net working capital and
incurred net capital spending of $103,600. What is the amount of the cash flow to stockholders
for the last year?
a. $64,100
B. $107,900
c. $147,900
d. $183,100
e. $187,900
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO STOCKHOLDERS
TYPE: PROBLEMS
2-42
Chapter 002 Financial Statements, Taxes, and Cash Flow
95. A firm has net income for the year of $32,600. At the beginning of the year, the firm had
common stock of $88,000, paid-in surplus of $154,000, and retained earnings of $29,000. At
the end of the year, the firm had common stock of $103,000, paid-in surplus of $173,400, and
retained earnings of $40,500. The firm does not pay dividends. What is the amount of the net
new equity raised during the year?
a. $15,000
b. $19,400
c. $26,500
D. $34,400
e. $45,900
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: NET NEW EQUITY
TYPE: PROBLEMS
96. For the year, the Bridgewater Co. has net income of $27,400, net new equity of $12,000,
and an addition to retained earnings of $19,600. What is the amount of the dividends paid?
a. $4,200
B. $7,800
c. $15,400
d. $31,600
e. $39,400
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.2
TOPIC: DIVIDENDS
TYPE: PROBLEMS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
97. The ABC Co. has sales of $264,200, costs of $185,600, and interest paid of $11,200. The
depreciation expense is $36,900 and the tax rate is 34 percent. At the beginning of the year, the
firm had retained earnings of $171,500 and common stock of $300,000. At the end of the year,
the firm has retained earnings of $164,700 and common stock of $350,000. What is the amount
of the dividends paid for the year?
a. $13,330
b. $20,678
C. $26,930
d. $34,322
e. $37,684
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.2
TOPIC: DIVIDENDS
TYPE: PROBLEMS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
98. Preston, Inc. has compiled the following information:
In whole dollars, the operating cash flow for 2007 is _____ and for 2008 it is _____.
a. $2,872; $4,279
b. $2,996; $4,262
c. $3,427; $5,087
D. $3,731; $5,087
e. $3,731; $5,606
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: OPERATING CASH FLOW
TYPE: PROBLEMS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
99. Preston, Inc. has compiled the following information:
For 2008, the cash flow from assets is _____, the cash flow to creditors is _____, and the cash
flow to stockholders is _____.
A. $4,487; $1,471; $3,016
b. $4,487; $646; $5,133
c. $4,797; $1,471; $3,326
d. $5,087; $2,071; $3,016
e. $5,224; $825; $4,399
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: CHALLENGE
SECTION: 2.4
TOPIC: CASH FLOWS
TYPE: PROBLEMS
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Chapter 002 Financial Statements, Taxes, and Cash Flow
Essay Questions
100. Explain the types of adjustments investors must make to a firm's book value to determine
the actual market value of a firm.
The book value must be adjusted in two primary ways. First, the book value of the assets and
liabilities must be adjusted to reflect current market values. Second, items that do not appear on
the balance sheet must be considered. These include such things as the firm's reputation,
customer loyalty, employee knowledge and experience, and the expertise and teamwork of the
managers.
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 1
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.1
TOPIC: BOOK AND MARKET VALUE
101. Explain the difference between a firm's net income and its operating cash flow.
Net income is an accounting measure of revenues and expenses based on GAAP. Operating
cash flow is a measure of net cash flows that includes revenues and cash expenses, excluding
interest. Thus, the primary difference between net income and operating cash flow is composed
of the value of the depreciation expense plus the interest expense.
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: ACCOUNTING INCOME AND OPERATING CASH FLOW
102. You are analyzing a new project. To estimate the potential operating cash flows you need
to estimate the tax liability. What tax rate should you apply to this project and why?
The marginal tax rate should be used as the marginal rate is the rate that applies to any
additional taxable income generated.
BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 3
LEVEL OF DIFFICULTY: BASIC
SECTION: 2.3
TOPIC: MARGINAL AND AVERAGE TAX RATES
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Chapter 002 Financial Statements, Taxes, and Cash Flow
103. Identify and describe the types of cash flows that occur between a firm and its long-term
creditors. Explain how the values of these cash flows are determined.
A firm borrows money, which is a cash inflow for the firm. The firm then repays both principal
and interest on the borrowed funds which are cash outflows for the firm. The interest paid is
found on the income statement while the net principal borrowed or repaid is determined by
comparing the ending long-term debt to the beginning long-term debt.
BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 4
LEVEL OF DIFFICULTY: INTERMEDIATE
SECTION: 2.4
TOPIC: CASH FLOW TO CREDITORS
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