Deck 4: Cash Flow and Financial Planning

Question 1

The depreciable value of an asset, under MACRS, is

A) the full cost excluding installation costs.
B) the full cost minus salvage value.
C) the full cost including installation costs.
D) the full cost including installation costs adjusted for the salvage value.

Answer 1

the full cost including installation costs.

Question 2

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is

A) $3,000.
B) $4,000.
C) $0.
D) $6,000.

Answer 2

$4,000.

Question 3

The depreciable value of an asset, under MACRS, is

A) the original cost (purchase price) only.
B) the original cost minus salvage value.
C) the original cost plus installation.
D) the original cost plus installation costs, minus salvage value.

Answer 3

the original cost plus installation.

Question 4

The depreciable life of an asset is of concern to the financial manager. In general,

A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows.
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows.
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off.
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life.

Question 5

Allocation of the historic costs of fixed assets against the annual revenue they generate is called

A) net profits.
B) gross profits.
C) depreciation.
D) amortization.

Question 6

Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

Question 7

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.

A) tax
B) financial reporting
C) managerial
D) cost accounting

Question 8

Given the financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

Question 9

Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.

Question 10

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?

A) $1,900
B) $1,200
C) $1,500
D) $2,100

Question 11

For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance (200 percent) method using the half-year convention and switching to straight line when advantageous.

Question 12

A corporation

A) must use the same depreciation method for tax and financial reporting purposes.
B) must use different depreciation methods for tax and financial reporting purposes.
C) may use different depreciation methods for tax and financial reporting purposes.
D) must use different (than for tax purposes), but strictly mandated, depreciation methods for financial reporting purposes.

Question 13

Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT - taxes + depreciation.

Question 14

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is

A) $10,000.
B) $12,000.
C) $21,000.
D) $ 9,000.

Question 15

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

A) $15,000
B) $12,750
C) $11,250
D) $22,000

Question 16

The depreciable life of an asset can significantly affect the pattern of cash flows. The shorter the depreciable life of an asset, the more quickly the cash flow created by the depreciation write-off will be received.

Question 17

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Question 18

Business firms are permitted to systematically charge a portion of the market value of fixed assets, as depreciation, against annual revenues.

Question 19

Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

Question 20

Given the financial manager's preference for faster receipt of cash flows,

A) a longer depreciable life is preferred to a shorter one.
B) a shorter depreciable life is preferred to a longer one.
C) the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
D) the manager is not concerned with depreciable lives, because once purchased, depreciation is considered a sunk cost.

Question 21

In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.

Question 22

________ is an expense that is a legal obligation of the firm.

A) Labor expense
B) Interest expense
C) Salaries expense
D) Rent expense

Question 23

Net operating profit after taxes (NOPAT) represents the firm's earnings after deducting both interest taxes.

Question 24

It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes plus depreciation.

Question 25

The statement of cash flows allows the financial manager and other interested parties to analyze the firm's past and possibly future profitability.

Question 26

To assess whether any developments have occurred that are contrary to the company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.

Question 27

In the statement of cash flows, retained earnings are handled through the adjustment of which two accounts?

A) Revenue and cost.
B) Assets and liabilities.
C) Depreciation and purchases.
D) Net profits and dividends.

Question 28

The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Question 29

Net operating profit after taxes (NOPAT) represents the firm's earnings before interest and after taxes.

Question 30

The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.

Question 31

The finance definition of operating cash flow excludes interest as an operating flow.

Question 32

A firm's operating cash flow (OCF) is defined as

A) gross profit minus operating expenses.
B) gross profit minus depreciation.
C) EBIT times one minus the tax rate plus depreciation.
D) EBIT plus depreciation.

Question 33

Depreciation is considered to be an outflow of cash since the cash must be drawn from somewhere.

Question 34

The firm's free cash flow (FCF) represents the amount of cash flow available to pay bank loans after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Question 35

Operating cash flow (OCF) is equal to the firm's net operating profits after taxes minus all non-cash charges.

Question 36

All of the following are non-cash charges EXCEPT

A) depreciation.
B) accruals.
C) depletion.
D) amortization.

Question 37

In the statement of cash flows, the financing flows are cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

Question 38

It would be correct to define Operating Cash Flow (OCF) as net operating profit after taxes minus depreciation.

Question 39

Which of the following is a source of cash flows?

A) Cost of goods sold.
B) Depreciation.
C) Interest expense.
D) Taxes.

Question 40

The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.

Question 41

All of the following are outflows of cash EXCEPT

A) an increase in inventory.
B) a decrease in accounts receivable.
C) an increase in accounts receivable.
D) a decrease in notes payable.

Question 42

A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered

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.

Question 43

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
The firm may have increased long-term debts to finance ________. (See Table 4.1)

A) an increase in gross fixed assets.
B) an increase in current assets.
C) a decrease in notes payable.
D) all of the above.

Question 44

The cash flows from operating activities section of the statement of cash flows considers

A) interest expense.
B) cost of raw materials.
C) dividends paid.
D) stock repurchases.

Question 45

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
Common stock dividends paid in 2010 amounted to ________. (See Table 4.1)

A) $100
B) $50
C) $600
D) $150

Question 46

All of the following are inflows of cash EXCEPT

A) a decrease in accounts receivable.
B) net profits after taxes.
C) an increase in accounts receivable.
D) an increase in accruals.

Question 47

The statement of cash flows provides a summary of the firm's

A) cash flows from operating activities.
B) cash inflows from financing activities.
C) cash flows from investment activities.
D) all of the above.

Question 48

The statement of cash flows includes all of the following categories EXCEPT

A) operating flows.
B) investment flows.
C) financing flows.
D) equity flows.

Question 49

Cash flows associated with the purchase and sale of fixed assets and business interests are called

A) operating flows.
B) investment flows.
C) financing flows.
D) none of the above.

Question 50

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
The firm ________ fixed assets worth ________. (See Table 4.1)

A) purchased; $0
B) purchased; $200
C) sold; $0
D) sold; $200

Question 51

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.

Question 52

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
The largest single source of funds for the firm in 2010 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.

Question 53

All of the following are financing cash flows EXCEPT

A) sale of stock.
B) payment of bonuses.
C) increasing debt.
D) repurchasing stock.

Question 54

All of the following are operating cash flows EXCEPT

A) net profit/earnings after tax.
B) increase or decrease in current liabilities.
C) increase or decrease in fixed assets.
D) depreciation expense.

Question 55

Cash flows directly related to production and sale of the firm's products and services are called

A) operating flows.
B) investment flows.
C) financing flows.
D) none of the above.

Question 56

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
The depreciation expense for 2010 is ________. (See Table 4.1)

A) $0
B) $200
C) $50
D) $1,000

Question 57

Table 4.1
Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2009 and 2010
The firm's cash flow from operating activities is ________. (See Table 4.1)

A) $50
B) $350
C) $150
D) $200

Question 58

Three important line items on the statement of cash flows that must be obtained from the income statement include all of the following EXCEPT

A) depreciation and any non-cash charges.
B) interest expenses.
C) net profits after taxes.
D) cash dividends paid on both preferred and common stocks.

Question 59

The cash flows from operating activities section of the statement of cash flows considers

A) labor expense.
B) interest expense.
C) taxes paid.
D) dividends paid.

Question 60

Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called

A) operating flows.
B) investment flows.
C) financing flows.
D) none of the above.

Question 61

The key output(s) of the short-run financial planning process are a(n)

A) cash budget, pro forma income statement, and pro forma balance sheet.
B) cash budget, sales forecast, and income statement.
C) sales forecast and cash budget.
D) income statement, balance sheet, and source and use statement.

Question 62

For the year ended December 31, 2008, 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.

Question 63

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) none of the above.

Question 64

The strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

Question 65

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) none of the above.

Question 66

Table 4.2 Magna Fax, Inc.
Balance Sheet
For the Years Ended December 31, 2009 and 2010
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 31,2010. (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, 2010.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2010.
(c) Prepare a statement of cash flows for the year ended December 31, 2010, organized by cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.

Question 67

NICO Corporation had net fixed assets of $2,000,000 at the end of 2010 and $1,800,000 at the end of 2009. In addition, the firm had a depreciation expense of $200,000 during 2010 and $180,000 during 2009. Using this information, NICO's net fixed asset investment for 2010 was

A) $20,000.
B) $0.
C) $380,000.
D) $400,000.

Question 68

Calculate the change in the key balance sheet accounts between 2009 and 2010 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 2009 and 2010

Question 69

Short-run financial plans and long-run financial plans generally cover periods ranging from ________ years and ________ years, respectively.

A) one to two; two to ten
B) two to ten; one to two
C) one to five; five to ten
D) one to three; three to five

Question 70

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, 2010
(a) Operating Cash Flow.
(b) Free Cash Flow.
For the year ended December 31,

Question 71

For the year ended December 31, 2008, 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.

Question 72

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.

Question 73

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both tend to use a shorter planning horizon.

Question 74

During 2010, NICO 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.

Question 75

For the year ended December 31, 2008, 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.

Question 76

NICO Corporation had net current assets of $2,000,000 at the end of 2010 and $1,800,000 at the end of 2009. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2010 and $1,500,000 in 2009. Using this information, NICO's net current asset investment for 2010 was

A) $700,000.
B) -$300,000.
C) $300,000.
D) -$700,000.

Question 77

Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

Question 78

The financial planning process begins with short-run, or operating, plans and budgets that in turn guide the formulation of long-run, or strategic, financial plans.

Question 79

The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.

A) short-run; long-run
B) short-run; operating
C) long-run; strategic
D) long-run; short-run

Question 80

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
Interest on a note receivable
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