Principles of Managerial Finance, 15e (Zutter)
Chapter 4 Long- and Short-Term Financial Planning
4.1 The financial planning process
1) Strategic financial plans are planned long-term financial actions and the anticipated financial impact of
those actions.
2) A financial planning process begins with short-term, or operating, plans and budgets that in turn guide
the formulation of long-term, or strategic, financial plans.
3) The key input to the short-term financial planning process is ________.
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
4) Operating financial plans are planned short-term financial actions and the anticipated financial impact
of those actions.
5) The sales forecast and various forms of operating and financial data are the key outputs of the short–
run (operating) financial planning.
6) The financial planning process begins with ________ financial plans that in turn guide the formation of
________ plans and budgets.
A) short-term; long-term
B) short-term; short-term
C) long-term; long-term
D) long-term; short-term
7) Short-term financial plans and long-term financial plans generally cover periods ranging from
________ years and ________ years, respectively.
A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen
8) The key aspects of a financial planning process are ________.
A) cash planning and investment planning
B) operations planning and investment planning
C) investment planning and profit planning
D) cash planning and profit planning
9) Pro forma financial statements are used for ________.
A) cash budgeting
B) preparing financial statements
C) profit planning
D) auditing
10) The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) to reduce risk
D) for profit planning
11) ________ consider proposed fixed-asset outlays, research and development activities, marketing and
product development actions, capital structure, and major sources of financing.
A) Short-term financial plans
B) Long-term financial plans
C) Pro forma statements
D) Cash budgeting
12) ________ generally reflect(s) the anticipated financial impact of planned long-term actions.
A) A cash budget
B) Strategic financial plans
C) Operating financial plans
D) A pro forma income statement
13) The key outputs of the short-term financial planning process are the ________.
A) cash budget, pro forma income statement, and pro forma balance sheet
B) sales forecast and capital assets journal
C) sales forecast and schedule of changes in working capital
D) income statement, balance sheet, and source and use statement
14) Key inputs to short-term financial planning are ________.
A) cash flow statements and income statement
B) pro forma financial statements
C) sales forecasts, and operating and financial data
D) leverage analysis and pro forma income statement
15) Once sales are forecasted, ________ must be generated to estimate required raw materials.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement
4.2 Measuring the firm’s cash flow
1) In the statement of cash flows, the cash flows from financing activities result from debt and equity
financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock,
and cash outflows to repurchase stock or pay cash dividends.
2) Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its
income statement.
3) Suppose that under the Tax Cuts and Jobs Act a firm that invests in equipment can immediately deduct
the full cost of that equipment or it can depreciate the equipment under the MACRS system. For tax
purposes the firm should ________.
A) use the MACRS system because doing so better matches the firms costs to its revenues
B) use the MACRS system because the firm will report higher profits in the year the equipment is
purchased than it would report if it fully expensed the cost of the asset
C) deduct the full cost of the asset immediately because doing so reduces taxes and increases cash flow
D) deduct the full cost of the asset immediately because profits in years after the equipment is purchased
will be higher
4) Prior to passage of the Tax Cuts and Jobs Act, most large corporations faced a 35% marginal tax rate.
Under the new tax law, the marginal tax rate is 21%. In terms of the effect of this tax change on a firm’s
decision to purchase assets that it will use for several years ________.
A) the tax change is beneficial because it lowers the after-tax cost of these assets
B) the tax change increases the tax benefits that the firm obtains when it acquires long-lived assets,
whether it immediately deducts the full cost of those assets or depreciates the cost over time
C) the tax law reduces the tax benefits that a firm obtains when it acquires long–lived assets, whether it
immediately deducts the full cost of those assets or depreciates the cost over time
D) the tax change has no effect because depreciation does not affect a firm’s cash flow
5) If the Tax Cuts and Jobs Act requires a firm to fully deduct the cost of new equipment when it is
purchased rather than depreciating that cost over several years, the investment becomes less attractive
financially.
6) When a firm acquires a long-lived asset such as equipment, if the tax law allows it managers would
generally prefer to ________.
A) depreciate the equipment over a long life
B) depreciate the equipment over a short life
C) immediately take a deduction for the full cost of the asset when it is purchased
D) take no deduction at all for the cost of the equipment
7) The Tax Cuts and Jobs Act allows firms to immediately deduct the full cost of many assets rather than
depreciating that cost over several years using the MACRS rules. Suppose a firm buys a new assets and
immediately deducts its full cost. The firm will have ________.
A) lower profits and higher cash flows than it would have had under the MACRS system
B) lower profits and lower cash flows than it would have had under the MACRS system
C) higher profits and higher cash flows than it would have had under the MACRS system
D) higher profits and lower cash flows than it would have had under the MACRS system
8) Non-cash charges are expenses that involve an actual outlay of cash during the period but are not
deducted on the income statement.
9) Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays
for installation.
10) Business firms are permitted to systematically charge a portion of the market value of fixed assets as
depreciation against annual revenues.
11) Given a financial manager’s preference for faster receipt of cash flows, a longer depreciable life is
preferred to a shorter one.
12) For tax purposes, using MACRS recovery periods, assets in the first four property classes are
depreciated by the double-declining balance method using the half-year convention and switching to
straight line when advantageous.
13) The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be
acquired in the middle of the year and only one-half of the first year’s depreciation is recovered in the
first year.
14) Allocation of the historic costs of fixed assets against the annual revenue they generate is called
________.
A) arbitraging
B) securitization
C) depreciation
D) amortization
15) The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for
________ purposes.
A) tax
B) financial reporting
C) budget
D) cost accounting
16) A corporation ________.
A) must use the straight-line depreciation method for tax purposes and double declining depreciation
method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial
reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods
for financial reporting purposes
17) The depreciable value of an asset, under MACRS, is the ________.
A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value
MACRS RATE
Recovery year
3 years
5 years
7 years
10 years
1
33%
20%
14%
10%
2
45
32
25
18
3
15
19
18
14
4
7
12
12
12
5
12
9
9
6
5
9
8
7
9
7
8
4
6
9
6
10
6
11
4
18) Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal
recovery period. What is the depreciation expense in year 3?
A) $1,900
B) $1,200
C) $1,500
D) $2,100
19) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal
recovery period. The depreciation expense in year 5 is ________.
A) $10,000
B) $12,000
C) $21,000
D) $9,000
20) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal
recovery period. The depreciation expense in year 11 is ________.
A) $3,000
B) $4,000
C) $0
D) $6,000
21) Given a financial manager’s preference for faster receipt of cash flows, ________.
A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a noncash expense
D) the manager is not concerned with depreciable life, because once purchased, depreciation is
considered a sunk cost
22) In general, ________.
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old
assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since
the old assets still have a useful life
23) The depreciable value of an asset, under MACRS, is ________.
A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value
MACRS RATE
Recovery year
3 years
5 years
7 years
10 years
1
33%
20%
14%
10%
2
45
32
25
18
3
15
19
18
14
4
7
12
12
12
5
12
9
9
6
5
9
8
7
9
7
8
4
6
9
6
10
6
11
4
24) Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has
an estimated salvage value of $25,000, is being depreciated using a 5–year normal recovery period. What
is the depreciation expense in year 1?
A) $15,000
B) $12,750
C) $11,250
D) $22,000
25) Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation
cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year
normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.
26) Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT
minus taxes plus depreciation.
27) A firm’s operating cash flow (OCF) is the cash flow it generates from its normal operations: producing
and selling its output of goods or services.
28) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.
29) The net current asset investment (NCAI) is defined as the change in current assets minus the change
in sum of the accounts payable and accruals.
30) A firm’s free cash flow (FCF) represents the amount of cash flow available to investors (stockholders
and bondholders) after the firm has met all operating needs and after having paid for net fixed asset
investments and net current asset investments.
31) A firm’s free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and
investing cash flows.
32) Operating cash flow (OCF) is equal to a firm’s net operating profits after taxes minus all non-cash
charges.
33) In the statement of cash flows, cash flows from operating activities are cash flows directly related to
purchase and sale of fixed assets.
34) Depreciation is considered to be an outflow of cash.
35) The statement of cash flows allows the financial manager and other interested parties to analyze a
firm’s past and possibly future profitability.
36) To assess whether any developments have occurred that are contrary to a company’s financial
policies, the financial manager should pay special attention to both the major categories of cash flow and
the individual items of cash inflow and outflow.
37) It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus
depreciation.
38) Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after
taxes.
39) Net operating profit after taxes (NOPAT) represents a firm’s earnings before interest and after taxes.
40) Net operating profit after taxes (NOPAT) represents a firm’s earnings after deducting both interest
and taxes.
41) A firm’s operating cash flow (OCF) is defined as ________.
A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation
42) Which of the following is an example of noncash charges?
A) depreciation
B) accruals
C) interest expense
D) dividends paid
43) Which of the following is a source of cash flows?
A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock
44) ________ is a noncash charge.
A) Labor expense
B) Depreciation
C) Salaries
D) Rent
45) In the statement of cash flows, retained earnings are handled through the adjustment of ________.
A) “Revenue” and “Cost” accounts
B) “Current Assets” and “Current Liabilities” accounts
C) “Depreciation” and “Purchases” accounts
D) “Net Profits After Taxes” and “Dividends Paid” accounts
46) The cash flows from operating activities section of the statement of cash flows includes ________.
A) principal received
B) cost of raw materials
C) dividends paid
D) stock repurchases
47) The cash flows from operating activities section of the statement of cash flows includes ________.
A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid
48) The cash flows from financing activities section of the statement of cash flows includes ________.
A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid
49) The three categories of a firm’s statement of cash flows are ________.
A) cash flow from operating activities, cash flow from investment activities, and cash flow from
noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow from
financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from
financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow from
financing activities
50) Which of the following is a cash inflow?
A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities
51) Which of the following is a cash outflow?
A) an increase in accounts payable
B) a decrease in notes receivable
C) an increase in accounts receivable
D) an increase in accrued liabilities
52) Which of the following line items of the statement of cash flows must be obtained from the income
statement?
A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks
53) Cash flows directly related to production and sale of a firm’s products and services are called
________.
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities
54) Cash flows associated with the purchase and sale of fixed assets and business interests are called cash
flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) equity activities
55) Cash flows that result from debt and equity financing transactions, including incurrence and
repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or
repurchase stock are called cash flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities