Ch 02 Financial Statements, Cash Flow, and Taxes
55. DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility.
Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is
considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes
law, which of the following would occur in the year following the change?
a.
The firm’s reported net income would increase.
b.
The firm’s operating income (EBIT) would increase.
c.
The firm’s taxable income would increase.
d.
The firm’s net cash flow would increase.
e.
The firm’s tax payments would increase.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.09 – LO: 2-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
56. Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new
common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not
pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant.
Which of the following would occur?
a.
The company would have to pay less taxes.
b.
The company’s taxable income would fall.
c.
The company’s interest expense would remain constant.
d.
The company would have less common equity than before.
e.
The company’s net income would increase.
Difficulty: Challenging
FMTP.EHRH.17.02.09 – LO: 2-9
Ch 02 Financial Statements, Cash Flow, and Taxes
57. On 12/31/2015, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that
it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/2014, the company had reported
$555,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did Heaton pay during
2015?
a.
$47,381
b.
$49,875
c.
$52,500
d.
$55,125
e.
$57,881
c
False
JFND-GO4G-EO5U-KOKD
Ch 02 Financial Statements, Cash Flow, and Taxes
58. Ullrich Printing Inc. paid out $21,750 of common dividends during the year. It ended the year with $187,500 of
retained earnings versus the prior year’s retained earnings of $132,250. How much net income did the firm earn during the
year?
a.
$77,000
b.
$80,850
c.
$84,893
d.
$89,137
e.
$93,594
a
False
do the arithmetic.
JFND-GO4G-EO5U-KOJO
JFND-GO4G-EO5U-KOJT
Ch 02 Financial Statements, Cash Flow, and Taxes
59. Which of the following statements is CORRECT?
a.
Depreciation and amortization are not cash charges, so neither of them has an effect on a firm’s reported
profits.
b.
The more depreciation a firm reports, the higher its tax bill, other things held constant.
c.
People sometimes talk about the firm’s net cash flow, which is shown as the lowest entry on the income
statement, hence it is often called “the bottom line.”
d.
Depreciation reduces a firm’s cash balance, so an increase in depreciation would normally lead to a reduction
in the firm’s net cash flow.
e.
Net cash flow (NCF) is often defined as follows:
Net Cash Flow = Net Income + Depreciation and Amortization Charges.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.06 – LO: 2-6
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
Depreciation, amortization, and net cash flow
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
60. Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue,
passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating
costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder
reporting purposes.
a.
Companies’ reported net incomes would decline.
b.
Companies’ net operating profits after taxes (NOPAT) would decline.
c.
Companies’ physical stocks of fixed assets would increase.
d.
Companies’ net cash flows would increase.
e.
Companies’ cash positions would decline.
Difficulty: Moderate
Multiple Choice
Ch 02 Financial Statements, Cash Flow, and Taxes
61. JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming
it had no amortization expense and sold none of its fixed assets?
a.
$4,831.31
b.
$5,085.59
c.
$5,353.25
d.
$5,635.00
e.
$5,916.75
False
JFND-GO4G-EO5U-KOJW
JFND-GO4G-EO5U-KOJI
Ch 02 Financial Statements, Cash Flow, and Taxes
62. Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250
of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its
federal-plus-state income tax rate was 35%. How much was its net cash flow?
a.
$3,284.75
b.
$3,457.63
c.
$3,639.61
d.
$3,831.17
e.
$4,032.81
e
False
JFND-GO4G-EO5U-KO1N
Ch 02 Financial Statements, Cash Flow, and Taxes
63. Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year,
even though the cash on its balance sheet increased?
a.
The company repurchased 20% of its common stock.
b.
The company sold a new issue of bonds.
c.
The company made a large investment in new plant and equipment.
d.
The company paid a large dividend.
e.
The company had high amortization expenses.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
64. Analysts following Armstrong Products recently noted that the company’s operating net cash flow increased over the
prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this
situation?
a.
The company issued new long-term debt.
b.
The company cut its dividend.
c.
The company made a large investment in a profitable new plant.
d.
The company sold a division and received cash in return.
e.
The company issued new common stock.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
forecasting, and cash flows
Ch 02 Financial Statements, Cash Flow, and Taxes
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
JFND-GO4G-EO5U-KO1G
65. A security analyst obtained the following information from Prestopino Products’ financial statements:
∙
Retained earnings at the end of 2014 were $700,000, but retained earnings at the end of 2015
had declined to $320,000.
∙
The company does not pay dividends.
∙
The company’s depreciation expense is its only non-cash expense; it has no amortization
charges.
∙
The company has no non-cash revenues.
∙
The company’s net cash flow (NCF) for 2015 was $150,000.
On the basis of this information, which of the following statements is CORRECT?
a.
Prestopino had negative net income in 2015.
b.
Prestopino’s depreciation expense in 2015 was less than $150,000.
c.
Prestopino had positive net income in 2015, but its income was less than its 2014 income.
d.
Prestopino’s NCF in 2015 must be higher than its NCF in 2014.
e.
Prestopino’s cash on the balance sheet at the end of 2015 must be lower than the cash it had on the balance
sheet at the end of 2014.
a
Difficulty: Moderate
Multiple Choice
False
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
JFND-GO4G-EO5U-KO1F
Ch 02 Financial Statements, Cash Flow, and Taxes
66. Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow
from operations declined. Which of the following could explain this performance?
a.
The company’s operating income declined.
b.
The company’s expenditures on fixed assets declined.
c.
The company’s cost of goods sold increased.
d.
The company’s depreciation and amortization expenses declined.
e.
The company’s interest expense increased.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
67. Which of the following statements is CORRECT?
a.
The statement of cash flows shows how much the firm’s cash⎯the total of currency, bank deposits, and short-
term liquid securities (or cash equivalents)⎯increased or decreased during a given year.
b.
The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or
selling fixed assets.
c.
The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks
and brokerage houses where cash is on deposit.
d.
The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects
of changes in working capital.
e.
The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect
cash obtained by selling new common stock.
Difficulty: Moderate
Multiple Choice
Ch 02 Financial Statements, Cash Flow, and Taxes
68. Which of the following statements is CORRECT?
a.
In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
b.
Dividends do not show up in the statement of cash flows because dividends are considered to be a financing
activity, not an operating activity.
c.
In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
d.
In the statement of cash flows, depreciation charges are reported as a use of cash.
e.
In the statement of cash flows, a decrease in inventories is reported as a use of cash.
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
69. Lucy’s Music Emporium opened its doors on January 1, 2015, and it was granted permission to use the same
depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed
assets over 20 years, but in December 2015 management realized that the assets would last for only 15 years. The firm’s
accountants plan to report the 2015 financial statements based on this new information. How would the new depreciation
assumption affect the company’s financial statements?
a.
The firm’s net liabilities would increase.
b.
The firm’s reported net fixed assets would increase.
c.
The firm’s EBIT would increase.
d.
The firm’s reported 2015 earnings per share would increase.
e.
The firm’s cash position in 2015 and 2016 would increase.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
70. Which of the following statements is CORRECT?
a.
If a company pays more in dividends than it generates in net income, its retained earnings as reported on the
balance sheet will decline from the previous year’s balance.
b.
Dividends paid reduce the net income that is reported on a company’s income statement.
c.
If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will
cause a decline in its current assets as shown on the balance sheet.
d.
If a company issues new long-term bonds during the current year, this will increase its reported current
liabilities at the end of the year.
e.
Accounts receivable are reported as a current liability on the balance sheet.
Difficulty: Moderate
Multiple Choice
Ch 02 Financial Statements, Cash Flow, and Taxes
71. Which of the following statements is CORRECT?
a.
If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance
sheet will be negative.
b.
Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings
will be, other things held constant.
c.
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make
required payments.
d.
Common equity includes common stock and retained earnings, less accumulated depreciation.
e.
The retained earnings account as shown on the balance sheet shows the amount of cash that is available for
paying dividends.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Retained earnings
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Financial statements
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
Ch 02 Financial Statements, Cash Flow, and Taxes
72. Jessie’s Bobcat Rentals’ operations provided a negative net cash flow last year, yet the cash shown on its balance sheet
increased. Which of the following statements could explain the increase in cash, assuming the company’s financial
statements were prepared under generally accepted accounting principles?
a.
The company had high depreciation expenses.
b.
The company repurchased some of its common stock.
c.
The company dramatically increased its capital expenditures.
d.
The company retired a large amount of its long-term debt.
e.
The company sold some of its fixed assets.
Difficulty: Challenging
Multiple Choice
FMTP.EHRH.17.02.05 – LO: 2-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
73. Which of the following statements is CORRECT?
a.
The primary difference between EVA and accounting net income is that when net income is calculated, a
deduction is made to account for the cost of common equity, whereas EVA represents net income before
deducting the cost of the equity capital the firm uses.
b.
MVA gives us an idea about how much value a firm’s management has added during the last year.
c.
MVA stands for market value added, and it is defined as follows:
MVA = (Shares outstanding)(Stock price) + Book value of common equity.
d.
EVA stands for economic value added, and it is defined as follows:
EVA = EBIT(1 − T) − (Investor-supplied op. capital) × (A − T cost of capital).
e.
EVA gives us an idea about how much value a firm’s management has added over the firm’s life.
Difficulty: Moderate
Multiple Choice
Ch 02 Financial Statements, Cash Flow, and Taxes
74. Which of the following statements is CORRECT?
a.
One way to increase EVA is to achieve the same level of operating income but with more investor-supplied
capital.
b.
If a firm reports positive net income, its EVA must also be positive.
c.
One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
d.
One way to increase EVA is to generate the same level of operating income but with less investor-supplied
capital.
e.
Actions that increase reported net income will always increase net cash flow.
Difficulty: Moderate
Multiple Choice
FMTP.EHRH.17.02.08 – LO: 2-8
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
EVA, CF, and net income
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
FMTP.EHRH.17.02.08 – LO: 2-8
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
United States – OH – Default City – TBA
MVA and EVA
TYPE: Multiple Choice: Conceptual
8/26/2015 10:43 AM
8/26/2015 10:43 AM
4OTI-GO4W-NQNBEE
Ch 02 Financial Statements, Cash Flow, and Taxes
75. Over the years, Janjigian Corporation’s stockholders have provided $15,250 of capital, part when they purchased new
issues of stock and part when they allowed management to retain some of the firm’s earnings. The firm now has 1,000
shares of common stock outstanding, and it sells at a price of $42.00 per share. How much value has Janjigian’s
management added to stockholder wealth over the years, i.e., what is Janjigian’s MVA?
a.
$21,788
b.
$22,935
c.
$24,142
d.
$25,413
e.
$26,750
e
False
MVA
do the arithmetic.
JFND-GO4G-EO5U-KOTW
76. Barnes’ Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after
taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders’ equity = $1,800; Total debt
= $700; and Total operating capital = $2,100. Barnes’ weighted average cost of capital is 10%. What is its economic value
added (EVA)?
a.
$399.11
b.
$420.11
c.
$442.23
Ch 02 Financial Statements, Cash Flow, and Taxes
d.
$465.50
e.
$490.00
e
False
JFND-GO4G-EO5U-KQNN
77. HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750
of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the
federal-plus-state income tax rate was 40%. What was HHH’s Economic Value Added (EVA), i.e., how much value did
management add to stockholders’ wealth during the year?
a.
$1,357.13
b.
$1,428.56
c.
$1,503.75
d.
$1,578.94
e.
$1,657.88
c
Ch 02 Financial Statements, Cash Flow, and Taxes