Financial Management: Principles and Applications, 11e (Titman)
Chapter 3 Understanding Financial Statements, Taxes, and Cash Flows
1) Which of the basic financial statements is best used to answer the question, “How profitable is
the business?”
A) Balance sheet
B) Statement of shareholder’s equity
C) Income statement
D) Accounts receivable aging schedule
Topic: 3.1 An Overview of the Firm’s Financial Statements
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
2) Who owns the retained earnings of a public firm?
A) The IRS
B) Common stockholders
C) Bondholders
D) Preferred stockholders
Topic: 3.1 An Overview of the Firm’s Financial Statements
Keywords: stockholder
Principles: Principle 3: Cash Flows Are the Source of Value
3) Which of the following represents an attempt to measure the earnings of the firm’s operations
over a given time period?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) None of the above
Topic: 3.1 An Overview of the Firm’s Financial Statements
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
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4) Stock that is repurchased by the issuing company is called:
A) paid in capital.
B) treasury stock.
C) retained capital.
D) par value stock.
Topic: 3.1 An Overview of the Firm’s Financial Statements
Keywords: treasury stock
Principles: Principle 3: Cash Flows Are the Source of Value
1) What is sales revenue, minus cost of goods sold and operating expenses, known as for income
statement purposes?
A) Net profit
B) Retained earnings
C) Net income available to preferred shareholders
D) EBIT
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
2) Which of the following streams of income is not affected by how a firm is financed (whether
with debt or equity)?
A) Net profit after tax but before dividends
B) Net working capital
C) Operating income
D) Income before tax
Topic: 3.2 The Income Statement
Keywords: operating income
Principles: Principle 3: Cash Flows Are the Source of Value
3) You are about to determine your corporation’s taxable income. Which of the below would
NOT be included as a tax-deductible expense?
A) Marketing expenses
B) Depreciation expense
C) Cost of goods sold
D) Dividend expense
Topic: 3.2 The Income Statement
Keywords: tax deductible expense
Principles: Principle 3: Cash Flows Are the Source of Value
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4) Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest
expense of $750,000. What is the amount of the firm’s EBIT?
A) $15,552,000
B) $58,000,000
C) $5,110,000
D) $4,630,000
Topic: 3.2 The Income Statement
Keywords: EBIT
Principles: Principle 3: Cash Flows Are the Source of Value
5) Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest
expense of $750,000. What is the amount of the firm’s gross profit?
A) $18,000,000
B) $15,225,000
C) $5,000,110
D) $6,632,000
Topic: 3.2 The Income Statement
Keywords: gross profit
Principles: Principle 3: Cash Flows Are the Source of Value
6) Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest
expense of $750,000. What is the amount of the firm’s income before tax?
A) $4,360,000
B) $750,000
C) $10,865,000
D) $25,115,000
Topic: 3.2 The Income Statement
Keywords: earnings before tax
Principles: Principle 3: Cash Flows Are the Source of Value
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7) Your firm has the following income statement items: sales of $50,250,000; income tax of
$1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; depreciation
and amortization of $1,365,000; and interest expense of $750,000. For purposes of determining
free cash flow, what is the amount of the firm’s after-tax cash flow from operations?
A) $255,223
B) $4,731,000
C) $2,385,000
D) $7,775,000
Topic: 3.2 The Income Statement
Keywords: after-tax cash flow
Principles: Principle 3: Cash Flows Are the Source of Value
8) Your firm has the following income statement items: sales of $52,000,000; income tax of
$1,880,000; operating expenses of $9,000,000; cost of goods sold of $36,000,000; depreciation
and amortization of $1,500,000; and interest expense of $800,000. For purposes of determining
free cash flow, what is the amount of the firm’s after-tax cash flow from operations?
A) $1,008,000
B) $3,600,000
C) $5,120,000
D) $750,000
Topic: 3.2 The Income Statement
Keywords: after-tax cash flow
Principles: Principle 3: Cash Flows Are the Source of Value
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Table 1
Jones Company
Financial Information
March 1995 March 1996
Net income $1,500 $3,000
Accounts receivable 750 750
Accumulated depreciation 1,125 1,500
Common stock 4,500 5,250
Capital surplus 7,500 8,250
Retained earnings 1,500 2,250
Accounts payable 750 750
9) Based on the information given in Table 1, calculate the dividends paid in 1996.
A) $3,750
B) $3,000
C) $750
D) $2,250
Topic: 3.2 The Income Statement
Keywords: dividends
Principles: Principle 3: Cash Flows Are the Source of Value
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Table 2
Bird Industries, Inc.
Balance Sheets
1995 1996
Cash $1,000 $?
Accounts receivable 5,000 6,000
Inventories 6,500 6,000
Land 10,000 12,000
Other fixed assets 8,000 9,000
Accumulated depreciation (1,000 ) (1,600 )
Total assets $29,500 $?
Accounts payable $3,200 $ 6,800
Bonds 4,000 4,000
Common stock 17,000 16,000
Retained earnings 5,300 5,000
Total debt and equity $29,500 $?
Bird Industries, Inc.
Income Statement
Sales $84,000
Cost of goods sold 66,400
Gross profit $17,600
Operating expenses (13,000)
Depreciation (600 )
EBIT $4,000
Interest expense (500 )
EBT $3,500
Taxes (1,500 )
Net Income $2,000
10) Based on the information contained in Table 2, what was the total amount of Bird Industries’
common stock dividend for 1996?
A) $800
B) $2,300
C) $2,000
D) Cannot be determined with available information
Topic: 3.2 The Income Statement
Keywords: dividends
Principles: Principle 3: Cash Flows Are the Source of Value
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11) Based on the information contained in Table 2, what was Bird Industries’ cash balance as of
December 31, 1996?
A) $300
B) $400
C) $100
D) $1,100
Topic: 3.2 The Income Statement
Keywords: cash balances
Principles: Principle 3: Cash Flows Are the Source of Value
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Table 3
Snark Enterprises, Inc.
Balance Sheets
1995 1996
Cash $1,000 $?
Accounts receivable 8,000 9,000
Inventories 4,000 7,000
Land 10,000 10,000
Other fixed assets 5,000 5,500
Accumulated depreciation (1,600 ) (2,000 )
Total assets $26,400 $?
Accounts payable $4,200 $ 7,000
Bonds 4,000 4,000
Common stock 15,000 16,000
Retained earnings 3,200 3,800
Total debt and equity $26,400 $?
Snark Enterprises, Inc.
Income Statement
Sales $44,900
Cost of goods sold (22,000 )
Gross profit $12,900
Operating expenses (10,000)
Depreciation (400 )
NOI $2,500
Interest expense (500)
EBT $2,000
Taxes (1,000 )
Net Income $1,000
12) Based on the information contained in Table 3, what was the total amount of Snark
Enterprise’s common stock dividend for 1996?
A) $0
B) $400
C) $600
D) Cannot be determined with available information
Topic: 3.2 The Income Statement
Keywords: stock dividend
Principles: Principle 3: Cash Flows Are the Source of Value
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13) Based on the information contained in Table 3, what is Snark Enterprise’s cash balance as of
December 31, 1996?
A) $1,100
B) $900
C) $1,300
D) None of the above
Topic: 3.2 The Income Statement
Keywords: cash balances
Principles: Principle 3: Cash Flows Are the Source of Value
14) Which of the following best represents operating income?
A) Income after financing activities
B) Earnings before interest and taxes
C) Income from capital gains
D) Income from discontinued operations
Topic: 3.2 The Income Statement
Keywords: EBIT
Principles: Principle 3: Cash Flows Are the Source of Value
15) Which of the following best represents the stream of income that is available to common
stockholders?
A) Net profit after tax and after preferred dividend payments
B) Earnings before interest and taxes
C) Gross profit
D) Operating profit
Topic: 3.2 The Income Statement
Keywords: shareholder
Principles: Principle 3: Cash Flows Are the Source of Value
16) Which of the following is NOT included in operating income?
A) Cost of goods sold
B) Sales
C) Taxes
D) Operating expenses
Topic: 3.2 The Income Statement
Keywords: operating income
Principles: Principle 3: Cash Flows Are the Source of Value
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17) Using the information provided, calculate net income for 2009. Assume a tax rate of 40
percent.
Year 2009
Inventory $5,000
Revenues 200,000
Depreciation expense 5,000
Cost of goods sold 100,000
Interest expense 10,000
Operating expenses 30,000
A) $33,000
B) $44,000
C) $55,000
D) $66,000
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
18) Based on the following selected financial information for Sheets Metalworks, calculate net
income for 2009.
2008 2009
Dividends paid $400 $700
Accts. payable/accr.300 500
Long-term debt 2,300 2,000
Common stock 2,200 3,000
Retained earnings6,150 6,350
A) $100
B) $300
C) $500
D) $700
E) $900
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
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