Answer Options:
a. True
b. False
Answer:
a. True
Question: Free cash flow is the amount of cash that if withdrawn would harm the firm’s ability to operate and to produce future cash flows.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Because the U.S. tax system is a progressive tax system, a taxpayer’s marginal and average tax rates are the same.
Answer Options:
a. True
b. False
Answer:
b. False
Question: 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: 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.”
Answer Options:
a. True
b. False
Answer:
b. False
Question: 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: 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.
Answer Options:
a. True
b. False
Answer:
b. False
Question: 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
Answer Options:
a. True
b. False
Answer:
a. True
Question: 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: 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.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
Answer Options:
a. True
b. False
Answer:
a. True
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer:
a. True
Question: The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.
Answer Options:
a. True
b. False
Answer:
b. False
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. 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: An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has 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.
Answer Options:
a. True
b. False
Answer:
a. True
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Options:
a. True
b. False
Answer:
a. True