Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2018 and 2019
56) The largest single source of funds for the firm in 2019 is ________. (See Table 4.1)
A) an increase in net profits after taxes
B) an increase in notes payable
C) an increase in long-term debt
D) an increase in inventory
57) Common stock dividends paid in 2019 amounted to ________. (See Table 4.1)
A) $100
B) $50
C) $600
D) $150
58) The firm may have increased long-term debts to finance ________. (See Table 4.1)
A) an increase in net fixed assets
B) an increase in current assets
C) accounts receivable payments
D) an increase in dividends
59) The firm ________ fixed assets worth ________. (See Table 4.1)
A) purchased; $0
B) purchased; $200
C) sold; $0
D) sold; $200
60) The firm’s cash flow from operating activities is ________. (See Table 4.1)
A) $50
B) $350
C) $150
D) $200
61) The depreciation expense for 2019 is ________. (See Table 4.1)
A) $0
B) $200
C) $50
D) $1,000
62) A corporation sold a fixed asset for $100,000. This is ________.
A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds
63) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is
considered as ________.
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively
64) Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
65) Which of the following represents a cash flow from operating activities?
A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock
66) For the year ended December 31, 2019, a corporation had cash flow from operating activities of –
$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000.
The statement of cash flows would show a ________.
A) net decrease of $3,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net increase of $3,000 in cash and marketable securities
D) net increase of $5,000 in cash and marketable securities
67) For the year ended December 31, 2019, a corporation had cash flow from operating activities of
$20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of –
$10,000. The statement of cash flows would show a ________.
A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities
68) For the year ended December 31, 2019, a corporation had cash flow from operating activities of
$12,000, cash flow from investment activities of – $10,000, and cash flow from financing activities of
$4,000. The statement of cash flows would show a ________.
A) net decrease of $18,000 in cash and marketable securities
B) net decrease of $6,000 in cash and marketable securities
C) net increase of $6,000 in cash and marketable securities
D) net increase of $2,000 in cash and marketable securities
69) A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise
purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise
during the year, it has yet to collect at year end from the customer. One possible problem this firm may
face is ________.
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage
70) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit
(EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000
71) Calculate a firm‘s free cash flow if it has net operating profit after taxes of $60,000, depreciation
expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of
$30,000 and a tax rate of 30%.
A) $0
B) $30,000
C) -$30,000
D) $60,000
72) NICO Corporation had net fixed assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of
2018. In addition, the firm had a depreciation expense of $200,000 during 2019 and $180,000 during 2018.
Using this information, NICO’s net fixed asset investment for 2019 was ________.
A) $20,000
B) $0
C) $380,000
D) $400,000
73) NICO Corporation had current assets of $2,000,000 at the end of 2019 and $1,800,000 at the end of
2018. In addition, NICO had accounts payable of $1,000,000 in 2019 and $1,500,000 in 2018. Using this
information, NICO’s net current asset investment for 2019 was ________.
A) $700,000
B) -$300,000
C) $300,000
D) -$700,000
74) During 2019, Xeron Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an
increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a
depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO’s free cash flow is
________.
A) -$630,000
B) -$50,000
C) $650,000
D) -$30,000
75) Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of
cash flows for the NEW for the year ended December 31, 2019.
(a) Operating cash flow
(b) Free cash flow
For the year ended December 31,
76) Identify each expense or revenue as a cash flow from operating activities (O), a cash flow from
investment activities (I), or a cash flow from financing activities (F).
Administrative expenses
Rent payment
Interest on a note payable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long-term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets
77) Calculate the change in the key balance sheet accounts between 2018 and 2019 and classify each as a
source (S), a use (U), or neither (N), and indicate which type of cash flow it is: an operating cash flow (O),
and investment cash flow (I) or a financing cash flow (F).
ABC Corp.
Balance Sheet Changes and Classification
of Key Accounts between 2014 and 2015
30
Table 4.2
Magna Fax, Inc.
Balance Sheet
For the Years Ended December 31, 2018 and 2019
78) The credit manager at First National Bank has just received the income statement and balance sheet
for Magna Fax, Inc. for the year ended December 31,2019. (See Table 4.2.) The bank requires the firm to
report its earnings performance and financial position quarterly as a condition of a loan agreement. The
bank’s credit manager must prepare two key financial statements based on the information sent by
Magna Fax, Inc. This will be passed on to the commercial loan officer assigned to this account, so that he
may review the financial condition of the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2019.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2019.
(c) Prepare a statement of cash flows for the year ended December 31, 2019, organized by cash flow from
operating activities, cash flow from investment activities, and cash flow from financing activities.
32
4.3 Cash planning: cash budgets
1) Generally, firms that have cash flows with highly seasonal cash flows or cash flows that are just
generally harder to forecast prepare cash budgets more frequently compared to firms with cash flows
that are less seasonal and/or more predictable.
2) Which of the following would be the least likely to utilize a cash budget?
A) top management
B) middle management
C) public investors
D) lenders
3) An internal sales forecast is based on the relationships that can be observed between a firm’s sales and
certain key economic indicators such as the gross domestic product, new housing starts, or disposable
personal income.
4) The ________ is a financial projection of a firm’s short-term cash surpluses or shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal
5) The primary purpose in preparing a cash budget is ________.
A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm’s short-term cash requirements
C) for risk analysis
D) to estimate sales
6) The cash budget is a statement of a firm’s planned inflows and outflows of cash that is used to estimate
its long-term cash requirement.
7) Cash budgets and pro forma statements are useful not only for internal financial planning but also are
routinely required by the Internal Revenue Service (IRS).
8) A cash budget gives the financial manager a clear view of the timing of a firm’s expected profitability
over a given period.
9) Since depreciation and other noncash charges represent a scheduled write–off of an earlier cash
outflow, they should not be included in the cash budget, though depreciation charges will affect the taxes
that a firm pays.
10) In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.
11) In cash budgeting, other cash receipts are cash receipts expected to result from sources other than
sales.
12) A firm’s net cash flow is the mathematical difference between the firm’s beginning cash and its cash
disbursements in each period.
13) The excess cash balance is the amount available for investment by a firm if the desired minimum cash
balance is less than the period’s ending cash.
14) The required total financing figures in the cash budget refer to the monthly changes in borrowing.
15) If the net cash flow is less than the minimum cash balance, financing is required.
16) If the ending cash is greater than the minimum cash balance, excess cash exists.
17) Using simulations, a firm can determine the amount of financing needed to protect it adequately
against a cash shortage.
18) As the typical cash budget shows cash flows only on a monthly basis, the information provided by the
cash budget is not necessarily adequate for ensuring solvency.
19) As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash
budget is adequate for ensuring solvency.
20) An external sales forecast is based on ________.
A) the relationships between a firm’s sales and certain key economic indicators such as GDP and
consumer confidence
B) a buildup, or consensus of sales forecasts through a firm’s own sales channels
C) the prediction of a firm’s sales over a given period through the analysis of the sales trends of its
competitors
D) developing the pro forma income statement to forecast sales and then express the various income
statement items as percentage of projected sales
21) An internal forecast is based on ________.
A) a buildup, or consensus, of sales forecasts through a firm’s own sales channels, adjusted for additional
factors such as production capabilities
B) the relationships between a firm‘s sales and certain economic indicators
C) the prediction of a firm’s sales over a given period through surveys sent to financial analysts
D) developing the pro forma income statement to forecast sales and then express the various income
statement items as percentage of projected sales
22) A firm’s final sales forecast is usually a function of ________.
A) its net income
B) the salesperson’s estimates of demand
C) internal and external factors in combination
D) its accounts receivable
23) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes
20 percent of sales for cash and collects the balance one month following the sale. The firm’s total cash
receipts in July is ________.
A) $220
B) $200
C) $180
D) $140
24) In preparing a cash budget, the ________ seasonal and uncertain a firm’s cash flows, the ________ the
number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer
25) The key input to any cash budget is ________.
A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws
26) Cash disbursements include ________.
A) amortization expense
B) rent payments
C) depreciation expense
D) depletion
27) A projected excess cash balance for the month may be ________.
A) financed with short-term securities
B) financed with long-term securities
C) invested in marketable securities
D) invested in long-term securities
28) If a firm expects short-term cash surpluses, it can plan ________.
A) long-term investments
B) short-term borrowing
C) short-term investments
D) leverage decisions
29) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000
and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one
month following the sale, and collects the balance two months following the sale. The firm’s total cash
receipts in January is ________.
A) $400
B) $2,100
C) $2,000
D) $3,300
30) In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of
$40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is
$25,000. At the end of May, the firm had ________.
A) an excess cash balance of $25,000
B) an excess cash balance of $0
C) required financing of $10,000
D) required financing of $25,000
31) In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow
of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm
had ________.
A) an excess cash balance of $50,000
B) an excess cash balance of $75,000
C) required total financing of $15,000
D) required total financing of $5,000
32) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000,
depreciation expense of $1,000, and a beginning cash balance of $500. The ending cash balance for August
totals ________.
A) $1,500
B) $5,500
C) $2,500
D) $3,500
33) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000,
depreciation expense of $1,000,and a beginning cash balance of $500. At the end of August, the firm
wants a minimum cash balance of $3,000. At the end of August, the firm ________.
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500