Corporate Finance, 12e (Ross)
1) Which one of these accounts appears on the right-hand side of a balance sheet?
A) Property, plant, and equipment
B) Accumulated retained earnings
C) Accumulated depreciation
D) Cash and equivalents
E) Intangible assets
2) The entire book value of the residual ownership of a corporation is known as the:
A) total equity.
B) intangible assets.
C) retained earnings.
D) capital surplus.
E) total assets.
3) Which account represents the book value of all of a corporation’s net profits less its dividend
payments?
A) Capital surplus
B) Accumulated retained earnings
C) Treasury stock
D) Common stock
E) Preferred stock
4) Which one of the following is a current liability?
A) Amount due to a supplier in 18 months
B) Note payable in nine months
C) Estimated taxes just paid
D) Loan payment due in 13 months
E) Amount due from a customer in 30 days
5) An increase in total assets:
A) means that net working capital is also increasing.
B) requires an investment in fixed assets.
C) means that stockholders’ equity must also increase.
D) must be offset by an equal increase in liabilities and stockholders’ equity.
E) can only occur when a firm has positive net income.
6) Which one of the following assets is generally the most liquid?
A) Inventory
B) Buildings
C) Accounts receivable
D) Equipment
E) Patents
7) Which one of the following statements concerning liquidity is correct?
A) Liquid assets generally earn higher rates of return than fixed assets.
B) If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.
C) Liquid assets are defined as those assets obtained within the past year.
D) The less liquidity a firm has, the lower the probability the firm will encounter financial
difficulties.
E) Balance sheet accounts are listed in order of decreasing liquidity.
8) Liquidity is:
A) a measure of the use of debt in a firm’s capital structure.
B) equal to current assets minus current liabilities.
C) equal to the market value of a firm’s total assets minus its total liabilities.
D) valuable to a firm even though liquid assets tend to be less profitable to own.
E) generally most associated with intangible assets.
9) Which one of the following accounts is included in stockholders’ equity?
A) Long-term debt
B) Deferred taxes
C) Plant and equipment
D) Accumulated retained earnings
E) Dividends paid
10) Book value:
A) is equivalent to market value for firms with fixed assets.
B) is based on historical cost.
C) generally tends to exceed market value when fixed assets are included.
D) is more of a financial than an accounting valuation.
E) is adjusted whenever the market value of an asset changes.
11) If you sell an asset, you are most apt to receive which value for that asset?
A) Market value
B) Original cost minus accumulated depreciation
C) Historical value
D) Book value
E) Carrying value
12) Which one of these equations is an accurate expression of the balance sheet?
A) Assets ≡ Liabilities − Stockholders’ equity
B) Stockholders’ equity ≡ Assets + Liabilities
C) Liabilities ≡ Stockholders’ equity − Assets
D) Assets ≡ Stockholders’ equity − Liabilities
E) Stockholders’ equity ≡ Assets − Liabilities
13) Which one of these accounts is classified as a fixed asset on the balance sheet?
A) Intangible assets
B) Accounts payable
C) Preferred stock
D) Inventory
E) Accounts receivable
14) On a balance sheet, deferred taxes are classified as:
A) stockholders’ equity.
B) a current asset.
C) a long-term liability.
D) a fixed asset.
E) a current liability.
15) If a firm’s financial managers successfully meet their primary goal, then the firm’s:
A) debts will exceed its equity.
B) market value will exceed its book value.
C) net working capital will exceed its long-term debt.
D) carrying value will exceed its market value.
E) equity will exceed its assets.
16) An asset that can be quickly converted into cash without significant loss in value is referred
to as being:
A) marketable.
B) tangible.
C) intangible.
D) liquid.
E) fixed.
17) Which one of these is related to an increase in the book value of the stockholders’ equity in a
profitable, non-dividend paying firm? Assume no shares of stock are repurchased or sold.
A) A decrease in the book value of inventory
B) An increase in earnings per share
C) An increase in the market value of the firm’s buildings
D) An increase in the market value of the firm’s long-term debt
E) An increase in non-cash expenses
18) Assets are listed on the balance sheet in order of:
A) decreasing liquidity.
B) acquisition.
C) increasing size.
D) market value relative to book value.
E) book value.
19) An increase in treasury stock:
A) increases the total equity of the firm.
B) is the result of a firm issuing new shares of stock to the federal government.
C) increases the number of shares outstanding.
D) results from a repurchase of outstanding shares of stock.
E) requires repayment at some point in the future.
20) The book value of assets:
A) is determined under Generally Accepted Accounting Principles (GAAP) and is based on the
cost of those assets.
B) represents the true market value of those assets according to GAAP.
C) is always the best measure of the company’s value to an investor.
D) is always higher than the replacement cost of the assets.
E) is shown on the firm’s income statement.
21) Under Generally Accepted Accounting Principles (GAAP), a firm’s assets are reported at:
A) market value.
B) liquidation value.
C) market value less accumulated depreciation.
D) historical cost less accumulated depreciation.
E) liquidation value less accumulated depreciation.
22) The income statement:
A) measures performance for one specific day.
B) ignores any income other than operating revenues.
C) excludes deferred tax expense.
D) treats dividends paid as a cash expense.
E) includes noncash expenses.
23) According to Generally Accepted Accounting Principles (GAAP), revenue is recognized as
income when:
A) a contract is signed to perform a service or deliver a good.
B) the transaction is complete and the goods or services are delivered.
C) payment is requested.
D) income taxes are paid on the revenue earned.
E) managers decide to recognize it.
24) The financial statement summarizing a firm’s accounting performance over a period of time
is the:
A) income statement.
B) balance sheet.
C) statement of cash flows.
D) tax reconciliation statement.
E) statement of equity.
25) Noncash items refer to:
A) the credit sales of a firm.
B) the accounts payable of a firm.
C) the costs incurred for the purchase of intangible fixed assets.
D) expenses charged against revenues that do not directly affect cash flow.
E) all accounts on the balance sheet other than cash on hand.
26) For a firm with long-term debt, net income must be equal to:
A) Pretax income − Interest expense − Taxes.
B) EBIT − Taxes.
C) Taxes + Addition to retained earnings.
D) Operating income × (1 − Marginal tax rate).
E) Dividends + Addition to retained earnings.
27) As seen on the income statement of a tax-paying firm:
A) interest is deducted from income and increases the total taxes incurred.
B) the tax rate is applied to the earnings before interest and taxes when the firm pays interest.
C) depreciation is shown as an expense but does not affect the tax expense.
D) depreciation reduces both the pretax income and the net income.
E) interest expense is added to earnings before interest and taxes to compute pretax income.
28) All else held constant, the earnings per share will decrease as the:
A) net income increases.
B) number of shares outstanding increases.
C) total revenue of the firm increases.
D) tax rate decreases.
E) costs decrease.
29) Which one of these statements is correct?
A) Pretax income is equal to net income minus taxes.
B) The addition to retained earnings is equal to net income plus dividends.
C) Operating income is equal to operating revenue minus cost of goods sold.
D) Only current taxes are included in the tax expense.
E) Earnings per share can be negative but dividends per share cannot.
30) Earnings per share:
A) will increase if net income increases and the number of shares outstanding decreases.
B) will increase if net income decreases and the number of shares outstanding increases.
C) is defined as the addition to retained earnings divided by the number of shares outstanding.
D) is the total amount of dividends paid per year on a per share basis.
E) must increase at the same rate as the net income.
31) Earnings per share will increase when:
A) depreciation decreases.
B) the number of shares outstanding increase.
C) operating income decreases.
D) dividends per share decrease.
E) the average tax rate increases.
32) Assuming the number of shares outstanding and total earnings remains constant, an increase
in dividends per share will:
A) reduce the earnings per share.
B) reduce the addition to retained earnings.
C) reduce net income.
D) increase total equity.
E) increase total assets.
33) Which one of these is a non-cash item?
A) Deferred taxes
B) Interest expense
C) Current taxes
D) Dividends
E) Selling expenses
34) For a tax-paying firm, an increase in the depreciation expense of $1 will:
A) reduce net income by $1.
B) increase net income by $1.
C) reduce net income by more than $1.
D) reduce net income by less than $1.
E) increase net income by less than $1.
35) According to Generally Accepted Accounting Principles (GAAP), the cost of goods sold
expenses are:
A) recorded as incurred.
B) recorded when paid.
C) matched with revenues.
D) matched with production levels.
E) expensed as management desires.
36) Depreciation for a profitable firm:
A) decreases both operating and net income.
B) increases the net fixed assets as shown on the balance sheet.
C) reduces both the net fixed assets and the costs of a firm.
D) is a non-cash expense which increases the net operating income.
E) decreases net fixed assets, net income, and operating cash flows.
37) Which one of these is most apt to be a fixed, cash expense in the short run?
A) Raw materials cost
B) Bond interest
C) Commissions paid to sales representatives
D) Depreciation
E) Manufacturing labor costs
38) When you are making a financial decision, the most relevant tax rate is the ________ rate
when the tax rate schedule is progressive.
A) average
B) fixed
C) marginal
D) total
E) variable
39) Which term defines the tax rate that applies to the next dollar of taxable income earned?
A) Deductible
B) Residual
C) Total
D) Average
E) Marginal
40) As of 2018, the U.S. corporate tax rate is:
A) based on a progressive tax rate schedule.
B) based on a tiered, multi-rate flat tax.
C) a flat tax of 34 percent.
D) zero with all corporate taxable income passed to shareholders.
E) a flat rate of 21 percent.
41) A firm starts its year with positive net working capital. During the year, the firm acquires
more short-term debt than it does short-term assets. This means that:
A) the ending net working capital must be negative.
B) both accounts receivable and inventory decreased during the year.
C) the beginning current assets were less than the beginning current liabilities.
D) accounts payable increased and inventory decreased during the year.
E) the ending net working capital can be positive, negative, or equal to zero.
42) For a growing firm, the change in net working capital is generally:
A) positive.
B) negative.
C) highly erratic.
D) highly negative.
E) equal to zero.
43) An increase in which one of the following will cause the operating cash flow to increase for a
profitable firm?
A) Depreciation
B) Cash
C) Net working capital
D) Taxes
E) Administrative expenses
44) Which one of these does not affect the cash flow to creditors?
A) Interest paid on long-term debt
B) New mortgage on a building
C) Increase in accounts payable
D) Mortgage interest payment
E) Reduction in long-term debt
45) A firm’s dividend payments less any net new equity raised is referred to as the firm’s:
A) operating cash flow.
B) capital spending.
C) net working capital.
D) cash flow from creditors.
E) cash flow to stockholders.
46) Which one of these will cause an increase in the cash flow to creditors for the current year?
A) Collection of a refund for the overpayment of a loan
B) Payoff of a 36-month loan after the first 15 months
C) Payment of a late charge on an account payable to a supplier
D) Acquiring a new loan that will be repaid in one lump sum 24 months from now
E) Purchasing inventory using credit offered by a supplier
47) The cash flow to stockholders must be positive when:
A) the dividends paid are less than the amount of net new equity raised.
B) the net sale of common stock exceeds the amount of dividends paid.
C) no income is distributed but new shares of stock are sold.
D) the cash flow from assets is positive and exceeds the cash flow to creditors.
E) both the cash flow to assets and the cash flow to creditors are positive.
48) Cash flow from assets:
A) equals net income plus non-cash items.
B) can be positive, negative, or equal to zero.
C) equals operating cash flow minus net capital spending.
D) equals the addition to retained earnings.
E) equals operating cash flow minus the cash flow to creditors.
49) Net capital spending is equal to the:
A) net change in total assets plus depreciation.
B) net change in fixed assets plus depreciation.
C) net income plus depreciation.
D) difference between the market and book values of the total assets.
E) change in total assets.
50) Cash flow to stockholders is defined as:
A) cash dividends paid.
B) repurchases of equity less new equity sold minus cash dividends paid.
C) cash flow from financing less cash flow to creditors.
D) cash dividends paid plus repurchases of equity minus new equity financing.
E) cash flow from assets plus cash flow to creditors.
51) Free cash flow is:
A) the money generated from the sale of new shares of stock.
B) another term for operating cash flow.
C) the cash generated by decreasing net working capital.
D) cash that the firm can distribute to creditors and stockholders.
E) the net income of a firm after taxes have been paid.
52) The cash flow of the firm must be equal to the:
A) cash flow to stockholders minus the cash flow to creditors.
B) cash flow to creditors minus the cash flow to stockholders.
C) cash flow to governments plus the cash flow to stockholders.
D) cash flow to stockholders plus the cash flow to creditors.
E) aftertax operating cash flow.
53) The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:
A) operating cash flow.
B) net capital spending.
C) additions to net working capital.
D) free cash flow.
E) cash flow to investors.
54) Capital spending is equal to:
A) ending net fixed assets minus beginning net fixed assets.
B) ending net fixed assets minus beginning net fixed assets plus depreciation.
C) ending total assets minus beginning total assets.
D) ending total assets minus beginning total assets plus depreciation.
E) beginning total assets plus asset purchases minus asset sales.
55) Operating cash flow is defined as:
A) Pretax income − Taxes.
B) Net income − Dividends.
C) EBIT + Depreciation − Taxes.
D) Pretax income + Depreciation.
E) Cash flow to investors + Taxes.
56) Payments to creditors that include interest and the repayment of principal are referred to as:
A) the cash flow to stockholders.
B) the reduction in net working capital.
C) debt service.
D) operating cash flow.
E) the change in net working capital.
57) In the accounting statement of cash flows, which one of these is calculated by adding back
noncash expenses to net income and adjusting for changes in current assets and liabilities?
A) Cash flow from investing activities
B) Cash flow from financing activities
C) Net working capital
D) Cash flow from operations
E) Cash flow to investors
58) The accounting statement of cash flows consists of the cash flows from:
A) operations, investing activities, and financing activities.
B) operations, investing activities, and divesting activities.
C) internal activities, external activities, and financing activities.
D) balance sheet accounts only.
E) income statement accounts only.
59) In the accounting statement of cash flows, interest expense is:
A) ignored completely.
B) included as a financing activity.
C) included both as an operating and as a financing activity.
D) included as an investing activity.
E) included in operations.