Deck 3: Understanding Financial Statements, taxes, and Cash Flows

Question 1

Which of the following streams of income is not affected by how a firm is financed (whether with debt or equity)?

A)Net profit after tax but before dividends
B)Net working capital
C)Operating income
D)Income before tax

Answer 1

C

Question 2

What is sales revenue,minus cost of goods sold and operating expenses,known as for income statement purposes?

A)Net profit
B)Retained earnings
C)Net income available to preferred shareholders
D)EBIT

Answer 2

D

Question 3

Which of the following best represents the stream of income that is available to common stockholders?

A)Net profit after tax and after preferred dividend payments
B)Earnings before interest and taxes
C)Gross profit
D)Operating profit

Answer 3

A

Question 4

Based on the information contained in Table 2,what was the total amount of Bird Industries' common stock dividend for 1996?

A)$800
B)$2,300
C)$2,000
D)Cannot be determined with available information

Question 5

Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $8,750,000;cost of goods sold of $35,025,000;depreciation and amortization of $1,365,000;and interest expense of $750,000.For purposes of determining free cash flow,what is the amount of the firm's after-tax cash flow from operations?

A)$255,223
B)$4,731,000
C)$2,385,000
D)$7,775,000

Question 6

Stock that is repurchased by the issuing company is called:

A)paid in capital.
B)treasury stock.
C)retained capital.
D)par value stock.

Question 7

Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's income before tax?

A)$4,360,000
B)$750,000
C)$10,865,000
D)$25,115,000

Question 8

Based on the information contained in Table 3,what was the total amount of Snark Enterprise's common stock dividend for 1996?

A)$0
B)$400
C)$600
D)Cannot be determined with available information

Question 9

Which of the basic financial statements is best used to answer the question,"How profitable is the business?"

A)Balance sheet
B)Statement of shareholder's equity
C)Income statement
D)Accounts receivable aging schedule

Question 10

Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's EBIT?

A)$15,552,000
B)$58,000,000
C)$5,110,000
D)$4,630,000

Question 11

Based on the information contained in Table 3,what is Snark Enterprise's cash balance as of December 31,1996?

A)$1,100
B)$900
C)$1,300
D)None of the above

Question 12

Based on the information given in Table 1,calculate the dividends paid in 1996.

A)$3,750
B)$3,000
C)$750
D)$2,250

Question 13

Which of the following best represents operating income?

A)Income after financing activities
B)Earnings before interest and taxes
C)Income from capital gains
D)Income from discontinued operations

Question 14

Based on the information contained in Table 2,what was Bird Industries' cash balance as of December 31,1996?

A)$300
B)$400
C)$100
D)$1,100

Question 15

Your firm has the following income statement items: sales of $52,000,000;income tax of $1,880,000;operating expenses of $9,000,000;cost of goods sold of $36,000,000;depreciation and amortization of $1,500,000;and interest expense of $800,000.For purposes of determining free cash flow,what is the amount of the firm's after-tax cash flow from operations?

A)$1,008,000
B)$3,600,000
C)$5,120,000
D)$750,000

Question 16

Which of the following is NOT included in operating income?

A)Cost of goods sold
B)Sales
C)Taxes
D)Operating expenses

Question 17

You are about to determine your corporation's taxable income.Which of the below would NOT be included as a tax-deductible expense?

A)Marketing expenses
B)Depreciation expense
C)Cost of goods sold
D)Dividend expense

Question 18

Who owns the retained earnings of a public firm?

A)The IRS
B)Common stockholders
C)Bondholders
D)Preferred stockholders

Question 19

Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period?

A)Balance sheet
B)Cash flow statement
C)Income statement
D)None of the above

Question 20

Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's gross profit?

A)$18,000,000
B)$15,225,000
C)$5,000,110
D)$6,632,000

Question 21

On an accrual basis income statement,revenues and expenses always match the firm's cash flow.

Question 22

Which of the following is the least liquid current asset?

A)Accruals
B)Marketable securities
C)Accounts receivable
D)Inventory

Question 23

Pearls,Inc.had sales in 1993 of $2.1 million.The common stockholders received $400,000 in cash dividends and preferred stockholders were paid $200,000.Interest totaling $150,000 was paid on outstanding debts.Operating expenses totaled $300,000,and cost of goods sold was $500,000.Stock that had been purchased for $50,000 in 1987 was sold for $70,000.What is the tax liability of Pearls,Inc.?

Question 24

Using the information provided,calculate net income for 2009.Assume a tax rate of 40 percent.

A)$33,000
B)$44,000
C)$55,000
D)$66,000

Question 25

Which of the following would be included in the calculation of net operating working capital?

A)Accounts payable
B)Accruals
C)Short-term notes payable
D)Both A and B
E)All of the above

Question 26

Based on the following selected financial information for Sheets Metalworks,calculate net income for 2009.

A)$100
B)$300
C)$500
D)$700
E)$900

Question 27

An income statement reports a firm's profit relative to its total investment in plant and equipment.

Question 28

The income statement represents a snapshot of account balances at one point in time.

Question 29

The interest payments on corporate bonds are tax-deductible.

Question 30

Corporate income statements are usually compiled on an accrual,rather than cash,basis.

Question 31

Dividends paid to a firm's stockholders,both preferred and common stockholders,are tax-deductible to the paying company.

Question 32

The income statement provides a statement of results for the firm's operations.

Question 33

Browning Cookware,Inc.has the following income statement items: sales of $50,250,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.If the firm's income tax rate is 34%,what is the amount of the firm's income tax liability?

A)$1,665,000
B)$725,000
C)$385,000
D)$1,482,400

Question 34

Use the following information to answer the following question(s).
In 2004,A & K,Inc.expects operating income (earnings before interest and taxes)of $18,000,000.In addition,the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay $1,000,000 in dividends to its common stockholders.
A & K's marginal tax rate for 2004 will be:

A)38 percent.
B)35 percent.
C)34 percent.
D)unknown because too little information is provided.

Question 35

Use the following information to answer the following question(s).
In 2004,A & K,Inc.expects operating income (earnings before interest and taxes)of $18,000,000.In addition,the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay $1,000,000 in dividends to its common stockholders.
Tax tables are based on ________ tax rates.

A)marginal
B)average
C)implied
D)investment

Question 36

The marginal tax rate would equal the average tax rate for firms with earnings less than $50,000.

Question 37

Use the following information to answer the following question(s).
In 2004,A & K,Inc.expects operating income (earnings before interest and taxes)of $18,000,000.In addition,the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay $1,000,000 in dividends to its common stockholders.
A & K's total tax liability for 2004 will be:

A)$5,488,250.
B)$5,530,000.
C)$5,600,000.
D)$6,080,000.

Question 38

The income statement describes the financial position of a firm on a given date.

Question 39

From the scrambled list of items presented in Table 4,prepare an income statement and a balance sheet for Dooley Sportswear Company.

Question 40

Use the following information to answer the following question(s).
In 2004,A & K,Inc.expects operating income (earnings before interest and taxes)of $18,000,000.In addition,the corporation has $20,000,000 of debt outstanding with a 10 percent interest rate and will pay $1,000,000 in dividends to its common stockholders.
Assume that A & K will receive no other sources of income during 2004.A & K's taxable income for 2004 will be:

A)$18,000,000.
B)$17,000,000.
C)$16,000,000.
D)$15,000,000.

Question 41

Which of the following would NOT be included as equity in a corporate balance sheet?

A)Cash
B)Paid in capital
C)Preferred stock
D)Retained earnings
E)Common stock

Question 42

Under current accounting rules,plant and equipment appear on a company's balance sheet valued at replacement value.

Question 43

The balance sheet provides a statement of the firm's financial position.

Question 44

Which of the following best describes a balance sheet?

A)Reports cash receipts and cash disbursements for a specific accounting period
B)Reports investment activities for a specified accounting period
C)Reports revenues and expenses for a specific accounting period
D)Reports the amount and composition of assets and liabilities at a specified point in time

Question 45

Which of the following items is part of the computation of net operating working capital for purposes of determining free cash flow?

A)Accounts payable
B)Fixed assets
C)Interest expense
D)Dividend payments

Question 46

The balance sheet describes the financial position of a firm on a given date.

Question 47

Fixed assets includes which of the below?

A)Inventory
B)Patents
C)Land
D)Copyrights

Question 48

Total equity on the balance sheet increases as dividends paid increases.

Question 49

An advantage of balance sheet numbers is that assets reflect current market values.

Question 50

A firm's balance sheet provides a representation of the current market value of the company.

Question 51

Which of the following would NOT be included as an asset on a corporate balance sheet?

A)Accounts receivable
B)Common stock
C)Inventory
D)Buildings

Question 52

Which of the following would NOT be included as a liability in a corporate balance sheet?

A)Accruals
B)Notes payable
C)Accounts payable
D)Bonds
E)Depreciation

Question 53

Grass Gadgets had sales of $30 million and net income of $2 million in 2008.Grass paid a dividend of $1.5 million.Assuming that their beginning balance for retained earnings was $3 million,calculate their ending balance for retained earnings.

A)$2.5 million
B)$3 million
C)$3.5 million
D)$4 million

Question 54

Your firm has the following balance sheet statement items: total current liabilities of $805,000;total assets of $2,655,000;fixed and other assets of $1,770,000;and long-term debt of $200,000.What is the amount of the firm's total current assets?

A)$885,000
B)$1,550,000
C)$600,000
D)$325,000

Question 55

A balance sheet is a statement of the financial position of the firm on a given date,including its asset holdings,liabilities,and equity.

Question 56

Which of the following is NOT considered a fixed asset?

A)Land
B)Equipment
C)Patents
D)Building

Question 57

Which of the following does NOT represent cash outflows to the firm?

A)Taxes
B)Interest payments
C)Dividends
D)Purchase of plant and equipment
E)Depreciation

Question 58

Your firm has the following balance sheet statement items: total current liabilities of $805,000;total assets of $2,655,000;fixed and other assets of $1,770,000;and long-term debt of $200,000.What is the amount of the firm's net working capital?

A)$25,000
B)$325,000
C)$770,000
D)$80,000

Question 59

How does "free cash flow" differ from net profit?

A)It is determined by accrual basis accounting.
B)It takes into consideration a firm's ongoing investment in working capital and fixed assets.
C)It ignores depreciation and taxes.
D)It is less expensive.

Question 60

Holding all other variables constant,which of the following will decrease total equity? An increase in:

A)common stock issued
B)dividends paid
C)net income
D)interest expense

Question 61

Cash flows from assets will always be less than cash flows from financing due to dividends.

Question 62

Which of the following is NOT included in the calculation of free cash flows?

A)Interest expense
B)Operating income
C)Depreciation
D)Net operating working capital

Question 63

Free cash flow will increase with a decrease in ________.

A)tax rate
B)accruals
C)depreciation expense
D)both A and C