Question 1

Calculate the aftertax cost of the interest. Assume the company has issued 10,000 bonds with a coupon rate of 8% and a face value of $1,000 per bond, and the company has a marginal tax rate of 42%.

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Question 2

Several theories have been suggested about the factors contributing to the management or "manipulation" of reported earnings. List and explain them.

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Question 3

What is a tax savings?

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Question 4

An item that may be converted to cash within one year or one operating cycle of the firm is classified as a

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Current assets are those that are expected to be converted to cash within one year or one operating cycle of the firm. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses.

Question 5

The residual income of the firm belongs to

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The residual income of a firm belongs to common shareholders because once all expenses, debt obligations, and preferred dividends have been paid, any excess earnings are available for distribution to common shareholders in the form of dividends or retained earnings. Creditors, such as lenders, are entitled to receive interest payments and repayment of principal, and preferred shareholders have a fixed dividend rate that must be paid before any dividends are paid to common shareholders. The Canada Revenue Agency is a government agency responsible for collecting taxes and would not have any claim to a firm's residual income.

Question 6

List and describe the limitations of the balance sheet.

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Question 7

Define free cash flow. Explain what it is equal to and why it is important a finance manager needs to know the value of free cash flow.

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Question 8

What is the P/E ratio? Why is it an important ratio? List 3 factors that influence the P/E ratio.

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Question 9

Identify each of the following as increasing (+) or decreasing (-) cash flows from operating activities (O), investment activities (I), or financing activities (F). (EXAMPLE: the sale of plant and equipment would increase cash flows from investing activities, and the correct answer would be +I).
_______ 1. Increase in accounts payable
_______ 2. Decrease in inventory
_______ 3. Net income from operations
_______ 4. Payment of dividends
_______ 5. Sale of preferred stock
_______ 6. Increase in accrued expenses
_______ 7. Purchase of new equipment
_______ 8. Decrease in amortization expense
_______ 9. Increase in accounts receivable
_______ 10. Decrease in notes payable
_______ 11. Increase in net worth
_______ 12. Increase in long-term liabilities
_______ 13. Increase in investments
_______ 14. Decrease in marketable securities
_______ 15. Reduction in retained earnings
_______ 16. Repurchase of common shares outstanding
_______ 17. Increase in prepaid expense
_______ 18. Decrease in income taxes payable
_______ 19. Retirement of long-term bonds payable
_______ 20. Sale of new common stock

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Question 10

In the text, the author said that "Earnings are flexible." What was meant by this?

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Question 11

ElectroWizard Company produces a popular video game called Destructo, which sells for $32. Last year ElectroWizard sold 50,000 Destructo games, each of which costs $6 to produce. ElectroWizard incurred selling and administrative expenses of $80,000 and amortization expense of $10,000. In addition, ElectroWizard has a $100,000 loan outstanding at 12%. Its tax rate is 40%. There are 100,000 common shares outstanding.
Prepare an income statement for ElectroWizard in good form (include EPS).

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Question 12

Describe and briefly explain the steps used in the indirect method to compute cash flows from typical operating activities of a company.

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Question 13

Assuming a tax rate of 35%, amortization expenses of $800,000 will

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Question 14

What is a cash flow statement? What information can it provide? Why is a cash flow statement important to small business?

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Question 15

Explain these terms found on a typical balance sheet. Provide examples of each if applicable.
Marketable securities, Accounts receivable, Inventory, Prepaid expenses, Investments, Plant and equipment, Accumulated amortization, Accounts payable, Notes payable, Accrued expense, Shareholders' equity.

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Question 16

List the 3 primary sections on the cash flow statement.

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Question 17

What causes the aftertax cash flow to the individuals to vary?

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Question 18

Assuming a tax rate of 30%, the aftertax cost of interest expense of $400,000 is

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The after-tax cost of interest expense is calculated by multiplying the interest expense by (1 - tax rate).

After-tax cost of interest expense = $400,000 * (1 - 0.30) = $280,000.

Therefore, the answer is B) $280,000.

Question 19

A firm has $7,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold?

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Question 20

What is an income statement and what is its purpose as it relates to financial management?

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Quiz 2: Review of Accounting