Question 1

Which one of the following expense categories is subtracted from total revenues to help arrive at a firm's EBIT (Operating Income)?

Accepted Answer

Depreciation expense is subtracted from total revenues to help arrive at a firm's EBIT (Operating Income) because it is a non-cash expense that reflects the decrease in value of an asset over time due to wear and tear or obsolescence. This reduces the taxable income and increases the cash flow available for operations, investments, and financing. Cash dividends, interest expense, and tax liability are not subtracted from total revenues to calculate EBIT, but they may affect the net income and cash flows of the firm.

Question 2

If a firm's statement of cash flows shows that cash was used for investments, which of the following would seem most likely?

Accepted Answer

If cash was used for investments, it means the firm spent money on acquiring new assets or properties, and one of the most likely investments is new machines or equipment. Increasing inventory or repurchasing common stock wouldn't be considered investments, and paying cash dividends would decrease cash flow from financing activities.

Question 3

Suppose Dee's just acquired the assets of Flo's Flowers.The book value of Flo's Flowers assets was $68,000 but Dee's paid a total of $75,000.The additional $7,000 paid by Dee's will be recorded on Dee's balance sheet as:

Accepted Answer

The additional $7,000 paid by Dee's over the book value of the assets represents the goodwill of the business, which is an intangible asset that reflects the value of the company's reputation, customer relationships, and other non-physical assets. Goodwill is recorded as an asset on the balance sheet.

Question 4

Interest expense appears in the operations section of the statement of cash flows because:

Accepted Answer

Interest expense appears in the operations section of the statement of cash flows because its payment is not within managerial discretion. Interest expense is a necessary cost of borrowing and is a result of a firm's operations, so it is included in the operations section of the statement of cash flows.

Question 5

The existence of goodwill on a corporate balance sheet indicates that the corporation has:

Accepted Answer

Goodwill is an intangible asset that arises when a corporation acquires another firm for a price that exceeds the fair market value of its net assets. Therefore, if a corporation has goodwill on its balance sheet, it indicates that it has acquired another company in the past and paid more than the fair market value of the net assets acquired. This excess payment is attributed to the value of intangible assets, such as the acquired company's brand name, customer base, or patents. Therefore, choice C is the correct answer. Choice A is incorrect because profitability alone does not generate goodwill. Choice B is incorrect because tangible assets are depreciated, not goodwill. Choice D is incorrect because retained earnings are not the same as goodwill.

Question 6

What is the fundamental difference between IFRS and GAAP?

Accepted Answer

GAAP (Generally Accepted Accounting Principles) is known for its reliance on specific rules, providing detailed regulations and guidelines for financial reporting and accounting practices. In contrast, IFRS (International Financial Reporting Standards) tends to focus more on general principles, allowing for interpretation and application based on the spirit of those principles. This fundamental difference highlights the more rules-based approach of GAAP versus the principles-based approach of IFRS.

Question 7

Current period depreciation expense is listed:

Accepted Answer

Current period depreciation expense is listed on the income statement as an expense.

Question 8

Perhaps the best method for estimating the market value of shareholders' equity is to:

Accepted Answer

Multiplying the number of shares outstanding by the current market price per share gives an estimate of the market value of equity. This is because the market value of equity represents the total value that shareholders would receive if the company were to be sold at its current market price. The balance sheet and income statement provide information about the financial health of the company, but do not directly give an estimate of the market value of equity. Adding retained earnings to total liabilities does not provide an accurate estimate of market value of equity, as retained earnings are already included in the equity section of the balance sheet.

Question 9

Which of the following changes in working capital will result in an increase in cash flows?

Accepted Answer

An increase in accounts payable means a company is taking longer to pay its suppliers, which conserves cash and thus increases cash flow.

Question 10

If the value of a firm's net fixed assets equals the value of the accumulated depreciation, from an accounting context the fixed assets are:

Accepted Answer

The answer of If the value of a firm's net...

Question 11

Which of the following cannot be used to reduce taxable corporate income?

Accepted Answer

Cash dividends are payments made to shareholders from a corporation's after-tax profits and do not affect the corporation's taxable income. Depreciation expense, interest expense, and administrative expenses all reduce taxable corporate income.

Question 12

In which of the following asset accounts are you least likely to find a difference between market value and book value?

Accepted Answer

Cash is a highly liquid asset, which means that it can quickly and easily be converted into cash. As a result, its market value is usually very close to its book value. On the other hand, inventory and land are subject to changes in market conditions and may have a significant difference between their market value and book value, while shareholders' equity is not an asset account but a section of the balance sheet that represents the residual interest in the assets of the company after deducting liabilities.

Question 13

If market values of equity exceed book values of equity, then:

Accepted Answer

When market values of equity exceed book values of equity, it indicates that the market has a positive perception of the company's future earnings and growth potential, which makes the stock more attractive to investors. Therefore, the profit potential is expected to be attractive relative to the level of risk, which is why the market value is higher than the book value. It has nothing to do with rapid depreciation, accrual-based accounting or holding too much cash.

Question 14

What happens to a firm's net worth as it uses cash to repay accounts payable?

Accepted Answer

Repaying accounts payable with cash affects both the asset side (cash decreases) and the liability side (accounts payable decreases) of the balance sheet by the same amount, leaving net worth (assets minus liabilities) unchanged.

Question 15

An increase in depreciation expense will (other things equal):

Accepted Answer

Depreciation expense is a non-cash expense that reduces net income. Therefore, if there is an increase in depreciation expense, it will decrease net income. Option A is incorrect because an increase in depreciation expense will not increase net income. Option C is also incorrect because although an increase in depreciation expense will increase taxable income, it will not increase net income. Option D is incorrect because the market value of assets is not directly impacted by depreciation expense.

Question 16

Assuming at the $50,000 income level that the corporate tax rate increases from 15% to 25%, which of the following statements is correct for a firm with $75,000 of taxable income?

Accepted Answer

The firm's taxable income ($75,000) is above the $50,000 threshold where the corporate tax rate increases from 15% to 25%. Therefore, the average tax rate would be calculated as follows: 
- The first $50,000 of taxable income is taxed at 15%, resulting in $7,500 of tax liability. 
- The remaining $25,000 of taxable income ($75,000 - $50,000) is taxed at 25%, resulting in $6,250 of tax liability. 
- Total tax liability is $7,500 + $6,250 = $13,750. 
- Average tax rate is $13,750 ÷ $75,000 = 18.33%.

Question 17

Which of the following statements about net working capital (NWC) is correct?

Accepted Answer

Decrease in NWC can increase the firm's risk of bankruptcy as it indicates that the company has fewer short-term assets to cover its short-term liabilities, making it difficult to meet its financial obligations.

Question 18

According to the statement of cash flows, cash flows from financing could be positive if:

Accepted Answer

Cash flows from financing include the inflows and outflows of cash resulting from the issuance or retirement of debt, the issuance or repurchase of equity, and the payment of dividends. If a firm added more debt than it repaid, it would have a net inflow of cash from financing, resulting in a positive value on the statement of cash flows. The other choices listed would result in negative cash flows from financing.

Question 19

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has:

Accepted Answer

If total assets exceed current liabilities plus shareholders' equity, it means the firm has more long-term debt than it does retained earnings or accumulated depreciation. Current assets may or may not be greater than current liabilities, but this is not relevant to the given statement.

Question 20

What happens to the market value of a firm's equity as the book value of the firm's equity increases?

Accepted Answer

The market value of a firm's equity may increase, decrease, or remain constant as the book value of the firm's equity increases, depending on various factors such as market conditions, industry trends, management performance, and investor sentiment. Therefore, there is no set relationship to determine this outcome.

Quiz 3: Accounting and Finance

Which one of the following expense categories is subtracted from total revenues to help arrive at a firm's EBIT (Operating Income) ?