55) Cash flows that result from debt and equity financing transactions, including incurrence and
repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends
or repurchase stock are called cash flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities
Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2018 and 2019
56) The largest single source of funds for the firm in 2019 is ________. (See Table 4.1)
A) an increase in net profits after taxes
B) an increase in notes payable
C) an increase in long-term debt
D) an increase in inventory
57) Common stock dividends paid in 2019 amounted to ________. (See Table 4.1)
A) $100
B) $50
C) $600
D) $150
58) The firm may have increased long-term debts to finance ________. (See Table 4.1)
A) an increase in net fixed assets
B) an increase in current assets
C) accounts receivable payments
D) an increase in dividends
59) The firm ________ fixed assets worth ________. (See Table 4.1)
A) purchased; $0
B) purchased; $200
C) sold; $0
D) sold; $200
60) The firm’s cash flow from operating activities is ________. (See Table 4.1)
A) $50
B) $350
C) $150
D) $200
61) The depreciation expense for 2019 is ________. (See Table 4.1)
A) $0
B) $200
C) $50
D) $1,000
62) A corporation sold a fixed asset for $100,000. This is ________.
A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds
63) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is
considered as ________.
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively
64) Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
65) Which of the following represents a cash flow from operating activities?
A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock
66) For the year ended December 31, 2019, a corporation had cash flow from operating activities
of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing
activities of $9,000. The statement of cash flows would show a ________.
A) net decrease of $3,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net increase of $3,000 in cash and marketable securities
D) net increase of $5,000 in cash and marketable securities
67) For the year ended December 31, 2019, a corporation had cash flow from operating activities
of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing
activities of -$10,000. The statement of cash flows would show a ________.
A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities
68) For the year ended December 31, 2019, a corporation had cash flow from operating activities
of $12,000, cash flow from investment activities of – $10,000, and cash flow from financing
activities of $4,000. The statement of cash flows would show a ________.
A) net decrease of $18,000 in cash and marketable securities
B) net decrease of $6,000 in cash and marketable securities
C) net increase of $6,000 in cash and marketable securities
D) net increase of $2,000 in cash and marketable securities
69) A firm has just ended the calendar year making a sale in the amount of $200,000 of
merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full
for the merchandise during the year, it has yet to collect at year end from the customer. One
possible problem this firm may face is ________.
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage
70) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000,
operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000
71) Calculate a firm’s free cash flow if it has net operating profit after taxes of $60,000,
depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net
current asset requirement of $30,000 and a tax rate of 30%.
A) $0
B) $30,000
C) -$30,000
D) $60,000
72) NICO Corporation had net fixed assets of $2,000,000 at the end of 2019 and $1,800,000 at
the end of 2018. In addition, the firm had a depreciation expense of $200,000 during 2019 and
$180,000 during 2018. Using this information, NICO’s net fixed asset investment for 2019 was
________.
A) $20,000
B) $0
C) $380,000
D) $400,000
73) NICO Corporation had current assets of $2,000,000 at the end of 2019 and $1,800,000 at the
end of 2018. In addition, NICO had accounts payable of $1,000,000 in 2019 and $1,500,000 in
2018. Using this information, NICO’s net current asset investment for 2019 was ________.
A) $700,000
B) -$300,000
C) $300,000
D) -$700,000
74) During 2019, Xeron Corporation had EBIT of $100,000, a change in net fixed assets of
$400,000, an increase in net current assets of $100,000, an increase in spontaneous current
liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this
information, NICO’s free cash flow is ________.
A) -$630,000
B) -$50,000
C) $650,000
D) -$30,000
75) Given the financial data for New Electronic World, Inc. (NEW), compute the following
measures of cash flows for the NEW for the year ended December 31, 2019.
(a) Operating cash flow
(b) Free cash flow
For the year ended December 31,
76) Identify each expense or revenue as a cash flow from operating activities (O), a cash flow
from investment activities (I), or a cash flow from financing activities (F).
Administrative expenses
Rent payment
Interest on a note payable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long-term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets
77) Calculate the change in the key balance sheet accounts between 2018 and 2019 and classify
each as a source (S), a use (U), or neither (N), and indicate which type of cash flow it is: an
operating cash flow (O), and investment cash flow (I) or a financing cash flow (F).
ABC Corp.
Balance Sheet Changes and Classification
of Key Accounts between 2014 and 2015
32
Copyright © 2019 Pearson Education, Inc.
Table 4.2
Magna Fax, Inc.
Balance Sheet
For the Years Ended December 31, 2018 and 2019
78) The credit manager at First National Bank has just received the income statement and
balance sheet for Magna Fax, Inc. for the year ended December 31,2019. (See Table 4.2.) The
bank requires the firm to report its earnings performance and financial position quarterly as a
condition of a loan agreement. The bank’s credit manager must prepare two key financial
statements based on the information sent by Magna Fax, Inc. This will be passed on to the
commercial loan officer assigned to this account, so that he may review the financial condition of
the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2019.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2019.
(c) Prepare a statement of cash flows for the year ended December 31, 2019, organized by cash
flow from operating activities, cash flow from investment activities, and cash flow from
financing activities.
(c)
1) Generally, firms that have cash flows with highly seasonal cash flows or cash flows that are
just generally harder to forecast prepare cash budgets more frequently compared to firms with
cash flows that are less seasonal and/or more predictable.
2) Which of the following would be the least likely to utilize a cash budget?
A) top management
B) middle management
C) public investors
D) lenders
3) An internal sales forecast is based on the relationships that can be observed between a firm’s
sales and certain key economic indicators such as the gross domestic product, new housing starts,
or disposable personal income.
4) The ________ is a financial projection of a firm’s short-term cash surpluses or shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal
5) The primary purpose in preparing a cash budget is ________.
A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm’s short-term cash requirements
C) for risk analysis
D) to estimate sales
6) The cash budget is a statement of a firm’s planned inflows and outflows of cash that is used to
estimate its long-term cash requirement.
7) Cash budgets and pro forma statements are useful not only for internal financial planning but
also are routinely required by the Internal Revenue Service (IRS).
8) A cash budget gives the financial manager a clear view of the timing of a firm’s expected
profitability over a given period.
9) Since depreciation and other noncash charges represent a scheduled write-off of an earlier
cash outflow, they should not be included in the cash budget, though depreciation charges will
affect the taxes that a firm pays.
10) In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.
11) In cash budgeting, other cash receipts are cash receipts expected to result from sources other
than sales.
12) A firm’s net cash flow is the mathematical difference between the firm’s beginning cash and
its cash disbursements in each period.
13) The excess cash balance is the amount available for investment by a firm if the desired
minimum cash balance is less than the period’s ending cash.
14) The required total financing figures in the cash budget refer to the monthly changes in
borrowing.
15) If the net cash flow is less than the minimum cash balance, financing is required.
16) If the ending cash is greater than the minimum cash balance, excess cash exists.
17) Using simulations, a firm can determine the amount of financing needed to protect it
adequately against a cash shortage.
18) As the typical cash budget shows cash flows only on a monthly basis, the information
provided by the cash budget is not necessarily adequate for ensuring solvency.
19) As the typical cash budget shows cash flows on a monthly basis, the information provided by
the cash budget is adequate for ensuring solvency.
20) An external sales forecast is based on ________.
A) the relationships between a firm’s sales and certain key economic indicators such as GDP and
consumer confidence
B) a buildup, or consensus of sales forecasts through a firm’s own sales channels
C) the prediction of a firm’s sales over a given period through the analysis of the sales trends of
its competitors.
D) developing the pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales
21) An internal forecast is based on ________.
A) a buildup, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for
additional factors such as production capabilities
B) the relationships between a firm’s sales and certain economic indicators
C) the prediction of a firm’s sales over a given period through surveys sent to financial analysts
D) developing the pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales
22) A firm’s final sales forecast is usually a function of ________.
A) its net income
B) the salesperson’s estimates of demand
C) internal and external factors in combination
D) its accounts receivable
23) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The
firm makes 20 percent of sales for cash and collects the balance one month following the sale.
The firm’s total cash receipts in July is ________.
A) $220
B) $200
C) $180
D) $140
24) In preparing a cash budget, the ________ seasonal and uncertain a firm’s cash flows, the
________ the number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer
25) The key input to any cash budget is ________.
A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws