Chapter 06: Accounting for Financial Management
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LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
TOPICS:
Modifying acct data for managerial purposes
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
1/6/2018 1:30 PM
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).
ANSWER:
c
POINTS:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
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
TOPICS:
Depreciation, amortization, and free cash flow
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
1/6/2018 1:30 PM
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.
Chapter 06: Accounting for Financial Management
POINTS:
1
Difficulty: Easy
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – OH – Default City – TBA
Net operating working capital
TYPE: Multiple Choice: Problem
e.
The company made a large capital investment early in the year.
ANSWER:
d
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
1/6/2018 1:30 PM
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.
b.
c.
d.
e.
ANSWER:
b
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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
ANSWER:
d
POINTS:
1
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
forecasting, and cash flows
LOCAL STANDARDS:
Total operating capital
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
1/6/2018 1:30 PM
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?
do the arithmetic.
10/30/2017 8:05 PM
DATE MODIFIED:
Chapter 06: Accounting for Financial Management
1
DIFFICULTY:
Difficulty: Moderate
a.
$383
b.
$425
c.
$468
d.
$514
e.
$566
ANSWER:
b
POINTS:
1
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
Free cash flow
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
DATE MODIFIED:
1/6/2018 1:30 PM
43. Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?
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.
b.
c.
d.
e.
ANSWER:
b
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Net operating profit after taxes (NOPAT)
OTHER:
TYPE: Multiple Choice: Problem
DATE MODIFIED:
1/6/2018 1:30 PM
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
c.
$410.64
d.
$432.25
e.
$455.00
ANSWER:
e
QUESTION TYPE:
Multiple Choice
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
Net operating working capital
KEYWORDS:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:05 PM
1/6/2018 1:30 PM
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.
b.
c.
d.
e.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Net operating profit after taxes (NOPAT)
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
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%
ANSWER:
d
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
Total operating capital
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
ANSWER:
b
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
HAS VARIABLES:
False
IFMG.DAVE.19.06.07 – LO: 6-7
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
Return on invested capital (ROIC)
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Problem
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
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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
ANSWER:
a
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
OTHER:
10/30/2017 8:05 PM
1/6/2018 1:30 PM
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
OTHER:
10/30/2017 8:05 PM
1/6/2018 1:30 PM
Chapter 06: Accounting for Financial Management
DIFFICULTY:
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.07 – LO: 6-7
forecasting, and cash flows
TOPICS:
Changes in net income and NCF
OTHER:
TYPE: Multiple Choice: Problem
DATE CREATED:
10/30/2017 8:05 PM
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
ANSWER:
e
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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
ANSWER:
c
POINTS:
1
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
DATE CREATED:
10/30/2017 8:05 PM
51. Which of the following statements is CORRECT?
Chapter 06: Accounting for Financial Management
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
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.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Federal income tax system
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
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
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.
ANSWER:
d
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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.
ANSWER:
a
DIFFICULTY:
Difficulty: Moderate
Multiple Choice
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
Changes in depreciation
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
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).
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TOPICS:
Federal income tax system
OTHER:
TYPE: Multiple Choice: Conceptual
10/30/2017 8:05 PM
1/6/2018 1:30 PM
Chapter 06: Accounting for Financial Management
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e.
LeMond’s reported net income after taxes for the year will be lower.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Changes in depreciation
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
55. DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility.
Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is
considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes
law, which of the following would occur in the year following the change?
a.
The firm’s reported net income would increase.
b.
The firm’s operating income (EBIT) would increase.
c.
The firm’s taxable income would increase.
d.
The firm’s net cash flow would increase.
e.
The firm’s tax payments would increase.
ANSWER:
d
POINTS:
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Changes in depreciation
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
56. Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new
common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not
pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant.
Chapter 06: Accounting for Financial Management
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Which of the following would occur?
a.
The company would have to pay less taxes.
b.
The company’s taxable income would fall.
c.
The company’s interest expense would remain constant.
d.
The company would have less common equity than before.
e.
The company’s net income would increase.
ANSWER:
e
POINTS:
1
DIFFICULTY:
Difficulty: Challenging
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.09 – LO: 6-9
NATIONAL STANDARDS:
United States – BUSPROG: Analytic
forecasting, and cash flows
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Changes in leverage
KEYWORDS:
OTHER:
TYPE: Multiple Choice: Conceptual
DATE CREATED:
10/30/2017 8:05 PM
DATE MODIFIED:
1/6/2018 1:30 PM
57. On 12/31/2015, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that
it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/2014, the company had reported
$555,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did Heaton pay during
2015?
a.
$47,381
b.
$49,875
c.
$52,500
d.
$55,125
e.
$57,881
ANSWER:
c
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
Multiple Choice
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.06.04 – LO: 6-4
NATIONAL STANDARDS:
United States – BUSPROG: Analytic