Exam 2: Financial Statements, Cash Flow, and Taxes

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.

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold,which is called non-operating income.Lindley Textiles recently reported $12,500 of sales,$7,250 of operating costs other than depreciation,and $1,000 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate,and its federal-plus-state income tax rate was 40%.How much was Lindley's operating income,or EBIT?

Which of the following statements is CORRECT?

The interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

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.

Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB)to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.Prior to the new provision,BRB's net income after taxes was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Last year Tiemann Technologies reported $10,500 of sales,$6,250 of operating costs other than depreciation,and $1,300 of depreciation.The company had no amortization charges,it had $5,000 of bonds 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 $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Which of the following statements is CORRECT?

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?

Which of the following statements is CORRECT?