Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
b. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
e. The statement of cash flows shows how much the firm’s cash, the total of currency, bank deposits, and short-term liquid securities (or cash equivalents), increased or decreased during a given year.
Answer: e. The statement of cash flows shows how much the firm’s cash, the total of currency, bank deposits, and short-term liquid securities (or cash equivalents), increased or decreased during a given year.
Question: Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?
Answer Choices:
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.
Answer: c. The company issues new common stock.
Question: As of the end of 2014, which of the following statements must be CORRECT?
Answer Choices:
a. The firm increased its short-term bank debt in 2014.
b. The firm issued long-term debt in 2014.
c. The firm issued new common stock in 2014.
d. The firm repurchased some common stock in 2014.
e. The firm had negative net income in 2014.
Answer: c. The firm issued new common stock in 2014.
Question: Below is the common equity section (in millions) of Timeless Technology’s last two year-end balance sheets: Common stock 2014: $2,000 2013: $1,000
Answer Choices:
Answer: b. The firm issued common stock in 2014.
Question: Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no “excess” cash.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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 represent increases or decreases to 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.
Answer Choices:
a. True
b. False
Answer: b. False
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. 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.
Question: The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time.
Answer Choices:
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 Choices:
a. True
b. False
Answer: b. False
Question: Which of the following factors could explain why Michigan Energy’s cash balance increased even though it had a negative cash flow last year?
Answer Choices:
a. The company sold a new issue of bonds.
b. The company made a large investment in new plant and equipment.
c. The company paid a large dividend.
d. The company had high depreciation expenses.
e. The company repurchased 20% of its common stock.
Answer: a. The company sold a new issue of bonds.
Question: EBIT stands for earnings before interest and taxes, and it is often called “operating income.”
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
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: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
Answer Choices:
a. Accounts payable.
b. Short-term notes payable to the bank.
c. Accrued wages.
d. Cost of goods sold.
e. Accrued payroll taxes.
Answer: d. Cost of goods sold.
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. Nantell’s cash position will improve (increase).
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 Choices:
a. True
b. False
Answer: a. True