43) Why is an understanding of cash flow so important in the study of finance?
1) Which of the statements below is FALSE?
A) The cash that the firm generates from its operating decisions (use of its assets) is used to
either pay creditors or the owners of the company.
B) Cash flow from assets shows the success or failure of the operating decisions.
C) Cash flow to owners shows cash paid to owners plus any new borrowing from owners.
D) Cash flow to creditors shows a portion of how the firm is financing the operations.
2) Which one of the answers below is NOT one of the three components of the “Cash Flow from
Assets”?
A) Operating Cash Flow
B) Net Capital Spending
C) Noncash Expenses
D) Change in Net Working Capital
3) Which of the following identities is TRUE?
A) Operating Cash Flow = EBIT + Depreciation – Taxes
B) Net Capital Spending = Ending Net Fixed Assets – Depreciation
C) Change in Net Working Capital (NWC) = Current Assets – Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow + Net Capital Spending
4) Which of the following identities is TRUE?
A) Operating Cash Flow = EBIT – Depreciation + Taxes
B) Net Capital Spending = Ending Net Fixed Assets – Depreciation
C) Net Working Capital (NWC) = Current Assets – Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow – Net Capital Spending
5) Which of the following identities is FALSE?
A) Cash Flow to Creditors = Interest Expense – Net New Borrowing from Creditors
B) Net New Borrowing = Ending Long-term Liabilities – Beginning Long-Term Liabilities
C) Cash Flow to Owners = Dividends + Net New Borrowing from Owners
D) Net New Borrowing from Owners = Change in Equity
6) Which of the following identities is FALSE?
A) Change in Equity = Paid-in-Surplus – Net New Borrowing from Creditors
B) Net New Borrowing = Ending Long-term Liabilities – Beginning Long-Term Liabilities
C) Cash Flow to Owners = Dividends – Net New Borrowing from Owners
D) Net New Borrowing from Owners = Change in Equity
7) Cash and Equivalents are $1,561, Short-Term Investments are $1,000, Accounts Receivables
are $3,616, Accounts Payable is $5,121, Short-Term Debt is $288, Inventories are $1,816, Other
Current Liabilities are $1,401, and Other Current Assets are $707. What are the Total Current
Assets?
A) $8,700
B) $8,752
C) $6,862
D) $5,136
8) Cash and Equivalents are $1,561; Short-Term Investments are $1,000; Accounts Receivables
are $3,616; Accounts Payable are $5,121; Short-Term Debt is $288; Inventories are $1,816;
Other Current Liabilities are $1,401; and Other Current Assets are $707. What is the amount of
Total Current Liabilities?
A) $8,752
B) $6,974
C) $6,810
D) $6,862
9) Net Working Capital for 2016 is $1,890 and Net Working Capital for 2017 is $3,597. What is
the change in Net Working Capital?
A) -$1,707
B) $1,707
C) -$1,727
D) $2,527
10) Which of the statements below is FALSE?
A) Understanding the underpinnings of the accounting identity and the relationship across the
primary financial statements provides a springboard for projecting cash flow for future periods
for both the company in general and for individual projects within a company.
B) The right hand side of the balance sheet represents all the claims to the assets of the company,
with these claims representing two types of lenders: creditors and owners.
C) Change in net working capital looks at both long-term assets and long-term liabilities.
D) Cash flow from assets examines the success or failure of the operating decisions, while cash
flow to creditors examines a portion of how the firm is financing the operations.
11) Cash flow from assets is derived from ________.
A) cash flow from operating activities and cash flow from investing activities
B) cash flow from operating activities and cash flow from financing activities
C) cash flow from creditors and cash flow from investing activities
D) cash flow from financing activities and cash flow from investing activities
12) Stimulus Industries Inc. has 2017 total current assets of $14,871,000. Last year the total
current assets were equal to $12,462,000. The change in total current assets is a ________ of
cash in the amount of ________.
A) source; $14,871,000
B) source; $2,409,000
C) use; $2,409,000
D) There is not enough information to answer this question.
13) Free cash flow is the ________.
A) cash flow from assets
B) remaining cash free to distribute to creditors and owners of the firm
C) cash that a company generates to operate the company
D) All of the above
14) The cash flow identity states that the cash flow from the left hand side of the balance sheet is
equal to the cash flow on the right hand side of the income statement.
15) Cash flow from assets shows the success or failure of the operating decisions, while cash
flow to creditors examines a portion of how the firm is financing the operations.
16) An increase in current assets is a source of cash.
17) An increase in borrowing from long-term debt holders is a source of cash.
18) The change in net working capital subtracts beginning net working capital from ending net
working capital.
19) Cash flow from assets equals cash flow to creditors plus cash flow to stockholders.
20) Consider the information below from a firm’s balance sheet for 2013 and 2014.
Current Assets 2014 2013 Change
Cash and Equivalents $1,561 $1,800 -$ 239
Short-Term Investments $1,052 $3,010 -$1,958
Accounts Receivable $3,616 $3,129 $ 487
Inventories $1,816 $1,543 $ 273
Other Current Assets $ 707 $ 601 $ 106
Total Current Assets $8,752 $10,083 -$1,331
Current Liabilities
Accounts Payable $5,173 $5,111 $ 62
Short-Term Debt $ 288 $ 277 $ 11
Other Current Liabilities $1,401 $1,098 $ 303
Total Current Liabilities $6,862 $6,486 $ 376
What is the Net Working Capital for 2014? What is it for 2013? What is the Change in Net
Working Capital (NWC)? Assuming the Operating Cash Flows (OCF) are $7,155 and the Net
Capital Spending (NCS) is $2,372, what is the Cash Flow from Assets?
1) Which of the sections below is NOT contained in the annual report?
A) Prediction of competitors’ returns
B) Company highlights
C) President’s letter to the shareholders
D) Description of the company’s activities (usually with pictures and graphs)
2) Which of the sections below is NOT contained in the annual report?
A) Notes to financial statements
B) Management’s analysis of the company’s performance
C) Prediction of gross national product
D) Auditor’s report
3) Which of the statements below is FALSE?
A) The report filed annually with the SEC is known as the 10-K Report.
B) The 10-K Report contains the annual report, as well as additional information about company
history, organizational structure, subsidiaries, and equity holdings.
C) Officers of a company or others who have a fiduciary responsibility to the owners cannot
trade on their acquired private information about the company prior to the information being
made public.
D) The 10-K must be filed within one week after the end of the company’s fiscal year.
4) Which of the statements below is FALSE?
A) Officers of a company or others who have a fiduciary responsibility to the owners can trade
on their acquired private information about the company prior to the information being made
public.
B) One potential problem in the world of finance can arise when some owners or potential
owners have access to more information about a company than do others.
C) Regulation Fair Disclosure (or Reg FD) requires companies to release all material information
to all investors at the same time.
D) The 10-K must be filed within sixty days after the end of the company’s fiscal year.
5) Notes to the financial statements help explain many of the details necessary to gain a more
complete picture of the firm’s performance. Some of the items often disclosed in the financial
notes includes which of the following?
A) How a specific item was computed
B) Additional information on a company’s financial condition
C) Methods used to prepare the financial statements
D) All of these items are often included.
6) Notes to the financial statements help explain many of the details necessary to gain a more
complete picture of the firm’s ________.
A) capital budget
B) choice of management
C) dividend policy
D) performance
7) The report filed annually with the SEC is known as the 10-K Report. It contains the annual
report as well as additional information about company history, organizational structure,
subsidiaries, and equity holdings.
8) The 10-K is a quarterly report that must be filed within 60 days after the end of the company’s
fiscal year.
9) Additional information on a company’s financial condition found in the annual report includes
special issues concerning its debt or contingent accounts but not information on the potential
impact of a pending lawsuit.
10) The financial statement notes contain both the history of the company’s performance and the
fundamental relationship between the ways the information is formatted. This information should
be made available to all simultaneously.
11) Describe some of the items often disclosed in the financial notes.
12) The annual report is a regular activity of public firms and is sent to current owners
(shareholders) and the SEC, and is also made available to prospective owners, financial analysts,
and others interested in a company’s performance. Name four of the major sections contained.
1) The annual report of a company is ________.
A) printed and mailed to owners and the SEC
B) not available online
C) not mailed to owners but only to the SEC
D) always available online in more details
2) The SEC has a site named EDGAR that ________.
A) provides, at a cost, on-line access to a company’s financial reports
B) offers investors free advice on what stocks to pick
C) provides an on-line tutorial on how to understand the government’s role in affecting stock
prices
D) provides an on-line tutorial that will help new viewers find a company and its financial
statements
3) If you query a company at finance.yahoo.com, you will see a menu that includes a section on
financial statements and ________.
A) provides the past six years of each of the primary financial statements
B) provides, at a cost, online access to limited information on a company’s financial reports
C) provides the past three years of each of the primary financial statements
D) provides an online tutorial on how to understand the government’s role in affecting stock
prices
4) Which of the items below may be included on all income statements at finance.yahoo.com,
even though they may not be part of an individual company’s income statement for that year?
A) Cost of Revenue and Minority Interest
B) Minority Interest and Effect of Accounting Changes
C) Effect of Accounting Changes and Extraordinary Items
D) All of the above
5) Which of the following items may be included on all balance sheets at Yahoo! Finance, even
though they may not be part of an individual company’s balance sheet for that year?
A) Effect of Accounting Changes, Extraordinary Items, and Treasury Stock
B) Deferred Long-Term Asset Charges, Treasury Stock, and Extraordinary Items
C) Goodwill, Deferred Long-Term Asset Charges, and Treasury Stock
D) Cost of Revenue, Goodwill, and Treasury Stock
6) Which of the following items may be included on all income statements at finance.yahoo.com,
even though they may not be part of an individual company’s income statement for that year?
A) Cost of Revenue and Extraordinary Items
B) Goodwill and Effect of Accounting Changes
C) Effect of Accounting Changes and Deferred Long-Term Asset Charges
D) Cost of Revenue and Treasury Stock
7) In regards to the Cash Flow Statement, assume we want to break down Yahoo! Finance’s cost
of revenue into its two major components, cost of goods sold (COGS) and depreciation. To do
so, we would need to look at ________ for the depreciation amount.
A) the Statement of Cash Flow
B) both the Income Statement and the Statement of Cash Flow
C) both the Balance Sheet and the Statement of Cash Flow
D) the Income Statement
8) Which of the following statements is FALSE?
A) Financial data on the Internet or via company annual reports provide a wealth of knowledge
about the operations of the firm.
B) Knowing the relationship of the primary financial statements and how to utilize the data in
each are important tools for all financial managers.
C) Although the annual report of a company is printed and mailed to owners and the SEC, much
of the financial statement information is available at various financial Web sites.
D) EDGAR stands for Electronic Data Gathering Analysis and Retribution.
9) In the years following the global economic recession of 2007-2009, the unemployment rate
for college graduates was approximately ________ high school graduates.
A) the same as
B) twice as large as
C) half the rate of
D) one-quarter the rate of
10) Career advisors unanimously suggest that applicants for professional and managerial jobs
learn all they can about a company before going to an interview.
11) The SEC has a site named EDGAR (Electronic Data Gathering Analysis and Retrieval) that
provides free access to annual reports.
12) If you query a company at finance.yahoo.com, you will see a menu that includes a section on
financial statements and provides only the past one year of each of the primary financial
statements.
13) Financial data on the Internet or via the company annual reports provide a limited amount of
knowledge about the operations of the firm.
14) In the presentation of the income statement at finance.yahoo.com, you will find cost of
revenue, not cost of goods sold, with depreciation expense included in cost of revenue.
15) Report on another on-line site besides finance.yahoo.com and www.sec.gov/edgar.shtml
(EDGAR’s) where one can get financial information. In your answer give the Web site, how to
access information, and what types of information are available. See if you can find at least one
aspect of this site that might make it superior to that found at finance.yahoo.com.
16) Describe some of the differences that the textbook mentions about finance.yahoo.com’s
presentation of the income statement.