Question: Which of the following statements is CORRECT?
Answer Choices:
A. 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, even though they report high accounting profits.
B. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
C. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income.
D. 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 corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends.
E. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Answer: c
Question: Which of the following statements is most correct?
Answer Choices:
A. Retained earnings, as reported on the balance sheet, represents the amount of cash a company has available to pay out as dividends to shareholders.
B. 70% of the interest received by corporations is excluded from taxable income.
C. 70% of the dividends received by corporations is excluded from taxable income.
D. Because taxes on long-term capital gains are not paid until the gain is realized, investors must pay the top individual tax rate on that gain.
E. The corporate tax system favors equity financing, as dividends paid are deductible from corporate taxes.
Answer: c
Question: Last year, Delip Industries had (1) negative 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?
Answer Choices:
A. The company had a sharp increase in its inventories.
B. The company had a sharp increase in its accrued liabilities.
C. The company sold a new issue of common stock.
D. The company made a large capital investment early in the year.
E. The company had a sharp increase in depreciation expenses.
Answer: c
Question: Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
Answer Choices:
A. Companies’ after-tax operating profits would decline.
B. Companies’ physical stocks of fixed assets would increase.
C. Companies’ cash flows would increase.
D. Companies’ cash positions would decline.
E. Companies’ reported net incomes would decline.
Answer: d
Question: Assume that Congress recently passed a provision that will enable Bev’s Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI’s net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI’s financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Answer Choices:
A. The provision will reduce the company’s cash flow.
B. The provision will increase the company’s tax payments.
C. The provision will increase the firm’s operating income (EBIT).
D. The provision will increase the company’s net income.
E. Net fixed assets on the balance sheet will decrease.
Answer: e
Question: The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Answer Choices:
A. Nantell’s taxable income will be lower.
B. Nantell’s operating income (EBIT) will increase.
C. Nantell’s cash position will improve (increase).
D. Nantell’s reported net income for the year will be lower.
E. Nantell’s tax liability for the year will be lower.
Answer: c
Question: Assume that Besley Golf Equipment commenced operations on January 1, 2014, 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 2014 management realized that the assets would last for only 10 years. The firm’s accountants plan to report the 2014 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?
Answer Choices:
A. The firm’s reported net fixed assets would increase.
B. The firm’s EBIT would increase.
C. The firm’s reported 2014 earnings per share would increase.
D. The firm’s cash position in 2014 and 2015 would increase.
E. The provision will increase the company’s tax payments.
Answer: a
Question: A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? a. The firm’s operating income (EBIT) would increase. b. The firm’s taxable income would increase. c. The firm’s cash flow would increase. d. The firm’s tax payments would increase. e. The firm’s reported net income would increase.
Answer Choices:
A. The firm’s operating income (EBIT) would increase.
B. The firm’s taxable income would increase.
C. The firm’s cash flow would increase.
D. The firm’s tax payments would increase.
E. The firm’s reported net income would increase.
Answer: C – The firm’s cash flow would increase.
Question: Which of the following statements is CORRECT? 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.
Answer Choices:
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.
Answer: 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.
Question: For managerial purposes, i.e., making decisions regarding the firm’s operations, the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm’s operations. Related to these modifications, which of the following statements is CORRECT? a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors. c. The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide. d. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP. e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
Answer Choices:
A. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
C. The standard statements provide useful information on the firm’s individual operating units, but management needs more information on the firm’s overall operations than the standard statements provide.
D. The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
E. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to “adjust” the results to make earnings look better.
Answer: B – The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm’s value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
Question: Which of the following statements is CORRECT? a. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant. b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. c. Common equity includes common stock and retained earnings, less accumulated depreciation. d. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. e. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer Choices:
A. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
B. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
C. Common equity includes common stock and retained earnings, less accumulated depreciation.
D. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends.
E. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer: B – A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
Question: Which of the following statements is CORRECT? a. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant. b. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. c. Common equity includes common stock and retained earnings, less accumulated depreciation. d. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends. e. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer Choices:
A. Since depreciation increases the firm’s net cash provided by operating activities, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
B. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
C. Common equity includes common stock and retained earnings, less accumulated depreciation.
D. The retained earnings account as reported on the balance sheet shows the amount of cash that is available for paying dividends.
E. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
Answer: B – A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
Question: Last year Besset Company’s operations provided a negative cash flow, yet the cash shown on its balance sheet was a positive amount. How could this occur? a. The company sold some of its fixed assets. b. The company had high amortization expenses. c. The company had a decrease in its inventory level. d. The company had a large increase in its accounts payable. e. The company had a large increase in its accounts receivable.
Answer Choices:
A. The company sold some of its fixed assets.
B. The company had high amortization expenses.
C. The company had a decrease in its inventory level.
D. The company had a large increase in its accounts payable.
E. The company had a large increase in its accounts receivable.
Answer: D – The company had a large increase in its accounts payable.
Question: Which of the following statements could explain the increase in cash, assuming the company’s financial statements were prepared under generally accepted accounting principles (GAAP)? a. The company repurchased some of its common stock. b. The company dramatically increased its capital expenditures. c. The company retired a large amount of its long-term debt. d. The company sold some of its fixed assets. e. The company had high depreciation expenses.
Answer Choices:
A. The company repurchased some of its common stock.
B. The company dramatically increased its capital expenditures.
C. The company retired a large amount of its long-term debt.
D. The company sold some of its fixed assets.
E. The company had high depreciation expenses.
Answer: D – The company sold some of its fixed assets.
Question: Which of the following statements is CORRECT? 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.
Answer Choices:
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.
Answer: 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.
Question: Ratio analysis involves analyzing financial statements to help appraise a firm’s financial position and strength. a. True b. False
Answer Choices:
A. True
B. False
Answer: A – True
Question: The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories. a. True b. False
Answer Choices:
A. True
B. False
Answer: A – True