Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   The more depreciation a firm reports, the higher its tax bill, other things held constant.
B)   People sometimes talk about the firm's cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
C)   Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's cash flow.
D)   Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes.
E)   Depreciation is not a cash charge, so it does not have an effect on a firm's reported profits.F) A) and C)
G) A) and D)

Question 2

To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.

Accepted Answer

A) True 
 B)False

Question 3

Assume that Besley Golf Equipment commenced operations on January 1, 2013, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2013 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2013 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

Accepted Answer

A)   The firm's reported net fixed assets would increase.
B)   The firm's EBIT would increase.
C)   The firm's reported 2013 earnings per share would increase.
D)   The firm's cash position in 2013 and 2014 would increase.
E)   The provision will increase the company's tax payments.F) B) and D)
G) A) and C)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   Dividends paid reduce the net income that is reported on a company's income statement.
B)   If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.
C)   If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year.
D)   Accounts receivable are reported as a current liability on the balance sheet.
E)   If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.F) B) and E)
G) All of the above

Question 5

Appalachian Airlines began operating in 2009. The company lost money the first year but has been profitable ever since. The company's taxable income (EBT)  for its first five years is listed below. Each year the company's corporate tax rate has been 40%.
  Year  Taxable Income 2009−$4,000,0002010$1,000,0002011$2,000,0002012$3,000,0002013$5,000,000\begin{array} { l r } 	ext { Year }  &  	ext { Taxable Income } \\hline2009 & -\$ 4,000,000 \2010 & \$ 1,000,000 \2011 & \$ 2,000,000 \2012 & \$ 3,000,000 \2013 & \$ 5,000,000\end{array} Year 20092010201120122013​ Taxable Income −$4,000,000$1,000,000$2,000,000$3,000,000$5,000,000​​ 
Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions and that the current provisions were applicable in 2009. How much did the company pay in taxes in 2012?

Accepted Answer

A)   $ 688,500
B)   $ 765,000
C)   $ 800,000
D)   $ 930,000
E)   $1,023,000 F) All of the above
G) B) and E)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   An increase in accounts receivable is added to net income in the operating activities section because if accounts receivable increase, then when they are collected cash will come into the firm.
B)   In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF)  is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and the change in net operating working capital. Free cash flow is the amount of cash that could be withdrawn without harming the firm's ability to operate and to produce future cash flows.
C)   The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that add to or subtract from cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt.
D)   The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line."
E)   Most rapidly growing companies have positive free cash flows because cash flows from existing operations will exceed fixed assets and working capital needed to support the growth.F) A) and B)
G) B) and E)

Question 7

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Accepted Answer

A)   6.57%
B)   6.92%
C)   7.28%
D)   7.64%
E)   8.03%F) D) and E)
G) A) and D)

Question 8

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Accepted Answer

A)   The company's dividend payment to common stockholders declined.
B)   The company's expenditures on fixed assets declined.
C)   The company's cost of goods sold increased.
D)   The company's depreciation expense declined.
E)   The company's interest expense increased.F) A) and E)
G) A) and D)

Question 9

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

A)   The company repurchases common stock.
B)   The company pays a dividend.
C)   The company issues new common stock.
D)   The company gives customers more time to pay their bills.
E)   The company purchases a new piece of equipment.F) All of the above
G) C) and E)

Question 10

C. F. Lee Inc. has the following income statement. How much after-tax operating income does the firm have?   Sales $2,850.00 Costs 1,850.00 Depreciation 192.00‾ EBIT $808.00 Interest expense 285.00‾ EBT $523.00 Taxes (35%)  183.05‾ Net income $339.95‾\begin{array} { l r } 	ext { Sales } & \$ 2,850.00 \	ext { Costs } & 1,850.00 \	ext { Depreciation } & \underline{192.00 }\	ext { EBIT } & \$ 808.00 \	ext { Interest expense } & \underline { 285.00 } \	ext { EBT } & \$ 523.00 \	ext { Taxes (35\%)  } & \underline { 183.05 } \	ext { Net income } & \underline{\$ 339.95}\end{array} Sales  Costs  Depreciation  EBIT  Interest expense  EBT  Taxes (35%)   Net income ​$2,850.001,850.00192.00​$808.00285.00​$523.00183.05​$339.95​​

Accepted Answer

A)   $427.78
B)   $450.29
C)   $473.99
D)   $498.94
E)   $525.20 F) C) and E)
G) A) and B)

Question 11

For 2013, Bargain Basement Stores reported $11,500 of sales and $5,000 of operating costs (including depreciation) . The company has $20,500 of total invested capital, the weighted average cost of that capital (the WACC)  was 10%, and the federal-plus-state income tax rate was 40%. What was the firm's Economic Value Added (EVA) , i.e., how much value did management add to stockholders' wealth during 2013?

Accepted Answer

A)   $1,670
B)   $1,758
C)   $1,850
D)   $1,943
E)   $2,040F) A) and C)
G) A) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm either sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
B)   Assets other than cash are expected to produce cash over time, and the amount of cash they eventually produce must be the same as the amounts at which the assets are carried on the books.
C)   The income statement shows the difference between a firm's income and its costs (i.e., its profits)  during a specified period of time. However, all reported income comes in the form of cash, and reported costs likewise are consistent with cash outlays. Therefore, there will not be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
D)   The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
E)   EPS stands for earnings per share, while DPS stands for dividends per share. We would normally expect to see DPS exceed EPS.F) A) and B)
G) B) and E)

Question 13

Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

Accepted Answer

A) True 
 B)False

Question 14

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

A) True 
 B)False

Question 15

Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.

Accepted Answer

A) True 
 B)False

Question 16

Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Accepted Answer

The answer of Wu Systems has the following balance sheet....

Question 17

If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

Accepted Answer

A) True 
 B)False

Question 18

Collins Co. began operations in 2010. The company lost money the first two years, but has been profitable ever since. The company's taxable income (EBT)  for its first four years is summarized below:   Year ‾ EBT ‾2010−$3,000,0002011−$5,200,0002012$4,200,0002013$8,300,000\begin{array} { l r }  \underline {	ext { Year }} & \underline { 	ext { EBT } } \2010 & -\$ 3,000,000 \2011 & -\$ 5,200,000 \2012 & \$ 4,200,000 \2013 & \$ 8,300,000\end{array} Year ​2010201120122013​ EBT ​−$3,000,000−$5,200,000$4,200,000$8,300,000​  The corporate tax rate has remained at 34%. Assume that the company has taken full advantage of the Tax Code's carry-back, carry-forward provisions, and assume that the current provisions were applicable in 2010. What is Collins' tax liability for 2013?

Accepted Answer

A)   $1,069,848
B)   $1,188,720
C)   $1,320,800
D)   $1,462,000
E)   $1,617,200 F) D) and E)
G) A) and B)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   Actions that increase reported net income will always increase cash flow.
B)   One way to increase EVA is to generate the same level of operating income but with less total invested capital.
C)   One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
D)   One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital.
E)   If a firm reports positive net income, its EVA must also be positive.F) B) and E)
G) A) and B)

Question 20

Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?

Accepted Answer

A)   $17.83
B)   $18.72
C)   $19.66
D)   $20.64
E)   $21.67F) C) and E)
G) B) and D)

Exam 3: Financial Statements, Cash Flow, and Taxes

Which of the following statements is CORRECT?

Correct Answer
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If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Correct Answer
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To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?

Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

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If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

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Which of the following statements is CORRECT?

Correct Answer
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Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Correct Answer
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Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Correct Answer
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Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Correct Answer
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Exam 3: Financial Statements, Cash Flow, and Taxes

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow.

Correct AnswerverifiedShow Answer

To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

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If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

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Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Van Dyke Corporation has a corporate tax rate equal to 30%. The company recently purchased preferred stock in another company. The preferred stock has an 8% before-tax yield. What is Van Dyke's after-tax yield on the preferred stock?

Correct AnswerverifiedShow Answer

Wu Systems has the following balance sheet. How much net operating working capital does the firm have?

Correct AnswerverifiedShow Answer

Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance?

Correct AnswerverifiedShow Answer

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