Fundamentals of Corporate Finance, 12e (Ross)
Chapter 2 Financial Statements, Taxes, and Cash Flow
1) Which one of the following is classified as a tangible fixed asset?
A) Accounts receivable
B) Production equipment
C) Cash
D) Patent
E) Inventory
2) Which one of the following is a current asset?
A) Accounts payable
B) Trademark
C) Accounts receivable
D) Notes payable
E) Equipment
3) Which one of the following is included in a firm’s market value but yet is excluded from the
firm’s accounting value?
A) Real estate investment
B) Good reputation of the company
C) Equipment owned by the firm
D) Money due from a customer
E) An item held by the firm for future sale
4) Which one of the following is a current liability?
A) Note payable to a supplier in 13 months
B) Amount due from a customer in two weeks
C) Account payable to a supplier that is due next week
D) Loan payable to the bank in 18 months
E) Amount due from a customer that is past due
5) Which one of the following will decrease the value of a firm’s net working capital?
A) Using cash to pay a supplier
B) Depreciating an asset
C) Collecting an accounts receivable
D) Purchasing inventory on credit
E) Selling inventory at a loss
6) Which one of the following statements concerning net working capital is correct?
A) Net working capital increases when inventory is purchased with cash.
B) Net working capital excludes inventory.
C) Total assets must increase if net working capital increases.
D) Net working capital may be a negative value.
E) Net working capital is the amount of cash a firm currently has available for spending.
7) Which one of the following statements concerning net working capital is correct?
A) A firm’s ability to meet its current obligations increases as the firm’s net working capital
decreases.
B) An increase in net working capital must also increase current assets.
C) Net working capital increases when inventory is sold for cash at a profit.
D) Firms with equal amounts of net working capital are also equally liquid.
E) Net working capital is a part of the operating cash flow.
8) Which one of the following accounts is the most liquid?
A) Inventory
B) Building
C) Accounts Receivable
D) Equipment
E) Land
9) Which one of the following represents the most liquid asset?
A) $100 account receivable that is discounted and collected for $96 today
B) $100 of inventory that is sold today on credit for $103
C) $100 of inventory that is discounted and sold for $97 cash today
D) $100 of inventory that is sold today for $100 cash
E) $100 of accounts receivable that will be collected in full next week
10) Which one of the following statements related to liquidity is correct?
A) Liquid assets tend to earn a high rate of return.
B) Liquid assets are valuable to a firm.
C) Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
D) Inventory is more liquid than accounts receivable because inventory is tangible.
E) Any asset that can be sold is considered liquid.
11) Shareholders’ equity:
A) is referred to as a firm’s financial leverage.
B) is equal to total assets plus total liabilities.
C) decreases whenever new shares of stock are issued.
D) includes patents, preferred stock, and common stock.
E) represents the residual value of a firm.
12) As the degree of financial leverage increases, the:
A) probability a firm will encounter financial distress increases.
B) amount of a firm’s total debt decreases.
C) less debt a firm has per dollar of total assets.
D) number of outstanding shares of stock increases.
E) accounts payable balance decreases.
13) The book value of a firm is:
A) equivalent to the firm’s market value provided that the firm has some fixed assets.
B) based on historical cost.
C) generally greater than the market value when fixed assets are included.
D) more of a financial than an accounting valuation.
E) adjusted to the market value whenever the market value exceeds the stated book value.
14) The value of which one of the following is included in the market value of a firm but is
excluded from the firm’s book value?
A) Office equipment
B) Copyright
C) Distribution warehouse
D) Employee’s experience
E) Land acquired over 25 years ago
15) You recently purchased a grocery store. At the time of the purchase, the store’s market value
and its book value were equal. The purchase included the building, fixtures, and inventory.
Which one of the following is most apt to cause the market value of this store to be less than its
book value?
A) A sudden and unexpected increase in inflation
B) The replacement of old inventory items with more desirable products
C) Improvements to the surrounding area by other store owners
D) Construction of a new restricted access highway located between the store and the
surrounding residential areas
E) Addition of a stop light at the main entrance to the store’s parking lot
16) Which one of the following is the financial statement that shows the accounting value of a
firm’s equity as of a particular date?
A) Income statement
B) Creditor’s statement
C) Balance sheet
D) Statement of cash flows
E) Dividend statement
17) Net working capital is defined as:
A) total liabilities minus shareholders’ equity.
B) current liabilities minus shareholders’ equity.
C) fixed assets minus long-term liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.
18) Which one of these sets forth the common set of standards and procedures by which audited
financial statements are prepared?
A) Matching principle
B) Cash flow identity
C) Generally Accepted Accounting Principles
D) Financial Accounting Reporting Principles
E) Standard Accounting Value Guidelines
19) Which one of the following is the financial statement that summarizes a firm’s revenue and
expenses over a period of time?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Tax reconciliation statement
E) Market value report
20) Noncash items refer to:
A) fixed expenses.
B) inventory items purchased using credit.
C) the ownership of intangible assets such as patents.
D) expenses that do not directly affect cash flows.
E) sales that are made using store credit.
21) Which one of the following is true according to generally accepted accounting principles?
A) Depreciation is recorded based on the market value principle.
B) Income is recorded based on the realization principle.
C) Costs are recorded based on the realization principle.
D) Depreciation is recorded based on the recognition principle.
E) Costs of goods sold are recorded based on the recognition principle.
22) Which one of these is most apt to be a fixed cost?
A) Raw materials
B) Manufacturing wages
C) Management bonuses
D) Office salaries
E) Shipping and freight
23) Which one of the following statements is correct assuming accrual accounting is used?
A) The addition to retained earnings is equal to net income plus dividends paid.
B) Credit sales are recorded on the income statement when the cash from the sale is collected.
C) The labor costs for producing a product are expensed when the product is sold.
D) Interest is a non-cash expense.
E) Depreciation increases the marginal tax rate.
24) The percentage of the next dollar you earn that must be paid in taxes is referred to as the
________ tax rate.
A) mean
B) residual
C) total
D) average
E) marginal
25) The ________ tax rate is equal to total taxes divided by total taxable income.
A) deductible
B) residual
C) total
D) average
E) marginal
26) Which one of the following statements related to corporate taxes is correct?
A) A company’s marginal tax rate must be equal to or lower than its average tax rate.
B) The tax for a company is computed by multiplying the marginal tax rate times the taxable
income.
C) Additional income is taxed at a firm’s average tax rate.
D) The marginal tax rate will always exceed a company’s average tax rate.
E) The marginal tax rate for a company can be either higher than or equal to the average tax rate.
27) Which one of the following statements concerning corporate income taxes is correct for
2018?
A) All corporations are exempt from federal taxation.
B) Corporations pay no tax on their first $50,000 of income.
C) The federal income tax on corporations is a flat-rate tax with the same rate applying to all
levels of taxable income.
D) The marginal tax rate will always be lower than the average tax rate.
E) The first 25 percent of corporate income is exempt from taxation.
28) The cash flow that is available for distribution to a corporation’s creditors and stockholders is
called the:
A) operating cash flow.
B) net capital spending.
C) net working capital.
D) cash flow from assets.
E) cash flow to stockholders.
29) Which term relates to the cash flow that results from a company’s ongoing, normal business
activities?
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
30) Cash flow from assets is also known as the firm’s:
A) capital structure.
B) equity structure.
C) hidden cash flow.
D) free cash flow.
E) historical cash flow.
31) The cash flow related to interest payments less any net new borrowing is called the:
A) operating cash flow.
B) capital spending cash flow.
C) net working capital.
D) cash flow from assets.
E) cash flow to creditors.
32) Cash flow to stockholders is defined as:
A) the total amount of interest and dividends paid during the past year.
B) the change in total equity over the past year.
C) cash flow from assets plus the cash flow to creditors.
D) operating cash flow minus the cash flow to creditors.
E) dividend payments less net new equity raised.
33) Which one of the following is an expense for accounting purposes but is not an operating
cash flow for financial purposes?
A) Interest expense
B) Taxes
C) Cost of goods sold
D) Labor costs
E) Administrative expenses
34) Depreciation for a tax-paying firm:
A) increases expenses and lowers taxes.
B) increases the net fixed assets as shown on the balance sheet.
C) reduces both the net fixed assets and the costs of a firm.
D) is a noncash expense that increases the net income.
E) decreases net fixed assets, net income, and operating cash flows.
35) Which one of the following statements related to an income statement is correct?
A) Interest expense increases the amount of tax due.
B) Depreciation does not affect taxes since it is a non-cash expense.
C) Net income is distributed to dividends and paid-in surplus.
D) Taxes reduce both net income and operating cash flow.
E) Interest expense is included in operating cash flow.
36) Which one of the following statements is correct concerning a corporation with taxable
income of $125,000?
A) Taxable income minus dividends paid will equal the ending retained earnings for the year.
B) An increase in depreciation will increase the operating cash flow.
C) Net income divided by the number of shares outstanding will equal the dividends per share.
D) Interest paid will be included in both net income and operating cash flow.
E) An increase in the tax rate will increase both net income and operating cash flow.
37) Which one of the following will increase the cash flow from assets, all else equal?
A) Decrease in cash flow to stockholders
B) Decrease in operating cash flow
C) Decrease in the change in net working capital
D) Decrease in cash flow to creditors
E) Increase in net capital spending
38) For a tax-paying firm, an increase in ________ will cause the cash flow from assets to
increase.
A) depreciation
B) net capital spending
C) the change in net working capital
D) taxes
E) production costs
39) Which one of the following must be true if a firm had a negative cash flow from assets?
A) The firm borrowed money.
B) The firm acquired new fixed assets.
C) The firm had a net loss for the period.
D) The firm utilized outside funding.
E) Newly issued shares of stock were sold.
40) An increase in the interest expense for a firm with a taxable income of $123,000 will:
A) increase net income.
B) increase gross income.
C) increase the cash flow from assets.
D) decrease the cash flow from equity.
E) decrease the operating cash flow.
41) Which one of the following is excluded from the cash flow from assets?
A) Accounts payable
B) Inventory
C) Sales
D) Interest expense
E) Cost of goods sold
42) Net capital spending:
A) is equal to ending net fixed assets minus beginning net fixed assets.
B) is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
C) reflects the net changes in total assets over a stated period of time.
D) is equivalent to the cash flow from assets minus the operating cash flow minus the change in
net working capital.
E) is equal to the net change in the current accounts.
43) Which one of the following statements related to the cash flow to creditors must be correct?
A) If the cash flow to creditors is positive, then the firm must have borrowed more money than it
repaid.
B) If the cash flow to creditors is negative, then the firm must have a negative cash flow from
assets.
C) A positive cash flow to creditors represents a net cash outflow from the firm.
D) A positive cash flow to creditors means that a firm has increased its long-term debt.
E) If the cash flow to creditors is zero, then a firm has no long-term debt.
44) A positive cash flow to stockholders indicates which one of the following with certainty?
A) The dividends paid exceeded the net new equity raised.
B) The amount of the sale of common stock exceeded the amount of dividends paid.
C) No dividends were distributed, but new shares of stock were sold.
D) Both the cash flow to assets and the cash flow to creditors must be negative.
E) Both the cash flow to assets and the cash flow to creditors must be positive.
45) A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in
accounts payable, and $80 in cash. What is the amount of the net working capital?
A) $970
B) $720
C) $640
D) $3,110
E) $2,860
46) A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390,
and fixed assets are $3,910. What is the amount of the total liabilities?
A) $2,050
B) $2,920
C) $4,130
D) $7,950
E) $6,890