19) Which of the following would be included in the calculation of net operating working
capital?
A) Accounts payable
B) Accruals
C) Short-term notes payable
D) Both A and B
E) All of the above
Topic: 3.2 The Income Statement
Keywords: net operating working capital
Principles: Principle 3: Cash Flows Are the Source of Value
20) The income statement represents a snapshot of account balances at one point in time.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
21) An income statement reports a firm’s profit relative to its total investment in plant and
equipment.
Topic: 3.2 The Income Statement
Keywords: profit
Principles: Principle 3: Cash Flows Are the Source of Value
22) The income statement describes the financial position of a firm on a given date.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
23) On an accrual basis income statement, revenues and expenses always match the firm’s cash
flow.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
11
24) Corporate income statements are usually compiled on an accrual, rather than cash, basis.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
25) The income statement provides a statement of results for the firm’s operations.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
Table 4
Financial Data for Dooley Sportswear, December 31, 1996
Inventory $206,250
Long-term debt 300,000
Interest expense 5,000
Accumulated depreciation 442,500
Cash 180,000
Net sales (all credit) 1,500,000
Common stock 800,000
Accounts receivable 225,000
Operating expenses 525,000
Notes payable-current 187,500
Cost of goods sold 937,500
Plant and equipment 1,312,500
Accounts payable 168,750
Marketable securities 95,000
Prepaid insurance 80,000
Accrued wages 65,000
Retained earnings-current-year ?
Federal income taxes 5,750
12
26) From the scrambled list of items presented in Table 4, prepare an income statement and a
balance sheet for Dooley Sportswear Company.
Topic: 3.2 The Income Statement
Keywords: income statement
Principles: Principle 3: Cash Flows Are the Source of Value
13
1) Browning Cookware, Inc. has the following income statement items: sales of $50,250,000;
operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of
$750,000. If the firm’s income tax rate is 34%, what is the amount of the firm’s income tax
liability?
A) $1,665,000
B) $725,000
C) $385,000
D) $1,482,400
Topic: 3.3 Corporate Taxes
Keywords: income tax liability
Principles: Principle 3: Cash Flows Are the Source of Value
Use the following information to answer the following question(s).
In 2004, A & K, Inc. expects operating income (earnings before interest and taxes) of
$18,000,000. In addition, the corporation has $20,000,000 of debt outstanding with a 10 percent
interest rate and will pay $1,000,000 in dividends to its common stockholders.
2) Assume that A & K will receive no other sources of income during 2004. A & K’s taxable
income for 2004 will be:
A) $18,000,000.
B) $17,000,000.
C) $16,000,000.
D) $15,000,000.
Topic: 3.3 Corporate Taxes
Keywords: taxable income
Principles: Principle 3: Cash Flows Are the Source of Value
3) A & K’s total tax liability for 2004 will be:
A) $5,488,250.
B) $5,530,000.
C) $5,600,000.
D) $6,080,000.
Topic: 3.3 Corporate Taxes
Keywords: income tax liability
Principles: Principle 3: Cash Flows Are the Source of Value
14
4) A & K’s marginal tax rate for 2004 will be:
A) 38 percent.
B) 35 percent.
C) 34 percent.
D) unknown because too little information is provided.
Topic: 3.3 Corporate Taxes
Keywords: marginal tax rate
Principles: Principle 3: Cash Flows Are the Source of Value
5) Tax tables are based on ________ tax rates.
A) marginal
B) average
C) implied
D) investment
Topic: 3.3 Corporate Taxes
Keywords: tax table
Principles: Principle 3: Cash Flows Are the Source of Value
6) The marginal tax rate would equal the average tax rate for firms with earnings less than
$50,000.
Topic: 3.3 Corporate Taxes
Keywords: marginal tax rate
Principles: Principle 3: Cash Flows Are the Source of Value
7) The interest payments on corporate bonds are tax-deductible.
Topic: 3.3 Corporate Taxes
Keywords: tax deductible expense
Principles: Principle 3: Cash Flows Are the Source of Value
8) Dividends paid to a firm’s stockholders, both preferred and common stockholders, are tax-
deductible to the paying company.
Topic: 3.3 Corporate Taxes
Keywords: tax deductible expense
Principles: Principle 3: Cash Flows Are the Source of Value
15
9) Pearls, Inc. had sales in 1993 of $2.1 million. The common stockholders received $400,000 in
cash dividends and preferred stockholders were paid $200,000. Interest totaling $150,000 was
paid on outstanding debts. Operating expenses totaled $300,000, and cost of goods sold was
$500,000. Stock that had been purchased for $50,000 in 1987 was sold for $70,000. What is the
tax liability of Pearls, Inc.?
6,250 + 372,300 + 11,750 = $397,800 or
Because taxable income is over $335,000
taxes can be computed 1,170,000 × .34 =
$397,800
Topic: 3.3 Corporate Taxes
Keywords: tax liability
10) Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and
interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin
had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding.
Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share
on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a
price of $50,500. Compute the taxable income and the resulting tax liability for Goodwin
Enterprises for the year.
Use the following tax rates:
Income Tax rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
over $335,001 34%
Topic: 3.3 Corporate Taxes
Keywords: tax liability
Principles: Principle 3: Cash Flows Are the Source of Value
1) Which of the following is the least liquid current asset?
A) Accruals
B) Marketable securities
C) Accounts receivable
D) Inventory
Topic: 3.4 The Balance Sheet
Keywords: liquidity
Principles: Principle 3: Cash Flows Are the Source of Value
17