CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
48. 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.
Difficulty: Moderate
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
Changes in depreciation
TYPE: Multiple Choice: Conceptual
49. Which of the following statements is CORRECT?
a.
If a company pays more in dividends than it generates in net income, its retained earnings as reported on the
balance sheet will decline from the previous year’s balance.
b.
Dividends paid reduce the net income that is reported on a company’s income statement.
c.
If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will
cause a decline in its current assets as shown on the balance sheet.
d.
If a company issues new long-term bonds during the current year, this will increase its reported current
liabilities at the end of the year.
e.
Accounts receivable are reported as a current liability on the balance sheet.
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
50. Which of the following statements is CORRECT?
a.
One way to increase EVA is to achieve the same level of operating income but with more investor-supplied
capital.
b.
If a firm reports positive net income, its EVA must also be positive.
c.
One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.
d.
One way to increase EVA is to generate the same level of operating income but with less investor-supplied
capital.
e.
Actions that increase reported net income will always increase net cash flow.
Difficulty: Moderate
INTE.GENE.16.44 – LO: 6-8
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
EVA, CF, and net income
TYPE: Multiple Choice: Conceptual
51. Which of the following statements is CORRECT?
a.
If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance
sheet will be negative.
b.
Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings
will be, other things held constant.
c.
A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make
required payments.
d.
Common equity includes common stock and retained earnings, less accumulated depreciation.
e.
The retained earnings account as shown on the balance sheet shows the amount of cash that is available for
paying dividends.
Difficulty: Moderate
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
forecasting, and cash flows
United States – OH – Default City – TBA
United States – AK – DISC: Financial statements, anal – DISC: Financial statements, analysis,
forecasting, and cash flows
United States – OH – Default City – TBA
Financial statements
TYPE: Multiple Choice: Conceptual
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
52. 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.
Which of the following would occur?
a.
b.
c.
d.
e.
Difficulty: Challenging
INTE.GENE.16.40 – LO: 6-9
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Changes in leverage
TYPE: Multiple Choice: Conceptual
53. Jessie’s Bobcat Rentals’ operations provided a negative net cash flow last year, yet the cash shown on its balance sheet
increased. Which of the following statements could explain the increase in cash, assuming the company’s financial
statements were prepared under generally accepted accounting principles?
a.
The company had high depreciation expenses.
b.
The company repurchased some of its common stock.
c.
The company dramatically increased its capital expenditures.
d.
The company retired a large amount of its long-term debt.
e.
The company sold some of its fixed assets.
Difficulty: Challenging
INTE.GENE.16.43 – LO: 6-5
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TYPE: Multiple Choice: Conceptual
Retained earnings
TYPE: Multiple Choice: Conceptual
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
54. Tucker Electronic System’s current balance sheet shows total common equity of $3,125,000. The company has
125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm’s market and
book values per share differ?
a.
$27.50
b.
$28.88
c.
$30.32
d.
$31.83
e.
$33.43
a
55. Hunter Manufacturing Inc.’s December 31, 2014 balance sheet showed total common equity of $2,050,000 and
100,000 shares of stock outstanding. During 2015, Hunter had $250,000 of net income, and it paid out $100,000 as
dividends. What was the book value per share at 12/31/2015, assuming that Hunter neither issued nor retired any common
stock during 2015?
a.
$20.90
b.
$22.00
c.
$23.10
d.
$24.26
e.
$25.47
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
56. Companies generate income from their “regular” operations and from other sources like interest earned on the
securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of
operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no
non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income
tax rate was 40%. How much was Lindley’s operating income, or EBIT?
a.
$3,462
b.
$3,644
c.
$3,836
d.
$4,038
e.
$4,250
e
Difficulty: Easy
INTE.GENE.16.38 – LO: 6-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Income statement: EBIT
TYPE: Multiple Choice: Problem
57. Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and
$1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds
outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm’s
Difficulty: Easy
INTE.GENE.16.37 – LO: 6-2
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Balance sheet: change in BVPS from RE addition
TYPE: Multiple Choice: Problem
Although the calculations are simple, it will take them some time to set up the problem and
do the arithmetic.
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
taxable income, or earnings before taxes (EBT)?
a.
$3,230.00
b.
$3,400.00
c.
$3,570.00
d.
$3,748.50
e.
$3,935.93
58. JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming
it had no amortization expense and sold none of its fixed assets?
a.
$4,831.31
b.
$5,085.59
c.
$5,353.25
d.
$5,635.00
e.
$5,916.75
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
59. 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.
$1,454
b.
$1,530
c.
$1,607
d.
$1,687
e.
$1,771
do the arithmetic.
60. Over the years, Janjigian Corporation’s stockholders have provided $15,250 of capital, part when they purchased new
issues of stock and part when they allowed management to retain some of the firm’s earnings. The firm now has 1,000
shares of common stock outstanding, and it sells at a price of $42.00 per share. How much value has Janjigian’s
management added to stockholder wealth over the years, i.e., what is Janjigian’s MVA?
a.
$21,788
b.
$22,935
c.
$24,142
d.
$25,413
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
e.
$26,750
e
MVA
do the arithmetic.
61. Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of
depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest
rate, and its federal-plus-state income tax rate was 35%. How much was the firm’s net income after taxes? Meric uses the
same depreciation expense for tax and stockholder reporting purposes.
a.
$3,284.55
b.
$3,457.42
c.
$3,639.39
d.
$3,830.94
e.
$4,022.48
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
62. 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
c
63. Ullrich Printing Inc. paid out $21,750 of common dividends during the year. It ended the year with $187,500 of
retained earnings versus the prior year’s retained earnings of $132,250. How much net income did the firm earn during the
year?
a.
$77,000
b.
$80,850
c.
$84,893
d.
$89,137
do the arithmetic.
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
e.
$93,594
a
do the arithmetic.
64. 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
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
65. Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and
$1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds 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 $750. By how much will net after-tax income change as a result of the
change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
a.
−463.13
b.
−487.50
c.
−511.88
d.
−537.47
e.
−564.34
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
66. 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?
a.
$383
b.
$425
c.
$468
d.
$514
e.
$566
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Free cash flow
TYPE: Multiple Choice: Problem
67. 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.
$54.00
b.
$60.00
c.
$66.00
d.
$72.60
e.
$79.86
TYPE: Multiple Choice: Problem
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
68. 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
e
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Net operating profit after taxes (NOPAT)
TYPE: Multiple Choice: Problem
69. 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
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Net operating working capital
TYPE: Multiple Choice: Problem
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
EBT
$ 80.00
Taxes (40%)
32.00
Net income
$ 48.00
a.
$81.23
b.
$85.50
c.
$90.00
d.
$94.50
e.
$99.23
c
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Net operating profit after taxes (NOPAT)
TYPE: Multiple Choice: Problem
70. 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%
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
TYPE: Multiple Choice: Problem
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
71. 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
Difficulty: Moderate
INTE.GENE.16.39 – LO: 6-7
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Total operating capital
TYPE: Multiple Choice: Problem
72. Barnes’ Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after
taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders’ equity = $1,800; Total debt
= $700; and Total operating capital = $2,100. Barnes’ weighted average cost of capital is 10%. What is its economic value
added (EVA)?
a.
$399.11
b.
$420.11
c.
$442.23
d.
$465.50
e.
$490.00
e
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
73. Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250
of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its
federal-plus-state income tax rate was 35%. How much was its net cash flow?
a.
$3,284.75
b.
$3,457.63
c.
$3,639.61
d.
$3,831.17
e.
$4,032.81
e
Difficulty: Moderate
INTE.GENE.16.42 – LO: 6-6
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Income statement: net cash flow
TYPE: Multiple Choice: Problem
74. 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
Difficulty: Moderate
INTE.GENE.16.44 – LO: 6-8
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Economic Value Added (EVA)
TYPE: Multiple Choice: Problem
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
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
a
75. HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750
of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the
federal-plus-state income tax rate was 40%. What was HHH’s Economic Value Added (EVA), i.e., how much value did
management add to stockholders’ wealth during the year?
a.
$1,357.13
b.
$1,428.56
c.
$1,503.75
d.
$1,578.94
e.
$1,657.88
c
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
76. 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
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
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT
77. 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
c
CHAPTER 6—ACCOUNTING FOR FINANCIAL MANAGEMENT