Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

A security analyst obtained the following information from Prestopino Products' financial statements: ∙
Retained earnings at the end of the previous year were $700,000, but retained earnings at the end of the current year had declined to $320,000.
∙
The company does not pay dividends.
∙
The company's depreciation expense is its only non-cash expense; it has no amortization charges.
∙
The company has no non-cash revenues.
∙
The company's net cash provided (used)  by operations for the current year was $150,000.
On the basis of this information, which of the following statements is CORRECT?

Accepted Answer

A)   Prestopino had negative net income in the current year.
B)   Prestopino's depreciation expense in the current year was less than $150,000.
C)   Prestopino had positive net income in the current year, but its income was less than its previous year's income.
D)   Prestopino's cash flow provided by operations in the current year must be higher than in the previous year.
E)   Prestopino's cash on the balance sheet at the end of the current year must be lower than the cash it had on the balance sheet at the previous year.F) A) and C)
G) A) and B)

Question 3

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have?   Cash $20.00 Accounts payable $30.00 Short-term investments 50.00 Accruals 50.00 Accounts receivable 20.00 Notes payable 30.00 Inventory 60.00 Current liabilities $110.00 Current assets $150.00 Long-term debt 70.00 Gross fixed assets $140.00 Common stock 30.00 Accumulated deprec. 40.00 Retained earnings 40.00 Net fixed assets $100.00 Total common equity $70.00 Total assets $250.00 Total liab. & equity $250.00\begin{array}{llll}	ext { Cash } & \$ 20.00& 	ext { Accounts payable } & \$ 30.00 \	ext { Short-term investments } & 50.00& 	ext { Accruals } & 50.00 \	ext { Accounts receivable } & 20.00& 	ext { Notes payable } & 30.00 \	ext { Inventory } & 60.00 &	ext { Current liabilities } & \$ 110.00\	ext { Current assets } & \$ 150.00& 	ext { Long-term debt } & 70.00 \	ext { Gross fixed assets } & \$ 140.00& 	ext { Common stock } & 30.00 \	ext { Accumulated deprec. } & 40.00& 	ext { Retained earnings } & 40.00\	ext { Net fixed assets } & \$ 100.00 &	ext { Total common equity } & \$ 70.00 \	ext { Total assets } & \$ 250.00 &	ext { Total liab. \& equity } & \$ 250.00\end{array} Cash  Short-term investments  Accounts receivable  Inventory  Current assets  Gross fixed assets  Accumulated deprec.  Net fixed assets  Total assets ​$20.0050.0020.0060.00$150.00$140.0040.00$100.00$250.00​ Accounts payable  Accruals  Notes payable  Current liabilities  Long-term debt  Common stock  Retained earnings  Total common equity  Total liab. & equity ​$30.0050.0030.00$110.0070.0030.0040.00$70.00$250.00​

Accepted Answer

A)   $114.00
B)   $120.00
C)   $126.00
D)   $132.30
E)   $138.92 F) C) and E)
G) None of the above

Question 4

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Accepted Answer

A) True 
 B)False

Question 5

Danielle's Sushi Shop last year had (1)  a negative net cash flow from operations, (2)  a negative free cash flow, and (3)  an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Accepted Answer

A)   The company had a sharp increase in its depreciation and amortization expenses.
B)   The company had a sharp increase in its inventories.
C)   The company had a sharp increase in its accrued liabilities.
D)   The company sold a new issue of common stock.
E)   The company made a large capital investment early in the year.F) B) and D)
G) C) and D)

Question 6

Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%.This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725.By how much will the depreciation change cause the firm's net after-tax income to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A)   −$442.89
B)   −$466.20
C)   −$490.73
D)   −$516.56
E)   −$543.75F) B) and C)
G) A) and E)

Question 7

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Accepted Answer

A)   $27.50
B)   $28.88
C)   $30.32
D)   $31.83
E)   $33.43F) A) and D)
G) D) and E)

Question 8

The retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
B)   Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
C)   A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
D)   Common equity includes common stock and retained earnings, less accumulated depreciation.
E)   The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.F) C) and D)
G) C) and E)

Question 10

Hunter Manufacturing Inc.'s December 31, 2019 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.During 2020, Hunter had $250,000 of net income, and it paid out $100,000 as dividends.What was the book value per share at 12/31/2020, assuming that Hunter neither issued nor retired any common stock during 2020?

Accepted Answer

A)   $20.90
B)   $22.00
C)   $23.10
D)   $24.26
E)   $25.47F) A) and E)
G) C) and D)

Question 11

Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation.The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%.This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A)   -534.38
B)   -562.50
C)   -590.63
D)   -620.16
E)   -651.16F) B) and D)
G) C) and E)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
B)   The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes.Thus, the federal government receives no tax revenue from these businesses.
C)   All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
D)   Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
E)   Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes.Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.F) A) and E)
G) A) and D)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   The maximum federal tax rate on personal income can exceed 50%.
B)   Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
C)   Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20%.
D)   The maximum federal tax rate on corporate income is 50%.
E)   Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes.F) None of the above
G) C) and D)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.
B)   The more depreciation a firm reports, the higher its tax bill, other things held constant.
C)   People sometimes talk about the firm's net cash provided (used)  by operations, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
D)   Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
E)   Net cash provided (used)  by operations is often defined as follows:Net cash flow provided (used)  by operations = Net Income + Noncash Adjustments + Working Capital Adjustments.F) All of the above
G) A) and B)

Question 15

The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Accepted Answer

A) True 
 B)False

Question 16

Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB)  to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Accepted Answer

A)   Net fixed assets on the balance sheet will decrease.
B)   The provision will reduce the company's free cash flow.
C)   The provision will increase the company's tax payments.
D)   Net fixed assets on the balance sheet will increase.
E)   The provision will increase the company's net income.F) C) and E)
G) B) and E)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.
B)   The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
C)   The balance sheet for a given year tells us how much money the company earned during that year.
D)   The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP) .
E)   For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.F) C) and D)
G) A) and B)

Question 18

Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%.How much was the firm's taxable income, or earnings before taxes (EBT) ?

Accepted Answer

A)   $3,230.00
B)   $3,400.00
C)   $3,570.00
D)   $3,748.50
E)   $3,935.93F) D) and E)
G) A) and C)

Question 19

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, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays.Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

Accepted Answer

A) True 
 B)False

Question 20

JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash provided (used)  by operations, assuming it had no amortization expense, added $200 to inventories, sold none of its fixed assets, and had a $200 increase in accounts payable?

Accepted Answer

A)   $4,831.31
B)   $5,085.59
C)   $5,353.25
D)   $5,635.00
E)   $5,916.75F) C) and D)
G) B) and C)

Exam 2: Financial Statements, Cash Flow, and Taxes

The retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Correct Answer
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Correct Answer
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The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash provided (used) by operations, assuming it had no amortization expense, added $200 to inventories, sold none of its fixed assets, and had a $200 increase in accounts payable?

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.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Correct Answer
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Exam 2: Financial Statements, Cash Flow, and Taxes

The retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Tucker Electronic System's current balance sheet shows total common equity of $3,125,000.The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share.By how much do the firm's market and book values per share differ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

JBS Inc.recently reported net income of $4,750 and depreciation of $885.How much was its net cash provided (used) by operations, assuming it had no amortization expense, added $200 to inventories, sold none of its fixed assets, and had a $200 increase in accounts payable?

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Correct AnswerverifiedShow Answer

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