Question 1

Which of the following statements is CORRECT?

Accepted Answer

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.

Question 2

Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net working capital?

Accepted Answer

A)  $2,874 
B)  $3,025 
C)  $3,176 
D)  $3,335 
E)  $3,502

Question 3

Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows.

Accepted Answer

A) True 
 B)False

Question 4

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 of cash, and reported costs likewise may not be consistent with 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 5

Brown Fashions Inc.'s December 31, 2008 balance sheet showed total common equity of $4,050,000 and 200,000 shares of stock outstanding. During 2008, the firm had $450,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/08, assuming no common stock was either issued or retired during 2008?

Accepted Answer

A)  $20.90 
B)  $22.00 
C)  $23.10 
D)  $24.26 
E)  $25.47

Question 6

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Accepted Answer

A)  7.02% 
B)  7.39% 
C)  7.76% 
D)  8.15% 
E)  8.56%

Question 7

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Accepted Answer

A)  6.49% 
B)  6.83% 
C)  7.19% 
D)  7.57% 
E)  7.95%

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." 
B)  The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP). 
C)  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) . 
D)  If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow. 
E)  The income statement for a given year, say 2008, is designed to give us an idea of how much the firm earned during that year.

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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.

Accepted Answer

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.

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6%, and Carter's marginal income tax rate is 40%, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?

Accepted Answer

A)  3.42% 
B)  3.60% 
C)  3.78% 
D)  3.97% 
E)  4.17%

Question 14

Below is the common equity section (in millions)The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Accepted Answer

A)  The company's net income in 2008 was higher than in 2007. 
B)  The firm issued common stock in 2008. 
C)  The market price of the firm's stock doubled in 2008. 
D)  The firm had positive net income in both 2007 and 2008, but its net income in 2008 was lower than it was in 2007. 
E)  The company has more equity than debt on its balance sheet.

Question 15

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Accepted Answer

A)  5.32% 
B)  5.60% 
C)  5.89% 
D)  6.20% 
E)  6.51%

Question 16

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

A)  Accounts payable. 
B)  Short-term notes payable to the bank. 
C)  Accrued wages. 
D)  Cost of goods sold. 
E)  Accrued payroll taxes.

Question 17

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?

Accepted Answer

A)  13.85% 
B)  14.54% 
C)  15.27% 
D)  16.03% 
E)  16.83%

Question 18

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.

Accepted Answer

A)  Companies' after-tax operating profits would decline. 
B)  Companies' physical stocks of fixed assets would increase. 
C)  Companies' cash flows would increase. 
D)  Companies' cash positions would decline. 
E)  Companies' reported net incomes would decline.

Exam 3: Financial Statements, Cash Flow, and Taxes

Which of the following statements is CORRECT?

Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $250 of accrued wages and taxes. What was its net working capital?

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.

Lovell Co. purchased preferred stock in another company. The preferred stock's before-tax yield was 8.4%. The corporate tax rate is 40%. What is the after-tax return on the preferred stock, assuming a 70% dividend exclusion?

Granville Co. recently purchased several shares of Kalvaria Electronics' preferred stock. The preferred stock has a before-tax yield of 8.6%. If the company's tax rate is 40%, what is Granville Co.'s after-tax yield on the preferred stock?

Which of the following statements is CORRECT?

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.

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.

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.

Below is the common equity section (in millions) The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

A corporation recently purchased some preferred stock that has a before-tax yield of 7%. The company has a tax rate of 38%. What is the after-tax return on the preferred stock?

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

A bond issued by the State of Pennsylvania provides a 9% yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 35% tax bracket?