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Ch 02 Financial Statements, Cash Flow, and Taxes
34. Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and
$1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds
outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's
taxable income, or earnings before taxes (EBT)?
a.
$3,230.00
b.
$3,400.00
c.
$3,570.00
d.
$3,748.50
e.
$3,935.93
Ch 02 Financial Statements, Cash Flow, and Taxes
35. Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of
depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest
rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the
same depreciation expense for tax and stockholder reporting purposes.
a.
$3,284.55
b.
$3,457.42
c.
$3,639.39
d.
$3,830.94
e.
$4,022.48
Ch 02 Financial Statements, Cash Flow, and Taxes
36. Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and
$1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate,
and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item,
depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the
change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
a.
−463.13
b.
−487.50
c.
−511.88
d.
−537.47
e.
−564.34
Ch 02 Financial Statements, Cash Flow, and Taxes
37. For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as
prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create
alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these
modifications, which of the following statements is CORRECT?
a.
The standard statements make adjustments to reflect the effects of inflation on asset values, and these
adjustments are normally carried into any adjustment that managers make to the standard statements.
b.
The standard statements focus on accounting income for the entire corporation, not cash flows, and the two
can be quite different during any given accounting period. However, for valuation purposes we need to
discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions,
and since division managers should be compensated on their divisions' performance, not that of the entire firm,
information that focuses on the divisions is needed. These factors have led to the development of information
that is focused on cash flows and the operations of individual units.
c.
The standard statements provide useful information on the firm's individual operating units, but management
needs more information on the firm's overall operations than the standard statements provide.
d.
The standard statements focus on cash flows, but managers are less concerned with cash flows than with
accounting income as defined by GAAP.
e.
The best feature of standard statements is that, if they are prepared under GAAP, the data are always
consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to
make earnings look better.
Ch 02 Financial Statements, Cash Flow, and Taxes
38. Which of the following statements is CORRECT?
a.
Net cash flow (NCF) is defined as follows:
NCF = Net income - Depreciation and Amortization.
b.
Changes in working capital have no effect on free cash flow.
c.
Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 − T)
+ Depreciation and Amortization
− Capital expenditures required to sustain operations
− Required changes in net operating working capital.
d.
Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 − T)+ Depreciation and Amortization + Capital expenditures.
e.
Net cash flow is the same as free cash flow (FCF).
39. Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3)
an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
a.
The company had a sharp increase in its depreciation and amortization expenses.
b.
The company had a sharp increase in its inventories.
c.
The company had a sharp increase in its accrued liabilities.
d.
The company sold a new issue of common stock.
e.
The company made a large capital investment early in the year.
Ch 02 Financial Statements, Cash Flow, and Taxes
40. Swinnerton Clothing Company's balance sheet showed total current assets of $2,250, all of which were required in
operations. Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank,
and $145 of accrued wages and taxes. What was its net operating working capital that was financed by investors?
a.
$1,454
b.
$1,530
c.
$1,607
d.
$1,687
e.
$1,771
Ch 02 Financial Statements, Cash Flow, and Taxes
41. NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets. All of these
assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of
6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes. Its remaining capital consisted of
long-term debt and common equity. What was NNR's total investor-provided operating capital?
a.
$4,694,128
b.
$4,941,188
c.
$5,201,250
d.
$5,475,000
e.
$5,748,750
Ch 02 Financial Statements, Cash Flow, and Taxes
42. TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700;
Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net
income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital =
$2,500. How much free cash flow did the firm generate during the just-completed year?
a.
$383
b.
$425
c.
$468
d.
$514
e.
$566
43. Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?
Ch 02 Financial Statements, Cash Flow, and Taxes
Cash
$ 10
Accounts payable
$ 20
Short-term investments
Accruals
20
Accounts receivable
50
Notes payable
50
Inventory
40
Current liabilities
$ 90
Current assets
$130
Long-term debt
0
Net fixed assets
100
Common equity
30
Retained earnings
50
Total assets
$230
Total liab. & equity
$230
a.
$54.00
b.
$60.00
c.
$66.00
d.
$72.60
e.
$79.86
44. Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?
Sales
$2,000.00
Costs
1,200.00
Depreciation
100.00
EBIT
$ 700.00
Interest expense
200.00
EBT
$ 500.00
Taxes (35%)
175.00
Net income
$ 325.00
a.
$370.60
b.
$390.11
Ch 02 Financial Statements, Cash Flow, and Taxes
c.
$410.64
d.
$432.25
e.
$455.00
45. EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm
have?
Sales
$1,800.00
Costs
1,400.00
Depreciation
250.00
EBIT
$ 150.00
Interest expense
70.00
EBT
$ 80.00
Taxes (40%)
32.00
Net income
$ 48.00
a.
$81.23
b.
$85.50
c.
$90.00
d.
$94.50
e.
$99.23
Ch 02 Financial Statements, Cash Flow, and Taxes
46. Tibbs Inc. had the following data for the year ending 12/31/2015: Net income = $300; Net operating profit after taxes
(NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt =
$700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)?
a.
14.91%
b.
15.70%
c.
16.52%
d.
17.39%
e.
18.26%
Ch 02 Financial Statements, Cash Flow, and Taxes
47. Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?
Cash
$ 20.00
Accounts payable
$ 30.00
Short-term investments
50.00
Accruals
50.00
Accounts receivable
20.00
Notes payable
30.00
Inventory
60.00
Current liabilities
$110.00
Current assets
$150.00
Long-term debt
70.00
Gross fixed assets
$140.00
Common stock
30.00
Accumulated deprec.
40.00
Retained earnings
40.00
Net fixed assets
$100.00
Total common equity
$ 70.00
Total assets
$250.00
Total liab. & equity
$250.00
a.
$114.00
b.
$120.00
c.
$126.00
d.
$132.30
e.
$138.92
Ch 02 Financial Statements, Cash Flow, and Taxes
48. Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of
depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest
rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash
flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating
working capital. How much free cash flow did Wells generate?
a.
$1,770.00
b.
$1,858.50
c.
$1,951.43
d.
$2,049.00
e.
$2,151.45
49. Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and
$1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5%
interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except
for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the
Ch 02 Financial Statements, Cash Flow, and Taxes
firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations
for tax and stockholder reporting purposes.
a.
−$383.84; $206.68
b.
−$404.04; $217.56
c.
−$425.30; $229.01
d.
−$447.69; $241.06
e.
−$471.25; $253.75
Ch 02 Financial Statements, Cash Flow, and Taxes
50. Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and
$700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5%
interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales
and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to
invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?
a.
$673.27
b.
$708.70
c.
$746.00
d.
$783.30
e.
$822.47
Ch 02 Financial Statements, Cash Flow, and Taxes
51. Which of the following statements is CORRECT?
a.
The maximum federal tax rate on personal income in 2014 was 50%.
b.
Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity
financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest
and dividends were both deductible.
c.
Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax
rate, which in 2014 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.
d.
The maximum federal tax rate on corporate income in 2014 was 50%.
e.
Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by
selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt,
and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income
when calculating income for tax purposes.
52. Which of the following statements is CORRECT?
a.
All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for
the lowest amounts of income and 35% for the highest amounts of income.
b.
The income of certain small corporations that qualify under the Tax Code is completely exempt from
Ch 02 Financial Statements, Cash Flow, and Taxes
corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.
c.
All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of
the Internal Revenue Code.
d.
Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners
must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
e.
Congress recently changed the tax laws to make dividend income received by individuals exempt from income
taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was
first taxed on the income and stockholders were taxed again on the income when it was paid to them as
dividends.
53. Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its
depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new
provision, BRB's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact
of the new provision on BRB's financial statements versus the statements without the provision? Assume that the
company uses the same depreciation method for tax and stockholder reporting purposes.
a.
Net fixed assets on the balance sheet will decrease.
b.
The provision will reduce the company's net cash flow.
c.
The provision will increase the company's tax payments.
d.
Net fixed assets on the balance sheet will increase.
e.
The provision will increase the company's net income.
Ch 02 Financial Statements, Cash Flow, and Taxes
54. The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the
equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to
depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will
occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and
stockholder reporting purposes.
a.
LeMond's tax liability for the year will be lower.
b.
LeMond's taxable income will be lower.
c.
LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year.
d.
LeMond's cash position will improve (increase).
e.
LeMond's reported net income after taxes for the year will be lower.
