Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02
Financial Statements, Taxes, and Cash Flow

Multiple Choice Questions

Chapter 02 Financial Statements, Taxes, and Cash Flow Answer Key


Multiple Choice Questions

1. Which one o the ollowin! is the inancial statement that shows the acco"ntin! #al"e o a
irm$s e%"ity as o a partic"lar date&
A. income statement
'. creditor$s statement
C. (alance sheet
). statement o cash lows
*. di#idend statement
+eer to section 2.1

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&o'ic: Balance s(eet

2-1
Chapter 02 - Financial Statements, Taxes, and Cash Flow
2. ,et wor-in! capital is deined as.
A. total lia(ilities min"s shareholders$ e%"ity.
'. c"rrent lia(ilities min"s shareholders$ e%"ity.
C. ixed assets min"s lon!-term lia(ilities.
). total assets min"s total lia(ilities.
E. c"rrent assets min"s c"rrent lia(ilities.
+eer to section 2.1

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&o'ic: Net wor)ing ca'ital

2-2
Chapter 02 - Financial Statements, Taxes, and Cash Flow
/. The common set o standards and proced"res (y which a"dited inancial statements are
prepared is -nown as the.
A. matchin! principle.
'. cash low identity.
C. 0enerally Accepted Acco"ntin! 1rinciples.
). Financial Acco"ntin! +eportin! 1rinciples.
*. Standard Acco"ntin! 2al"e 0"idelines.
+eer to section 2.1

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&o'ic: *AA+

3. Which one o the ollowin! is the inancial statement that s"mmari4es a irm$s re#en"e and
expenses o#er a period o time&
A. income statement
'. (alance sheet
C. statement o cash lows
). tax reconciliation statement
*. mar-et #al"e report
+eer to section 2.2

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&o'ic: ,ncome statement

2-/
Chapter 02 - Financial Statements, Taxes, and Cash Flow
5. ,oncash items reer to.
A. accr"ed expenses.
'. in#entory items p"rchased "sin! credit.
C. the ownership o intan!i(le assets s"ch as patents.
D. expenses which do not directly aect cash lows.
*. sales which are made "sin! store credit.
+eer to section 2.2

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&o'ic: Noncas( items

6. The percenta!e o the next dollar yo" earn that m"st (e paid in taxes is reerred to as the
77777 tax rate.
A. mean
'. resid"al
C. total
). a#era!e
E. mar!inal
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&o'ic: .arginal ta/ rate

2-3
Chapter 02 - Financial Statements, Taxes, and Cash Flow
8. The 77777 tax rate is e%"al to total taxes di#ided (y total taxa(le income.
A. ded"cti(le
'. resid"al
C. total
D. a#era!e
*. mar!inal
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&o'ic: A!erage ta/ rate

9. The cash low o a irm which is a#aila(le or distri("tion to the irm$s creditors and
stoc-holders is called the.
A. operatin! cash low.
'. net capital spendin!.
C. net wor-in! capital.
D. cash low rom assets.
*. cash low to stoc-holders.
+eer to section 2.3

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&o'ic: Cas( flow from assets

2-5
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:. Which term relates to the cash low which res"lts rom a irm$s on!oin!, normal ("siness
acti#ities&
A. operatin! cash low
'. capital spendin!
C. net wor-in! capital
). cash low rom assets
*. cash low to creditors
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&o'ic: O'erating cas( flow

10. Cash low rom assets is also -nown as the irm$s.
A. capital str"ct"re.
'. e%"ity str"ct"re.
C. hidden cash low.
D. ree cash low.
*. historical cash low.
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&o'ic: 1ree cas( flow

2-6
Chapter 02 - Financial Statements, Taxes, and Cash Flow
11. The cash low related to interest payments less any net new (orrowin! is called the.
A. operatin! cash low.
'. capital spendin! cash low.
C. net wor-in! capital.
). cash low rom assets.
E. cash low to creditors.
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&o'ic: Cas( flow to creditors

12. Cash low to stoc-holders is deined as.
A. the total amo"nt o interest and di#idends paid d"rin! the past year.
'. the chan!e in total e%"ity o#er the past year.
C. cash low rom assets pl"s the cash low to creditors.
). operatin! cash low min"s the cash low to creditors.
E. di#idend payments less net new e%"ity raised.
+eer to section 2.3

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&o'ic: Cas( flow to stoc)(olders

2-8
Chapter 02 - Financial Statements, Taxes, and Cash Flow
1/. Which one o the ollowin! is classiied as an intan!i(le ixed asset&
A. acco"nts recei#a(le
'. prod"ction e%"ipment
C. ("ildin!
D. trademar-
*. in#entory
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&o'ic: ,ntangible fi/ed asset

13. Which o the ollowin! are c"rrent assets&
;. patent
;;. ;n#entory
;;;. acco"nts paya(le
;2. cash
A. ; and ;;; only
. ;; and ;2 only
C. ;, ;;, and ;2 only
). ;, ;; and ;;; only
*. ;;, ;;;, and ;2 only
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&o'ic: Current assets

2-9
Chapter 02 - Financial Statements, Taxes, and Cash Flow
15. Which one o the ollowin! is incl"ded in a irm$s mar-et #al"e ("t yet is excl"ded rom
the irm$s acco"ntin! #al"e&
A. real estate in#estment
. !ood rep"tation o the company
C. e%"ipment owned (y the irm
). money d"e rom a c"stomer
*. an item held (y the irm or "t"re sale
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&o'ic: .ar)et !alue

16. Which o the ollowin! are incl"ded in c"rrent lia(ilities&
;. note paya(le to a s"pplier in ei!ht months
;;. amo"nt d"e rom a c"stomer next month
;;;. acco"nt paya(le to a s"pplier that is d"e next wee-
;2. loan paya(le to the (an- in o"rteen months
A. ; and ;;; only
'. ;; and ;;; only
C. ;, ;;, and ;;; only
). ;, ;;;, and ;2 only
*. ;, ;;, ;;;, and ;2
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&o'ic: Current liabilities

2-:
Chapter 02 - Financial Statements, Taxes, and Cash Flow
18. Which one o the ollowin! will increase the #al"e o a irm$s net wor-in! capital&
A. "sin! cash to pay a s"pplier
'. depreciatin! an asset
C. collectin! an acco"nts recei#a(le
). p"rchasin! in#entory on credit
E. sellin! in#entory at a proit
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&o'ic: Net wor)ing ca'ital

19. Which one o the ollowin! statements concernin! net wor-in! capital is correct&
A. ,et wor-in! capital increases when in#entory is p"rchased with cash.
'. ,et wor-in! capital m"st (e a positi#e #al"e.
C. Total assets m"st increase i net wor-in! capital increases.
D. A decrease in the cash (alance also decreases net wor-in! capital.
*. ,et wor-in! capital is the amo"nt o cash a irm c"rrently has a#aila(le or spendin!.
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&o'ic: Net wor)ing ca'ital

2-10
Chapter 02 - Financial Statements, Taxes, and Cash Flow
1:. Which one o the ollowin! statements concernin! net wor-in! capital is correct&
A. The lower the #al"e o net wor-in! capital the !reater the a(ility o a irm to meet its
c"rrent o(li!ations.
'. An increase in net wor-in! capital m"st also increase c"rrent assets.
C. ,et wor-in! capital increases when in#entory is sold or cash at a proit.
). Firms with e%"al amo"nts o net wor-in! capital are also e%"ally li%"id.
*. ,et wor-in! capital is a part o the operatin! cash low.
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&o'ic: Net wor)ing ca'ital

20. Which one o the ollowin! acco"nts is the most li%"id&
A. in#entory
'. ("ildin!
C. acco"nts recei#a(le
). e%"ipment
*. land
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&o'ic: Li2uidity

2-11
Chapter 02 - Financial Statements, Taxes, and Cash Flow
21. Which one o the ollowin! represents the most li%"id asset&
A. <100 acco"nt recei#a(le that is disco"nted and collected or <:6 today
'. <100 o in#entory which is sold today on credit or <10/
C. <100 o in#entory which is disco"nted and sold or <:8 cash today
D. <100 o in#entory that is sold today or <100 cash
*. <100 acco"nts recei#a(le that will (e collected in "ll next wee-
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&o'ic: Li2uidity

22. Which one o the ollowin! statements related to li%"idity is correct&
A. =i%"id assets tend to earn a hi!h rate o ret"rn.
. =i%"id assets are #al"a(le to a irm.
C. =i%"id assets are deined as assets that can (e sold %"ic-ly re!ardless o the price o(tained.
). ;n#entory is more li%"id than acco"nts recei#a(le (eca"se in#entory is tan!i(le.
*. Any asset that can (e sold within the next year is considered li%"id.
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&o'ic: Li2uidity

2-12
Chapter 02 - Financial Statements, Taxes, and Cash Flow
2/. Shareholders$ e%"ity.
A. increases in #al"e anytime total assets increases.
'. is e%"al to total assets pl"s total lia(ilities.
C. decreases whene#er new shares o stoc- are iss"ed.
). incl"des lon!-term de(t, preerred stoc-, and common stoc-.
E. represents the resid"al #al"e o a irm.
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&o'ic: S(are(olders' e2uity

23. The hi!her the de!ree o inancial le#era!e employed (y a irm, the.
A. hi!her the pro(a(ility that the irm will enco"nter inancial distress.
'. lower the amo"nt o de(t inc"rred.
C. less de(t a irm has per dollar o total assets.
). hi!her the n"m(er o o"tstandin! shares o stoc-.
*. lower the (alance in acco"nts paya(le.
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&o'ic: 1inancial le!erage

2-1/
Chapter 02 - Financial Statements, Taxes, and Cash Flow
25. The (oo- #al"e o a irm is.
A. e%"i#alent to the irm$s mar-et #al"e pro#ided that the irm has some ixed assets.
. (ased on historical cost.
C. !enerally !reater than the mar-et #al"e when ixed assets are incl"ded.
). more o a inancial than an acco"ntin! #al"ation.
*. ad>"sted to the mar-et #al"e whene#er the mar-et #al"e exceeds the stated (oo- #al"e.
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&o'ic: Boo) !alue

26. Which o the ollowin! are incl"ded in the mar-et #al"e o a irm ("t are excl"ded rom
the irm$s (oo- #al"e&
;. #al"e o mana!ement s-ills
;;. #al"e o a copyri!ht
;;;. #al"e o the irm$s rep"tation
;2. #al"e o employee$s experience
A. ; only
'. ;; only
C. ;;; and ;2 only
). ;, ;;, and ;;; only
E. ;, ;;;, and ;2 only
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&o'ic: .ar)et and boo) !alue

2-13
Chapter 02 - Financial Statements, Taxes, and Cash Flow
28. ?o" recently p"rchased a !rocery store. At the time o the p"rchase, the store$s mar-et
#al"e e%"aled its (oo- #al"e. The p"rchase incl"ded the ("ildin!, the ixt"res, and the
in#entory. Which one o the ollowin! is most apt to ca"se the mar-et #al"e o this store to (e
lower than the (oo- #al"e&
A. a s"dden and "nexpected increase in inlation
'. the replacement o old in#entory items with more desira(le prod"cts
C. impro#ements to the s"rro"ndin! area (y other store owners
D. constr"ction o a new restricted access hi!hway located (etween the store and the
s"rro"ndin! residential areas
*. addition o a stop li!ht at the main entrance to the store$s par-in! lot
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29. Which one o the ollowin! is tr"e accordin! to 0enerally Accepted Acco"ntin!
1rinciples&
A. )epreciation may or may not (e recorded at mana!ement$s discretion.
'. ;ncome is recorded (ased on the matchin! principle.
C. Costs are recorded (ased on the reali4ation principle.
). )epreciation is recorded (ased on the reco!nition principle.
E. Costs o !oods sold are recorded (ased on the matchin! principle.
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&o'ic: *AA+

2-15
Chapter 02 - Financial Statements, Taxes, and Cash Flow
2:. Which one o these is most apt to (e a ixed cost&
A. raw materials
'. man"act"rin! wa!es
C. mana!ement (on"ses
D. oice salaries
*. shippin! and rei!ht
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&o'ic: 1i/ed cost

/0. Which one o the ollowin! costs is most apt to (e a ixed cost&
A. prod"ction la(or cost
. depreciation
C. raw materials
). "tilities
*. sales commissions
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&o'ic: 1i/ed cost

2-16
Chapter 02 - Financial Statements, Taxes, and Cash Flow
/1. Which o the ollowin! are expenses or acco"ntin! p"rposes ("t are not operatin! cash
lows or inancial p"rposes&
;. interest expense
;;. taxes
;;;. costs o !oods sold
;2. depreciation
A. ;2 only
'. ;; and ;2 only
C. ; and ;;; only
D. ; and ;2 only
*. ;, ;;, and ;2 only
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&o'ic: Accounting !ersus cas( flow

/2. Which one o the ollowin! statements related to an income statement is correct& Ass"me
accr"al acco"ntin! is "sed.
A. The addition to retained earnin!s is e%"al to net income pl"s di#idends paid.
'. Credit sales are recorded on the income statement when the cash rom the sale is collected.
C. The la(or costs or prod"cin! a prod"ct are expensed when the prod"ct is sold.
). ;nterest is a non-cash expense.
*. )epreciation increases the mar!inal tax rate.
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&o'ic: ,ncome statement

2-18
Chapter 02 - Financial Statements, Taxes, and Cash Flow
//. Which one o the ollowin! statements related to taxes is correct&
A. The mar!inal tax rate m"st (e e%"al to or lower than the a#era!e tax rate or a irm.
'. The tax or a irm is comp"ted (y m"ltiplyin! the irm$s c"rrent mar!inal tax rate times the
taxa(le income.
C. Additional income is taxed at a irm$s a#era!e tax rate.
). 0i#en the corporate tax str"ct"re in 2009, the hi!hest mar!inal tax rate is e%"al to the
hi!hest a#era!e tax rate.
E. The mar!inal tax rate or a irm can (e either hi!her or lower than the a#era!e tax rate.
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&o'ic: &a/ rates

/3. As o 2009, which one o the ollowin! statements concernin! corporate income taxes is
correct&
A. The lar!est corporations ha#e an a#era!e tax rate o /: percent.
'. The lowest mar!inal rate is 25 percent.
C. A irm$s tax is comp"ted on an incremental (asis.
). A irm$s mar!inal tax rate will !enerally (e lower than its a#era!e tax rate once the irm$s
income exceeds <50,000.
*. When analy4in! a new pro>ect, the a#era!e tax rate sho"ld (e "sed.
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2-19
Chapter 02 - Financial Statements, Taxes, and Cash Flow
/5. )epreciation.
A. red"ces (oth taxes and net income.
'. increases the net ixed assets as shown on the (alance sheet.
C. red"ces (oth the net ixed assets and the costs o a irm.
). is a noncash expense which increases the net income.
*. decreases net ixed assets, net income, and operatin! cash lows.
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&o'ic: De'reciation

/6. Which one o the ollowin! statements related to an income statement is correct&
A. ;nterest expense increases the amo"nt o tax d"e.
'. )epreciation does not aect taxes since it is a non-cash expense.
C. ,et income is distri("ted to di#idends and paid-in s"rpl"s.
D. Taxes red"ce (oth net income and operatin! cash low.
*. ;nterest expense is incl"ded in operatin! cash low.
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&o'ic: ,ncome statement

2-1:
Chapter 02 - Financial Statements, Taxes, and Cash Flow
/8. Which one o the ollowin! statements is correct concernin! a corporation with taxa(le
income o <125,000&
A. ,et income min"s di#idends paid will e%"al the endin! retained earnin!s or the year.
. An increase in depreciation will increase the operatin! cash low.
C. ,et income di#ided (y the n"m(er o shares o"tstandin! will e%"al the di#idends per share.
). ;nterest paid will (e incl"ded in (oth net income and operatin! cash low.
*. An increase in the tax rate will increase (oth net income and operatin! cash low.
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/9. Which one o the ollowin! will increase the cash low rom assets, all else e%"al&
A. decrease in cash low to stoc-holders
'. decrease in operatin! cash low
C. increase in the chan!e in net wor-in! capital
). decrease in cash low to creditors
E. decrease in net capital spendin!
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&o'ic: Cas( flow from assets

2-20
Chapter 02 - Financial Statements, Taxes, and Cash Flow
/:. For a tax-payin! irm, an increase in 77777 will ca"se the cash low rom assets to
increase.
A. depreciation
'. net capital spendin!
C. chan!e in net wor-in! capital
). taxes
*. prod"ction costs
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30. Which one o the ollowin! m"st (e tr"e i a irm had a ne!ati#e cash low rom assets&
A. The irm (orrowed money.
'. The irm ac%"ired new ixed assets.
C. The irm had a net loss or the period.
D. The irm "tili4ed o"tside "ndin!.
*. ,ewly iss"ed shares o stoc- were sold.
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2-21
Chapter 02 - Financial Statements, Taxes, and Cash Flow
31. An increase in the depreciation expense will do which o the ollowin!&
;. increase net income
;;. decrease net income
;;;. increase the cash low rom assets
;2. decrease the cash low rom assets
A. ; only
'. ;; only
C. ; and ;;; only
D. ;; and ;;; only
*. ;; and ;2 only
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&o'ic: De'reciation

32. Which one o the ollowin! is ,@T incl"ded in cash low rom assets&
A. acco"nts paya(le
'. in#entory
C. sales
D. interest expense
*. cash acco"nt
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2-22
Chapter 02 - Financial Statements, Taxes, and Cash Flow
3/. ,et capital spendin!.
A. is e%"al to endin! net ixed assets min"s (e!innin! net ixed assets.
. is e%"al to 4ero i the decrease in the net ixed assets is e%"al to the depreciation expense.
C. relects the net chan!es in total assets o#er a stated period o time.
). is e%"i#alent to the cash low rom assets min"s the operatin! cash low min"s the chan!e
in net wor-in! capital.
*. is e%"al to the net chan!e in the c"rrent acco"nts.
+eer to section 2.3

AACSB: N/A
Bloom's: Com're(ension
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net ca'ital s'ending

33. Which one o the ollowin! statements related to the cash low to creditors is correct&
A. ; the cash low to creditors is positi#e then the irm m"st ha#e (orrowed more money than
it repaid.
'. ; the cash low to creditors is ne!ati#e then the irm m"st ha#e a ne!ati#e cash low rom
assets.
C. A positi#e cash low to creditors represents a net cash o"tlow rom the irm.
). A positi#e cash low to creditors means that a irm has increased its lon!-term de(t.
*. ; the cash low to creditors is 4ero, then a irm has no lon!-term de(t.
+eer to section 2.3

AACSB: N/A
Bloom's: Com're(ension
Difficulty: ,ntermediate
Learning Obecti!e: "#0
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&o'ic: Cas( flow to creditors

2-2/
Chapter 02 - Financial Statements, Taxes, and Cash Flow
35. A positi#e cash low to stoc-holders indicates which one o the ollowin! with certainty&
A. The di#idends paid exceeded the net new e%"ity raised.
'. The amo"nt o the sale o common stoc- exceeded the amo"nt o di#idends paid.
C. ,o di#idends were distri("ted ("t new shares o stoc- were sold.
). 'oth the cash low to assets and the cash low to creditors m"st (e ne!ati#e.
*. 'oth the cash low to assets and the cash low to creditors m"st (e positi#e.
+eer to section 2.3

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#0
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&o'ic: Cas( flow to stoc)(olders

36. A irm has <520 in in#entory, <1,960 in ixed assets, <1:0 in acco"nts recei#a(les, <210 in
acco"nts paya(le, and <80 in cash. What is the amo"nt o the c"rrent assets&
A. <810
. <890
C. <::0
). <2,3/0
*. <2,630
C"rrent assets A <520 B <1:0 B <80 A <890

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Current assets

2-23
Chapter 02 - Financial Statements, Taxes, and Cash Flow
38. A irm has net wor-in! capital o <630. =on!-term de(t is <3,190, total assets are <6,2/0,
and ixed assets are </,:10. What is the amo"nt o the total lia(ilities&
A. <2,050
'. <2,6:0
C. <3,1/0
). <5,5:0
E. <5,960
C"rrent assets A <6,2/0 - </,:10 A <2,/20
C"rrent lia(ilities A <2,/20 - <630 A <1,690
Total lia(ilities A <1,690 B <3,190 A <5,960

AACSB: Analytic
Bloom's: Synt(esis
Difficulty: ,ntermediate
Learning Obecti!e: "#$
Section: "%$
&o'ic: Net wor)ing ca'ital

39. A irm has common stoc- o <6,200, paid-in s"rpl"s o <:,100, total lia(ilities o <9,300,
c"rrent assets o <5,:00, and ixed assets o <21,200. What is the amo"nt o the shareholders$
e%"ity&
A. <6,:00
'. <15,/00
C. <19,800
). <2/,800
*. </5,500
Shareholders$ e%"ity A <5,:00 B <21,200 - <9,300 A <19,800
C,ote. The amo"nt o retained earnin!s is not pro#ided, so yo" m"st "se total assets min"s
total lia(ilities to deri#e the correct answer.D

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#$
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&o'ic: S(are(olders' e2uity

2-25
Chapter 02 - Financial Statements, Taxes, and Cash Flow
3:. ?o"r irm has total assets o <3,:00, ixed assets o </,200, lon!-term de(t o <2,:00, and
short-term de(t o <1,300. What is the amo"nt o net wor-in! capital&
A. -<100
. </00
C. <600
). <1,800
*. <1,900
,et wor-in! capital A <3,:00 - </,200 - <1,300 A </00

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Net wor)ing ca'ital

50. 'onner Collision has shareholders$ e%"ity o <131,900. The irm owes a total o <126,000
o which 60 percent is paya(le within the next year. The irm net ixed assets o <161,:00.
What is the amo"nt o the net wor-in! capital&
A. <25,/00
. </0,/00
C. <85,600
). <96,/00
*. <111,500
C"rrent lia(ilities A .60 <126,000 A <85,600
Total assets A <131,900 B <126,000 A <268,900
C"rrent assets A <268,900 - <161,:00 A <105,:00
,et wor-in! capital A <105,:00 - <85,600 A </0,/00

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#$
Section: "%$
&o'ic: Net wor)ing ca'ital

2-26
Chapter 02 - Financial Statements, Taxes, and Cash Flow
51. Fo"r years a!o, 2el#et 1"rses p"rchased a mailin! machine at a cost o <186,000. This
e%"ipment is c"rrently #al"ed at <63,500 on today$s (alance sheet ("t co"ld act"ally (e sold
or <59,:00. This is the only ixed asset the irm owns. ,et wor-in! capital is <58,200 and
lon!-term de(t is <111,/00. What is the (oo- #al"e o shareholders$ e%"ity&
A. <3,900
'. <8,800
C. <10,300
). <222,600
*. <2//,000
'oo- #al"e o shareholders$ e%"ity A <63,500 B <58,200 - <111,/00 A <10,300

AACSB: Analytic
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Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Boo) !alue

52. Ea-e owns The Corner Far-et which he is tryin! to sell so that he can retire and tra#el.
The Corner Far-et owns the ("ildin! in which it is located. This ("ildin! was ("ilt at a cost
o <638,000 and is c"rrently appraised at <91:,000. The co"nters and ixt"res ori!inally cost
<139,000 and are c"rrently #al"ed at <65,000. The in#entory is #al"ed on the (alance sheet at
</1:,000 and has a retail mar-et #al"e e%"al to 1.2 times its cost. Ea-e expects the store to
collect :9 percent o the <21,800 in acco"nts recei#a(le. The irm has <26,900 in cash and has
total de(t o <313,800. What is the mar-et #al"e o this irm&
A. <958,6/3
. <:00,166
C. <:1:,000
). <1,/13,966
*. <1,///,800
Far-et #al"e o irm A <91:,000 B <65,000 B 1.2C</1:,000D B .:9C<21,800D B <26,900 -
<313,800 A <:00,166

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: .ar)et !alue

2-28
Chapter 02 - Financial Statements, Taxes, and Cash Flow
5/. Eensen *nterprises paid <1,/00 in di#idends and <:20 in interest this past year. Common
stoc- increased (y <1,200 and retained earnin!s decreased (y </10. What is the net income
or the year&
A. -<210
. <::0
C. <1,610
). <1,:10
*. <2,1:0
,et income A <1,/00 B C-</10D A <::0

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#"
Section: "%"
&o'ic: Net income

53. Andre$s 'a-ery has sales o <698,000 with costs o <3:2,000. ;nterest expense is <26,000
and depreciation is <32,000. The tax rate is /5 percent. What is the net income&
A. <32,850
'. <33,350
C. <92,550
). <96,350
*. <123,550
,et income A C<698,000 - <3:2,000 - <26,000 - <32,000D C1 - ./5D A <92,550

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#"
Section: "%"
&o'ic: Net income

2-29
Chapter 02 - Financial Statements, Taxes, and Cash Flow
55. Kaylor *%"ipment +ental paid <85 in di#idends and <511 in interest expense. The
addition to retained earnin!s is <319 and net new e%"ity is <500. The tax rate is /5 percent.
Sales are <15,:00 and depreciation is <690. What are the earnin!s (eore interest and taxes&
A. <59:.36
. <1,26:.36
C. <1,//1.53
). <1,:51.53
*. <1,:3:.36
,et income A <85 B <319 A <3:/
Taxa(le income A <3:/GC1 - ./5D A <859.36
*arnin!s (eore interest and taxes A <859.36 B <511 A <1,26:.36

AACSB: Analytic
Bloom's: A''lication
Difficulty: ,ntermediate
Learning Obecti!e: "#"
Section: "%"
&o'ic: 3B,&

56. 0i#en the tax rates as shown, what is the a#era!e tax rate or a irm with taxa(le income
o </11,/60&

A. 29.25 percent
'. /1.0: percent
C. //.62 percent
). /5.39 percent
*. /:.00 percent
Tax A .15C<50,000D B .25C<25,000D B ./3C<25,000D B ./:C<211,/60D A <103,690.30
A#era!e tax rate A <103,690.30G</11,/60 A //.62 percent

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#-
Section: "%-
&o'ic: A!erage ta/ rate

2-2:
Chapter 02 - Financial Statements, Taxes, and Cash Flow
58. The tax rates are as shown. ,e#ada Finin! c"rrently has taxa(le income o <:8,900. How
m"ch additional tax will the irm owe i taxa(le income increases (y <21,000&

A. <9,090
'. <9,1/0
C. <9,155
). <9,180
*. <9,1:0
Additional tax A ./3C<100,000 - <:8,900D B ./:C<:8,900 B <21,000 - <100,000D A <9,090

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#-
Section: "%-
&o'ic: .arginal ta/

59. Winston ;nd"stries had sales o <93/,900 and costs o <60:,:00. The irm paid </9,200 in
interest and <19,000 in di#idends. ;t also increased retained earnin!s (y <62,1/9 or the year.
The depreciation was <86,300. What is the a#era!e tax rate&
A. /2.9/ percent
'. //.// percent
C. /9.18 percent
). 3/./: percent
*. 39.98 percent
*arnin!s (eore taxes A <93/,900 - <60:,:00 - <86,300 - </9,200 A <11:,/00
,et income A <19,000 B <62,1/9 A <90,1/9
Taxes A <11:,/00 - <90,1/9 A </:,162
Tax rate A </:,162G<11:,/00 A /2.9/ percent

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#-
Section: "%-
&o'ic: A!erage ta/ rate

2-/0
Chapter 02 - Financial Statements, Taxes, and Cash Flow
5:. Crandall @il has total sales o <1,/3:,900 and costs o <:0/,500. )epreciation is <32,800
and the tax rate is /3 percent. The irm does not ha#e any interest expense. What is the
operatin! cash low&
A. <12:,152
'. <181,952
C. <18:,:23
). <291,318
E. </0:,086
*arnin!s (eore interest and taxes A <1,/3:,900 - <:0/,500 - <32,800 A <30/,600
Tax A <30/,600 ./3 A <1/8,223
@peratin! cash low A <30/,600 B <32,800 - <1/8,223 A </0:,086

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: OC1

60. ,ielsen A"to 1arts had (e!innin! net ixed assets o <219,380 and endin! net ixed assets
o <20:,311. )"rin! the year, assets with a com(ined (oo- #al"e o <6,:3/ were sold.
)epreciation or the year was <32,922. What is the amo"nt o net capital spendin!&
A. <//,86/
'. <30,806
C. <59,219
). <65,161
*. <68,309
,et capital spendin! A <20:,311 - <219,380 B <32,922 A <//,86/

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net ca'ital s'ending

2-/1
Chapter 02 - Financial Statements, Taxes, and Cash Flow
61. At the (e!innin! o the year, a irm had c"rrent assets o <121,/06 and c"rrent lia(ilities
o <123,50:. At the end o the year, the c"rrent assets were <122,319 and the c"rrent lia(ilities
were <10/,819. What is the chan!e in net wor-in! capital&
A. -<1:,68:
'. -<11,50/
C. -<:,/98
). <1,90:
E. <21,:0/
Chan!e in net wor-in! capital A C<122,319 - <10/,819D - C<121,/06 - <123,50:D A <21,:0/

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: C(ange in net wor)ing ca'ital

62. At the (e!innin! o the year, the lon!-term de(t o a irm was <82,:19 and total de(t was
<1/9,308. At the end o the year, lon!-term de(t was <69,21: and total de(t was <135,9/9.
The interest paid was <6,3/0. What is the amo"nt o the cash low to creditors&
A. -<19,/39
'. -<1,001
C. <11,12:
). <1/,961
*. <1:,182
Cash low to creditors A <6,3/0 - C<69,21: - <82,:19D A <11,12:

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to creditors

2-/2
Chapter 02 - Financial Statements, Taxes, and Cash Flow
6/. Adelson$s *lectric had (e!innin! lon!-term de(t o <32,511 and endin! lon!-term de(t o
<39,:1:. The (e!innin! and endin! total de(t (alances were <93,652 and <89,61/,
respecti#ely. The interest paid was <3,868. What is the amo"nt o the cash low to creditors&
A. -<1,631
'. -<1,282
C. <1,282
). <8,319
*. <11,185
Cash low to creditors A <3,868 - C<39,:1: - <32,511D A -<1,631

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to creditors

63. The )aily ,ews had net income o <121,600 o which 30 percent was distri("ted to the
shareholders as di#idends. )"rin! the year, the company sold <85,000 worth o common
stoc-. What is the cash low to stoc-holders&
A. -<85,000
. -<26,/60
C. -<2,030
). <12/,630
*. <138,:60
Cash low to stoc-holders A .30C<121,600D - <85,000 A -<26,/60

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to stoc)(olders

2-//
Chapter 02 - Financial Statements, Taxes, and Cash Flow
65. The =a-eside ;nn had operatin! cash low o <39,350. )epreciation was <6,800 and
interest paid was <2,390. A net total o <2,620 was paid on lon!-term de(t. The irm spent
<23,000 on ixed assets and decreased net wor-in! capital (y <1,//0. What is the amo"nt o
the cash low to stoc-holders&
A. <5,100
'. <8,9/0
C. <19,020
). <1:,::9
E. <20,690
Cash low rom assets A <39,350 - C-<1,//0D - <23,000 A <25,890
Cash low to creditors A<2,390 - C-<2,620D A <5,100
Cash low to stoc-holders A <25,890 - <5,100 A <20,690

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to stoc)(olders

2-/3
Chapter 02 - Financial Statements, Taxes, and Cash Flow



66. What is the chan!e in the net wor-in! capital rom 2009 to 200:&
A. -<1,1:3
. <1,/06
C. <1,998
). <3,890
*. <5,182
Chan!e in net wor-in! capital A C<3,881 - <1,5/2D - C<6,128 - <3,1:3D A <1,/06

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net wor)ing ca'ital

2-/5
Chapter 02 - Financial Statements, Taxes, and Cash Flow
68. What is the amo"nt o the noncash expenses or 200:&
A. <830
'. <1,292
C. <1,///
D. <1,611
*. <2,/51
The noncash expense is the depreciation in the amo"nt o <1,611.

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#"
Section: "%"
&o'ic: Noncas( e/'ense

69. What is the amo"nt o the net capital spendin! or 200:&
A. -</92
. <1,22:
C. <1,903
). <2,/85
*. <2,516
,et capital spendin! A <18,108 - <18,39: B <1,611 A <1,22:

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net ca'ital s'ending

2-/6
Chapter 02 - Financial Statements, Taxes, and Cash Flow
6:. What is the operatin! cash low or 200:&
A. <2,113
'. <2,:00
C. <2,:95
). </,5/6
E. <3,268
@peratin! cash low A </,/:6 B <1,611 - <830 A <3,268

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: O'erating cas( flow

80. What is the cash low rom assets or 200:&
A. <1,8/2
'. <2,238
C. <2,:61
). </,:15
*. <3,268
Chan!e in net wor-in! capital A C<3,881 - <1,5/2D - C<6,128 - <3,1:3D A <1,/06
,et capital spendin! A <18,108 - <18,39: B <1,611 A <1,22:
@peratin! cash low A </,/:6 B <1,611 - <830 A <3,268
Cash low rom assets A <3,268 - <1,22: - <1,/06 A <1,8/2

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
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&o'ic: Cas( flow from assets

2-/8
Chapter 02 - Financial Statements, Taxes, and Cash Flow
81. What is the amo"nt o net new (orrowin! or 200:&
A. -<1,912
'. -<1,8/9
C. <230
). <662
E. <950
,et new (orrowin! A <10,650 - <:,900 A <950

AACSB: Analytic
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Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net new borrowing

82. What is the cash low to creditors or 200:&
A. -</5/
'. -<210
C. </00
D. <3/2
*. <528
Cash low to creditors A <1,292 - C<10,650 - <:,900D A <3/2

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to creditors

2-/9
Chapter 02 - Financial Statements, Taxes, and Cash Flow
8/. What is the amo"nt o di#idends paid in 200:&
A. <0
'. <583
C. <900
). <2,01/
*. <2,183
)i#idends paid A <1,/83 - C<2,6:6 - <2,122D A <900

AACSB: Analytic
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Difficulty: Basic
Learning Obecti!e: "#"
Section: "%"
&o'ic: Di!idends 'aid

83. What is the cash low to stoc-holders or 200:&
A. -<500
'. -<900
C. <500
D. <1,/00
*. <2,100
Cash low to stoc-holders A I<1,/83 - C<2,6:6 - <2,122DJ - C<8,000 - <8,500D A <1,/00

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to stoc)(olders

2-/:
Chapter 02 - Financial Statements, Taxes, and Cash Flow


85. What is the net wor-in! capital or 200:&
A. -<185
'. <//9
C. <1,262
D. <1,:35
*. <3,:31
,et wor-in! capital A </1/ B <1,162 B <1,521 - <1,051 A <1,:35

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Net wor)ing ca'ital

2-30
Chapter 02 - Financial Statements, Taxes, and Cash Flow
86. What is the chan!e in net wor-in! capital rom 2009 to 200:&
A. -<185
'. -<80
C. <125
). <230
*. </15
Chan!e in net wor-in! capital A C</1/ B <1,162 B <1,521 - <1,051D - C<250 B <1,0:2 B <1,3:5
- <818D A -<185

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: C(ange in net wor)ing ca'ital

88. What is the net capital spendin! or 200:&
A. <118
. <2/:
C. <258
). <//9
*. <321
,et capital spendin! A <3,12/ - <3,006 B <122 A <2/:

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net ca'ital s'ending

2-31
Chapter 02 - Financial Statements, Taxes, and Cash Flow
89. What is the operatin! cash low or 200:&
A. <1,226
'. <1,/68
C. <1,633
). <1,866
*. <1,92/
@peratin! cash low A C<6,32/ - <3,10: - <122D B <122 - <680 A <1,633

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: O'erating cas( flow

8:. What is the cash low rom assets or 200:&
A. <1,2/0
. <1,590
C. <1,880
). <1,910
*. <1,:90
@peratin! cash low A C<6,32/ - <3,10: - <122D B <122 - <680 A <1,633
,et capital spendin! A <3,12/ - <3,006 B <122 A <2/:
Chan!e in net wor-in! capital A C</1/ B <1,162 B <1,521 - <1,051D - C<250 B <1,0:2 B <1,3:5
- <818D A -<185
Cash low rom assets A <1,633 - <2/: - C-<185D A <1,590

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow from assets

2-32
Chapter 02 - Financial Statements, Taxes, and Cash Flow
90. What is net new (orrowin! or 200:&
A. -<1,/00
'. -<1,020
C. <990
). <1,020
*. <1,/00
,et new (orrowin! A <1,100 - <2,300 A -<1,/00

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net new borrowing

91. What is the cash low to creditors or 200:&
A. -<1,020
'. -<1,100
C. <290
D. <1,590
*. <1,860
,et new (orrowin! A <1,100 - <2,300 A -<1,/00
Cash low to creditors A 290 - C-<1,/00D A <1,590

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to creditors

2-3/
Chapter 02 - Financial Statements, Taxes, and Cash Flow
92. What is the cash low to stoc-holders or 200:&
A. <0
'. <1//
C. <269
). <1,80:
*. <1,515
@peratin! cash low A C<6,32/ - <3,10: - <122D B <122 - <680 A <1,633
,et capital spendin! A <3,12/ - <3,006 B <122 A <2/:
Chan!e in net wor-in! capital A C</1/ B <1,162 B <1,521 - <1,051D - C<250 B <1,0:2 B <1,3:5
- <818D A -<185
Cash low rom assets A <1,633 - <2/: - C-<185D A <1,590
,et new (orrowin! A <1,100 - <2,300 A -<1,/00
Cash low to creditors A 290 - C-<1,/00D A <1,590
Cash low to stoc-holders A <1,590 - <1,590 A <0

AACSB: Analytic
Bloom's: Synt(esis
Difficulty: C(allenge
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to stoc)(olders



2-33
Chapter 02 - Financial Statements, Taxes, and Cash Flow
9/. What is the taxa(le income or 200:&
A. <1,051.00
'. <1,/68.89
C. <1,5:2.32
). <2,886.31
*. </,0:1.19
,et income A <320 B <6/1 A <1,051
Taxa(le income A <1,051GC1 - ./3D A <1,5:2.32

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#"
Section: "%"
&o'ic: &a/able income

93. What is the operatin! cash low or 200:&
A. <2,089.00
'. <2,122.32
C. <2,362.59
). <2,662.00
*. <2,831.32
,et income A <320 B <6/1 A <1,051
Taxa(le income A <1,051GC1 - ./3D A <1,5:2.32
*arnin!s (eore interest and taxes A <1,5:2.32 B <2/9 A <1,9/0.32
@peratin! cash low A <1,9/0.32 B <89: - ./3C<1,5:2.32D A <2,089.00

AACSB: Analytic
Bloom's: Synt(esis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: O'erating cas( flow


2-35
Chapter 02 - Financial Statements, Taxes, and Cash Flow
Essa! Questions

95. Ass"me yo" are the inancial oicer o a ma>or irm. The president o the irm has >"st
stated that she wishes to red"ce the irm$s in#estment in c"rrent assets since those assets
pro#ide little, i any, ret"rn to the irm. How wo"ld yo" respond to this statement&
While it is tr"e that c"rrent assets pro#ide a low rate o ret"rn, those assets are essential to the
irm$s li%"idity. Sho"ld the li%"id assets (e red"ced too low, the irm co"ld ace a m"ch
!reater pro(lem than a low rate o ret"rn. That pro(lem wo"ld (e the ina(ility to meet the
irm$s inancial o(li!ations which co"ld e#en res"lt in a (an-r"ptcy d"e to a lac- o cash low.
Feed(ac-. +eer to section 2.1

AACSB: 4eflecti!e t(in)ing
Bloom's: A''lication
Difficulty: ,ntermediate
Learning Obecti!e: "#$
Section: "%$
&o'ic: Li2uidity

96. As lon! as a irm maintains a positi#e cash (alance, why is it essential to re#iew the irm$s
cash lows&
Firms can ha#e positi#e cash (alances (eca"se they are "sin! (orrowed "nds or e%"ity
in#estments. For a irm to (e inancially healthy o#er the lon!-term, it m"st (e a(le to
!enerate cash internally. Cash low analysis ena(les yo" to determine the so"rces, and "ses, o
a irm$s cash to e#al"ate the inancial health o the irm and ens"re that the irm is !eneratin!
positi#e cash lows rom its operations.
Feed(ac-. +eer to section 2.3

AACSB: 4eflecti!e t(in)ing
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow from assets

2-36
Chapter 02 - Financial Statements, Taxes, and Cash Flow
98. The mana!ers o a irm wish to expand the irm$s operations and are tryin! to determine
the amo"nt o de(t inancin! the irm sho"ld o(tain #ers"s the amo"nt o e%"ity inancin! that
sho"ld (e raised. The mana!ers ha#e as-ed yo" to explain the eects that (oth o these orms
o inancin! wo"ld ha#e on the cash lows o the irm. Write a short response to this re%"est.
)e(t inancin! will re%"ire cash o"tlows or (oth interest and principal payments. The
interest o"tlow will (e partially oset (y a decrease in the cash o"tlow or taxes. Sho"ld the
irm accept additional de(t, the li%"idity o the irm mi!ht ha#e to (e increased to ens"re the
de(t o(li!ations can (e met in a timely manner. @n the other hand, e%"ity inancin! does not
create any re%"irement or "t"re cash o"tlows as e%"ity does not need to (e repaid nor are
di#idends re%"ired. Howe#er, i di#idends are paid, they wo"ld not lower the irm$s cash
o"tlow or taxes.
Feed(ac-. +eer to section 2.3

AACSB: 4eflecti!e t(in)ing
Bloom's: 3!aluation
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow from assets

99. )isc"ss the dierence (etween (oo- #al"es and mar-et #al"es and explain which one is
more important to the inancial mana!er and why.
The acco"nts on the (alance sheet are !enerally carried at historical cost, not mar-et #al"es.
Altho"!h the (oo- #al"e o the c"rrent assets and the lia(ilities may closely approximate
mar-et #al"es, the same cannot (e said or the rest o the (alance sheet acco"nts. Far-et
#al"es are more rele#ant as they relect today$s #al"es whereas the (alance sheet relects
historical costs as ad>"sted (y #ario"s acco"ntin! methods. To determine the c"rrent #al"e o
a irm, and its worth to the shareholders, inancial mana!ers m"st monitor mar-et #al"es.
Feed(ac-. +eer to section 2.1

AACSB: 4eflecti!e t(in)ing
Bloom's: Analysis
Difficulty: ,ntermediate
Learning Obecti!e: "#$
Section: "%$
&o'ic: Boo) !ersus mar)et !alue

2-38
Chapter 02 - Financial Statements, Taxes, and Cash Flow
9:. Ass"me yo" are a credit mana!er in char!e o appro#in! commercial loans to ("siness
irms. ;dentiy three aspects o a irm$s cash lows yo" wo"ld re#iew and explain the type o
inormation yo" hope to !ain rom re#iewin! each o those i#e aspects.
St"dent answers will #ary ("t here are some examples.
1D operatin! cash low - ;s the irm !eneratin! positi#e cash low rom its c"rrent operations&
2D cash low to creditors - ;s the irm c"rrently repayin! de(t or is it ass"min! additional de(t&
/D net wor-in! capital - ;s the irm increasin! or decreasin! its net wor-in! capital and what
eect, i any, is this ha#in! on the irm$s li%"idity&
3D cash low to stoc-holders - ;s the irm c"rrently payin! any di#idends to its shareholders
and are those shareholders in#estin! additional capital into the irm&
5D net capital spendin! - ;s the irm c"rrently in#estin! in additional ixed assets&
Feed(ac-. +eer to section 2.3

AACSB: 4eflecti!e t(in)ing
Bloom's: 3!aluation
Difficulty: ,ntermediate
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow from assets


Multiple Choice Questions

:0. 'each Front ;nd"stries has sales o <536,000, costs o <2:5,000, depreciation expense o
</8,000, interest expense o <15,000, and a tax rate o /2 percent. The irm paid <5:,000 in
cash di#idends. What is the addition to retained earnin!s&
A. <86,/20
'. <91,800
C. <:5,200
). <10/,360
*. <121,690
,et income A C<536,000 - <2:5,000 - </8,000 - <15,000D C1 - ./2D A <1/5,/20
Addition to retained earnin!s A <1/5,/20 - <5:,000 A <86,/20

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#-
Learning Obecti!e: "#"
Section: "%"
&o'ic: Addition to retained earnings

2-39
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:1. The Wid!et Co. p"rchased new machinery three years a!o or <3 million. The machinery
can (e sold to the +oman Co. today or <2 million. The Wid!et Co.$s c"rrent (alance sheet
shows net ixed assets o <2,500,000, c"rrent lia(ilities o <1,/85,000, and net wor-in! capital
o <825,000. ; all the c"rrent assets were li%"idated today, the company wo"ld recei#e <1.:
million in cash. The (oo- #al"e o the Wid!et Co.$s assets today is 77777 and the mar-et
#al"e o those assets is 77777.
A. <3,600,000K </,:00,000
'. <3,600,000K </,125,000
C. <5,000,000K </,125,000
). <5,000,000K </,:00,000
*. <6,500,000K </,:00,000
'oo- #al"e A C<825,000 B <1,/85,000D B <2,500,000 A <3,600,000
Far-et #al"e A <1,:00,000 B <2,000,000 A </,:00,000

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#6
Learning Obecti!e: "#$
Section: "%$
&o'ic: .ar)et and boo) !alue

2-3:
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:2. 'oyer *nterprises had <200,000 in 2009 taxa(le income. What is the irm$s a#era!e tax
rate (ased on the rates shown in the ollowin! ta(le&

A. 29.25 percent
. /0.6/ percent
C. /2.39 percent
). /6.50 percent
*. /:.00 percent
Tax A .15C<50,000D B .25C<25,000D B ./3C<25,000D B ./:C<200,000 - <100,000D A <61,250
A#era!e tax rate A <61,250G<200,000 A /0.6/ percent

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#7
Learning Obecti!e: "#-
Section: "%-
&o'ic: A!erage ta/ rate

:/. We(ster World has sales o <12,:00, costs o <5,900, depreciation expense o <1,100, and
interest expense o <800. What is the operatin! cash low i the tax rate is /2 percent&
A. <3,803
'. <5,83:
C. <5,303
). <8,0/6
*. <8,100
*arnin!s (eore interest and taxes A <12,:00 - <5,900 - <1,100 A <6,000
Taxa(le income A <6,000 - <800 A <5,/00
Tax A ./2C<5,/00D A <1,6:6
@peratin! cash low A <6,000 B <1,100 - <1,6:6 A <5,303

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#8
Learning Obecti!e: "#0
Section: "%0
&o'ic: O'erating cas( flow

2-50
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:3. The 'l"e 'onnet$s 2009 (alance sheet showed net ixed assets o <2.2 million, and the
200: (alance sheet showed net ixed assets o <2.6 million. The company$s income statement
showed a depreciation expense o <:00,000. What was the amo"nt o the net capital spendin!
or 200:&
A. -<500,000
'. <300,000
C. <1,/00,000
). <1,800,000
*. <1,900,000
,et capital spendin! A <2,600,000 - <2,200,000 B <:00,000 A <1,/00,000

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#9
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net ca'ital s'ending

:5. The 2009 (alance sheet o 0lo(al To"rs showed c"rrent assets o <1,/60 and c"rrent
lia(ilities o <:30. The 200: (alance sheet showed c"rrent assets o <1,630 and c"rrent
lia(ilities o <1,130. What was the chan!e in net wor-in! capital or 200:&
A. <90
'. <180
C. <1:0
). <990
*. <:20
Chan!e in net wor-in! capital A C<1,630 - <1,130D - C<1,/60 - <:30D A <90

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#$:
Learning Obecti!e: "#0
Section: "%0
&o'ic: Net wor)ing ca'ital

2-51
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:6. The 2009 (alance sheet o The 'each Shoppe showed lon!-term de(t o <2.1 million, and
the 200: (alance sheet showed lon!-term de(t o <2./ million. The 200: income statement
showed an interest expense o <250,000. What was the cash low to creditors or 200:&
A. -<200,000
'. -<150,000
C. <50,000
). <200,000
*. <350,000
Cash low to creditors A <250,000 - C<2,/00,000 - <2,100,000D A <50,000

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#$$
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to creditors

:8. The 2009 (alance sheet o The Sports Store showed <900,000 in the common stoc-
acco"nt and <6.8 million in the additional paid-in s"rpl"s acco"nt. The 200: (alance sheet
showed <982,000 and <9 million in the same two acco"nts, respecti#ely. The company paid
o"t <600,000 in cash di#idends d"rin! 200:. What is the cash low to stoc-holders or 200:&
A. -<1,/82,000
. -<882,000
C. -<629,000
). </82,000
*. <1,:82,000
Cash low to stoc-holders A <600,000 - IC<982,000 B <9,000,000D - C<900,000 B <6,800,000D
A -<882,000

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
3OC 5: "#$"
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow to stoc)(olders

2-52
Chapter 02 - Financial Statements, Taxes, and Cash Flow
:9. S"ppose yo" are !i#en the ollowin! inormation or 'ayside 'a-ery. sales A </0,000K
costs A <15,000K addition to retained earnin!s A <3,221K di#idends paid A <36:K interest
expense A <1,/00K tax rate A /0 percent. What is the amo"nt o the depreciation expense&
A. <3,920
'. <5,500
C. <8,000
). <9,190
*. <:,500
,et income A <36: B <3,221 A <3,6:0
*arnin!s (eore taxes A <3,6:0GC1 - ./0D A <6,800
*arnin!s (eore interest and taxes A <6,800 B <1,/00 A <9,000
)epreciation A </0,000 - <15,000 - <9,000 A <8,000

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
3OC 5: "#$6
Learning Obecti!e: "#"
Section: "%"
&o'ic: ,ncome statement

::. )ee )ee$s Farina is o(li!ated to pay its creditors <6,300 today. The irm$s assets ha#e a
c"rrent mar-et #al"e o <5,:00. What is the c"rrent mar-et #al"e o the shareholders$ e%"ity&
A. -<600
'. -<500
C. <0
). <500
*. <600
Shareholders$ e%"ity A Fax IC<5,:00 - <6,300D, 0J. Since the mar-et #al"e o e%"ity cannot (e
ne!ati#e, the answer is 4ero.

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
3OC 5: "#$7
Learning Obecti!e: "#$
Section: "%$
&o'ic: S(are(olders' e2uity

2-5/
Chapter 02 - Financial Statements, Taxes, and Cash Flow
100. )"rin! 200:, +;T Corp. had sales o <565,600. Costs o !oods sold, administrati#e and
sellin! expenses, and depreciation expenses were <386,000, <59,900, and <59,900,
respecti#ely. ;n addition, the company had an interest expense o <112,000 and a tax rate o /2
percent. What is the operatin! cash low or 200:& ;!nore any tax loss carry-(ac- or carry-
orward pro#isions.
A. <18,:20
'. <21,930
C. </0,900
). <52,600
*. <88,930
*arnin!s (eore interest and taxes A ,et income A <565,600 - <386,000 - <59,900 - <59,900 A
-<29,000
@peratin! cash low A -<29,000 B <59,900 - <0 A </0,900

AACSB: Analytic
Bloom's: Analysis
Difficulty: ,ntermediate
3OC 5: "#$9
Learning Obecti!e: "#0
Section: "%0
&o'ic: O'erating cas( flow

2-53