Question 1

Which of the following statements is CORRECT?

Accepted Answer

Free cash flow (FCF) is a measure of a company's financial performance that shows how much cash is available for the company to repay creditors or pay dividends and interest to investors. The correct definition of FCF includes earnings before interest and taxes (EBIT) adjusted for taxes, plus depreciation (which is a non-cash expense), minus capital expenditures required to sustain operations, and minus required changes in net operating working capital. This formula captures the true cash generating ability of a company, beyond just its net income or earnings.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A decrease in accounts payable indicates that a company has paid off some of its liabilities, which means cash has flowed out of the business. In the operating activities section of the statement of cash flows, this decrease is subtracted from net income to adjust for the cash that was used.

Question 3

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

Accepted Answer

B) The company making large investments in fixed assets could explain the situation where net cash provided from operations increased, yet cash as reported on the balance sheet decreased. This is because the cash generated from operations might have been used to pay for these investments, leading to a decrease in cash reserves despite the operational success.

Question 4

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 reported on the income statement, not a current liability listed on the balance sheet. The other options, accounts payable, short-term notes payable to the bank, accrued wages, and accrued payroll taxes, are all examples of current liabilities commonly found on a firm's balance sheet.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

Statement b is true,because the EVA equation: EVA = EBIT (1 - T)- (After-tax cost of capital %)(Total invested capital)implies that lowering the operating capital,other things held constant,lowers capital costs and thus increases EVA.

Question 6

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous year.Assuming that no earnings restatements were issued,which of the following statements is CORRECT?

Accepted Answer

If the retained earnings amount did not change from one year to the next, it means that any earnings generated during the year were exactly offset by dividends paid, allowing for the possibility of dividends being paid but requiring them to equal the earnings for the year.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm's income as personal income and pay taxes on that income. This option is known as pass-through taxation, where the corporation's income is passed through to its shareholders who report it on their personal tax returns.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

Statement a is false;corporations cannot exclude interest income from corporate taxes.Statement b is true because the 70% exclusion rule gets around the issue of triple taxation.Statements c,d,and e are false because individuals pay no taxes on municipal bond income,and individuals cannot exclude 70% of their income from either interest or dividends.

Question 9

A loss incurred by a corporation

Accepted Answer

According to the tax laws, corporations can carry back losses for two years and carry forward for up to 20 years following the loss. This allows them to reduce taxes in future profitable years and potentially recover from the loss incurred.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

The income statement is designed to show how much the firm earned during a given year. It does not necessarily reflect the amount of cash generated during that period, as non-cash items such as depreciation are included in the calculation of net income. The other options are incorrect because the cash account can be manipulated, different accounting procedures can result in different reported incomes, and reported net income may not be identical to reported cash flow even if GAAP is followed.

Question 11

Which of the following items is NOT normally considered a current asset?

Accepted Answer

Bonds are not considered a current asset because they represent a long-term investment rather than a readily available source of cash to cover current expenses or obligations. Current assets are defined as assets that are expected to be converted into cash within a year or the operating cycle of the business, whichever is longer. Examples of current assets include accounts receivable, inventory, cash, and short-term, highly-liquid, marketable securities.

Question 12

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

Accepted Answer

The answer of Austin Financial recently announced that its net...

Question 13

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

Accepted Answer

If the company sold a new issue of bonds, it would have received cash inflow which would increase the cash balance even though it had negative cash flow from its operations.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

Option D is correct because it correctly defines operating income and its calculation. Option A is incorrect because more depreciation reduces taxable income, thus lowering the tax bill. Option B is incorrect because the "bottom line" usually refers to the net income, not cash flow. Option C is incorrect because depreciation is a non-cash expense and does not directly affect cash flow. Option E is incorrect for the same reason as option C.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

Interest paid to individuals is counted as income and taxed at their regular tax rate, which can be as high as 39.6%, while qualified dividends are taxed at a maximum rate of 15% for most individuals. The other statements are either incorrect or incomplete.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

If a firm is more profitable than average, its stock price is expected to exceed its book value per share due to market expectations and demand for the stock. The other statements are incorrect. A firm's DPS may or may not exceed its EPS depending on its dividend policy. A firm's net income is expected to be lower than its EBIT due to interest and tax payments. The relationship between a firm's profitability and its stock price and book value per share is not clearly defined and depends on various factors such as market conditions and investor expectations. The amount of depreciation does not necessarily affect a firm's EPS as it is a non-cash expense.

Question 17

Below is the common equity section (in millions)of Timeless Technology's last two year-end balance sheets: $\begin{array}{lrr} 
& 2018 & 2017 \
 \text { Common stock } & 2,000 & 1,000 \
\text { Retained earnings } & 2,000 & 2,340 \
 \text { Total common equity } & \$ 4,000 & \$ 3,340 \
\end{array}$
?
The firm has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

Accepted Answer

The answer of Below is the common equity section (in...

Question 18

Which of the following statements is CORRECT?

Accepted Answer

The statement of cash flows shows how much the firm's cash (currency, bank deposits, and short-term liquid securities) increased or decreased during a given year. It reflects cash flows from operations, investing, and financing activities and does include changes in working capital and the effects of buying or selling fixed assets, as well as cash obtained by selling new common stock.

Question 19

Below are the 2017 and 2018 year-end balance sheets for Tran Enterprises: $\begin{array}{lrr}\text { Assets: } & 2018 & 2017 \
\text { Cash } & \$ 200,000 & \$ 170,000 \
\text { Accounts receivable } & 864,000 & 700,000 \
\text { Inventories } & \underline{2,000,000} & \underline{1,400,000} \
\text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \
\text { Net fixed assets } & 6,000,000 & 5,600,000 \
\text { Total assets } & \$ 9,064,000 & \$ 7,870,000 \
\hline
\end{array}$
Liabilities and equity: 
$\begin{array}{lrr}
\text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \
\text { Notes payable to bank } & \underline{1,600,000} & \underline{1,800,000} \
\text { Total current liabilities } & \$ 3,000,000 & \$ 2,890,000 \
\text { Long-term debt } & 2,400,000 & 2,400,000 \
\text { Common stock } & 3,000,000 & 2,000,000 \
\text { Retained earnings } & \underline{664,000} &{580,000} \
\text { Total common equity } & \$ 3,664,000 & \$ 2,580,000 \
\text { Total liabilities and equity } & \$ 9,064,000 & \$ 7,870,000
\end{array}$
The firm has never paid a dividend on its common stock,and it issued $2,400,000 of 10-year,non-callable,long-term debt in 2017.As of the end of 2018,none of the principal on this debt had been repaid.Assume that the company's sales in 2017 and 2018 were the same.Which of the following statements must be CORRECT?

Accepted Answer

The firm's common stock increased from $2,000,000 in 2017 to $3,000,000 in 2018, indicating that new common stock was issued since there were no dividends paid and the long-term debt remained constant, ruling out debt conversion.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

Statement e gives the correct equation for EVA.The other statements are false.

Quiz 3: Financial Statements,cash Flow and Taxes

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

Which of the following statements is CORRECT?

On its 12/31/18 balance sheet,Barnes Inc showed $510 million of retained earnings,and exactly that same amount was shown the previous 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?

A loss incurred by a corporation

Which of the following statements is CORRECT?

Which of the following items is NOT normally considered a current asset?

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

Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year?

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?

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