Question 1

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 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 2

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 soldE) None of the above
F) A) and B)

Question 3

Which statement regarding the statement of cash flows 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 reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
C)   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.
D)   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.E) C) and D)
F) B) and D)

Question 4

Retained earnings are the existing shareholders' reinvested profit and do not represent cash.

Accepted Answer

A) True 
 B)False  True

Question 5

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they currently do, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

Which statement about the balance sheet is true?

Accepted Answer

A)   The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
B)   The balance sheet for a given year tells us how much money the company earned during that year.
C)   For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
D)   A balance sheet lists the assets that will be converted to cash first, and then goes on down to list the longest-lived ones last.E) A) and B)
F) None of the above

Question 7

Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is for operation only.

Accepted Answer

A) True 
 B)False

Question 8

What is the tax liability for a small Canadian-controlled private corporation (CCPC)  located in British Columbia having earnings before taxes (EBT)  of $480,000? The relevant combined federal and provincial corporate income tax rate is 13.5% for taxable income up to $400,000 and 26.5 for the amount exceeding $400,000.

Accepted Answer

A)   $64,800
B)   $75,200
C)   $96,000
D)   $127,200E) A) and D)
F) All of the above

Question 9

On the balance sheet, total assets must always equal total liabilities plus equity.

Accepted Answer

A) True 
 B)False

Question 10

Formed in 2008, ABC Ltd. had taxable income of $95,000 in 2008; $70,000 in 2009; $55,000 in 2010; $80,000 in 2011, and -$150,000 in 2012. What is the adjusted corporate tax payment in 20012? Assume that ABC is a CCPC in Manitoba with a combined federal and provincial corporate income tax rate of 13%.

Accepted Answer

A)   $17,150.00
B)   $18,100.00
C)   $19,500.00
D)   $20,550.00E) A) and D)
F) C) and D)

Question 11

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?

Accepted Answer

A)   $383
B)   $425
C)   $468
D)   $514E) All of the above
F) A) and C)

Question 12

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?

Accepted Answer

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

Question 13

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  True

Question 14

Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its combined federal and provincial income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and shareholder reporting purposes.

Accepted Answer

A)   $3,284.55
B)   $3,457.42
C)   $3,639.39
D)   $3,830.94E) B) and C)
F) All of the above

Question 15

During 2012, Bascom Bakery Inc. paid out $21,750 of common dividends. 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)   $89,137E) A) and B)
F) All of the above

Question 16

The standard financial statements prepared by accountants have to be modified for managerial purposes. Related to these modifications, which of the following statements is correct?

Accepted Answer

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) All of the above
F) A) and C)

Question 17

Which of the following items is NOT included in current assets?

Accepted Answer

A)   accounts receivable
B)   inventory
C)   bonds
D)   cashE) None of the above
F) A) and B) C

Question 18

Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Accepted Answer

A) True 
 B)False

Question 19

Which statement about depreciation is true?

Accepted Answer

A)   The more depreciation a firm reports, the higher its tax bill, other things held constant.
B)   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.
C)   Net Cash Flow = Net Income + Depreciation and Amortization Charges.
D)   Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.E) C) and D)
F) A) and D)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 2: Financial Statements, Cash Flow, and Taxes

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

Correct Answer
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Which statement regarding the statement of cash flows is correct?

Correct Answer
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Retained earnings are the existing shareholders' reinvested profit and do not represent cash.

Correct Answer
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True

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they currently do, other things held constant.

Correct Answer
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Which statement about the balance sheet is true?

Correct Answer
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Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is for operation only.

Correct Answer
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On the balance sheet, total assets must always equal total liabilities plus equity.

Correct Answer
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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.

Correct Answer
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True

Correct Answer
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During 2012, Bascom Bakery Inc. paid out $21,750 of common dividends. 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?

Correct Answer
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The standard financial statements prepared by accountants have to be modified for managerial purposes. Related to these modifications, which of the following statements is correct?

Correct Answer
verified

Which of the following items is NOT included in current assets?

Correct Answer
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C

Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Correct Answer
verified

Which statement about depreciation is true?

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

Correct Answer
verified

Exam 2: Financial Statements, Cash Flow, and Taxes

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which statement regarding the statement of cash flows is correct?

Correct AnswerverifiedShow Answer

Retained earnings are the existing shareholders' reinvested profit and do not represent cash.

Correct AnswerverifiedTrue

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they currently do, other things held constant.

Correct AnswerverifiedShow Answer

Which statement about the balance sheet is true?

Correct AnswerverifiedShow Answer

Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is for operation only.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

On the balance sheet, total assets must always equal total liabilities plus equity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

During 2012, Bascom Bakery Inc. paid out $21,750 of common dividends. 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?

Correct AnswerverifiedShow Answer

The standard financial statements prepared by accountants have to be modified for managerial purposes. Related to these modifications, which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following items is NOT included in current assets?

Correct AnswerverifiedC

Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Correct AnswerverifiedShow Answer

Which statement about depreciation is true?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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True

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True

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C

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