Chapter 2—Financial Statement and Cash Flow Analysis
MULTIPLE CHOICE
1. Which of the following items can be found on an income statement?
a.
Accounts receivable
b.
Long-term debt
c.
Sales
d.
Inventory
2. If you only knew a company’s total assets and total debt, which item could you easily calculate?
a.
Sales
b.
Depreciation
c.
Total equity
d.
Inventory
3. How do we calculate a company’s operating cash flow?
a.
EBIT – taxes + depreciation
b.
EBIT – taxes – depreciation
c.
EBIT + taxes + depreciation
d.
EBIT – Sales
4. Holding all other things constant, which of the following represents a cash outflow?
a.
The company sells a machine.
b.
The company acquires inventory.
c.
The company receives a bank loan.
d.
The company increases accounts payable.
5. Which of the following is a liquidity ratio?
a.
Quick ratio
b.
P/E- ratio
c.
Inventory turnover
d.
Equity multiplier
NARRBEGIN: Bavarian Sausage, Inc.
Bavarian Sausage, Inc.
Bavarian Sausage, Inc. posted the following balance sheet and income statement.
Balance Sheet
Cash
$ 50,000
Accounts Payable
$185,000
Accounts Receivable
125,000
Notes Payable
125,000
Inventories
225,000
Long-term debt
115,000
Net Plant and
Equipment
525,000
Common Stock
350,000
Retained earnings
150,000
Total Assets
$925,000
Total liabilities and
Stockholders’ Equity
$925,000
Income Statement
Sales
$525,000
Cost of goods sold
215,000
Depreciation
65,000
Earnings before
interest and taxes
245,000
Interest expense
35,000
Net profit before
taxes
210,000
Taxes (@ 40%)
84,000
Net income
$126,000
NARREND
6. What is Bavarian Sausage, Inc.’s operating cash flow?
a.
$394,000
b.
$191,000
c.
$212,000
d.
$359,000
7. What is Bavarian Sausage, Inc.’s quick ratio?
a.
0.5645
b.
1.2903
c.
1.9565
d.
0.8871
8. What is Bavarian Sausage, Inc.’s average collection period?
a.
14.39 days
b.
4.20 days
c.
122.56 days
d.
86.90 days
9. Bavarian Sausage, Inc. has 100,000 shares of common stock outstanding, but no preferred stock. The
current price of Bavarian’s common stock is $15. What is the company’s P/E-ratio?
a.
119.00
b.
1.26
c.
11.90
d.
12.60
10. What is Bavarian Sausage, Inc.’s net profit margin?
a.
40%
b.
47%
c.
15%
d.
24%
11. What is Bavarian Sausage, Inc.’s debt-equity ratio?
a.
0.23
b.
0.52
c.
1.25
d.
0.85
12. Calculate Bavarian Sausage, Inc.’s return on assets.
a.
25.20%
b.
16.35%
c.
13.62%
d.
8.47%
13. If Bavarian Sausage, Inc. has 100,000 shares outstanding, what is the book value per share?
a.
$5.00
b.
$9.25
c.
$3.50
d.
$1.50
14. Calculate Bavarian Sausage, Inc.’s inventory turnover.
a.
1.05
b.
0.96
c.
0.76
d.
1.51
15. Calculate Bavarian Sausage, Inc.’s return on equity.
a.
24.00%
b.
13.62%
c.
15.74%
d.
25.20%
16. What is Bavarian Sausage, Inc.’s times interest earned ratio?
a.
3.60
b.
7.00
c.
15.00
d.
6.00
17. If a company’s net profit margin is 5% and its total asset turnover is 3.5, what is its ROA?
a.
17.50%
b.
1.43%
c.
70.00%
d.
12.53%
18. You have the following information about a firm: total asset = $350,000; common stock equity =
$175,000; ROE = 12.5%. What is the firm’s earnings available for common stockholders?
a.
$43,750
b.
$21,875
c.
$50,000
d.
$47,632
NARRBEGIN: Tax table
Tax Table
Taxable income over
Not over
Tax Rate
$ 0
$ 50,000
15%
50,000
75,000
25%
75,000
100,000
34%
100,000
335,000
39%
335,000
10,000,000
34%
10,000,000
15,000,000
35%
15,000,000
18,333,333
38%
18,333,333
……………
35%
NARREND
19. Refer to Tax Table. First Watch, Inc. has a pretax income of $3,755,250. What is the company’s
average tax rate?
a.
25%
b.
15%
c.
39%
d.
34%
20. Refer to Tax Table. First Watch, Inc. has a pretax income of $3,755,250. What is the company’s tax
liability?
a.
$1,276,785
b.
$1,390,571
c.
$1,464,548
d.
$563,288
21. Refer to Tax Table. Bavarian Sausage, Inc. has a pretax income of $325,000. What is the company’s
tax liability?
a.
$126,750
b.
$110,000
c.
$81,250
d.
$325,000
22. Refer to Tax Table. Bavarian Sausage, Inc. has a pretax income of $325,000. What is the company’s
marginal tax rate?
a.
34%
b.
39%
c.
35%
d.
25%
23. Refer to Tax Table. Bavarian Sausage, Inc. has a pretax income of $325,000. What is the company’s
average tax rate?
a.
39.00%
b.
29.55%
c.
26.75%
d.
33.85%
24. A company has an average collection period of 52 days and accounts receivables of $250,000. What
are the company’s annual sales?
a.
$2,234,756
b.
$1,754,808
c.
$1,543,823
d.
$250,000
25. Your company has an average collection period of 40 days and accounts receivables of $315,000.
What are the company’s annual sales?
a.
$12,600,000
b.
$1,754,808
c.
$2,874,375
d.
$315,000
26. A company has a total asset turnover of 2 and sales of $500,000. What is the company’s total assets?
a.
$1,000,000
b.
$250,000
c.
$750,000
d.
$500,000
27. You have the following information about a company: quick ratio = 0.85, inventory = $125,000 and
current assets = $375,000. What is the company’s current ratio?
a.
0.85
b.
1.05
c.
2.56
d.
1.28
28. You have the following information about a company: quick ratio = 0.9, inventory = $50,000 and
current assets = $200,000. What is the company’s current ratio?
a.
3.60
b.
1.80
c.
1.20
d.
1.28
29. A company has sales of $1,250,000, cost of goods sold of $750,000, depreciation expenses of
$250,000 and interest expenses of $55,000. If the company’s tax rate is 34% and the income statement
is complete, what is this firm’s operating cash flow?
a.
$183,700
b.
$433,700
c.
$165,000
d.
$415,000
30. A company has sales of $1,000,000, cost of goods sold of $700,000, depreciation expenses of
$250,000 and interest expenses of $55,000. If the company’s tax rate is 34% and the income statement
is complete, what is this firm’s operating cash flow?
a.
$300,000
b.
$246,700
c.
$283,000
d.
$33,000
31. A company has sales of $250,000, cost of goods sold of $50,000, depreciation expenses of $250,000.
If the company’s tax rate is 34% and the income statement is complete, what is this firm’s operating
cash flow?
a.
-$132,000
b.
$118,000
c.
$217,000
d.
$283,000
32. In a given year a company decreased its inventory by $250,000, increased its accounts receivable by
$50,000 and increased its accounts payable by $100,000. What is the net change of the company’s
cash?
a.
$400,000
b.
$300,000
c.
$200,000
d.
$100,000
33. In a given year a company decreased its inventory by $250,000, purchased $350,000 worth of fixed
assets and took on a new $500,000 loan. What is the net change of the company’s cash as a result of
these transactions?
a.
$100,000
b.
-$100,000
c.
$400,000
d.
-$400,000
34. Given the following information, calculate the company’s Current Assets.
Current assets:
???
Current liabilities:
$ 50,000
Net fixed assets:
$100,000
Long term Debt
$100,000
Total equity:
$180,000
a.
$330,000
b.
$230,000
c.
$150,000
d.
$50,000
35. Given the following information, calculate the company’s long-term debt.
Current assets:
$125,000
Current liabilities:
$ 85,000
Net fixed assets:
$250,000
Total equity:
$200,000
a.
$375,000
b.
$50,000
c.
$285,000
d.
$90,000
36. Financial professionals prefer to focus on an accounting approach that focuses on
a.
governmental accounting methods.
b.
current and prospective cash flows.
c.
economically based accruals.
d.
international accrual accounting standards.
37. Generally accepted accounting principles are developed by
a.
the Securities and Exchange Commission.
b.
the Financial Accounting Standards Board.
c.
Congress.
d.
the New York Stock Exchange.
38. Which of the following statements is not required by the SEC for publicly traded firms?
a.
the statement of cost of goods sold
b.
the statement of retained earnings
c.
the statement of cash flows
d.
the balance sheet
39. The balance sheet entry that represents the cumulative total of the earnings that a firm has reinvested
since its inception is
a.
common stock.
b.
paid-in-capital.
c.
par value.
d.
retained earnings.
40. Company X had sales of $120 with a cost of goods sold equal to 25% of sales. In addition, X had total
other operating expenses of $50 with an interest expense of $20. If X pays a flat 40% of its pre-tax
income in income taxes, what is X’s net income?
a.
$20
b.
$27
c.
$12
d.
none of the above
41. If you are looking to review a firm’s sources and uses of cash flows over the year, the easiest place to
find that information is
a.
the Income Statement
b.
the Statement of Retained Earnings
c.
the Statement of Cash Flows
d.
the Balance Sheet
42. In order to identify the amount of funds that a firm borrowed during the preceding year, what section is
the best source within the Statement of Cash Flows?
a.
operating flows
b.
investment flows
c.
financing flows
d.
total net cash flows
43. If you start with earnings before interest and taxes and then subtract a firm’s tax expense while adding
back the amount of depreciation expense for the firm during the year, the resulting figure is called
a.
free cash flow
b.
operating cash flow
c.
net cash flow
d.
gross cash flow
44. Emma Corp. had earnings before interest and taxes of $500,000 and had a depreciation expense of
$200,000 this last year. If the firm was subject to an average tax rate of 30%, what was Emma’s
operating cash flow for the year? If you need to, assume that Emma’s interest expense was zero for the
year.
a.
$175,000
b.
$82,500
c.
$25,000
d.
It lost money
45. Edison Bagels had operating cash flow equal to $850 for 2012. If its earnings before interest and taxes
was $1,000 while its tax bill was $300, what was Edison’s depreciation expense for the year?
a.
$150
b.
$550
c.
$1,550
d.
not enough information to calculate
46. When calculating a firm’s free cash flow from earnings before interest and taxes we must add back
depreciation, amortization and depletion expense and allowances because
a.
they are non-cash expenditures.
b.
the accounting method for reporting such expenses may be different from that reported to
the taxing authority.
c.
they approximate the value of fixed asset purchases during the year.
d.
they are unrelated to the amount of taxes paid during the year.
47. When calculating the dollar amount of fixed assets purchased during the year what information is
required? Assume that no fixed assets were disposed of during the year.
a.
the current and prior year’s gross fixed assets
b.
the current and prior year’s net fixed assets
c.
the current and prior year’s net fixed assets plus the firm’s depreciation expense for the
year.
d.
either a or c will suffice
NARRBEGIN: Cold Weather Sports
Cold Weather Sports, Inc. (CWS)
Cold Weather Sports, Inc. (CWS) just completed its 2012 fiscal year. During the year, CWS had sales
of $10,000 and total expenses (no interest expenses were incurred) of $6,000. Assume that CWS pays
30% of its EBIT in taxes and that depreciation expense of $1,200 is included in the total expense
number listed above. A list of some balance sheet items for CWS for end of fiscal year 2011 and 2012
is as below.
2011
Current Assets
$1,000
Net Long-Term Assets
5,000
Accounts Payable
600
Accrued Expenses
500
Short-Term Debt
2,000
Long-Term Debt
3,000
2012
Current Assets
$1,200
Net Long-Term Assets
5,600
Accounts Payable
800
Accrued Expenses
600
Short-Term Debt
2,100
Long-Term Debt
3,200
No fixed assets were disposed of during the year.
NARREND
48. What is Cold Weather Sports’ operating cash flow for 2012?
a.
$2,400
b.
$2,800
c.
$4,000
d.
none of the above
49. What was the dollar amount of fixed assets purchased during the year for Cold Weather Sports?
a.
$600
b.
$1,200
c.
$1,800
d.
none of the above
50. What is the amount of free cash flow generated by Cold Weather Sports in 2012?
a.
$100
b.
$2,100
c.
$2,300
d.
none of the above
51. The effect of an increase in a firm’s accounts payable during the year, assuming that the current asset
portion of the balance sheet remains the same, is
a.
an outflow of cash.
b.
an inflow of cash.
c.
neither an inflow nor an outflow of cash.
d.
a decrease in the equity of the firm.
52. Roxy Corp. has total current liabilities of $22,000 and an inventory of $7,000. If its current ratio is 1.2,
then what is Rocy’s quick ratio?
a.
.88
b.
.75
c.
.64
d.
.36
53. Granny’s Jug Herbal Shop has total current liabilities of $2,000 and an inventory of $1,000. If its
current ratio is 2.5, then what is its quick ratio?
a.
2.0
b.
2.5
c.
3.0
d.
3.5
54. BadBanna Co. has an average age of inventory equal to 25 days. If its end of year inventory level is
$8,500, then what does that imply for the cost of goods sold during the year? (round to the nearest
dollar)
a.
$582
b.
$4964
c.
$21,250
d.
$124,100
55. Wunder Boy Bat Co. has an average age of inventory equal to 121.67 days. If its end of year inventory
level is $4,000, then what does that imply for the cost of goods sold during the year? (round to the
nearest dollar)
a.
$1,333
b.
$3,000
c.
$12,000
d.
$16,000