Questions in Chapter 2.

qz 1) At the end of last year, Jamestown Industries had common stock of $220, paid-in surplus of $180, and retained earnings of $300. This year, the company earned net income of $200 and paid a $40 dividend. What is the retained earnings balance at the end of this year? [A] $160 [B] $460 [C] $500 [D] $540 [E] $860 [A] :What is the relationship among retained earnings, net income and dividends? Review section 2.2. [B] :You are correct! [C] :Did you forget the dividend paid? Review section 2.2. [D] :Do you add or subtract dividends from retained earnings? Review section 2.2. [E] :What is the question in this problem? Review section 2.2.

2) What is the proper measure of cash flow to creditors in a given year? [A] interest paid [B] operating cash flow minus net new borrowing [C] interest paid minus the change in total debt [D] interest paid plus net new borrowing minus additions to net fixed assets [E] interest paid minus net new borrowing [A] :You are partially correct, but there is something missing. Review section 2.4. [B] :You are confusing your cash flows. Review section 2.4. [C] :Do you use total debt or long-term debt? Review section 2.4. [D] :This is incorrect in more ways than one. Review section 2.4. [E] :You are correct!

3) The income statement equation is: Revenues - Expenses = Income. [A] True [B] False [A] :You are correct! [B] :This definition is correct. Review section 2.2.

4) A(n) _________ asset is one that can be sold quickly without a significant loss in value. [A] fixed [B] liquid [C] intangible [D] current [E] long-term [A] :Can fixed assets be sold quickly without much loss in value? Review section 2.1. [B] :You are correct! [C] :Can intangible assets be sold quickly without much loss in value? Review section 2.1. [D] :Close, but there is a better answer. Review section 2.1. [E] :Can long-term assets be sold quickly without much loss in value? Review section 2.1.

5) Which one of the following statements is always true? [A] Depreciation is a cash expense. [B] The change in retained earnings is a part of the cash flow to stockholders. [C] The change in net working capital is the same as cash flow from assets. [D] Interest expense is a cash outflow from the company to the bondholders. [E] Cash flow to stockholders is equal to net new equity. [A] :If so, what is a noncash expense? Review section 2.4. [B] :The change in retained earnings is not a component of the cash flow to stockholders. Review section 2.4. [C] :This is only true if operating cash flow and net capital spending net out to zero. There is a better answer. Review section 2.4. [D] :You are correct! [E] :This is only true if dividends paid are zero. There is a better answer. Review section 2.4.

6) Assets are listed on the balance sheet in: [A] order of importance to the firm. [B] order of increasing size. [C] order of decreasing liquidity. [D] no particular order. [E] the order of preference followed in a bankruptcy. [A] :You need to review the construction of a balance sheet in section 2.1. [B] :You need to review the construction of a balance sheet in section 2.1. [C] :You are correct! [D] :You need to review the construction of a balance sheet in section 2.1. [E] :You need to review the construction of a balance sheet in section 2.1.

7) Broomfield Enterprises has net income of $459 million, retained earnings of $620 million, and annual dividend payments of $200 million. There are 340 million shares of common stock outstanding. What is the amount of the earnings per share?

[A] $0.59 [B] $0.76 [C] $1.35 [D] $1.61 [E] $2.59 [A] :This is the dividend per share amount. See section 2.2. [B] :Is this the amount of income earned or retained per share? See section 2.2. [C] :You are correct! [D] :You need to review section 2.2 to see how to compute EPS. [E] :You need to review section 2.2 to see how to compute EPS.

8) A firm has cash of $30, accounts payable of $20, inventory of $90, net fixed assets of $220, accounts receivable of $30, and stockholder's equity of $50. What is the amount of long-term debt if that is the only remaining balance sheet account?

[A] $120 [B] $190 [C] $280 [D] $300 [E] $340 [A] :You need to review the construction of a balance sheet in section 2.1. [B] :You need to review the construction of a balance sheet in section 2.1. [C] :Did you confuse accounts receivable with accounts payable? Review section 2.1. [D] :You are correct! [E] :You need to review the construction of a balance sheet in section 2.1.

9) Last year the operating cash flow for JBC Inc. was positive while total cash flow from assets was negative. Based on this information, you know that: [A] the firm is in financial distress. [B] this is certainly good news, because the firm is investing a lot of cash in new projects. [C] cash flow to stockholders is also negative. [D] the firm's net income for the year was also negative. [E] the firm invested more cash in assets and working capital than it generated from operations during the year. [A] :This does not necessarily signal financial distress. Review section 2.4. [B] :This is not necessarily correct. There could be other reasons for the negative cash flow from assets. Review section 2.4. [C] :Cash flow to stockholders could be positive in this case. Review section 2.4. [D] :You cannot surmise this to be true based on the information provided. Review section 2.4. [E] :You are correct!

10) A firm's balance sheet shows current assets of $95, net fixed assets of $250, long-term debt of $40, and owner's equity of $200. What is the value of the firm's current liabilities if they are the only remaining balance sheet item? [A] -$50 [B] $50 [C] $105 [D] $145 [E] $545 [A] :You need to review the construction of a balance sheet in section 2.1. [B] :You need to review the construction of a balance sheet in section 2.1. [C] :You are correct! [D] :You need to review the construction of a balance sheet in section 2.1. [E] :You need to review the construction of a balance sheet in section 2.1.

11) Which of the following are included in cash flow from assets? I. operating cash flow II. dividends paid III. net new borrowing IV. changes in the level of inventory [A] I and II only [B] I and IV only

[C] I, III, and IV only [D] I, II, and IV only [E] I, II, and III only [A] :At least one of these is part of the cash flow to stockholders. Review section 2.4. [B] :You are correct! [C] :At least one of these is part of the cash flow to creditors. Review section 2.4. [D] :At least one of these is part of the cash flow to stockholders. Review section 2.4. [E] :At least one of these is part of the cash flow to stockholders. Review section 2.4.

12) The average tax rate is equal to total taxes paid divided by total taxable income. [A] True [B] False [A] :You are correct! [B] :This is the definition of the average tax rate. Review section 2.3.

13) Anderson's net income for the year is $18,000. The firm retained 60 percent of the net income and paid out the remaining income in dividends to stockholders. There are 5,000 shares of stock outstanding. What is the dividend per share amount? [A] $1.44 [B] $2.16 [C] $3.60 [D] $6.00 [E] $9.00 [A] :You are correct! [B] :If 60 percent is retained, what percentage of net income is paid out to stockholders? Review section 2.2. [C] :Are you confusing earnings per share and dividends per share? Review section 2.2. [D] :Your math is incorrect. Review section 2.2. [E] :Your math is incorrect. Review section 2.2.

14) Which one of the following assets is generally considered to be the most liquid? [A] accounts receivable [B] inventory [C] net fixed assets [D] patent [E] long-term debt [A] :You are correct! [B] :Remember, assets are listed on the balance sheet in order of decreasing liquidity. Review section 2.1. [C] :Remember, assets are listed on the balance sheet in order of decreasing liquidity. Review section 2.1. [D] :This is an intangible asset, which is generally considered illiquid. Review section 2.1. [E] :This is not an asset. Review section 2.1.

15) An increase in which of the following results in an increase in operating cash flow, all else equal? I. interest expense II. depreciation III. taxes [A] II only [B] III only [C] I and II only [D] II and III only [E] I, II, and III [A] :This is correct, but at least one other option is also correct. Review section 2.4. [B] :An increase in taxes reduces operating cash flow. Review section 2.4. [C] :You are correct! Since interest is tax deductible, a higher interest expense means lower taxes and higher operating cash flow. Similar arguments apply to depreciation as well. [D] :At least one of these is incorrect. Review section 2.4. [E] :At least one of these is incorrect. Review section 2.4.

16) If a firm's cash flow to stockholders is negative, then total dividends paid must have exceeded the value of net new equity sold by the firm during the year. [A] True [B] False [A] :When cash flow to stockholders is negative then the firm received more cash from its stockholders than the firm paid to them. Review section 2.4. [B] :You are correct!

17) The balance sheet of a firm shows $23,000 in total assets, $3,000 of which is cash. The receivables are worth $4,200 in today's market and the inventory can be sold today for $6,900. The fixed assets have a current market value of $17,400. There are no other assets than those mentioned. What is the total market value of the assets? [A] $20,000 [B] $23,000 [C] $25,500 [D] $28,500 [E] $31,500 [A] :You need to review market values in section 2.1. [B] :This is the book value not the market value. Review section 2.1. [C] :Did you subtract or add the cash? Review section 2.1. [D] :Did you forget the cash? Review section 2.1. [E] :You are correct!

18) Solski, Inc., a maker of flea collars, paid $75,000 cash for inventory on January 1, 2005. On December 31, 2005, the entire inventory had been sold and never replaced. The company's sales orders totaled $97,000, and of that, $42,000 has been collected. If inventory represents Solski's only cost, calculate the firm's accounting profit and its cash flow as of December 31. Assume there are no taxes. [A] $33,000; $42,000 [B] $33,000; -$42,000

[C] $22,000; -$33,000 [D] -$22,000; $42,000 [E] -$22,000; -$33,000 [A] :You are incorrect on both counts. Review sections 2.2 and 2.4. [B] :You are incorrect on both counts. Review sections 2.2 and 2.4. [C] :You are correct! [D] :You are incorrect on both counts. Review sections 2.2 and 2.4. [E] :You are partially correct. Review section 2.2.

19) Which one of the following correctly defines operating cash flow? [A] EBIT - Interest + Depreciation [B] EBIT - Depreciation + Taxes [C] EBIT + Interest + Depreciation - Taxes [D] EBIT + Depreciation - Taxes [E] EBIT + Depreciation [A] :Is interest a part of operating cash flow? Review section 2.4. [B] :Are your plus and minus signs correct? Review section 2.4. [C] :Is interest a part of operating cash flow? Review section 2.4. [D] :You are correct! [E] :Aren't taxes a part of operating cash flow? Review section 2.4.

20) Which one of the following statements is true? [A] Accounting income is generally equal to cash flow. [B] Assets are usually listed on the balance sheet at market value. [C] Accounting statements are usually prepared to match the timing of income and expenses. [D] The balance sheet equity account represents the market value of the firm to the stockholders. [E] The balance sheet tells investors exactly what the firm is worth. [A] :This is not true, primarily because of GAAP. Review section 2.2. [B] :This is not true, primarily because of GAAP. Review section 2.1. [C] :You are correct! [D] :This is not true, primarily because of GAAP. Review section 2.1. [E] :This is not true, primarily because of GAAP. Review section 2.1.

21) The market value and the book value are most similar for which one of the following accounts? [A] net fixed assets [B] common stock [C] inventory [D] intangible assets [E] preferred stock [A] :The book and the market value of fixed assets usually differ significantly. Review section 2.1. [B] :The book and the market value of common stock usually differ significantly. Review section 2.1. [C] :You are correct!

[D] :The book and the market value of intangible assets usually differ significantly. Review section 2.1. [E] :The book and the market value of preferred stock usually differ significantly. Review section 2.1.

22) The income statement: [A] measures performance for a particular date. [B] when prepared according to GAAP will show revenue when it accrues. [C] includes the cost of inventory waiting to be sold. [D] includes expenses when they are ultimately paid in cash. [E] is an accurate representation of a firm's operating cash flows. [A] :This is true of the balance sheet, not the income statement. Review sections 2.1 and 2.2. [B] :You are correct! [C] :Inventory is recorded on the balance sheet. Review sections 2.1 and 2.2. [D] :What is the matching principle? Review section 2.2. [E] :What is the difference between net income and cash flow from operations? Review sections 2.2 and 2.4.

23) Liquidity refers to the speed and ease with which an asset can be converted into cash. [A] True [B] False [A] :You are correct! [B] :This is the definition of liquidity. Review section 2.1.

24) Which one of the following statements about liquidity is true? [A] If a firm has a high degree of liquidity, it also faces a high degree of financial distress. [B] Too little liquidity results in lower profits since there is generally a tradeoff between liquidity and profitability. [C] You can get an accurate picture of the liquidity of a firm by looking at its current assets. [D] Accounts receivable are generally considered to be more liquid than inventory. [E] An asset is liquid if it can be sold quickly regardless of the price at which it is sold. [A] :This would be true if the firm had a low degree of liquidity. Review section 2.1. [B] :This would be true if the firm had too much liquidity. Review section 2.1. [C] :Current liabilities are also a part of the liquidity picture. Review section 2.1. [D] :You are correct! [E] :What is the difference between marketability and liquidity? Review section 2.1.

25) As an investor, how can you determine the total market value of a publicly traded corporation such as General Motors? I. add the value of the debt and the equity as they appear on the most recent financial statement II. add the value of debt as it appears on the most recent financial statement to the current market value of GM's common stock III. add the current market value of GM's stock and the current market value of GM's debt [A] I only

[B] II only [C] III only [D] I and II only [E] II and III only [A] :What is the difference between market value and book value? Review section 2.1. [B] :What is the difference between market value and book value? Review section 2.1. [C] :You are correct! [D] :What is the difference between market value and book value? Review section 2.1. [E] :What is the difference between market value and book value? Review section 2.1.

26) Depreciation expense is considered a non-cash item on the balance sheet. [A] True [B] False [A] :Depreciation is considered a non-cash expense on the income statement. Review section 2.2. [B] :You are correct!

27) Which of the following are included in the cash flow from assets? I. dividends paid II. operating cash flow III. additions to net working capital IV. net capital spending [A] I and II only [B] II and III only [C] III and IV only [D] II, III, and IV only [E] I, II, III, and IV [A] :One of these is incorrect. Review section 2.4. [B] :True, but another option is also included. Review section 2.4. [C] :True, but another option is also included. Review section 2.4. [D] :You are correct! [E] :One of these is incorrect. Review section 2.4.

28) Suppose a firm had equity of $12,000 at the beginning of the year. Net income for the year was a loss of $200, dividends paid totaled $400, and the firm raised $1,000 from the sale of new equity. What is the year-end equity value? [A] $10,600 [B] $11,800 [C] $12,400 [D] $12,800 [E] $13,200 [A] :You need to review these computations in sections 2.1 and 2.2. [B] :You need to review these computations in sections 2.1 and 2.2. [C] :You are correct! [D] :You may have handled the net income incorrectly. Review section 2.2. [E] :You may have handled the dividends incorrectly. Review section 2.2.

29) If operating cash flow is negative, then: [A] the firm is apparently about to go bankrupt. [B] the firm can pay no dividends. [C] cash flow to bondholders must also be negative. [D] cash flow from assets may still be positive. [E] cash flow to stockholders must be positive. [A] :This is not necessarily true. Review section 2.4. [B] :This is not necessarily true. Review section 2.4. [C] :This is not necessarily true. There are many more cash flows to consider. Review section 2.4. [D] :You are correct! [E] :This is not necessarily true. There are many more cash flows to consider. Review section 2.4.

30) There is a tradeoff between the advantages of liquidity and forgone potential profits. [A] True [B] False [A] :You are correct! [B] :This statement is true. Review section 2.1.

31) Intangible assets: [A] are generally considered to be very liquid. [B] are listed on the balance sheet just before accounts receivable. [C] include such things as patents. [D] include any item that exists physically. [E] are the most valuable of all assets. [A] :They are some of the least liquid of the assets. Review section 2.1. [B] :You need to review the construction of balance sheets. Review section 2.1. [C] :You are correct! [D] :This is contrary to the definition of an intangible asset. Review section 2.1. [E] :This may or may not be true. Review section 2.1.

32) Which one of the following statements is true and illustrates the matching principle in accounting? [A] The cost of purchasing a good on account is recorded when the account payable is paid. [B] Revenues from a sale on account are recorded when the payment on the account receivable is received. [C] The cost of an inventory item is expensed at the time the item is sold. [D] The cost of producing a unit of inventory is expensed when the production of that unit is completed. [E] Revenue is recorded at the time a sale is completed whether the sale is for cash or on credit. [A] :This statement is false. Review section 2.2. [B] :This statement is false. Review section 2.2.

[C] :You are correct! [D] :This statement is false. Review section 2.2. [E] :This statement is true but it illustrates the realization principle, not the matching principle. Review section 2.2.

33) Which one of the following assets is generally considered to be the most liquid? [A] warehouse [B] patent [C] inventory [D] accounts receivable [E] manufacturing equipment [A] :At least one other choice is more liquid. Review section 2.1. [B] :At least one other choice is more liquid. Review section 2.1. [C] :At least one other choice is more liquid. Review section 2.1. [D] :You are correct! [E] :At least one other choice is more liquid. Review section 2.1.

34) Horn, Inc. is obligated to pay its creditors $1,000 at the end of the year. After the payment is made, the firm will have no liabilities. At year end, the assets have a book value of $1,200 and a market value of $1,050. What is the market value of the stockholder's equity just prior to paying the creditors? [A] -$200 [B] -$50 [C] $50 [D] $200 [E] $1,050 [A] :Can a share of stock have a negative market value? Review section 2.1. [B] :Can a share of stock have a negative market value? Review section 2.1. [C] :You are correct! [D] :Are you looking for a market value or a book value? Review section 2.1. [E] :What is the relationship between assets, liabilities, and owner's equity? Review section 2.1.

35) Which of the following are components of shareholders' equity? I. common stock II. paid-in surplus III. long-term debt IV. retained earnings [A] I and IV only [B] I and II only [C] II and III only [D] I and III only [E] I, II, and IV only [A] :True, but at least one of the other accounts is a part of equity as well. Review section 2.1. [B] :True, but at least one of the other accounts is a part of equity as well. Review section 2.1. [C] :At least one of these is not a part of equity. Review section 2.1.

[D] :At least one of these is not a part of equity. Review section 2.1. [E] :You are correct!

36) Which one of the following statements correctly describes the balance sheet of a firm? [A] Current assets and current liabilities are on the right-hand side of a balance sheet. [B] Current assets, current liabilities, and equity are on the right-hand side of a balance sheet. [C] Current assets and long-term debt are on the left-hand side of a balance sheet. [D] Current assets, fixed assets, and net working capital are on the left-hand side of a balance sheet. [E] Current assets and fixed assets are on the left-hand side of a balance sheet. [A] :Are assets and liabilities on the same side? Review section 2.1. [B] :Are assets, liabilities and equity all on the same side? Review section 2.1. [C] :Are assets and liabilities on the same side? Review section 2.1. [D] :What is net working capital? Review section 2.1. [E] :You are correct!

37) Net working capital is: [A] the amount of money that would be distributed to the owners of a firm if all of the firm's assets were sold and all of the liabilities paid off. [B] the amount of cash, accounts receivable, and fixed assets a firm has on hand. [C] the total value of the assets that will convert to cash in one year plus the total liabilities that must be paid within one year. [D] negative when current assets exceed current liabilities. [E] usually positive for a healthy firm. [A] :This includes accounts other than current accounts. Review section 2.1. [B] :Fixed assets are not current assets. Review section 2.1. [C] :Should you add or subtract these two values? Review section 2.1. [D] :Wouldn't it be positive in this case? Review section 2.1. [E] :You are correct!

38) Sales are $16,500, cost of goods sold is $10,350, operating expenses are $3,118, depreciation is $1,120, and interest expense is $900. The tax rate is 34 percent. Given this information, what is the amount of the operating cash flow? [A] $667.92 [B] $1,912.00 [C] $2,201.12 [D] $2,381.92 [E] $2,687.92 [A] :This is net income, not operating cash flow. Review section 2.4. [B] :This is EBIT, not operating cash flow. Review section 2.4. [C] :Did you get EBIT of $1,912 and taxes of $344.08? Review sections 2.2 and 2.4. [D] :Did you get EBIT of $1,912 and taxes of $344.08? Review sections 2.2 and 2.4. [E] :You are correct!

39) Which of the following is a (are) component(s) of cash flow to creditors?

I. interest paid II. net new borrowing III. dividends paid [A] I only [B] II only [C] I and II only [D] I and III only [E] II and III only [A] :At least one other option is also a component of cash flow to creditors. Review section 2.4. [B] :At least one other option is also a component of cash flow to creditors. Review section 2.4. [C] :You are correct! [D] :Are dividends paid to creditors? Review section 2.4. [E] :Are dividends paid to creditors? Review section 2.4.

40) Last year, Michaels, Inc. experienced a negative cash flow from assets. Given this, which one of the following statements must be true? [A] The net working capital increased during the year. [B] The company paid more dividends and interest to creditors and stockholders than it raised by borrowing from creditors and selling stock. [C] Both the cash flows to stockholders and to creditors must be negative. [D] The operating cash flow is less than the sum of the changes in net working capital and additions to net fixed assets. [E] Michael's is bankrupt. [A] :This may not be true. Review section 2.4. [B] :This would make cash flow from assets positive. Review section 2.4. [C] :This may not be true. Review section 2.4. [D] :You are correct! [E] :This may not be true. Review section 2.4.

41) A non-cash item is an expense charged against revenues that does not directly affect cash flow. [A] True [B] False [A] :You are correct! [B] :This is the definition of a non-cash item. Review section 2.2.

42) Which one of the following assets is generally the least liquid? [A] 100 shares of common stock in IBM [B] customized piece of equipment used in the production of steel plates [C] 100 shares of preferred stock in General Motors [D] U.S. Treasury bill [E] accounts receivable from the last thirty days of sales [A] :This could likely be sold immediately in the secondary market. Review section 2.1. [B] :You are correct!

[C] :This could likely be sold immediately in the secondary market. Review section 2.1. [D] :This could likely be sold immediately in the secondary market. Review section 2.1. [E] :This could likely be sold relatively quickly to a financial institution. Review section 2.1.

43) Which of the following statements is (are) correct about a firm that earns negative net income? I. The firm must have a negative cash flow from operations. II. The cash flow from assets will also be negative. III. The expenses exceed the revenues for the period. IV. Cash flow to stockholders will be negative. [A] I only [B] II only [C] III only [D] I and III only [E] II and III only [A] :This may or may not be true. Review sections 2.2 and 2.4. [B] :This may or may not be true. Review sections 2.2 and 2.4. [C] :You are correct! [D] :One of these may or may not be true. Review sections 2.2 and 2.4. [E] :One of these may or may not be true. Review sections 2.2 and 2.4.

44) Last year, HD Corporation had $1 million in operating cash flow, $500,000 in net capital spending, and a decrease in net working capital of $25,000. What was the firm's cash flow from assets? [A] $475,000 [B] $525,000 [C] $1,000,000 [D] $1,475,000 [E] $1,525,000 [A] :Note that net working capital decreased. Review section 2.4. [B] :You are correct! [C] :You are ignoring some parts of the cash flow from assets equation. Review section 2.4. [D] :Do you have the correct signs on net capital spending and change in net working capital? Review section 2.4. [E] :It appears you have handled net capital spending incorrectly. Review section 2.4.

45) Over the year, the WWW Company had cash flow from operations of $938. They spent $400 to purchase new equipment and sold old equipment for $611 cash. In addition, the company's net working capital declined by $73. What is the amount of the cash flow from assets? [A] $654 [B] $800 [C] $954 [D] $1,076 [E] $1,222 [A] :Be careful of the negative capital spending and the reduction in net working capital. Review section 2.4.

[B] :Be careful of the negative capital spending and the reduction in net working capital. Review section 2.4. [C] :Be careful of the negative capital spending and the reduction in net working capital. Review section 2.4. [D] :Be careful of the negative capital spending and the reduction in net working capital. Review section 2.4. [E] :You are correct!

46) Sales are $135, cost of goods sold is $40, selling, general and administrative expenses are $35, depreciation is $20, and interest expense is $20. The tax rate is 34 percent. Based on this information, what is the net income? [A] $13.20 [B] $19.80 [C] $20.00 [D] $23.10 [E] $42.90 [A] :You are correct! [B] :You need to review the construction of an income statement in section 2.2. [C] :Apparently you forgot the taxes. Review section 2.2. [D] :You need to review the construction of an income statement in section 2.2. [E] :You need to review the construction of an income statement in section 2.2.

47) Cash flow from assets is equal to which of the following? [A] cash flow to creditors minus cash flow to stockholders [B] cash flow to stockholders plus cash flow to creditors [C] cash flow to creditors plus cash flow to the government [D] cash flow to stockholders minus net new borrowing [E] cash flow to stockholders plus operating cash flow [A] :Watch the plus and minus signs. Review section 2.4. [B] :You are correct! [C] :You are confused. Review section 2.4. [D] :This ignores interest expense. Review section 2.4. [E] :You are confused. Review section 2.4.

48) Which term is used to define debts which must be paid by a firm within the next twelve months? [A] long-term bank loans [B] current liabilities [C] bonds [D] marketable securities [E] accounts receivable [A] :This is a long-term liability, not a short-term one. Review section 2.1. [B] :You are correct! [C] :This is a long-term liability, not a short-term one. Review section 2.1. [D] :This is an asset, not a debt. Review section 2.1. [E] :This is an asset, not a debt. Review section 2.1.

49) Which of the following are current assets? I. cash II. inventory III. patents IV. equipment [A] I and II only [B] II and III only [C] I and III only [D] III and IV only [E] I, II, and III only [A] :You are correct! [B] :One of these is not a current asset. Review section 2.1. [C] :One of these is not a current asset. Review section 2.1. [D] :At least one of these is not a current asset. Review section 2.1. [E] :At least one of these is not a current asset. Review section 2.1.

50) Which of the following is (are) considered a current liability? I. account receivable II. account payable III. note payable in 9 months IV. note payable in 15 months. [A] I only [B] II only [C] III only [D] II and III only [E] II, III, and IV only [A] :Accounts receivable are assets. Review section 2.1. [B] :At least one of the other accounts is also a current liability. Review section 2.1. [C] :At least one of the other accounts is also a current liability. Review section 2.1. [D] :You are correct! [E] :At least one of these is not a current liability. Review section 2.1.

51) Suppose a firm's net income is $950, dividends paid total $300, and new equity sales over the same period amount to $350. The initial value of equity was $7,100. What is the cash flow to stockholders? [A] -$650 [B] -$50 [C] $50 [D] $650 [E] $8,100 [A] :Watch the direction of your cash flows. Review section 2.4. [B] :You are correct! [C] :Watch the direction of your cash flows. Review section 2.4. [D] :Remember, new equity sales represent a cash flow from the stockholders to the company. Review section 2.4. [E] :This is ending equity, not cash flow to stockholders. Review section 2.4.

52) The ___________ tax rate is the rate that applies if one more dollar of income is earned while the ___________ tax rate is the total tax paid divided by taxable income. [A] marginal; flat [B] marginal; average [C] flat; marginal [D] flat; average [E] average; marginal [A] :At least one of these is incorrect. Review section 2.3. [B] :You are correct! [C] :At least one of these is incorrect. Review section 2.3. [D] :At least one of these is incorrect. Review section 2.3. [E] :At least one of these is incorrect. Review section 2.3.

53) Cash flow to stockholders is equal to: [A] net income minus net new equity. [B] dividends paid. [C] net new equity. [D] dividends paid minus net new equity. [E] dividends paid minus interest paid. [A] :Net income is not a cash flow. Review section 2.4. [B] :This is part, but not all of the cash flow to stockholders. Review section 2.4. [C] :This is part, but not all of the cash flow to stockholders. Review section 2.4. [D] :You are correct! [E] :Interest is not a part of the cash flow to stockholders. Review section 2.4.

54) Total assets are $550, fixed assets are $375, current liabilities are $140, equity is $265, and long-term debt is $145. If the only item missing from the balance sheet is current assets, what is the value of net working capital? [A] $35 [B] $175 [C] $190 [D] $235 [E] $410 [A] :You are correct! [B] :What is the question in this problem? Review section 2.1 [C] :You need to review the construction of a balance sheet in section 2.1. [D] :You need to review the construction of a balance sheet in section 2.1. [E] :You need to review the construction of a balance sheet in section 2.1.

55) You are to determine the level of net capital spending by a firm. If you have the balance sheet and income statements, how would you go about your task? [A] ending net fixed assets minus beginning net fixed assets plus depreciation [B] beginning net fixed assets plus ending net fixed assets minus depreciation [C] ending net fixed assets minus beginning net fixed assets minus depreciation plus taxes [D] ending net fixed assets minus beginning net fixed assets plus depreciation minus taxes [E] beginning net fixed assets minus ending net fixed assets plus depreciation

[A] :You are correct! [B] :Your plus and minus signs are not correct. Review section 2.4. [C] :Taxes are not included. Also, watch your plus and minus signs. Review section 2.4. [D] :Taxes are not included. Review section 2.4. [E] :You have the ending and beginning values reversed. Review section 2.4.

56) Which one of the following statements is generally true regarding liquidity? [A] Liquidity is detrimental to a firm because it allows the firm to pay its bills more easily, thereby avoiding financial distress. [B] Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value. [C] Liquidity is valuable to a firm because a firm can borrow money using its liquid assets, such as a warehouse, as collateral. [D] Assets are generally listed on a firm's balance sheet in the order of increasing liquidity. [E] Liquid assets generally earn a large return, especially in comparison to illiquid assets. [A] :How would the ability to pay bills easier be considered detrimental? Review section 2.1. [B] :You are correct! [C] :A warehouse is not a liquid asset. Review section 2.1. [D] :Assets are listed in order of decreasing liquidity. Review section 2.1. [E] :What are the drawbacks of holding liquid assets? Review section 2.1.

57) The balance sheet is a financial statement summarizing a firm's performance over a period of time. [A] True [B] False [A] :This is the definition of an income statement. Review section 2.2. [B] :You are correct!

58) Under GAAP, balance sheet assets are: [A] only carried on the books if they are relatively liquid. [B] carried on the books at market value. [C] listed in the order of increasing liquidity. [D] carried on the books at historical cost. [E] converted from historical cost to the current market value if there are substantial differences between the two values. [A] :All assets are included regardless of their degree of liquidity. Review section 2.1. [B] :Are the assets shown at market value or historical cost? Review section 2.1. [C] :Assets are listed in order of decreasing liquidity. Review section 2.1. [D] :You are correct! [E] :Asset values are not adjusted to the market value. Review section 2.1.

59) If a firm has operating cash flow of $20,000, a change in net working capital of $6,000, net capital spending of $12,000, and cash flow to creditors of $5,000, then cash flow to stockholders must be -$3,000 (negative). [A] True

[B] False [A] :You are correct! [B] :This combines the cash flow identity and the cash flow from assets. Review section 2.4.

60) Last year, Eddie's, Inc. had an operating cash flow of $284,500. The net fixed asset account declined by $8,000 and the depreciation expense was $13,000. Also during the year, net working capital increased from $16,500 to $18,000. What is the company's cash flow from assets? [A] $262,000 [B] $278,000 [C] $281,000 [D] $288,000 [E] $301,000 [A] :It appears you computed net capital spending incorrectly. Review section 2.4. [B] :You are correct! [C] :It appears you computed the change in net working capital incorrectly. Review section 2.4. [D] :You need to review these formulas in section 2.4. [E] :You need to review these formulas in section 2.4.

61) Which one of the following is generally considered a fixed cost, at least in the short run? [A] raw materials [B] direct labor expenses [C] company president's salary [D] manufacturing labor [E] commissions paid to the sales force [A] :This cost varies with the level of sales and production. Review section 2.2. [B] :This cost varies with the level of sales and production. Review section 2.2. [C] :You are correct! This salary is paid regardless of the level of sales or production. [D] :This cost varies with the level of sales and production. Review section 2.2. [E] :This cost varies with the level of sales. Review section 2.2.

62) Marvelous Entertainment Group, Inc. had net income of $32.7 million in 2005. The firm paid no dividends. If there were no further changes to the stockholders' equity accounts, then _____ by $32.7 million. [A] common stock must have increased [B] retained earnings must have increased [C] total stockholders' equity must have decreased [D] capital surplus must have decreased [E] the market value of the firm's stock must have decreased [A] :You need to review the equity section of a balance sheet. Review section 2.1. [B] :You are correct! [C] :You need to review the equity section of a balance sheet. Review section 2.1. [D] :You need to review the equity section of a balance sheet. Review section 2.1. [E] :Does the balance sheet reflect market values? Review section 2.1.

63) Which one of the following is considered a noncash expense on the income statement? [A] income taxes [B] depreciation [C] interest expense [D] wages and salaries [E] cost of goods sold [A] :This is a cash expense. Review section 2.2. [B] :You are correct! [C] :This is a cash expense. Review section 2.2. [D] :This is a cash expense. Review section 2.2. [E] :This is a cash expense. Review section 2.2.

64) Which one of the following is the proper procedure to determine net investment in fixed assets over the course of a year? [A] ending net fixed assets minus beginning net fixed assets plus interest charges [B] ending net fixed assets minus beginning net fixed assets minus interest charges [C] ending net fixed assets minus beginning net fixed assets plus depreciation [D] ending net fixed assets minus beginning net fixed assets minus depreciation [E] ending net fixed assets minus beginning net fixed assets [A] :You need to review net capital spending in section 2.4. [B] :You need to review net capital spending in section 2.4. [C] :You are correct! [D] :Check your pluses and minuses. Review section 2.4. [E] :You are forgetting depreciation. Review section 2.4.

65) A firm paid dividends of $300 and interest of $640. In addition, the firm raised cash by selling new debt of $400 and new equity of $950. What is the firm's cash flow to creditors? [A] -$1,040 [B] -$240 [C] $240 [D] $890 [E] $1,040 [A] :You need to review your cash flows between a firm and it's creditors. Review section 2.4. [B] :It appears you have your signs reversed in your computation. Review section 2.4. [C] :You are correct! [D] :You need to review this computation in section 2.4. [E] :Remember, new borrowing is a cash flow from the creditors to the company. Review section 2.4.

66) A firm with negative net working capital: [A] must have no cash. [B] is unable to pay its bills today. [C] will go bankrupt within the next twelve months. [D] needs to reduce its inventory to correct the problem. [E] has more current liabilities than current assets.

[A] :This is not necessarily true. Review section 2.1. [B] :This is not necessarily true. Review section 2.1. [C] :This is not necessarily true as things could change over the next twelve months. Review section 2.1. [D] :This is not necessarily true. Review section 2.1. [E] :You are correct!

67) Last year, the Simple Company reported ending retained earnings of $400. This year, Simple had a net loss of $40 after taxes and paid a dividend of $60. What is the amount of Simple's ending retained earnings this year? [A] $220 [B] $300 [C] $340 [D] $380 [E] $420 [A] :What is the relationship between net income, dividends, and retained earnings? Review section 2.2. [B] :You are correct! [C] :What is the relationship between net income, dividends, and retained earnings? Review section 2.2. [D] :What is the relationship between net income, dividends, and retained earnings? Review section 2.2. [E] :What is the relationship between net income, dividends, and retained earnings? Review section 2.2.

68) Operating cash flow is the cash generated from a firm's normal business activities. [A] True [B] False [A] :You are correct! [B] :This is the definition of operating cash flow. Review section 2.4.

69) Accounts payable are a component of: [A] current assets. [B] long-term liabilities. [C] equity. [D] fixed assets. [E] net working capital. [A] :Accounts payable are not assets. Review section 2.1. [B] :Accounts payable are short-term liabilities. Review section 2.1. [C] :Accounts payable are short-term liabilities. Review section 2.1. [D] :Accounts payable are not assets. Review section 2.1. [E] :You are correct!

70) If a firm has operating cash flow of $12,000, a change in net working capital of $8,000, and net capital spending of $12,000, then cash flow from assets must be -$8,000 (negative).

[A] True [B] False [A] :You are correct! [B] :Cash flow from assets equals operating cash flow minus change in net working capital minus net capital spending. Review section 2.4.

71) Additions to net working capital over the course of a year can be computed by: [A] subtracting depreciation from the difference between ending NWC and beginning NWC. [B] adding depreciation to the difference between ending NWC and beginning NWC. [C] adding interest paid to the difference between ending NWC and beginning NWC. [D] subtracting interest paid from the difference between ending NWC and beginning NWC. [E] subtracting beginning NWC from ending NWC. [A] :Depreciation does not enter into this computation. Review section 2.4. [B] :Depreciation does not enter into this computation. Review section 2.4. [C] :Interest charges do not enter into this computation. Review section 2.4. [D] :Interest charges do not enter into this computation. Review section 2.4. [E] :You are correct!

72) An increase in the financial leverage of a firm as a result of an increase in outstanding debt _______ the potential reward to stockholders while ______ the risk of financial distress or bankruptcy. [A] decreases; decreasing [B] increases; increasing [C] increases; decreasing [D] decreases; increasing [E] does not affect; increasing [A] :You have this concept backwards. Review section 2.1. [B] :You are correct! [C] :At least one of these is incorrect. Review section 2.1. [D] :At least one of these is incorrect. Review section 2.1. [E] :At least one of these is incorrect. Review section 2.1.

73) Net capital spending is equal to: [A] the change in net working capital. [B] the change in net fixed assets minus depreciation. [C] net income plus depreciation. [D] total cash flow to stockholders less interest and dividends paid. [E] operating cash flow minus cash flow from assets minus additions to net working capital. [A] :This does not reflect changes in net capital spending. Review section 2.4. [B] :Should depreciation be added or subtracted? Review section 2.4. [C] :This does not reflect changes in net capital spending. Review section 2.4. [D] :This does not reflect changes in net capital spending. Review section 2.4. [E] :You are correct!

74) When evaluating project cash flows as part of the financial decision making process:

[A] you can ignore taxes because they are a noncash expense. [B] you should use the marginal tax rate. [C] you should use only the average tax rate for the firm. [D] you should use the tax rate that is equal to the total tax liability divided by total taxable income. [E] you can completely ignore taxes unless net income for the project is greater than zero. [A] :Taxes must be paid in cash. Review section 2.3. [B] :You are correct! [C] :Is the average tax rate important to a financial manager? Review section 2.3. [D] :Is the average tax rate important to a financial manager? Review section 2.3. [E] :What about tax refunds? Review section 2.3.

75) A firm has taxable income of $74,000. How much tax do they owe? Taxable Income: Tax Rate $0-$50,000: 15% $50,001-$75,000: 25% $75,001-$100,000: 34% $100,001-$335,000: 39% [A] $10,050 [B] $11,750 [C] $13,500 [D] $16,750 [E] $18,500 [A] :This is incorrect. Review section 2.3. [B] :This is incorrect. Review section 2.3. [C] :You are correct! [D] :This is incorrect. Review section 2.3. [E] :Not all of this income is taxable at the 25 percent rate. Review section 2.3.

76) Alta's, Inc. had a net fixed asset balance of $6.5 million at the beginning of the year and $11 million at the end of the year. If depreciation for the 12-month period was $750,000, what was the firm's investment in new fixed assets? [A] -$3.75 million [B] $4.25 million [C] $4.50 million [D] $5.25 million [E] $6.75 million [A] :You are apparently treating the beginning and ending balances incorrectly. Review section 2.4. [B] :Try again! Review section 2.4. [C] :You are apparently forgetting about depreciation. Review section 2.4. [D] :You are correct! [E] :Try again! Review section 2.4.

77) Which of the following statements is (are) true about the balance sheet and income statement? I. The income statement reflects a summary of activity that occurs over some period of time. II. The balance sheet is a snapshot taken at a single point in time.

III. The balance sheet reflects the market value of the firm. [A] I only [B] II only [C] III only [D] I and II only [E] I, II, and III [A] :True, but another statement is also correct. Review section 2.1. [B] :True, but another statement is also correct. Review section 2.2. [C] :What is the difference between market value and book value? Review section 2.1. [D] :You are correct! [E] :At least one of these is incorrect. Review sections 2.1 and 2.2.