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.

Lucy's Music Emporium opened its doors on January 1, 2012, 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 20 years, but in December 2012 management realized that the assets would last for only 15 years.The firm's accountants plan to report the 2012 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

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.

Rao Corporation has the following balance sheet.How much net operating working capital does the firm have?

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?

Which of the following statements is CORRECT?

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?

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?

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?

TSW Inc.had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT)= $700; Total assets = $3, 000; and Total operating capital = $2, 000.Information for the just-completed year is as follows: Net income = $1, 000; Net operating profit after taxes (NOPAT)= $925; Total assets = $2, 600; and Total operating capital = $2, 500.How much free cash flow did the firm generate during the just-completed year?

Which of the following statements is CORRECT?

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.

Swinnerton Clothing Company's balance sheet showed total current assets of $2, 250, all of which were required in operations.Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes.What was its net operating working capital that was financed by investors?

Bae Inc.has the following income statement.How much net operating profit after taxes (NOPAT)does the firm have?

Net operating working capital is equal to operating current assets minus operating current liabilities.

A security analyst obtained the following information from Prestopino Products' financial statements: •Retained earnings at the end of 2011 were $700, 000, but retained earnings at the end of 2012 had declined to $320, 000. •The company does not pay dividends. •The company's depreciation expense is its only non-cash expense; it has no amortization charges. •The company has no non-cash revenues. •The company's net cash flow (NCF)for 2012 was $150, 000. On the basis of this information, which of the following statements is CORRECT?