Testbank Corporate Finance Ross

Chapter 02 - Financial Statements, Taxes, and Cash Flow
Chapter 02 Financial Statements, Taxes, and Cash Flow

Multiple Choice Questions
1. Which one of the following is the financial statement that shows the accounting alue of a firm!s e"uit# as of a particular date$ %. income statement &. creditor!s statement C. 'alance sheet (. statement of cash flows ). di idend statement
2. *et wor+ing capital is defined as, %. total lia'ilities minus shareholders! e"uit#. &. current lia'ilities minus shareholders! e"uit#. C. fixed assets minus long-term lia'ilities. (. total assets minus total lia'ilities. ). current assets minus current lia'ilities.
-. The common set of standards and procedures '# which audited financial statements are prepared is +nown as the, %. matching principle. &. cash flow identit#. C. .enerall# %ccepted %ccounting /rinciples. (. Financial %ccounting 0eporting /rinciples. ). Standard %ccounting 1alue .uidelines.
2. Which one of the following is the financial statement that summari3es a firm!s re enue and expenses o er a period of time$ %. income statement &. 'alance sheet C. statement of cash flows (. tax reconciliation statement ). mar+et alue report
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4. *oncash items refer to, %. accrued expenses. &. in entor# items purchased using credit. C. the ownership of intangi'le assets such as patents. (. expenses which do not directl# affect cash flows. ). sales which are made using store credit.
5. The percentage of the next dollar #ou earn that must 'e paid in taxes is referred to as the 66666 tax rate. %. mean &. residual C. total (. a erage ). marginal
7. The 66666 tax rate is e"ual to total taxes di ided '# total taxa'le income. %. deducti'le &. residual C. total (. a erage ). marginal
8. The cash flow of a firm which is a aila'le for distri'ution to the firm!s creditors and stoc+holders is called the, %. operating cash flow. &. net capital spending. C. net wor+ing capital. (. cash flow from assets. ). cash flow to stoc+holders.
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9. Which term relates to the cash flow which results from a firm!s ongoing, normal 'usiness acti ities$ %. operating cash flow &. capital spending C. net wor+ing capital (. cash flow from assets ). cash flow to creditors
10. Cash flow from assets is also +nown as the firm!s, %. capital structure. &. e"uit# structure. C. hidden cash flow. (. free cash flow. ). historical cash flow.
11. The cash flow related to interest pa#ments less an# net new 'orrowing is called the, %. operating cash flow. &. capital spending cash flow. C. net wor+ing capital. (. cash flow from assets. ). cash flow to creditors.
12. Cash flow to stoc+holders is defined as, %. the total amount of interest and di idends paid during the past #ear. &. the change in total e"uit# o er the past #ear. C. cash flow from assets plus the cash flow to creditors. (. operating cash flow minus the cash flow to creditors. ). di idend pa#ments less net new e"uit# raised.
1-. Which one of the following is classified as an intangi'le fixed asset$ %. accounts recei a'le &. production e"uipment C. 'uilding (. trademar+ ). in entor#
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12. Which of the following are current assets$ :. patent ::. :n entor# :::. accounts pa#a'le :1. cash %. : and ::: onl# &. :: and :1 onl# C. :, ::, and :1 onl# (. :, :: and ::: onl# ). ::, :::, and :1 onl#
14. Which one of the following is included in a firm!s mar+et alue 'ut #et is excluded from the firm!s accounting alue$ %. real estate in estment &. good reputation of the compan# C. e"uipment owned '# the firm (. mone# due from a customer ). an item held '# the firm for future sale
15. Which of the following are included in current lia'ilities$ :. note pa#a'le to a supplier in eight months ::. amount due from a customer next month :::. account pa#a'le to a supplier that is due next wee+ :1. loan pa#a'le to the 'an+ in fourteen months %. : and ::: onl# &. :: and ::: onl# C. :, ::, and ::: onl# (. :, :::, and :1 onl# ). :, ::, :::, and :1
17. Which one of the following will increase the alue of a firm!s net wor+ing capital$ %. using cash to pa# a supplier &. depreciating an asset C. collecting an accounts recei a'le (. purchasing in entor# on credit ). selling in entor# at a profit
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18. Which one of the following statements concerning net wor+ing capital is correct$ %. *et wor+ing capital increases when in entor# is purchased with cash. &. *et wor+ing capital must 'e a positi e alue. C. Total assets must increase if net wor+ing capital increases. (. % decrease in the cash 'alance also decreases net wor+ing capital. ). *et wor+ing capital is the amount of cash a firm currentl# has a aila'le for spending.
19. Which one of the following statements concerning net wor+ing capital is correct$ %. The lower the alue of net wor+ing capital the greater the a'ilit# of a firm to meet its current o'ligations. &. %n increase in net wor+ing capital must also increase current assets. C. *et wor+ing capital increases when in entor# is sold for cash at a profit. (. Firms with e"ual amounts of net wor+ing capital are also e"uall# li"uid. ). *et wor+ing capital is a part of the operating cash flow.
20. Which one of the following accounts is the most li"uid$ %. in entor# &. 'uilding C. accounts recei a'le (. e"uipment ). land
21. Which one of the following represents the most li"uid asset$ %. ;100 account recei a'le that is discounted and collected for ;95 toda# &. ;100 of in entor# which is sold toda# on credit for ;10C. ;100 of in entor# which is discounted and sold for ;97 cash toda# (. ;100 of in entor# that is sold toda# for ;100 cash ). ;100 accounts recei a'le that will 'e collected in full next wee+
22. Which one of the following statements related to li"uidit# is correct$ %. <i"uid assets tend to earn a high rate of return. &. <i"uid assets are alua'le to a firm. C. <i"uid assets are defined as assets that can 'e sold "uic+l# regardless of the price o'tained. (. :n entor# is more li"uid than accounts recei a'le 'ecause in entor# is tangi'le. ). %n# asset that can 'e sold within the next #ear is considered li"uid.
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2-. Shareholders! e"uit#, %. increases in alue an#time total assets increases. &. is e"ual to total assets plus total lia'ilities. C. decreases whene er new shares of stoc+ are issued. (. includes long-term de't, preferred stoc+, and common stoc+. ). represents the residual alue of a firm.
22. The higher the degree of financial le erage emplo#ed '# a firm, the, %. higher the pro'a'ilit# that the firm will encounter financial distress. &. lower the amount of de't incurred. C. less de't a firm has per dollar of total assets. (. higher the num'er of outstanding shares of stoc+. ). lower the 'alance in accounts pa#a'le.
24. The 'oo+ alue of a firm is, %. e"ui alent to the firm!s mar+et alue pro ided that the firm has some fixed assets. &. 'ased on historical cost. C. generall# greater than the mar+et alue when fixed assets are included. (. more of a financial than an accounting aluation. ). ad=usted to the mar+et alue whene er the mar+et alue exceeds the stated 'oo+ alue.
25. Which of the following are included in the mar+et alue of a firm 'ut are excluded from the firm!s 'oo+ alue$ :. alue of management s+ills ::. alue of a cop#right :::. alue of the firm!s reputation :1. alue of emplo#ee!s experience %. : onl# &. :: onl# C. ::: and :1 onl# (. :, ::, and ::: onl# ). :, :::, and :1 onl#
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27. >ou recentl# purchased a grocer# store. %t the time of the purchase, the store!s mar+et alue e"ualed its 'oo+ alue. The purchase included the 'uilding, the fixtures, and the in entor#. Which one of the following is most apt to cause the mar+et alue of this store to 'e lower than the 'oo+ alue$ %. a sudden and unexpected increase in inflation &. the replacement of old in entor# items with more desira'le products C. impro ements to the surrounding area '# other store owners (. construction of a new restricted access highwa# located 'etween the store and the surrounding residential areas ). addition of a stop light at the main entrance to the store!s par+ing lot
28. Which one of the following is true according to .enerall# %ccepted %ccounting /rinciples$ %. (epreciation ma# or ma# not 'e recorded at management!s discretion. &. :ncome is recorded 'ased on the matching principle. C. Costs are recorded 'ased on the reali3ation principle. (. (epreciation is recorded 'ased on the recognition principle. ). Costs of goods sold are recorded 'ased on the matching principle.
29. Which one of these is most apt to 'e a fixed cost$ %. raw materials &. manufacturing wages C. management 'onuses (. office salaries ). shipping and freight
-0. Which one of the following costs is most apt to 'e a fixed cost$ %. production la'or cost &. depreciation C. raw materials (. utilities ). sales commissions
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-1. Which of the following are expenses for accounting purposes 'ut are not operating cash flows for financial purposes$ :. interest expense ::. taxes :::. costs of goods sold :1. depreciation %. :1 onl# &. :: and :1 onl# C. : and ::: onl# (. : and :1 onl# ). :, ::, and :1 onl#
-2. Which one of the following statements related to an income statement is correct$ %ssume accrual accounting is used. %. The addition to retained earnings is e"ual to net income plus di idends paid. &. Credit sales are recorded on the income statement when the cash from the sale is collected. C. The la'or costs for producing a product are expensed when the product is sold. (. :nterest is a non-cash expense. ). (epreciation increases the marginal tax rate.
--. Which one of the following statements related to taxes is correct$ %. The marginal tax rate must 'e e"ual to or lower than the a erage tax rate for a firm. &. The tax for a firm is computed '# multipl#ing the firm!s current marginal tax rate times the taxa'le income. C. %dditional income is taxed at a firm!s a erage tax rate. (. .i en the corporate tax structure in 2008, the highest marginal tax rate is e"ual to the highest a erage tax rate. ). The marginal tax rate for a firm can 'e either higher or lower than the a erage tax rate.
-2. %s of 2008, which one of the following statements concerning corporate income taxes is correct$ %. The largest corporations ha e an a erage tax rate of -9 percent. &. The lowest marginal rate is 24 percent. C. % firm!s tax is computed on an incremental 'asis. (. % firm!s marginal tax rate will generall# 'e lower than its a erage tax rate once the firm!s income exceeds ;40,000. ). When anal#3ing a new pro=ect, the a erage tax rate should 'e used.
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-4. (epreciation, %. reduces 'oth taxes and net income. &. increases the net fixed assets as shown on the 'alance sheet. C. reduces 'oth the net fixed assets and the costs of a firm. (. is a noncash expense which increases the net income. ). decreases net fixed assets, net income, and operating cash flows.
-5. Which one of the following statements related to an income statement is correct$ %. :nterest expense increases the amount of tax due. &. (epreciation does not affect taxes since it is a non-cash expense. C. *et income is distri'uted to di idends and paid-in surplus. (. Taxes reduce 'oth net income and operating cash flow. ). :nterest expense is included in operating cash flow.
-7. Which one of the following statements is correct concerning a corporation with taxa'le income of ;124,000$ %. *et income minus di idends paid will e"ual the ending retained earnings for the #ear. &. %n increase in depreciation will increase the operating cash flow. C. *et income di ided '# the num'er of shares outstanding will e"ual the di idends per share. (. :nterest paid will 'e included in 'oth net income and operating cash flow. ). %n increase in the tax rate will increase 'oth net income and operating cash flow.
-8. Which one of the following will increase the cash flow from assets, all else e"ual$ %. decrease in cash flow to stoc+holders &. decrease in operating cash flow C. increase in the change in net wor+ing capital (. decrease in cash flow to creditors ). decrease in net capital spending
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-9. For a tax-pa#ing firm, an increase in 66666 will cause the cash flow from assets to increase. %. depreciation &. net capital spending C. change in net wor+ing capital (. taxes ). production costs
20. Which one of the following must 'e true if a firm had a negati e cash flow from assets$ %. The firm 'orrowed mone#. &. The firm ac"uired new fixed assets. C. The firm had a net loss for the period. (. The firm utili3ed outside funding. ). *ewl# issued shares of stoc+ were sold.
21. %n increase in the depreciation expense will do which of the following$ :. increase net income ::. decrease net income :::. increase the cash flow from assets :1. decrease the cash flow from assets %. : onl# &. :: onl# C. : and ::: onl# (. :: and ::: onl# ). :: and :1 onl#
22. Which one of the following is *?T included in cash flow from assets$ %. accounts pa#a'le &. in entor# C. sales (. interest expense ). cash account
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2-. *et capital spending, %. is e"ual to ending net fixed assets minus 'eginning net fixed assets. &. is e"ual to 3ero if the decrease in the net fixed assets is e"ual to the depreciation expense. C. reflects the net changes in total assets o er a stated period of time. (. is e"ui alent to the cash flow from assets minus the operating cash flow minus the change in net wor+ing capital. ). is e"ual to the net change in the current accounts.
22. Which one of the following statements related to the cash flow to creditors is correct$ %. :f the cash flow to creditors is positi e then the firm must ha e 'orrowed more mone# than it repaid. &. :f the cash flow to creditors is negati e then the firm must ha e a negati e cash flow from assets. C. % positi e cash flow to creditors represents a net cash outflow from the firm. (. % positi e cash flow to creditors means that a firm has increased its long-term de't. ). :f the cash flow to creditors is 3ero, then a firm has no long-term de't.
24. % positi e cash flow to stoc+holders indicates which one of the following with certaint#$ %. The di idends paid exceeded the net new e"uit# raised. &. The amount of the sale of common stoc+ exceeded the amount of di idends paid. C. *o di idends were distri'uted 'ut new shares of stoc+ were sold. (. &oth the cash flow to assets and the cash flow to creditors must 'e negati e. ). &oth the cash flow to assets and the cash flow to creditors must 'e positi e.
25. % firm has ;420 in in entor#, ;1,850 in fixed assets, ;190 in accounts recei a'les, ;210 in accounts pa#a'le, and ;70 in cash. What is the amount of the current assets$ %. ;710 &. ;780 C. ;990 (. ;2,2-0 ). ;2,520
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27. % firm has net wor+ing capital of ;520. <ong-term de't is ;2,180, total assets are ;5,2-0, and fixed assets are ;-,910. What is the amount of the total lia'ilities$ %. ;2,040 &. ;2,590 C. ;2,1-0 (. ;4,490 ). ;4,850
28. % firm has common stoc+ of ;5,200, paid-in surplus of ;9,100, total lia'ilities of ;8,200, current assets of ;4,900, and fixed assets of ;21,200. What is the amount of the shareholders! e"uit#$ %. ;5,900 &. ;14,-00 C. ;18,700 (. ;2-,700 ). ;-4,400
29. >our firm has total assets of ;2,900, fixed assets of ;-,200, long-term de't of ;2,900, and short-term de't of ;1,200. What is the amount of net wor+ing capital$ %. -;100 &. ;-00 C. ;500 (. ;1,700 ). ;1,800
40. &onner Collision has shareholders! e"uit# of ;121,800. The firm owes a total of ;125,000 of which 50 percent is pa#a'le within the next #ear. The firm net fixed assets of ;151,900. What is the amount of the net wor+ing capital$ %. ;24,-00 &. ;-0,-00 C. ;74,500 (. ;85,-00 ). ;111,400
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41. Four #ears ago, 1el et /urses purchased a mailing machine at a cost of ;175,000. This e"uipment is currentl# alued at ;52,400 on toda#!s 'alance sheet 'ut could actuall# 'e sold for ;48,900. This is the onl# fixed asset the firm owns. *et wor+ing capital is ;47,200 and long-term de't is ;111,-00. What is the 'oo+ alue of shareholders! e"uit#$ %. ;2,800 &. ;7,700 C. ;10,200 (. ;222,500 ). ;2--,000
42. @a+e owns The Corner Aar+et which he is tr#ing to sell so that he can retire and tra el. The Corner Aar+et owns the 'uilding in which it is located. This 'uilding was 'uilt at a cost of ;527,000 and is currentl# appraised at ;819,000. The counters and fixtures originall# cost ;128,000 and are currentl# alued at ;54,000. The in entor# is alued on the 'alance sheet at ;-19,000 and has a retail mar+et alue e"ual to 1.2 times its cost. @a+e expects the store to collect 98 percent of the ;21,700 in accounts recei a'le. The firm has ;25,800 in cash and has total de't of ;212,700. What is the mar+et alue of this firm$ %. ;847,5-2 &. ;900,155 C. ;919,000 (. ;1,-12,855 ). ;1,---,700
4-. @ensen )nterprises paid ;1,-00 in di idends and ;920 in interest this past #ear. Common stoc+ increased '# ;1,200 and retained earnings decreased '# ;-10. What is the net income for the #ear$ %. -;210 &. ;990 C. ;1,510 (. ;1,910 ). ;2,190
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42. %ndre!s &a+er# has sales of ;587,000 with costs of ;292,000. :nterest expense is ;25,000 and depreciation is ;22,000. The tax rate is -4 percent. What is the net income$ %. ;22,740 &. ;22,240 C. ;82,440 (. ;85,240 ). ;122,440
44. Ba#lor )"uipment 0ental paid ;74 in di idends and ;411 in interest expense. The addition to retained earnings is ;218 and net new e"uit# is ;400. The tax rate is -4 percent. Sales are ;14,900 and depreciation is ;580. What are the earnings 'efore interest and taxes$ %. ;489.25 &. ;1,259.25 C. ;1,--1.42 (. ;1,941.42 ). ;1,929.25
45. .i en the tax rates as shown, what is the a erage tax rate for a firm with taxa'le income of ;-11,-50$
%. 28.24 percent &. -1.09 percent C. --.52 percent (. -4.28 percent ). -9.00 percent
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47. The tax rates are as shown. *e ada Aining currentl# has taxa'le income of ;97,800. Cow much additional tax will the firm owe if taxa'le income increases '# ;21,000$
%. ;8,080 &. ;8,1-0 C. ;8,144 (. ;8,170 ). ;8,190
48. Winston :ndustries had sales of ;82-,800 and costs of ;509,900. The firm paid ;-8,200 in interest and ;18,000 in di idends. :t also increased retained earnings '# ;52,1-8 for the #ear. The depreciation was ;75,200. What is the a erage tax rate$ %. -2.8- percent &. --.-- percent C. -8.17 percent (. 2-.-9 percent ). 28.87 percent
49. Crandall ?il has total sales of ;1,-29,800 and costs of ;90-,400. (epreciation is ;22,700 and the tax rate is -2 percent. The firm does not ha e an# interest expense. What is the operating cash flow$ %. ;129,142 &. ;171,842 C. ;179,922 (. ;281,217 ). ;-09,075
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50. *ielsen %uto /arts had 'eginning net fixed assets of ;218,270 and ending net fixed assets of ;209,211. (uring the #ear, assets with a com'ined 'oo+ alue of ;5,92- were sold. (epreciation for the #ear was ;22,822. What is the amount of net capital spending$ %. ;--,75&. ;20,705 C. ;48,218 (. ;54,151 ). ;57,208
51. %t the 'eginning of the #ear, a firm had current assets of ;121,-05 and current lia'ilities of ;122,409. %t the end of the #ear, the current assets were ;122,218 and the current lia'ilities were ;10-,718. What is the change in net wor+ing capital$ %. -;19,579 &. -;11,40C. -;9,-87 (. ;1,809 ). ;21,90-
52. %t the 'eginning of the #ear, the long-term de't of a firm was ;72,918 and total de't was ;1-8,207. %t the end of the #ear, long-term de't was ;58,219 and total de't was ;124,8-8. The interest paid was ;5,2-0. What is the amount of the cash flow to creditors$ %. -;18,-28 &. -;1,001 C. ;11,129 (. ;1-,851 ). ;19,172
5-. %delson!s )lectric had 'eginning long-term de't of ;22,411 and ending long-term de't of ;28,919. The 'eginning and ending total de't 'alances were ;82,542 and ;78,51-, respecti el#. The interest paid was ;2,757. What is the amount of the cash flow to creditors$ %. -;1,521 &. -;1,272 C. ;1,272 (. ;7,218 ). ;11,174
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52. The (ail# *ews had net income of ;121,500 of which 20 percent was distri'uted to the shareholders as di idends. (uring the #ear, the compan# sold ;74,000 worth of common stoc+. What is the cash flow to stoc+holders$ %. -;74,000 &. -;25,-50 C. -;2,020 (. ;12-,520 ). ;127,950
54. The <a+eside :nn had operating cash flow of ;28,240. (epreciation was ;5,700 and interest paid was ;2,280. % net total of ;2,520 was paid on long-term de't. The firm spent ;22,000 on fixed assets and decreased net wor+ing capital '# ;1,--0. What is the amount of the cash flow to stoc+holders$ %. ;4,100 &. ;7,8-0 C. ;18,020 (. ;19,998 ). ;20,580
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55. What is the change in the net wor+ing capital from 2008 to 2009$ %. -;1,192 &. ;1,-05 C. ;1,887 (. ;2,780 ). ;4,172
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57. What is the amount of the noncash expenses for 2009$ %. ;720 &. ;1,282 C. ;1,--(. ;1,511 ). ;2,-41
58. What is the amount of the net capital spending for 2009$ %. -;-82 &. ;1,229 C. ;1,802 (. ;2,-74 ). ;2,415
59. What is the operating cash flow for 2009$ %. ;2,112 &. ;2,900 C. ;2,984 (. ;-,4-5 ). ;2,257
70. What is the cash flow from assets for 2009$ %. ;1,7-2 &. ;2,227 C. ;2,951 (. ;-,914 ). ;2,257
71. What is the amount of net new 'orrowing for 2009$ %. -;1,812 &. -;1,7-8 C. ;220 (. ;552 ). ;840
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72. What is the cash flow to creditors for 2009$ %. -;-4&. -;210 C. ;-00 (. ;2-2 ). ;427
7-. What is the amount of di idends paid in 2009$ %. ;0 &. ;472 C. ;800 (. ;2,01). ;2,172
72. What is the cash flow to stoc+holders for 2009$ %. -;400 &. -;800 C. ;400 (. ;1,-00 ). ;2,100
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74. What is the net wor+ing capital for 2009$ %. -;174 &. ;--8 C. ;1,252 (. ;1,924 ). ;2,921
75. What is the change in net wor+ing capital from 2008 to 2009$ %. -;174 &. -;70 C. ;124 (. ;220 ). ;-14
77. What is the net capital spending for 2009$ %. ;117 &. ;2-9 C. ;247 (. ;--8 ). ;221
78. What is the operating cash flow for 2009$ %. ;1,225 &. ;1,-57 C. ;1,522 (. ;1,755 ). ;1,82-
79. What is the cash flow from assets for 2009$ %. ;1,2-0 &. ;1,480 C. ;1,770 (. ;1,810 ). ;1,980
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80. What is net new 'orrowing for 2009$ %. -;1,-00 &. -;1,020 C. ;880 (. ;1,020 ). ;1,-00
81. What is the cash flow to creditors for 2009$ %. -;1,020 &. -;1,100 C. ;280 (. ;1,480 ). ;1,750
82. What is the cash flow to stoc+holders for 2009$ %. ;0 &. ;1-C. ;258 (. ;1,709 ). ;1,414
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8-. What is the taxa'le income for 2009$ %. ;1,041.00 &. ;1,-57.78 C. ;1,492.22 (. ;2,775.21 ). ;-,091.18
82. What is the operating cash flow for 2009$ %. ;2,078.00 &. ;2,122.22 C. ;2,252.48 (. ;2,552.00 ). ;2,721.22
Essay Questions
84. %ssume #ou are the financial officer of a ma=or firm. The president of the firm has =ust stated that she wishes to reduce the firm!s in estment in current assets since those assets pro ide little, if an#, return to the firm. Cow would #ou respond to this statement$
85. %s long as a firm maintains a positi e cash 'alance, wh# is it essential to re iew the firm!s cash flows$
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87. The managers of a firm wish to expand the firm!s operations and are tr#ing to determine the amount of de't financing the firm should o'tain ersus the amount of e"uit# financing that should 'e raised. The managers ha e as+ed #ou to explain the effects that 'oth of these forms of financing would ha e on the cash flows of the firm. Write a short response to this re"uest.
88. (iscuss the difference 'etween 'oo+ alues and mar+et alues and explain which one is more important to the financial manager and wh#.
89. %ssume #ou are a credit manager in charge of appro ing commercial loans to 'usiness firms. :dentif# three aspects of a firm!s cash flows #ou would re iew and explain the t#pe of information #ou hope to gain from re iewing each of those fi e aspects.
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90. &each Front :ndustries has sales of ;425,000, costs of ;294,000, depreciation expense of ;-7,000, interest expense of ;14,000, and a tax rate of -2 percent. The firm paid ;49,000 in cash di idends. What is the addition to retained earnings$ %. ;75,-20 &. ;81,700 C. ;94,200 (. ;10-,250 ). ;121,580
91. The Widget Co. purchased new machiner# three #ears ago for ;2 million. The machiner# can 'e sold to the 0oman Co. toda# for ;2 million. The Widget Co.!s current 'alance sheet shows net fixed assets of ;2,400,000, current lia'ilities of ;1,-74,000, and net wor+ing capital of ;724,000. :f all the current assets were li"uidated toda#, the compan# would recei e ;1.9 million in cash. The 'oo+ alue of the Widget Co.!s assets toda# is 66666 and the mar+et alue of those assets is 66666. %. ;2,500,000D ;-,900,000 &. ;2,500,000D ;-,124,000 C. ;4,000,000D ;-,124,000 (. ;4,000,000D ;-,900,000 ). ;5,400,000D ;-,900,000
92. &o#er )nterprises had ;200,000 in 2008 taxa'le income. What is the firm!s a erage tax rate 'ased on the rates shown in the following ta'le$
%. 28.24 percent &. -0.5- percent C. -2.28 percent (. -5.40 percent ). -9.00 percent
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9-. We'ster World has sales of ;12,900, costs of ;4,800, depreciation expense of ;1,100, and interest expense of ;700. What is the operating cash flow if the tax rate is -2 percent$ %. ;2,702 &. ;4,729 C. ;4,202 (. ;7,0-5 ). ;7,100
92. The &lue &onnet!s 2008 'alance sheet showed net fixed assets of ;2.2 million, and the 2009 'alance sheet showed net fixed assets of ;2.5 million. The compan#!s income statement showed a depreciation expense of ;900,000. What was the amount of the net capital spending for 2009$ %. -;400,000 &. ;200,000 C. ;1,-00,000 (. ;1,700,000 ). ;1,800,000
94. The 2008 'alance sheet of .lo'al Tours showed current assets of ;1,-50 and current lia'ilities of ;920. The 2009 'alance sheet showed current assets of ;1,520 and current lia'ilities of ;1,120. What was the change in net wor+ing capital for 2009$ %. ;80 &. ;170 C. ;190 (. ;880 ). ;920
95. The 2008 'alance sheet of The &each Shoppe showed long-term de't of ;2.1 million, and the 2009 'alance sheet showed long-term de't of ;2.- million. The 2009 income statement showed an interest expense of ;240,000. What was the cash flow to creditors for 2009$ %. -;200,000 &. -;140,000 C. ;40,000 (. ;200,000 ). ;240,000
2-25
97. The 2008 'alance sheet of The Sports Store showed ;800,000 in the common stoc+ account and ;5.7 million in the additional paid-in surplus account. The 2009 'alance sheet showed ;872,000 and ;8 million in the same two accounts, respecti el#. The compan# paid out ;500,000 in cash di idends during 2009. What is the cash flow to stoc+holders for 2009$ %. -;1,-72,000 &. -;772,000 C. -;528,000 (. ;-72,000 ). ;1,972,000
98. Suppose #ou are gi en the following information for &a#side &a+er#, sales E ;-0,000D costs E ;14,000D addition to retained earnings E ;2,221D di idends paid E ;259D interest expense E ;1,-00D tax rate E -0 percent. What is the amount of the depreciation expense$ %. ;2,820 &. ;4,400 C. ;7,000 (. ;8,180 ). ;9,400
99. (ee (ee!s Aarina is o'ligated to pa# its creditors ;5,200 toda#. The firm!s assets ha e a current mar+et alue of ;4,900. What is the current mar+et alue of the shareholders! e"uit#$ %. -;500 &. -;400 C. ;0 (. ;400 ). ;500
100. (uring 2009, 0:T Corp. had sales of ;454,500. Costs of goods sold, administrati e and selling expenses, and depreciation expenses were ;275,000, ;48,800, and ;48,800, respecti el#. :n addition, the compan# had an interest expense of ;112,000 and a tax rate of -2 percent. What is the operating cash flow for 2009$ :gnore an# tax loss carr#-'ac+ or carr#forward pro isions. %. ;17,920 &. ;21,820 C. ;-0,800 (. ;42,500 ). ;77,820
2-27
Chapter 02 Financial Statements, Taxes, and Cash Flow %nswer Be#
1. Which one of the following is the financial statement that shows the accounting alue of a firm!s e"uit# as of a particular date$ %. income statement &. creditor!s statement C. 'alance sheet (. statement of cash flows ). di idend statement 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Balance s(eet
2. *et wor+ing capital is defined as, %. total lia'ilities minus shareholders! e"uit#. &. current lia'ilities minus shareholders! e"uit#. C. fixed assets minus long-term lia'ilities. (. total assets minus total lia'ilities. E. current assets minus current lia'ilities. 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
2-28
-. The common set of standards and procedures '# which audited financial statements are prepared is +nown as the, %. matching principle. &. cash flow identit#. C. .enerall# %ccepted %ccounting /rinciples. (. Financial %ccounting 0eporting /rinciples. ). Standard %ccounting 1alue .uidelines. 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: *AA+
2. Which one of the following is the financial statement that summari3es a firm!s re enue and expenses o er a period of time$ A. income statement &. 'alance sheet C. statement of cash flows (. tax reconciliation statement ). mar+et alue report 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: ,ncome statement
2-29
4. *oncash items refer to, %. accrued expenses. &. in entor# items purchased using credit. C. the ownership of intangi'le assets such as patents. . expenses which do not directl# affect cash flows. ). sales which are made using store credit. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: Noncas( items
5. The percentage of the next dollar #ou earn that must 'e paid in taxes is referred to as the 66666 tax rate. %. mean &. residual C. total (. a erage E. marginal 0efer to section 2.-
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: .arginal ta/ rate
2--0
7. The 66666 tax rate is e"ual to total taxes di ided '# total taxa'le income. %. deducti'le &. residual C. total . a erage ). marginal 0efer to section 2.-
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage ta/ rate
8. The cash flow of a firm which is a aila'le for distri'ution to the firm!s creditors and stoc+holders is called the, %. operating cash flow. &. net capital spending. C. net wor+ing capital. . cash flow from assets. ). cash flow to stoc+holders. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2--1
9. Which term relates to the cash flow which results from a firm!s ongoing, normal 'usiness acti ities$ A. operating cash flow &. capital spending C. net wor+ing capital (. cash flow from assets ). cash flow to creditors 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
10. Cash flow from assets is also +nown as the firm!s, %. capital structure. &. e"uit# structure. C. hidden cash flow. . free cash flow. ). historical cash flow. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: 1ree cas( flow
2--2
11. The cash flow related to interest pa#ments less an# net new 'orrowing is called the, %. operating cash flow. &. capital spending cash flow. C. net wor+ing capital. (. cash flow from assets. E. cash flow to creditors. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to creditors
12. Cash flow to stoc+holders is defined as, %. the total amount of interest and di idends paid during the past #ear. &. the change in total e"uit# o er the past #ear. C. cash flow from assets plus the cash flow to creditors. (. operating cash flow minus the cash flow to creditors. E. di idend pa#ments less net new e"uit# raised. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2---
1-. Which one of the following is classified as an intangi'le fixed asset$ %. accounts recei a'le &. production e"uipment C. 'uilding . trademar+ ). in entor# 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,ntangible fi/ed asset
12. Which of the following are current assets$ :. patent ::. :n entor# :::. accounts pa#a'le :1. cash %. : and ::: onl# !. :: and :1 onl# C. :, ::, and :1 onl# (. :, :: and ::: onl# ). ::, :::, and :1 onl# 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Current assets
2--2
14. Which one of the following is included in a firm!s mar+et alue 'ut #et is excluded from the firm!s accounting alue$ %. real estate in estment !. good reputation of the compan# C. e"uipment owned '# the firm (. mone# due from a customer ). an item held '# the firm for future sale 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: .ar)et !alue
15. Which of the following are included in current lia'ilities$ :. note pa#a'le to a supplier in eight months ::. amount due from a customer next month :::. account pa#a'le to a supplier that is due next wee+ :1. loan pa#a'le to the 'an+ in fourteen months A. : and ::: onl# &. :: and ::: onl# C. :, ::, and ::: onl# (. :, :::, and :1 onl# ). :, ::, :::, and :1 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Current liabilities
2--4
17. Which one of the following will increase the alue of a firm!s net wor+ing capital$ %. using cash to pa# a supplier &. depreciating an asset C. collecting an accounts recei a'le (. purchasing in entor# on credit E. selling in entor# at a profit 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
18. Which one of the following statements concerning net wor+ing capital is correct$ %. *et wor+ing capital increases when in entor# is purchased with cash. &. *et wor+ing capital must 'e a positi e alue. C. Total assets must increase if net wor+ing capital increases. . % decrease in the cash 'alance also decreases net wor+ing capital. ). *et wor+ing capital is the amount of cash a firm currentl# has a aila'le for spending. 0efer to section 2.1
AACSB: N/A Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
2--5
19. Which one of the following statements concerning net wor+ing capital is correct$ %. The lower the alue of net wor+ing capital the greater the a'ilit# of a firm to meet its current o'ligations. &. %n increase in net wor+ing capital must also increase current assets. C. *et wor+ing capital increases when in entor# is sold for cash at a profit. (. Firms with e"ual amounts of net wor+ing capital are also e"uall# li"uid. ). *et wor+ing capital is a part of the operating cash flow. 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
20. Which one of the following accounts is the most li"uid$ %. in entor# &. 'uilding C. accounts recei a'le (. e"uipment ). land 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Li2uidity
2--7
21. Which one of the following represents the most li"uid asset$ %. ;100 account recei a'le that is discounted and collected for ;95 toda# &. ;100 of in entor# which is sold toda# on credit for ;10C. ;100 of in entor# which is discounted and sold for ;97 cash toda# . ;100 of in entor# that is sold toda# for ;100 cash ). ;100 accounts recei a'le that will 'e collected in full next wee+ 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Li2uidity
22. Which one of the following statements related to li"uidit# is correct$ %. <i"uid assets tend to earn a high rate of return. !. <i"uid assets are alua'le to a firm. C. <i"uid assets are defined as assets that can 'e sold "uic+l# regardless of the price o'tained. (. :n entor# is more li"uid than accounts recei a'le 'ecause in entor# is tangi'le. ). %n# asset that can 'e sold within the next #ear is considered li"uid. 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Li2uidity
2--8
2-. Shareholders! e"uit#, %. increases in alue an#time total assets increases. &. is e"ual to total assets plus total lia'ilities. C. decreases whene er new shares of stoc+ are issued. (. includes long-term de't, preferred stoc+, and common stoc+. E. represents the residual alue of a firm. 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: S(are(olders' e2uity
22. The higher the degree of financial le erage emplo#ed '# a firm, the, A. higher the pro'a'ilit# that the firm will encounter financial distress. &. lower the amount of de't incurred. C. less de't a firm has per dollar of total assets. (. higher the num'er of outstanding shares of stoc+. ). lower the 'alance in accounts pa#a'le. 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 1inancial le!erage
2--9
24. The 'oo+ alue of a firm is, %. e"ui alent to the firm!s mar+et alue pro ided that the firm has some fixed assets. !. 'ased on historical cost. C. generall# greater than the mar+et alue when fixed assets are included. (. more of a financial than an accounting aluation. ). ad=usted to the mar+et alue whene er the mar+et alue exceeds the stated 'oo+ alue. 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Boo) !alue
25. Which of the following are included in the mar+et alue of a firm 'ut are excluded from the firm!s 'oo+ alue$ :. alue of management s+ills ::. alue of a cop#right :::. alue of the firm!s reputation :1. alue of emplo#ee!s experience %. : onl# &. :: onl# C. ::: and :1 onl# (. :, ::, and ::: onl# E. :, :::, and :1 onl# 0efer to section 2.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: .ar)et and boo) !alue
2-20
27. >ou recentl# purchased a grocer# store. %t the time of the purchase, the store!s mar+et alue e"ualed its 'oo+ alue. The purchase included the 'uilding, the fixtures, and the in entor#. Which one of the following is most apt to cause the mar+et alue of this store to 'e lower than the 'oo+ alue$ %. a sudden and unexpected increase in inflation &. the replacement of old in entor# items with more desira'le products C. impro ements to the surrounding area '# other store owners . construction of a new restricted access highwa# located 'etween the store and the surrounding residential areas ). addition of a stop light at the main entrance to the store!s par+ing lot 0efer to section 2.1
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: .ar)et and boo) !alue
28. Which one of the following is true according to .enerall# %ccepted %ccounting /rinciples$ %. (epreciation ma# or ma# not 'e recorded at management!s discretion. &. :ncome is recorded 'ased on the matching principle. C. Costs are recorded 'ased on the reali3ation principle. (. (epreciation is recorded 'ased on the recognition principle. E. Costs of goods sold are recorded 'ased on the matching principle. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: *AA+
2-21
29. Which one of these is most apt to 'e a fixed cost$ %. raw materials &. manufacturing wages C. management 'onuses . office salaries ). shipping and freight 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: 1i/ed cost
-0. Which one of the following costs is most apt to 'e a fixed cost$ %. production la'or cost !. depreciation C. raw materials (. utilities ). sales commissions 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: 1i/ed cost
2-22
-1. Which of the following are expenses for accounting purposes 'ut are not operating cash flows for financial purposes$ :. interest expense ::. taxes :::. costs of goods sold :1. depreciation %. :1 onl# &. :: and :1 onl# C. : and ::: onl# . : and :1 onl# ). :, ::, and :1 onl# 0efer to sections 2.2 and 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" and "#0 Section: "%" and "%0 &o'ic: Accounting !ersus cas( flow
-2. Which one of the following statements related to an income statement is correct$ %ssume accrual accounting is used. %. The addition to retained earnings is e"ual to net income plus di idends paid. &. Credit sales are recorded on the income statement when the cash from the sale is collected. C. The la'or costs for producing a product are expensed when the product is sold. (. :nterest is a non-cash expense. ). (epreciation increases the marginal tax rate. 0efer to sections 2.2 and 2.-
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#" and "#Section: "%" and "%&o'ic: ,ncome statement
2-2-
--. Which one of the following statements related to taxes is correct$ %. The marginal tax rate must 'e e"ual to or lower than the a erage tax rate for a firm. &. The tax for a firm is computed '# multipl#ing the firm!s current marginal tax rate times the taxa'le income. C. %dditional income is taxed at a firm!s a erage tax rate. (. .i en the corporate tax structure in 2008, the highest marginal tax rate is e"ual to the highest a erage tax rate. E. The marginal tax rate for a firm can 'e either higher or lower than the a erage tax rate. 0efer to section 2.-
AACSB: N/A Bloom's: Knowledge Difficulty: ,ntermediate Learning Ob ecti!e: "#Section: "%&o'ic: &a/ rates
-2. %s of 2008, which one of the following statements concerning corporate income taxes is correct$ %. The largest corporations ha e an a erage tax rate of -9 percent. &. The lowest marginal rate is 24 percent. C. % firm!s tax is computed on an incremental 'asis. (. % firm!s marginal tax rate will generall# 'e lower than its a erage tax rate once the firm!s income exceeds ;40,000. ). When anal#3ing a new pro=ect, the a erage tax rate should 'e used. 0efer to section 2.-
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#Section: "%&o'ic: &a/es
2-22
-4. (epreciation, A. reduces 'oth taxes and net income. &. increases the net fixed assets as shown on the 'alance sheet. C. reduces 'oth the net fixed assets and the costs of a firm. (. is a noncash expense which increases the net income. ). decreases net fixed assets, net income, and operating cash flows. 0efer to sections 2.2 and 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#" and "#0 Section: "%" and "%0 &o'ic: De'reciation
-5. Which one of the following statements related to an income statement is correct$ %. :nterest expense increases the amount of tax due. &. (epreciation does not affect taxes since it is a non-cash expense. C. *et income is distri'uted to di idends and paid-in surplus. . Taxes reduce 'oth net income and operating cash flow. ). :nterest expense is included in operating cash flow. 0efer to sections 2.2 and 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#" and "#0 Section: "%" and "%0 &o'ic: ,ncome statement
2-24
-7. Which one of the following statements is correct concerning a corporation with taxa'le income of ;124,000$ %. *et income minus di idends paid will e"ual the ending retained earnings for the #ear. !. %n increase in depreciation will increase the operating cash flow. C. *et income di ided '# the num'er of shares outstanding will e"ual the di idends per share. (. :nterest paid will 'e included in 'oth net income and operating cash flow. ). %n increase in the tax rate will increase 'oth net income and operating cash flow. 0efer to sections 2.2 and 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#" and "#0 Section: "%" and "%0 &o'ic: ,ncome statement
-8. Which one of the following will increase the cash flow from assets, all else e"ual$ %. decrease in cash flow to stoc+holders &. decrease in operating cash flow C. increase in the change in net wor+ing capital (. decrease in cash flow to creditors E. decrease in net capital spending 0efer to section 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-25
-9. For a tax-pa#ing firm, an increase in 66666 will cause the cash flow from assets to increase. A. depreciation &. net capital spending C. change in net wor+ing capital (. taxes ). production costs 0efer to section 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
20. Which one of the following must 'e true if a firm had a negati e cash flow from assets$ %. The firm 'orrowed mone#. &. The firm ac"uired new fixed assets. C. The firm had a net loss for the period. . The firm utili3ed outside funding. ). *ewl# issued shares of stoc+ were sold. 0efer to section 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-27
21. %n increase in the depreciation expense will do which of the following$ :. increase net income ::. decrease net income :::. increase the cash flow from assets :1. decrease the cash flow from assets %. : onl# &. :: onl# C. : and ::: onl# . :: and ::: onl# ). :: and :1 onl# 0efer to sections 2.2 and 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#" and "#0 Section: "%" and "%0 &o'ic: De'reciation
22. Which one of the following is *?T included in cash flow from assets$ %. accounts pa#a'le &. in entor# C. sales . interest expense ). cash account 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-28
2-. *et capital spending, %. is e"ual to ending net fixed assets minus 'eginning net fixed assets. !. is e"ual to 3ero if the decrease in the net fixed assets is e"ual to the depreciation expense. C. reflects the net changes in total assets o er a stated period of time. (. is e"ui alent to the cash flow from assets minus the operating cash flow minus the change in net wor+ing capital. ). is e"ual to the net change in the current accounts. 0efer to section 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net ca'ital s'ending
22. Which one of the following statements related to the cash flow to creditors is correct$ %. :f the cash flow to creditors is positi e then the firm must ha e 'orrowed more mone# than it repaid. &. :f the cash flow to creditors is negati e then the firm must ha e a negati e cash flow from assets. C. % positi e cash flow to creditors represents a net cash outflow from the firm. (. % positi e cash flow to creditors means that a firm has increased its long-term de't. ). :f the cash flow to creditors is 3ero, then a firm has no long-term de't. 0efer to section 2.2
AACSB: N/A Bloom's: Com're(ension Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to creditors
2-29
24. % positi e cash flow to stoc+holders indicates which one of the following with certaint#$ A. The di idends paid exceeded the net new e"uit# raised. &. The amount of the sale of common stoc+ exceeded the amount of di idends paid. C. *o di idends were distri'uted 'ut new shares of stoc+ were sold. (. &oth the cash flow to assets and the cash flow to creditors must 'e negati e. ). &oth the cash flow to assets and the cash flow to creditors must 'e positi e. 0efer to section 2.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
25. % firm has ;420 in in entor#, ;1,850 in fixed assets, ;190 in accounts recei a'les, ;210 in accounts pa#a'le, and ;70 in cash. What is the amount of the current assets$ %. ;710 !. ;780 C. ;990 (. ;2,2-0 ). ;2,520 Current assets E ;420 F ;190 F ;70 E ;780
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Current assets
2-40
27. % firm has net wor+ing capital of ;520. <ong-term de't is ;2,180, total assets are ;5,2-0, and fixed assets are ;-,910. What is the amount of the total lia'ilities$ %. ;2,040 &. ;2,590 C. ;2,1-0 (. ;4,490 E. ;4,850 Current assets E ;5,2-0 - ;-,910 E ;2,-20 Current lia'ilities E ;2,-20 - ;520 E ;1,580 Total lia'ilities E ;1,580 F ;2,180 E ;4,850
AACSB: Analytic Bloom's: Synt(esis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
28. % firm has common stoc+ of ;5,200, paid-in surplus of ;9,100, total lia'ilities of ;8,200, current assets of ;4,900, and fixed assets of ;21,200. What is the amount of the shareholders! e"uit#$ %. ;5,900 &. ;14,-00 C. ;18,700 (. ;2-,700 ). ;-4,400 Shareholders! e"uit# E ;4,900 F ;21,200 - ;8,200 E ;18,700 G*ote, The amount of retained earnings is not pro ided, so #ou must use total assets minus total lia'ilities to deri e the correct answer.H
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: S(are(olders' e2uity
2-41
29. >our firm has total assets of ;2,900, fixed assets of ;-,200, long-term de't of ;2,900, and short-term de't of ;1,200. What is the amount of net wor+ing capital$ %. -;100 !. ;-00 C. ;500 (. ;1,700 ). ;1,800 *et wor+ing capital E ;2,900 - ;-,200 - ;1,200 E ;-00
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
40. &onner Collision has shareholders! e"uit# of ;121,800. The firm owes a total of ;125,000 of which 50 percent is pa#a'le within the next #ear. The firm net fixed assets of ;151,900. What is the amount of the net wor+ing capital$ %. ;24,-00 !. ;-0,-00 C. ;74,500 (. ;85,-00 ). ;111,400 Current lia'ilities E .50 ;125,000 E ;74,500 Total assets E ;121,800 F ;125,000 E ;257,800 Current assets E ;257,800 - ;151,900 E ;104,900 *et wor+ing capital E ;104,900 - ;74,500 E ;-0,-00
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
2-42
41. Four #ears ago, 1el et /urses purchased a mailing machine at a cost of ;175,000. This e"uipment is currentl# alued at ;52,400 on toda#!s 'alance sheet 'ut could actuall# 'e sold for ;48,900. This is the onl# fixed asset the firm owns. *et wor+ing capital is ;47,200 and long-term de't is ;111,-00. What is the 'oo+ alue of shareholders! e"uit#$ %. ;2,800 &. ;7,700 C. ;10,200 (. ;222,500 ). ;2--,000 &oo+ alue of shareholders! e"uit# E ;52,400 F ;47,200 - ;111,-00 E ;10,200
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Boo) !alue
42. @a+e owns The Corner Aar+et which he is tr#ing to sell so that he can retire and tra el. The Corner Aar+et owns the 'uilding in which it is located. This 'uilding was 'uilt at a cost of ;527,000 and is currentl# appraised at ;819,000. The counters and fixtures originall# cost ;128,000 and are currentl# alued at ;54,000. The in entor# is alued on the 'alance sheet at ;-19,000 and has a retail mar+et alue e"ual to 1.2 times its cost. @a+e expects the store to collect 98 percent of the ;21,700 in accounts recei a'le. The firm has ;25,800 in cash and has total de't of ;212,700. What is the mar+et alue of this firm$ %. ;847,5-2 !. ;900,155 C. ;919,000 (. ;1,-12,855 ). ;1,---,700 Aar+et alue of firm E ;819,000 F ;54,000 F 1.2G;-19,000H F .98G;21,700H F ;25,800 ;212,700 E ;900,155
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: .ar)et !alue
2-4-
4-. @ensen )nterprises paid ;1,-00 in di idends and ;920 in interest this past #ear. Common stoc+ increased '# ;1,200 and retained earnings decreased '# ;-10. What is the net income for the #ear$ %. -;210 !. ;990 C. ;1,510 (. ;1,910 ). ;2,190 *et income E ;1,-00 F G-;-10H E ;990
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: Net income
42. %ndre!s &a+er# has sales of ;587,000 with costs of ;292,000. :nterest expense is ;25,000 and depreciation is ;22,000. The tax rate is -4 percent. What is the net income$ %. ;22,740 &. ;22,240 C. ;82,440 (. ;85,240 ). ;122,440 *et income E G;587,000 - ;292,000 - ;25,000 - ;22,000H G1 - .-4H E ;82,440
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: Net income
2-42
44. Ba#lor )"uipment 0ental paid ;74 in di idends and ;411 in interest expense. The addition to retained earnings is ;218 and net new e"uit# is ;400. The tax rate is -4 percent. Sales are ;14,900 and depreciation is ;580. What are the earnings 'efore interest and taxes$ %. ;489.25 !. ;1,259.25 C. ;1,--1.42 (. ;1,941.42 ). ;1,929.25 *et income E ;74 F ;218 E ;29Taxa'le income E ;29-IG1 - .-4H E ;748.25 )arnings 'efore interest and taxes E ;748.25 F ;411 E ;1,259.25
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#" Section: "%" &o'ic: 3B,&
45. .i en the tax rates as shown, what is the a erage tax rate for a firm with taxa'le income of ;-11,-50$
%. 28.24 percent &. -1.09 percent C. --.52 percent (. -4.28 percent ). -9.00 percent Tax E .14G;40,000H F .24G;24,000H F .-2G;24,000H F .-9G;211,-50H E ;102,580.20 % erage tax rate E ;102,580.20I;-11,-50 E --.52 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: A!erage ta/ rate
2-44
47. The tax rates are as shown. *e ada Aining currentl# has taxa'le income of ;97,800. Cow much additional tax will the firm owe if taxa'le income increases '# ;21,000$
A. ;8,080 &. ;8,1-0 C. ;8,144 (. ;8,170 ). ;8,190 %dditional tax E .-2G;100,000 - ;97,800H F .-9G;97,800 F ;21,000 - ;100,000H E ;8,080
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#Section: "%&o'ic: .arginal ta/
48. Winston :ndustries had sales of ;82-,800 and costs of ;509,900. The firm paid ;-8,200 in interest and ;18,000 in di idends. :t also increased retained earnings '# ;52,1-8 for the #ear. The depreciation was ;75,200. What is the a erage tax rate$ A. -2.8- percent &. --.-- percent C. -8.17 percent (. 2-.-9 percent ). 28.87 percent )arnings 'efore taxes E ;82-,800 - ;509,900 - ;75,200 - ;-8,200 E ;119,-00 *et income E ;18,000 F ;52,1-8 E ;80,1-8 Taxes E ;119,-00 - ;80,1-8 E ;-9,152 Tax rate E ;-9,152I;119,-00 E -2.8- percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#Section: "%&o'ic: A!erage ta/ rate
2-45
49. Crandall ?il has total sales of ;1,-29,800 and costs of ;90-,400. (epreciation is ;22,700 and the tax rate is -2 percent. The firm does not ha e an# interest expense. What is the operating cash flow$ %. ;129,142 &. ;171,842 C. ;179,922 (. ;281,217 E. ;-09,075 )arnings 'efore interest and taxes E ;1,-29,800 - ;90-,400 - ;22,700 E ;20-,500 Tax E ;20-,500 .-2 E ;1-7,222 ?perating cash flow E ;20-,500 F ;22,700 - ;1-7,222 E ;-09,075
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: OC1
50. *ielsen %uto /arts had 'eginning net fixed assets of ;218,270 and ending net fixed assets of ;209,211. (uring the #ear, assets with a com'ined 'oo+ alue of ;5,92- were sold. (epreciation for the #ear was ;22,822. What is the amount of net capital spending$ A. ;--,75&. ;20,705 C. ;48,218 (. ;54,151 ). ;57,208 *et capital spending E ;209,211 - ;218,270 F ;22,822 E ;--,75-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net ca'ital s'ending
2-47
51. %t the 'eginning of the #ear, a firm had current assets of ;121,-05 and current lia'ilities of ;122,409. %t the end of the #ear, the current assets were ;122,218 and the current lia'ilities were ;10-,718. What is the change in net wor+ing capital$ %. -;19,579 &. -;11,40C. -;9,-87 (. ;1,809 E. ;21,90Change in net wor+ing capital E G;122,218 - ;10-,718H - G;121,-05 - ;122,409H E ;21,90-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: C(ange in net wor)ing ca'ital
52. %t the 'eginning of the #ear, the long-term de't of a firm was ;72,918 and total de't was ;1-8,207. %t the end of the #ear, long-term de't was ;58,219 and total de't was ;124,8-8. The interest paid was ;5,2-0. What is the amount of the cash flow to creditors$ %. -;18,-28 &. -;1,001 C. ;11,129 (. ;1-,851 ). ;19,172 Cash flow to creditors E ;5,2-0 - G;58,219 - ;72,918H E ;11,129
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to creditors
2-48
5-. %delson!s )lectric had 'eginning long-term de't of ;22,411 and ending long-term de't of ;28,919. The 'eginning and ending total de't 'alances were ;82,542 and ;78,51-, respecti el#. The interest paid was ;2,757. What is the amount of the cash flow to creditors$ A. -;1,521 &. -;1,272 C. ;1,272 (. ;7,218 ). ;11,174 Cash flow to creditors E ;2,757 - G;28,919 - ;22,411H E -;1,521
52. The (ail# *ews had net income of ;121,500 of which 20 percent was distri'uted to the shareholders as di idends. (uring the #ear, the compan# sold ;74,000 worth of common stoc+. What is the cash flow to stoc+holders$ %. -;74,000 !. -;25,-50 C. -;2,020 (. ;12-,520 ). ;127,950 Cash flow to stoc+holders E .20G;121,500H - ;74,000 E -;25,-50
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2-49
54. The <a+eside :nn had operating cash flow of ;28,240. (epreciation was ;5,700 and interest paid was ;2,280. % net total of ;2,520 was paid on long-term de't. The firm spent ;22,000 on fixed assets and decreased net wor+ing capital '# ;1,--0. What is the amount of the cash flow to stoc+holders$ %. ;4,100 &. ;7,8-0 C. ;18,020 (. ;19,998 E. ;20,580 Cash flow from assets E ;28,240 - G-;1,--0H - ;22,000 E ;24,780 Cash flow to creditors E;2,280 - G-;2,520H E ;4,100 Cash flow to stoc+holders E ;24,780 - ;4,100 E ;20,580
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2-50
55. What is the change in the net wor+ing capital from 2008 to 2009$ %. -;1,192 !. ;1,-05 C. ;1,887 (. ;2,780 ). ;4,172 Change in net wor+ing capital E G;2,771 - ;1,4-2H - G;5,127 - ;2,192H E ;1,-05
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net wor)ing ca'ital
2-51
57. What is the amount of the noncash expenses for 2009$ %. ;720 &. ;1,282 C. ;1,--. ;1,511 ). ;2,-41 The noncash expense is the depreciation in the amount of ;1,511.
AACSB: Analytic Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: Noncas( e/'ense
58. What is the amount of the net capital spending for 2009$ %. -;-82 !. ;1,229 C. ;1,802 (. ;2,-74 ). ;2,415 *et capital spending E ;17,107 - ;17,289 F ;1,511 E ;1,229
2-52
59. What is the operating cash flow for 2009$ %. ;2,112 &. ;2,900 C. ;2,984 (. ;-,4-5 E. ;2,257 ?perating cash flow E ;-,-95 F ;1,511 - ;720 E ;2,257
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
70. What is the cash flow from assets for 2009$ A. ;1,7-2 &. ;2,227 C. ;2,951 (. ;-,914 ). ;2,257 Change in net wor+ing capital E G;2,771 - ;1,4-2H - G;5,127 - ;2,192H E ;1,-05 *et capital spending E ;17,107 - ;17,289 F ;1,511 E ;1,229 ?perating cash flow E ;-,-95 F ;1,511 - ;720 E ;2,257 Cash flow from assets E ;2,257 - ;1,229 - ;1,-05 E ;1,7-2
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-5-
71. What is the amount of net new 'orrowing for 2009$ %. -;1,812 &. -;1,7-8 C. ;220 (. ;552 E. ;840 *et new 'orrowing E ;10,540 - ;9,800 E ;840
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net new borrowing
72. What is the cash flow to creditors for 2009$ %. -;-4&. -;210 C. ;-00 . ;2-2 ). ;427 Cash flow to creditors E ;1,282 - G;10,540 - ;9,800H E ;2-2
2-52
7-. What is the amount of di idends paid in 2009$ %. ;0 &. ;472 C. ;800 (. ;2,01). ;2,172 (i idends paid E ;1,-72 - G;2,595 - ;2,122H E ;800
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#" Section: "%" &o'ic: Di!idends 'aid
72. What is the cash flow to stoc+holders for 2009$ %. -;400 &. -;800 C. ;400 . ;1,-00 ). ;2,100 Cash flow to stoc+holders E J;1,-72 - G;2,595 - ;2,122HK - G;7,000 - ;7,400H E ;1,-00
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2-54
74. What is the net wor+ing capital for 2009$ %. -;174 &. ;--8 C. ;1,252 . ;1,924 ). ;2,921 *et wor+ing capital E ;-1- F ;1,152 F ;1,421 - ;1,041 E ;1,924
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Net wor)ing ca'ital
2-55
75. What is the change in net wor+ing capital from 2008 to 2009$ A. -;174 &. -;70 C. ;124 (. ;220 ). ;-14 Change in net wor+ing capital E G;-1- F ;1,152 F ;1,421 - ;1,041H - G;240 F ;1,092 F ;1,294 - ;717H E -;174
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: C(ange in net wor)ing ca'ital
77. What is the net capital spending for 2009$ %. ;117 !. ;2-9 C. ;247 (. ;--8 ). ;221 *et capital spending E ;2,12- - ;2,005 F ;122 E ;2-9
2-57
78. What is the operating cash flow for 2009$ %. ;1,225 &. ;1,-57 C. ;1,522 (. ;1,755 ). ;1,82?perating cash flow E G;5,22- - ;2,109 - ;122H F ;122 - ;570 E ;1,522
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
79. What is the cash flow from assets for 2009$ %. ;1,2-0 !. ;1,480 C. ;1,770 (. ;1,810 ). ;1,980 ?perating cash flow E G;5,22- - ;2,109 - ;122H F ;122 - ;570 E ;1,522 *et capital spending E ;2,12- - ;2,005 F ;122 E ;2-9 Change in net wor+ing capital E G;-1- F ;1,152 F ;1,421 - ;1,041H - G;240 F ;1,092 F ;1,294 - ;717H E -;174 Cash flow from assets E ;1,522 - ;2-9 - G-;174H E ;1,480
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-58
80. What is net new 'orrowing for 2009$ A. -;1,-00 &. -;1,020 C. ;880 (. ;1,020 ). ;1,-00 *et new 'orrowing E ;1,100 - ;2,200 E -;1,-00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net new borrowing
81. What is the cash flow to creditors for 2009$ %. -;1,020 &. -;1,100 C. ;280 . ;1,480 ). ;1,750 *et new 'orrowing E ;1,100 - ;2,200 E -;1,-00 Cash flow to creditors E 280 - G-;1,-00H E ;1,480
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to creditors
2-59
82. What is the cash flow to stoc+holders for 2009$ A. ;0 &. ;1-C. ;258 (. ;1,709 ). ;1,414 ?perating cash flow E G;5,22- - ;2,109 - ;122H F ;122 - ;570 E ;1,522 *et capital spending E ;2,12- - ;2,005 F ;122 E ;2-9 Change in net wor+ing capital E G;-1- F ;1,152 F ;1,421 - ;1,041H - G;240 F ;1,092 F ;1,294 - ;717H E -;174 Cash flow from assets E ;1,522 - ;2-9 - G-;174H E ;1,480 *et new 'orrowing E ;1,100 - ;2,200 E -;1,-00 Cash flow to creditors E 280 - G-;1,-00H E ;1,480 Cash flow to stoc+holders E ;1,480 - ;1,480 E ;0
AACSB: Analytic Bloom's: Synt(esis Difficulty: C(allenge Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2-70
8-. What is the taxa'le income for 2009$ %. ;1,041.00 &. ;1,-57.78 C. ;1,492.22 (. ;2,775.21 ). ;-,091.18 *et income E ;220 F ;5-1 E ;1,041 Taxa'le income E ;1,041IG1 - .-2H E ;1,492.22
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#" Section: "%" &o'ic: &a/able income
82. What is the operating cash flow for 2009$ A. ;2,078.00 &. ;2,122.22 C. ;2,252.48 (. ;2,552.00 ). ;2,721.22 *et income E ;220 F ;5-1 E ;1,041 Taxa'le income E ;1,041IG1 - .-2H E ;1,492.22 )arnings 'efore interest and taxes E ;1,492.22 F ;2-8 E ;1,8-0.22 ?perating cash flow E ;1,8-0.22 F ;789 - .-2G;1,492.22H E ;2,078.00
AACSB: Analytic Bloom's: Synt(esis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
2-71

Essay Questions
84. %ssume #ou are the financial officer of a ma=or firm. The president of the firm has =ust stated that she wishes to reduce the firm!s in estment in current assets since those assets pro ide little, if an#, return to the firm. Cow would #ou respond to this statement$ While it is true that current assets pro ide a low rate of return, those assets are essential to the firm!s li"uidit#. Should the li"uid assets 'e reduced too low, the firm could face a much greater pro'lem than a low rate of return. That pro'lem would 'e the ina'ilit# to meet the firm!s financial o'ligations which could e en result in a 'an+ruptc# due to a lac+ of cash flow. Feed'ac+, 0efer to section 2.1
AACSB: 4eflecti!e t(in)ing Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Li2uidity
85. %s long as a firm maintains a positi e cash 'alance, wh# is it essential to re iew the firm!s cash flows$ Firms can ha e positi e cash 'alances 'ecause the# are using 'orrowed funds or e"uit# in estments. For a firm to 'e financiall# health# o er the long-term, it must 'e a'le to generate cash internall#. Cash flow anal#sis ena'les #ou to determine the sources, and uses, of a firm!s cash to e aluate the financial health of the firm and ensure that the firm is generating positi e cash flows from its operations. Feed'ac+, 0efer to section 2.2
AACSB: 4eflecti!e t(in)ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
2-72
87. The managers of a firm wish to expand the firm!s operations and are tr#ing to determine the amount of de't financing the firm should o'tain ersus the amount of e"uit# financing that should 'e raised. The managers ha e as+ed #ou to explain the effects that 'oth of these forms of financing would ha e on the cash flows of the firm. Write a short response to this re"uest. (e't financing will re"uire cash outflows for 'oth interest and principal pa#ments. The interest outflow will 'e partiall# offset '# a decrease in the cash outflow for taxes. Should the firm accept additional de't, the li"uidit# of the firm might ha e to 'e increased to ensure the de't o'ligations can 'e met in a timel# manner. ?n the other hand, e"uit# financing does not create an# re"uirement for future cash outflows as e"uit# does not need to 'e repaid nor are di idends re"uired. Cowe er, if di idends are paid, the# would not lower the firm!s cash outflow for taxes. Feed'ac+, 0efer to section 2.2
AACSB: 4eflecti!e t(in)ing Bloom's: 3!aluation Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
88. (iscuss the difference 'etween 'oo+ alues and mar+et alues and explain which one is more important to the financial manager and wh#. The accounts on the 'alance sheet are generall# carried at historical cost, not mar+et alues. %lthough the 'oo+ alue of the current assets and the lia'ilities ma# closel# approximate mar+et alues, the same cannot 'e said for the rest of the 'alance sheet accounts. Aar+et alues are more rele ant as the# reflect toda#!s alues whereas the 'alance sheet reflects historical costs as ad=usted '# arious accounting methods. To determine the current alue of a firm, and its worth to the shareholders, financial managers must monitor mar+et alues. Feed'ac+, 0efer to section 2.1
AACSB: 4eflecti!e t(in)ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Boo) !ersus mar)et !alue
2-7-
89. %ssume #ou are a credit manager in charge of appro ing commercial loans to 'usiness firms. :dentif# three aspects of a firm!s cash flows #ou would re iew and explain the t#pe of information #ou hope to gain from re iewing each of those fi e aspects. Student answers will ar# 'ut here are some examples, 1H operating cash flow - :s the firm generating positi e cash flow from its current operations$ 2H cash flow to creditors - :s the firm currentl# repa#ing de't or is it assuming additional de't$ -H net wor+ing capital - :s the firm increasing or decreasing its net wor+ing capital and what effect, if an#, is this ha ing on the firm!s li"uidit#$ 2H cash flow to stoc+holders - :s the firm currentl# pa#ing an# di idends to its shareholders and are those shareholders in esting additional capital into the firm$ 4H net capital spending - :s the firm currentl# in esting in additional fixed assets$ Feed'ac+, 0efer to section 2.2
AACSB: 4eflecti!e t(in)ing Bloom's: 3!aluation Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow from assets
90. &each Front :ndustries has sales of ;425,000, costs of ;294,000, depreciation expense of ;-7,000, interest expense of ;14,000, and a tax rate of -2 percent. The firm paid ;49,000 in cash di idends. What is the addition to retained earnings$ A. ;75,-20 &. ;81,700 C. ;94,200 (. ;10-,250 ). ;121,580 *et income E G;425,000 - ;294,000 - ;-7,000 - ;14,000H G1 - .-2H E ;1-4,-20 %ddition to retained earnings E ;1-4,-20 - ;49,000 E ;75,-20
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#Learning Ob ecti!e: "#" Section: "%" &o'ic: Addition to retained earnings
2-72
91. The Widget Co. purchased new machiner# three #ears ago for ;2 million. The machiner# can 'e sold to the 0oman Co. toda# for ;2 million. The Widget Co.!s current 'alance sheet shows net fixed assets of ;2,400,000, current lia'ilities of ;1,-74,000, and net wor+ing capital of ;724,000. :f all the current assets were li"uidated toda#, the compan# would recei e ;1.9 million in cash. The 'oo+ alue of the Widget Co.!s assets toda# is 66666 and the mar+et alue of those assets is 66666. A. ;2,500,000D ;-,900,000 &. ;2,500,000D ;-,124,000 C. ;4,000,000D ;-,124,000 (. ;4,000,000D ;-,900,000 ). ;5,400,000D ;-,900,000 &oo+ alue E G;724,000 F ;1,-74,000H F ;2,400,000 E ;2,500,000 Aar+et alue E ;1,900,000 F ;2,000,000 E ;-,900,000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#6 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: .ar)et and boo) !alue
2-74
92. &o#er )nterprises had ;200,000 in 2008 taxa'le income. What is the firm!s a erage tax rate 'ased on the rates shown in the following ta'le$
%. 28.24 percent !. -0.5- percent C. -2.28 percent (. -5.40 percent ). -9.00 percent Tax E .14G;40,000H F .24G;24,000H F .-2G;24,000H F .-9G;200,000 - ;100,000H E ;51,240 % erage tax rate E ;51,240I;200,000 E -0.5- percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#7 Learning Ob ecti!e: "#Section: "%&o'ic: A!erage ta/ rate
9-. We'ster World has sales of ;12,900, costs of ;4,800, depreciation expense of ;1,100, and interest expense of ;700. What is the operating cash flow if the tax rate is -2 percent$ %. ;2,702 &. ;4,729 C. ;4,202 (. ;7,0-5 ). ;7,100 )arnings 'efore interest and taxes E ;12,900 - ;4,800 - ;1,100 E ;5,000 Taxa'le income E ;5,000 - ;700 E ;4,-00 Tax E .-2G;4,-00H E ;1,595 ?perating cash flow E ;5,000 F ;1,100 - ;1,595 E ;4,202
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#8 Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
2-75
92. The &lue &onnet!s 2008 'alance sheet showed net fixed assets of ;2.2 million, and the 2009 'alance sheet showed net fixed assets of ;2.5 million. The compan#!s income statement showed a depreciation expense of ;900,000. What was the amount of the net capital spending for 2009$ %. -;400,000 &. ;200,000 C. ;1,-00,000 (. ;1,700,000 ). ;1,800,000 *et capital spending E ;2,500,000 - ;2,200,000 F ;900,000 E ;1,-00,000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#9 Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net ca'ital s'ending
94. The 2008 'alance sheet of .lo'al Tours showed current assets of ;1,-50 and current lia'ilities of ;920. The 2009 'alance sheet showed current assets of ;1,520 and current lia'ilities of ;1,120. What was the change in net wor+ing capital for 2009$ A. ;80 &. ;170 C. ;190 (. ;880 ). ;920 Change in net wor+ing capital E G;1,520 - ;1,120H - G;1,-50 - ;920H E ;80
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#$: Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Net wor)ing ca'ital
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95. The 2008 'alance sheet of The &each Shoppe showed long-term de't of ;2.1 million, and the 2009 'alance sheet showed long-term de't of ;2.- million. The 2009 income statement showed an interest expense of ;240,000. What was the cash flow to creditors for 2009$ %. -;200,000 &. -;140,000 C. ;40,000 (. ;200,000 ). ;240,000 Cash flow to creditors E ;240,000 - G;2,-00,000 - ;2,100,000H E ;40,000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#$$ Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to creditors
97. The 2008 'alance sheet of The Sports Store showed ;800,000 in the common stoc+ account and ;5.7 million in the additional paid-in surplus account. The 2009 'alance sheet showed ;872,000 and ;8 million in the same two accounts, respecti el#. The compan# paid out ;500,000 in cash di idends during 2009. What is the cash flow to stoc+holders for 2009$ %. -;1,-72,000 !. -;772,000 C. -;528,000 (. ;-72,000 ). ;1,972,000 Cash flow to stoc+holders E ;500,000 - JG;872,000 F ;8,000,000H - G;800,000 F ;5,700,000H E -;772,000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 3OC 5: "#$" Learning Ob ecti!e: "#0 Section: "%0 &o'ic: Cas( flow to stoc)(olders
2-78
98. Suppose #ou are gi en the following information for &a#side &a+er#, sales E ;-0,000D costs E ;14,000D addition to retained earnings E ;2,221D di idends paid E ;259D interest expense E ;1,-00D tax rate E -0 percent. What is the amount of the depreciation expense$ %. ;2,820 &. ;4,400 C. ;7,000 (. ;8,180 ). ;9,400 *et income E ;259 F ;2,221 E ;2,590 )arnings 'efore taxes E ;2,590IG1 - .-0H E ;5,700 )arnings 'efore interest and taxes E ;5,700 F ;1,-00 E ;8,000 (epreciation E ;-0,000 - ;14,000 - ;8,000 E ;7,000
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 3OC 5: "#$6 Learning Ob ecti!e: "#" Section: "%" &o'ic: ,ncome statement
99. (ee (ee!s Aarina is o'ligated to pa# its creditors ;5,200 toda#. The firm!s assets ha e a current mar+et alue of ;4,900. What is the current mar+et alue of the shareholders! e"uit#$ %. -;500 &. -;400 C. ;0 (. ;400 ). ;500 Shareholders! e"uit# E Aax JG;4,900 - ;5,200H, 0K. Since the mar+et alue of e"uit# cannot 'e negati e, the answer is 3ero.
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 3OC 5: "#$7 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: S(are(olders' e2uity
2-79
100. (uring 2009, 0:T Corp. had sales of ;454,500. Costs of goods sold, administrati e and selling expenses, and depreciation expenses were ;275,000, ;48,800, and ;48,800, respecti el#. :n addition, the compan# had an interest expense of ;112,000 and a tax rate of -2 percent. What is the operating cash flow for 2009$ :gnore an# tax loss carr#-'ac+ or carr#forward pro isions. %. ;17,920 &. ;21,820 C. ;-0,800 (. ;42,500 ). ;77,820 )arnings 'efore interest and taxes E *et income E ;454,500 - ;275,000 - ;48,800 - ;48,800 E -;28,000 ?perating cash flow E -;28,000 F ;48,800 - ;0 E ;-0,800
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 3OC 5: "#$9 Learning Ob ecti!e: "#0 Section: "%0 &o'ic: O'erating cas( flow
2-80

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Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

%. ;8,080 &. ;8,1-0 C. ;8,144 (. ;8,170 ). ;8,190

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 Financial Statements, Taxes, and Cash Flow %nswer Be#

Multiple Choice Questions

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow