Question 1

Your corporation has the following cash flows:   Operating income $250,000 Interest received $10,000 Interest paid $45,000 Dividends received $17,000 Dividends paid $50,000\begin{array} { l r } 	ext { Operating income } & \$ 250,000 \	ext { Interest received } & \$ 10,000 \	ext { Interest paid } & \$ 45,000 \	ext { Dividends received } & \$ 17,000 \	ext { Dividends paid } & \$ 50,000\end{array} Operating income  Interest received  Interest paid  Dividends received  Dividends paid ​$250,000$10,000$45,000$17,000$50,000​ 
?
If the applicable income tax rate is 40% (federal and state combined) ,and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

Accepted Answer

A)   $87,160
B)   $88,040
C)   $80,116
D)   $108,289
E)   $77,475 F) A) and C)
G) B) and D)

Question 2

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous year.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

Accepted Answer

A)   If the company lost money in 2018,it must have paid dividends.
B)   The company must have had zero net income in 2018.
C)   The company must have paid out half of its 2018 earnings as dividends.
D)   The company must have paid no dividends in 2018.
E)   Dividends could have been paid in 2018,but they would have had to equal the earnings for the year.F) A) and D)
G) C) and D)

Question 3

Solarcell Corporation has $20,000 that it plans to invest in marketable securities.It is choosing between AT&T bonds that yield 11.00%,State of Florida municipal bonds that yield 8.00%,and AT&T preferred stock with a dividend yield of 9.00%.Solarcell's corporate tax rate is 39.00%,and 70.00% of the preferred stock dividends it receives are tax exempt.Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns,which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.

Accepted Answer

A)   8.00%
B)   9.12%
C)   8.24%
D)   7.44%
E)   6.08%F) B) and E)
G) A) and B)

Question 4

A bond issued by the State of Pennsylvania provides a 5.75% yield.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket?

Accepted Answer

A)   9.02%
B)   11.06%
C)   8.85%
D)   9.91%
E)   7.70%F) A) and B)
G) C) and E)

Question 5

The annual report contains four basic financial statements: the income statement,the balance sheet,the cash flow statement,and the statement of stockholders' equity.

Accepted Answer

A) True 
 B)False

Question 6

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,companies would be encouraged to use more debt financing than they presently do,other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

A)   Accounts payable.
B)   Short-term notes payable to the bank.
C)   Accrued wages.
D)   Cost of goods sold.
E)   Accrued payroll taxes.F) B) and C)
G) A) and B)

Question 8

C.F.Lee Inc.has the following income statement.How much after-tax operating income does the firm have?   Sales $3,150.00 Costs 1,850.00 Depreciation 192.00 EB IT $1,108.00 Interest expense 285.00 EB T $823.00 Taxes (35%)  288.05 Net income $534.95\begin{array}{lr}	ext { Sales } & \$ 3,150.00 \	ext { Costs } & 1,850.00 \	ext { Depreciation } & 192.00 \	ext { EB IT } & \$ 1,108.00 \	ext { Interest expense } & 285.00 \ 	ext { EB T } & \$ 823.00 \	ext { Taxes (35\%)  } & 288.05 \	ext { Net income } & \$ 534.95 \\hline\end{array} Sales  Costs  Depreciation  EB IT  Interest expense  EB T  Taxes (35%)   Net income ​$3,150.001,850.00192.00$1,108.00285.00$823.00288.05$534.95​​ 
?

Accepted Answer

A)   $583.36
B)   $900.25
C)   $821.03
D)   $720.20
E)   $835.43 F) C) and D)
G) D) and E)

Question 9

Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions ($4,050 for each exemption) .In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $213,500.Assume the following tax table is applicable:
?
Married Couples Filing Joint Returns
?   You Pay This  Plus This Percentage  Average Tax  If Your Taxable  Amount on the  on the Excess over the  Rate at  Income Is  Base of the Bracket  Base  Top of Bracket  Up to $18,650$0.0010.0%10.0%$18,650−$75,9001,865.0015.013.8$75,900−$153,10010,452.5025.019.4$153,100−$233,35029,752.5028.022.4$233,350−$416,70052,222.5033.027.1$416,700−$470,700112,728.0035.028.0 Over $470,700131,628.0039.639.6\begin{array}{lccc} & 	ext { You Pay This } & 	ext { Plus This Percentage } & 	ext { Average Tax } \	ext { If Your Taxable } & 	ext { Amount on the } & 	ext { on the Excess over the } & 	ext { Rate at } \	ext { Income Is } & 	ext { Base of the Bracket } & 	ext { Base } & 	ext { Top of Bracket } \\hline	ext { Up to } \$ 18,650 & \$ 0.00 & 10.0 \% & 10.0 \% \\$ 18,650-\$ 75,900 & 1,865.00 & 15.0 & 13.8 \\$ 75,900-\$ 153,100 & 10,452.50 & 25.0 & 19.4 \\$ 153,100-\$ 233,350 & 29,752.50 & 28.0 & 22.4 \\$ 233,350-\$ 416,700 & 52,222.50 & 33.0 & 27.1 \\$ 416,700-\$ 470,700 & 112,728.00 & 35.0 & 28.0 \	ext { Over } \$ 470,700 & 131,628.00 & 39.6 & 39.6\end{array} If Your Taxable  Income Is  Up to $18,650$18,650−$75,900$75,900−$153,100$153,100−$233,350$233,350−$416,700$416,700−$470,700 Over $470,700​ You Pay This  Amount on the  Base of the Bracket $0.001,865.0010,452.5029,752.5052,222.50112,728.00131,628.00​ Plus This Percentage  on the Excess over the  Base 10.0%15.025.028.033.035.039.6​ Average Tax  Rate at  Top of Bracket 10.0%13.819.422.427.128.039.6​​ 
?
What is their federal tax liability?
?

Accepted Answer

A)   $31,077.50
B)   $33,522.25
C)   $38,760.50
D)   $36,664.00
E)   $34,918.50 F) B) and E)
G) A) and D)

Question 10

An increase in accounts payable represents an increase in net cash provided by operating activities,an effect similar to taking out a new bank loan.However,these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.

Accepted Answer

A) True 
 B)False

Question 11

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."

Accepted Answer

A) True 
 B)False

Question 12

Below is the common equity section (in millions) of Timeless Technology's last two year-end balance sheets:  20182017 Common stock 2,0001,000 Retained earnings 2,0002,340 Total common equity $4,000$3,340\begin{array}{lrr} & 2018 & 2017 \ 	ext { Common stock } & 2,000 & 1,000 \	ext { Retained earnings } & 2,000 & 2,340 \ 	ext { Total common equity } & \$ 4,000 & \$ 3,340 \\end{array} Common stock  Retained earnings  Total common equity ​20182,0002,000$4,000​20171,0002,340$3,340​ 
?
The firm has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

Accepted Answer

A)   The company's net income in 2018 was higher than in 2017.
B)   The firm issued common stock in 2018.
C)   The market price of the firm's stock doubled in 2018.
D)   The firm had positive net income in both 2017 and 2018,but its net income in 2018 was lower than it was in 2017.
E)   The company has more equity than debt on its balance sheet. F) A) and B)
G) C) and D)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   The focal point of the income statement is the cash account because that account cannot be manipulated by "accounting tricks."
B)   The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP) .
C)   The reported income of two otherwise identical firms must be identical if the firms are publicly owned,provided they follow procedures that are permitted by the Securities and Exchange Commission (SE
C)  .
D)   If a firm follows generally accepted accounting principles (GAAP) ,then its reported net income will be identical to its reported cash flow.
E)   The income statement for a given year is designed to give us an idea of how much the firm earned during that year.F) D) and E)
G) A) and B)

Question 14

Collins Co.began operations in 2015.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 are summarized below:   Year  EB T 2015−$7,000,0002016−$5,200,0002017$4,200,0002018$8,300,000\begin{array} { r r } 	ext { Year } & 	ext { EB T } \\hline 2015 & - \$ 7,000,000 \2016 & - \$ 5,200,000 \2017 & \$ 4,200,000 \2018 & \$ 8,300,000\end{array} Year 2015201620172018​ EB T −$7,000,000−$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 2015.What is Collins' tax liability for 2018?

Accepted Answer

A)   $76,500
B)   $87,720
C)   $125,460
D)   $127,500
E)   $102,000 F) B) and D)
G) All of the above

Question 15

The amount shown on the December 31,2018 balance sheet as "retained earnings" is equal to the firm's net income for 2018 minus any dividends it paid

Accepted Answer

A) True 
 B)False

Question 16

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Accepted Answer

A) True 
 B)False

Question 17

Garner Grocers began operations in 2015.Garner has reported the following levels of taxable income (EBT) over the past several years.The corporate tax rate was 34% each year.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 2015.What is the amount of taxes the company paid in 2018?   Year  Taxable Income 2015−$1,750,0002016$200,0002017$500,0002018$2,800,000\begin{array} { r r } 	ext { Year } & 	ext { Taxable Income } \\hline 2015 & - \$ 1,750,000 \2016 & \$ 200,000 \2017 & \$ 500,000 \2018 & \$ 2,800,000\end{array} Year 2015201620172018​ Taxable Income −$1,750,000$200,000$500,000$2,800,000​​ 
?

Accepted Answer

A)   $559,300
B)   $493,850
C)   $654,500
D)   $595,000
E)   $725,900 F) B) and C)
G) B) and D)

Question 18

Wu Systems has the following balance sheet.Assume that all current assets are used in operations.How much net operating working capital does the firm have?   Cash $100 Accounts payable $200 Accounts receivable 650 Accruals 110 Inventory 550 Notes payable 590 Current assets $1,300 Current liabilities $900 Net fixed assets $1,000 Long-term debt 600 Common equity 300 Retained earnings 500 Total assets $2,300 Total liab. & equity $2,300\begin{array}{lrlr}	ext { Cash } & \$ 100 & 	ext { Accounts payable } & \$ 200 \	ext { Accounts receivable } & 650 & 	ext { Accruals } & 110 \	ext { Inventory } & 550 & 	ext { Notes payable } & 590 \	ext { Current assets } & \$ 1,300 & 	ext { Current liabilities } & \$ 900 \	ext { Net fixed assets } & \$ 1,000 & 	ext { Long-term debt } & 600 \& & 	ext { Common equity } & 300 \& & 	ext { Retained earnings } & 500 \	ext { Total assets } & \$ 2,300 & 	ext { Total liab. \& equity } & \$ 2,300 \\hline\end{array} Cash  Accounts receivable  Inventory  Current assets  Net fixed assets  Total assets ​$100650550$1,300$1,000$2,300​ Accounts payable  Accruals  Notes payable  Current liabilities  Long-term debt  Common equity  Retained earnings  Total liab. & equity ​$200110590$900600300500$2,300​​ 
?

Accepted Answer

A)   $990
B)   $911
C)   $1,010
D)   $1,168
E)   $782 F) A) and B)
G) C) and E)

Question 19

​Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)   Free cash flow (FCF) is,essentially,the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
B)   After-tax operating income is calculated as EBIT(1 - T) + Depreciation.
C)   Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
D)   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.
E)   Retained earnings as reported on the balance sheet represent cash and are therefore available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.F) C) and E)
G) All of the above

Exam 3: Financial Statements,cash Flow and Taxes

Correct Answer
verified

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,companies would be encouraged to use more debt financing than they presently do,other things held constant.

Correct Answer
verified

The annual report contains four basic financial statements: the income statement,the balance sheet,the cash flow statement,and the statement of stockholders' equity.

Correct Answer
verified

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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."

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous year.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

Correct Answer
verified

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Correct Answer
verified

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct Answer
verified

Correct Answer
verified

A bond issued by the State of Pennsylvania provides a 5.75% yield.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket?

Correct Answer
verified

The amount shown on the December 31,2018 balance sheet as "retained earnings" is equal to the firm's net income for 2018 minus any dividends it paid

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Exam 3: Financial Statements,cash Flow and Taxes

Correct AnswerverifiedShow Answer

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense,companies would be encouraged to use more debt financing than they presently do,other things held constant.

Correct AnswerverifiedShow Answer

The annual report contains four basic financial statements: the income statement,the balance sheet,the cash flow statement,and the statement of stockholders' equity.

Correct AnswerverifiedShow Answer

​Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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."

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous year.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Correct AnswerverifiedShow Answer

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond issued by the State of Pennsylvania provides a 5.75% yield.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35.00% tax bracket?

Correct AnswerverifiedShow Answer

The amount shown on the December 31,2018 balance sheet as "retained earnings" is equal to the firm's net income for 2018 minus any dividends it paid

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.If the firm has sufficient retained earnings,it can purchase assets and pay for them with cash from retained earnings.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified