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

A) True
B) False

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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?


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

F) C) and E)
G) A) and B)

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Which of the following statements is CORRECT?


A) All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
B) 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.
C) All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
D) Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
E) 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 income and stockholders were taxed again on the income when it was paid to them as dividends.

F) A) and B)
G) C) and D)

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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?


A) The firm's net liabilities would increase.
B) The firm's reported net fixed assets would increase.
C) The firm's EBIT would increase.
D) The firm's reported 2012 earnings per share would increase.
E) The firm's cash position in 2012 and 2013 would increase.

F) B) and E)
G) All of the above

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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?


A) Prestopino had negative net income in 2012.
B) Prestopino's depreciation expense in 2012 was less than $150, 000.
C) Prestopino had positive net income in 2012, but its income was less than its 2011 income.
D) Prestopino's NCF in 2012 must be higher than its NCF in 2011.
E) Prestopino's cash on the balance sheet at the end of 2012 must be lower than the cash it had on the balance sheet at the end of 2011.

F) A) and B)
G) A) and C)

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Which of the following statements is CORRECT?


A) Net cash flow (NCF) is defined as follows: NCF= Net income - Depreciation and Amortization.
B) Changes in working capital have no effect on free cash flow.
C) Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation and Amortization - Capital expenditures required to sustain operations - Required changes in net operating working capital.
D) Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation and Amortization + Capital expenditures.
E) Net cash flow is the same as free cash flow (FCF) .

F) D) and E)
G) A) and E)

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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?


A) The company repurchased 20% of its common stock.
B) The company sold a new issue of bonds.
C) The company made a large investment in new plant and equipment.
D) The company paid a large dividend.
E) The company had high amortization expenses.

F) A) and E)
G) A) and D)

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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.


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

F) All of the above
G) C) and E)

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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?


A) $1, 454
B) $1, 530
C) $1, 607
D) $1, 687
E) $1, 771

F) D) and E)
G) B) and E)

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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?


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, for valuation purposes we need to discount cash flows, not accounting income.Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed.These factors have led to the development of information that is focused on cash flows and the operations of individual units.
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 are 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.

F) A) and B)
G) B) and C)

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Rao Corporation has the following balance sheet.How much net operating working capital does the firm have? Rao Corporation has the following balance sheet.How much net operating working capital does the firm have? A) $54.00 B) $60.00 C) $66.00 D) $72.60 E) $79.86


A) $54.00
B) $60.00
C) $66.00
D) $72.60
E) $79.86

F) A) and B)
G) C) and E)

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Which of the following statements is CORRECT?


A) One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.
B) If a firm reports positive net income, its EVA must also be positive.
C) One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
D) One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.
E) Actions that increase reported net income will always increase net cash flow.

F) B) and D)
G) A) and C)

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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?


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.

F) A) and E)
G) A) and B)

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

F) B) and E)
G) A) and C)

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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?


A) $383
B) $425
C) $468
D) $514
E) $566

F) B) and E)
G) D) and E)

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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.

A) True
B) False

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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.

A) True
B) False

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