Question 1

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

Cost of goods sold is an expense item and is not listed on the balance sheet. The other options are all current liabilities that would be listed under that section of the balance sheet.

Question 2

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Accepted Answer

An increase in operating net cash flow means that the company generated more cash from its core operations. However, if the cash balance decreased, it means that the company used the cash to invest in something else, repay debt, or return cash to shareholders.

Option A is incorrect, as cutting dividend would result in an increase in cash balance, not a decrease.

Option C is incorrect, as the sale of a division would result in an increase in cash balance.

Option D is incorrect, as issuing new common stock would result in an increase in cash balance.

Option E is incorrect because issuing new long-term debt would not affect the cash balance on the balance sheet as it is not operating cash flow.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

EVA stands for economic value added, which represents net income before deducting the cost of the equity capital the firm uses. The formula for EVA is EVA = EBIT(1-T) - (Investor-supplied op. capital) x (A-T cost of capital). Choice A is incorrect because the deduction for the cost of common equity is not made when calculating net income, but rather when calculating the cost of equity capital. Choice B is incorrect because MVA represents the difference between the market value of a firm and the total amount of capital invested in it, and therefore does not give us an idea about how much value the management has added in the last year. Choice C is also incorrect because the formula for MVA is incorrect - the correct formula is Market Value of Equity - Book Value of Equity. Choice E is incorrect because EVA represents the added value during a specific time period, not over the entire life of the firm.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

Free cash flow (FCF) is defined as the cash flow available to the firm's investors after funding operations and capital expenditures required to sustain those operations. Therefore, FCF is calculated as follows: FCF = EBIT(1 - T) + Depreciation and Amortization - Capital expenditures required to sustain operations - Required changes in net operating working capital. Option A is incorrect because it only includes depreciation and amortization in the calculation, while neglecting changes in working capital and capital expenditures. Option B is incorrect because changes in working capital have a significant impact on free cash flow. Option D erroneously adds capital expenditures instead of subtracting them. Option E is incorrect because operating cash flow and free cash flow are not the same thing; operating cash flow refers to the cash generated or used by the company's business activities, while free cash flow adjusts for capital expenditures and changes in working capital.

Question 5

Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?

Accepted Answer

The answer of Which of the following factors could explain...

Question 6

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

The answer of Other things held constant, which of the...

Question 7

For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?

Accepted Answer

The statement correctly identifies that the standard financial statements focus on accounting income for the entire corporation, not cash flows, and that managers often need information that is focused on cash flows and the operations of individual units. It also correctly notes that for valuation purposes, we need to discount cash flows, not accounting income. Overall, the statement provides a more accurate and complete picture of the modifications and alternatives used by managers for decision-making. The other answer choices either contain inaccuracies or are incomplete.

Question 8

On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Accepted Answer

If retained earnings remained the same, any net income earned in 2010 must have been paid out as dividends, meaning dividends equaled the earnings for the year.

Question 9

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.

Accepted Answer

The answer of Which of the following would be most...

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A decrease in accounts payable is considered a use of cash because it represents cash outflow to settle the company's obligations, reducing the cash available.

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A firm's stock price is usually positively related to its profitability. Therefore, if a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share. The other statements are incorrect. A firm's DPS (dividends per share) may or may not exceed its EPS (earnings per share), depending on its dividend policy. A firm's EBIT (earnings before interest and taxes) is typically less than or equal to its EBITDA (earnings before interest, taxes, depreciation, and amortization), since EBITDA is a more comprehensive measure of cash flow. A firm's book value per share is a measure of its net worth, while its stock price reflects investors' expectations of its future performance. Inflation has no direct effect on the relative values of book value per share and stock price. Finally, higher depreciation reduces a firm's EPS, other things held constant, because it reduces its net income.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

This statement correctly describes the tax treatment of interest and dividends in 2008, which favored the use of debt financing over equity financing. The other statements are either incorrect or incomplete.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

The income statement is designed to give us an idea of how much the firm earned during a specific period, such as a year. However, this does not mean that the reported income cannot be manipulated by accounting procedures or that it will be identical to the net cash flow. The income statement does not focus solely on the cash account. The reported income can vary even for identical firms if different accounting procedures are used or if certain permitted procedures are applied differently. Therefore, the only statement that is correct is that the income statement is designed to report on the earnings of the firm for a specific period.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 15

Which of the following items is NOT included in current assets?

Accepted Answer

Bonds are not included in current assets as they are a long-term investment. Current assets are assets that can be easily converted into cash within a year or less, such as cash, accounts receivable, inventory, and short-term marketable securities.

Question 16

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Accepted Answer

The answer of Aubey Aircraft recently announced that its net...

Question 17

Which of the following statements is CORRECT?

Accepted Answer

The statement of cash flows reflects cash flows from operations, investing, and financing activities and shows how much the firm's cash increased or decreased during a given year. It includes changes in working capital and the effects of buying or selling fixed assets. It does not provide a listing of banks and brokerage houses where cash is on deposit, nor does it reflect cash obtained by selling new common stock.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The balance sheet gives us a picture of the firm's financial position at a point in time, while the income statement provides information about the firm's profitability over a period of time. The cash budget and statement of stockholders' equity are additional financial statements, but not among the four most important. The statement of cash flows tells us about the firm's cash inflows and outflows, while the statement of cash needs is not a standard financial statement.

Question 20

A security analyst obtained the following information from Prestopino Products' financial statements: • Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.
• The company does not pay dividends.
• The company's depreciation expense is its only non-cash expense; it has no amortization charges.
• The company has no non-cash revenues.
• The company's net cash flow (NCF)On the basis of this information, which of the following statements is CORRECT?

Accepted Answer

The answer of A security analyst obtained the following information...

Quiz 2: Financial Statements, Cash Flow, and Taxes

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following factors could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following items is NOT included in current assets?

Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?