CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
1. The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash
flows, and statement of stockholders’ equity.
a.
True
b.
False
True
Difficulty: Easy
INTE.GENE.16.36 – LO: 6-1
United States – BUSPROG: Reflective Thinking
forecasting, and cash flows
United States – OH – Default City – TBA
Annual report
2. The primary reason the annual report is important in finance is that it is used by investors when they form expectations
about the firm’s future earnings and dividends, and the riskiness of those cash flows.
a.
True
b.
False
True
Difficulty: Easy
INTE.GENE.16.36 – LO: 6-1
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Annual report and expectations
3. Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings,
the company would be able to pay cash to buy an asset with a cost of $200,000.
Cash
Accounts payable
Inventory
Accruals
Accounts receivable
Total CL
Total CA
Debt
Net fixed assets
Common stock
Retained earnings
Total assets
Total L & E
a.
True
b.
False
False
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
4. On the balance sheet, total assets must always equal total liabilities and equity.
a.
True
b.
False
True
5. Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be
higher or lower than the values at which these assets are carried on the books.
a.
True
b.
False
True
6. The income statement shows the difference between a firm’s income and its costs⎯i.e., its profits⎯during a specified
period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly
reflect cash outlays. Therefore, there may be a substantial difference between a firm’s reported profits and its actual cash
flow for the same period.
a.
True
b.
False
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
7. Net operating working capital is equal to operating current assets minus operating current liabilities.
a.
True
b.
False
True
8. Total net operating capital is equal to net fixed assets.
a.
True
b.
False
False
9. Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if
it had no interest income or interest expense.
a.
True
b.
False
True
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
10. The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages
firms to use more debt financing than they would in the absence of this tax law provision.
a.
True
b.
False
False
11. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-
deductible expense, this would probably encourage companies to use more debt financing than they presently do, other
things held constant.
a.
True
b.
False
False
12. The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they
decrease the firm’s tax liability.
a.
True
b.
False
False
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
13. The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time,
while the income statement measures the firm’s financial position at a point in time.
a.
True
b.
False
False
14. Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid
out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts,
when added together, will always be equal to the firm’s total retained earnings.
a.
True
b.
False
False
15. The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders’
claims against the firm’s existing assets. This implies that retained earnings are in fact stockholders’ reinvested earnings.
a.
True
b.
False
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
16. In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting
principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm.
However, a secondary financial consideration is cash flow, because cash is needed to operate the business.
a.
True
b.
False
False
Difficulty: Moderate
INTE.GENE.16.42 – LO: 6-6
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Cash flow and net income
17. To estimate the cash flow from operations, depreciation must be added back to net income because it is a non–cash
charge that has been deducted from revenue.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Statement of cash flows
18. The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm
depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future
flows with which investors are concerned.
a.
True
b.
False
False
INTE.GENE.16.41 – LO: 6-4
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Retained earnings
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
19. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This
treatment, other things held constant, tends to encourage the use of debt financing by corporations.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Federal income taxes: interest expense and dividends
20. The time dimension is important in financial statement analysis. The balance sheet shows the firm’s financial position
at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects
changes in the firm’s accounts over that period of time.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
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United States – OH – Default City – TBA
Financial stmts: time dimension
21. Which of the following statements is CORRECT?
a.
The statement of cash needs tells us how much cash the firm will require during some future period, generally
a month or a year.
b.
The four most important financial statements provided in the annual report are the balance sheet, income
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Future cash flows
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
statement, cash budget, and the statement of stockholders’ equity.
c.
The balance sheet gives us a picture of the firm’s financial position at a point in time.
d.
The income statement gives us a picture of the firm’s financial position at a point in time.
e.
The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
Difficulty: Easy
INTE.GENE.16.36 – LO: 6-1
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Financial statements
TYPE: Multiple Choice: Conceptual
22. Which of the following statements is CORRECT?
a.
A typical industrial company’s balance sheet lists the firm’s assets that will be converted to cash first, and then
goes on down to list the firm’s longest lived assets last.
b.
The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
c.
The balance sheet for a given year tells us how much money the company earned during that year.
d.
The difference between the total assets reported on the balance sheet and the debts reported on this statement
tells us the current market value of the stockholders’ equity, assuming the statements are prepared in
accordance with generally accepted accounting principles (GAAP).
e.
For most companies, the market value of the stock equals the book value of the stock as reported on the
balance sheet.
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Balance sheet
TYPE: Multiple Choice: Conceptual
23. Other things held constant, which of the following actions would increase the amount of cash on a company’s balance
sheet?
a.
The company purchases a new piece of equipment.
b.
The company repurchases common stock.
c.
The company pays a dividend.
d.
The company issues new common stock.
e.
The company gives customers more time to pay their bills.
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Balance sheet
TYPE: Multiple Choice: Conceptual
24. Which of the following items is NOT included in current assets?
a.
Short-term, highly liquid, marketable securities.
b.
Accounts receivable.
c.
Inventory.
d.
Bonds.
e.
Cash.
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Current assets
TYPE: Multiple Choice: Conceptual
25. Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
a.
Accrued payroll taxes.
b.
Accounts payable.
c.
Short-term notes payable to the bank.
d.
Accrued wages.
e.
Cost of goods sold.
e
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
26. Which of the following statements is CORRECT?
a.
The income statement for a given year is designed to give us an idea of how much the firm earned during that
year.
b.
The focal point of the income statement is the cash account, because that account cannot be manipulated by
“accounting tricks.”
c.
The reported income of two otherwise identical firms cannot be manipulated by different accounting
procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
d.
The reported income of two otherwise identical firms must be identical if the firms are publicly owned,
provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).
e.
If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be
identical to its reported net cash flow.
a
Difficulty: Easy
INTE.GENE.16.38 – LO: 6-3
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
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Income statement
TYPE: Multiple Choice: Conceptual
27. Below are the year-end balance sheets for Wolken Enterprises:
Assets:
Cash
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets
Liabilities and equity:
Accounts payable
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total common equity
Total liabilities and equity
Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt
in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company’s sales in
Current liabilities
TYPE: Multiple Choice: Conceptual
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
2014 and 2015 were the same. Which of the following statements must be CORRECT?
a.
Wolken increased its short-term bank debt in 2015.
b.
Wolken issued long-term debt in 2015.
c.
Wolken issued new common stock in 2015.
d.
Wolken repurchased some common stock in 2015.
e.
Wolken had negative net income in 2015.
Difficulty: Moderate
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Balance sheet
TYPE: Multiple Choice: Conceptual
28. On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount
was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following
statements is CORRECT?
a.
Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.
b.
If the company lost money in 2015, they must have paid dividends.
c.
The company must have had zero net income in 2015.
d.
The company must have paid out half of its earnings as dividends.
e.
The company must have paid no dividends in 2015.
Difficulty: Moderate
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Balance sheet
TYPE: Multiple Choice: Conceptual
29. Below is the common equity section (in millions) of Fethe Industries’ last two year-end balance sheets:
2014
Common stock
$1,000
Retained earnings
2,340
Total common equity
$3,340
The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
a.
The company’s net income in 2014 was higher than in 2015.
b.
The company issued common stock in 2015.
c.
The market price of the company’s stock doubled in 2015.
d.
The company had positive net income in both 2014 and 2015, but the company’s net income in 2014 was
lower than it was in 2015.
e.
The company has more equity than debt on its balance sheet.
Difficulty: Moderate
INTE.GENE.16.37 – LO: 6-2
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
Balance sheet
TYPE: Multiple Choice: Conceptual
30. Which of the following statements is CORRECT?
a.
The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
b.
Typically, a firm’s DPS should exceed its EPS.
c.
Typically, a firm’s EBIT should exceed its EBITDA.
d.
If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed
its book value per share.
e.
If a firm is more profitable than most other firms, we would normally expect to see its book value per share
exceed its stock price, especially after several years of high inflation.
Difficulty: Moderate
INTE.GENE.16.38 – LO: 6-3
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
31. 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
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
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
INTE.GENE.16.42 – LO: 6-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Depreciation, amortization, and net cash flow
TYPE: Multiple Choice: Conceptual
32. 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
INTE.GENE.16.42 – LO: 6-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
33. 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.
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
34. 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.
c
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
35. 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.
Difficulty: Moderate
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United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
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TYPE: Multiple Choice: Conceptual
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
Difficulty: Moderate
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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
36. 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
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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
37. 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
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
38. 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.
Difficulty: Moderate
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United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
Statement of cash flows
TYPE: Multiple Choice: Conceptual
39. 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.
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
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Statement of cash flows
TYPE: Multiple Choice: Conceptual
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
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
Modifying acct data for managerial purposes
TYPE: Multiple Choice: Conceptual
40. 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).
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
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
Depreciation, amortization, and free cash flow
TYPE: Multiple Choice: Conceptual
41. 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.
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
Difficulty: Moderate
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forecasting, and cash flows
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MVA and EVA
TYPE: Multiple Choice: Conceptual
42. 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.
Difficulty: Moderate
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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
Federal income tax system
TYPE: Multiple Choice: Conceptual
43. 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
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
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
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.
Difficulty: Moderate
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Federal income tax system
TYPE: Multiple Choice: Conceptual
44. 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.
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
NCF, FCF, and cash
TYPE: Multiple Choice: Conceptual
45. 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.
a
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
46. 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.
Difficulty: Moderate
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
47. 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
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual