Question 1

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. 
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.

Question 2

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 flow, 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 flow (NCF) is often defined as follows:Net Cash Flow = Net Income + Depreciation and Amortization Charges. 
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 flow, 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 flow (NCF) is often defined as follows:Net Cash Flow = Net Income + Depreciation and Amortization Charges.

Question 3

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 4

Total net operating capital is equal to net fixed assets.

Accepted Answer

A) True 
 B)False

Question 5

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 35%.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 and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Accepted Answer

A) −$383.84; $206.68 
B) −$404.04; $217.56 
C) −$425.30; $229.01 
D) −$447.69; $241.06 
E) −$471.25; $253.75 
A) −$383.84; $206.68 
B) −$404.04; $217.56 
C) −$425.30; $229.01 
D) −$447.69; $241.06 
E) −$471.25; $253.75

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A) The income statement for a given year is designed to give us an idea of how much the firm earned during that year. 
B) The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." 
C) The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP). 
D) 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) . 
E) If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow. 
A) The income statement for a given year is designed to give us an idea of how much the firm earned during that year. 
B) The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." 
C) The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP). 
D) 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) . 
E) If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.

Question 7

Wells Water Systems recently reported $8,250 of sales,$4,500 of operating costs other than depreciation,and $950 of depreciation.The company had no amortization charges,it had $3,250 of outstanding bonds that carry a 6.75% interest rate,and its federal-plus-state income tax rate was 35%.In order to sustain its operations and thus generate sales and cash flows in the future,the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital.How much free cash flow did Wells generate?

Accepted Answer

A) $1,770.00 
B) $1,858.50 
C) $1,951.43 
D) $2,049.00 
E) $2,151.45 
A) $1,770.00 
B) $1,858.50 
C) $1,951.43 
D) $2,049.00 
E) $2,151.45

Question 8

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 9

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.

Accepted Answer

A) True 
 B)False

Question 10

In accounting,emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance,the primary emphasis is also on net income because that is what investors use to value the firm.However,a secondary financial consideration is cash flow,because cash is needed to operate the business.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Which of the following statements is CORRECT?

Accepted Answer

A) In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash. 
B) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. 
C) In the statement of cash flows, a decrease in accounts payable is reported as a use of cash. 
D) In the statement of cash flows, depreciation charges are reported as a use of cash. 
E) In the statement of cash flows, a decrease in inventories is reported as a use of cash. 
A) In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash. 
B) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. 
C) In the statement of cash flows, a decrease in accounts payable is reported as a use of cash. 
D) In the statement of cash flows, depreciation charges are reported as a use of cash. 
E) In the statement of cash flows, a decrease in inventories is reported as a use of cash.

Question 13

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have?

Accepted Answer

A) $114.00 
B) $120.00 
C) $126.00 
D) $132.30 
E) $138.92 
A) $114.00 
B) $120.00 
C) $126.00 
D) $132.30 
E) $138.92

Question 14

Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Accepted Answer

A) $77,000 
B) $80,850 
C) $84,893 
D) $89,137 
E) $93,594 
A) $77,000 
B) $80,850 
C) $84,893 
D) $89,137 
E) $93,594

Question 15

Jessie's Bobcat Rentals' operations provided a negative net cash flow last year,yet the cash shown on its balance sheet increased.Which of the following statements could explain the increase in cash,assuming the company's financial statements were prepared under generally accepted accounting principles?

Accepted Answer

A) The company had high depreciation expenses. 
B) The company repurchased some of its common stock. 
C) The company dramatically increased its capital expenditures. 
D) The company retired a large amount of its long-term debt. 
E) The company sold some of its fixed assets. 
A) The company had high depreciation expenses. 
B) The company repurchased some of its common stock. 
C) The company dramatically increased its capital expenditures. 
D) The company retired a large amount of its long-term debt. 
E) The company sold some of its fixed assets.

Question 16

Barnes' Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after taxes (NOPAT)= $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100.Barnes' weighted average cost of capital is 10%.What is its economic value added (EVA)?

Accepted Answer

A) $399.11 
B) $420.11 
C) $442.23 
D) $465.50 
E) $490.00 
A) $399.11 
B) $420.11 
C) $442.23 
D) $465.50 
E) $490.00

Question 17

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT)does the firm have? $$\begin{array} { l r } 
\text { Sales } & \$ 2,000.00 \
\text { Costs } & 1,200.00 \
\text { Depreciation } & 100.00 \
\text { EB IT } & \$ 700.00 \
\text { Interest expense } & 200.00 \
\text { EBT } & \$ 500.00 \
\text { Taxes } ( 35 \% ) & 175.00 \
\text { Net income } & \$ 325.00 \

\end{array}$$

Accepted Answer

A) $370.60 
B) $390.11 
C) $410.64 
D) $432.25 
E) $455.00 
A) $370.60 
B) $390.11 
C) $410.64 
D) $432.25 
E) $455.00

Question 18

Olivia Hardison,CFO of Impact United Athletic Designs,plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company,which does not pay any dividends,takes this action,and that total assets,operating income (EBIT),and its tax rate all remain constant.Which of the following would occur?

Accepted Answer

A) The company would have to pay less taxes. 
B) The company's taxable income would fall. 
C) The company's interest expense would remain constant. 
D) The company would have less common equity than before. 
E) The company's net income would increase. 
A) The company would have to pay less taxes. 
B) The company's taxable income would fall. 
C) The company's interest expense would remain constant. 
D) The company would have less common equity than before. 
E) The company's net income would increase.

Question 19

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 20

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation).The company had $18,750 of investor-supplied operating assets (or capital),the weighted average cost of that capital (the WACC)was 9.5%,and the federal-plus-state income tax rate was 40%.What was HHH's Economic Value Added (EVA),i.e.,how much value did management add to stockholders' wealth during the year?

Accepted Answer

A) $1,357.13 
B) $1,428.56 
C) $1,503.75 
D) $1,578.94 
E) $1,657.88 
A) $1,357.13 
B) $1,428.56 
C) $1,503.75 
D) $1,578.94 
E) $1,657.88

Exam 6: Accounting for Financial Management

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Total net operating capital is equal to net fixed assets.

Which of the following statements is CORRECT?

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.

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.

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.

Which of the following statements is CORRECT?

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have?

Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT)does the firm have? Sales \ 2,000.00 Costs 1,200.00 Depreciation 100.00 EB IT \ 700.00 Interest expense 200.00 EBT \ 500.00 Taxes (35\%) 175.00 Net income \ 325.00

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.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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