Question 1

The CEO of Tom and Sue's wants the company to earn a net income of $3.25 million in 2014.Cost of goods sold is expected to be 60 percent of net sales,depreciation expense is $2.9 million,interest expense is expected to increase to $1.050 million,and the firm's tax rate will be 30 percent.Calculate the net sales needed to produce net income of $3.25 million.
A) $26.02 million
B) $29.36 million
C) $21.48 million
D) $28.25 million

Accepted Answer

Work backwards (up) the income statement: EBT = 3.25/1 - 0.3 = $4.64m; EBIT = $4.64m + $1.05m = $5.69m; Gross Profits = $5.69m + $2.9 = $8.59m; Net sales = $8.59/(1 - 0.6) = $21.475m

Question 2

Oakdale Fashions Inc.had $255,000 in 2018 taxable income.If the firm paid $82,100 in taxes,what is the firm's average tax rate?
A) 34.70%
B) 32.20%
C) 29.90%
D) 28.20%

Accepted Answer

82,100 / 255,000 = 32.20%

Question 3

Mr.Husker's Tuxedos,Corp.began the year 2018 with $205 million in retained earnings.The firm earned net income of $30 million in 2018 and paid $5 million to its preferred stockholders and $12 million to its common stockholders.What is the year-end 2018 balance in retained earnings for Mr.Husker's Tuxedos?
A) $193,000,000
B) $200,000,000
C) $213,000,000
D) $218,000,000

Accepted Answer

$205m + $30m - $5m - $12m = $218m

Question 4

Is it possible for a firm to have positive net income and yet to have cash flow problems?
A) No, this is impossible since net income increases the firm's cash.
B) Yes, this can occur when a firm is growing very rapidly.
C) Yes, this is possible if the firm window-dressed its financial statements.
D) No, this is impossible since net income and cash are highly correlated.

Accepted Answer

A firm can have positive net income and still face cash flow problems if it is growing at a fast pace and investing heavily in capital expenditures or inventory. This can tie up cash in the short term and create cash flow issues even though the firm is profitable.

Question 5

Which of the following is NOT a source of cash?
A) The firm reduces its inventory.
B) The firm pays off some of its long-term debt.
C) The firm has positive net income.
D) The firm sells more common stock.

Accepted Answer

Paying off long-term debt is a use of cash, not a source. Reducing inventory, having positive net income, and selling more common stock all bring in cash, making them sources of cash.

Question 6

You are considering an investment in Fields and Struthers,Inc.and want to evaluate the firm's free cash flow.From the income statement,you see that Fields and Struthers earned an EBIT of $52 million,paid taxes of $10 million,and its depreciation expense was $5 million.Fields and Struthers' gross fixed assets increased by $38 million from 2012 to 2013.The firm's current assets increased by $20 million and spontaneous current liabilities increased by $12 million.Calculate Fields and Struthers' operating cash flow (OCF),investment in operating capital (IOC),and free cash flow (FCF)for 2013.
A) OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000
B) OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000
C) OCF = $42,000,000; IOC = $46,000,000; FCF = -$4,000,000
D) OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000

Accepted Answer

OCF = EBIT - Taxes + Depreciation = ($52m - $10m + $5m) = $47m Investment in operating capital: ΔGross fixed assets + ΔNet operating working capital = $38m + ($20m - $12m) = $46m Accordingly, Fields and Struthers' free cash flow for 2013 was: FCF = Operating cash flow - Investment in operating capital = $47m - $46m = $1m

Question 7

Ramakrishnan Inc.reported 2018 net income of $20 million and depreciation of $1,500,000.The top part of Ramakrishnan,Inc.'s 2017 and 2018 balance sheets is listed as follows (in millions of dollars).  Calculate the 2018 net cash flow from operating activities for Ramakrishnan,Inc.
A) $12,500,000
B) $10,500,000
C) $8,500,000
D) $7,100,000

Accepted Answer

20 + [1.5 + 2 + 5] - [9 + 11] = $8.5m

Question 8

Brenda's Bar and Grill has total assets of $17 million of which $5 million are current assets.Cash makes up 12 percent of the current assets and accounts receivable makes up another 40 percent of current assets.Brenda's gross plant and equipment has a cost value of $12 million and other long-term assets have a cost value of $1,000,000.Using this information,what are the balance of inventory and the balance of depreciation on Brenda's Bar and Grill's balance sheet?
A) $2.4 million; $1 million
B) $3.4 million; $2 million
C) $1.4 million; $1 million
D) $0.4 million; $3 million

Accepted Answer

Step 1: Find Inventory: CA = 5 = Cash + A/R + Inv = 0.12 × 5 + 0.40 × 5 + Inv; => Inv = $2.4m;
Step 2: Find Depreciation Expense: TA = CA + FA - Accumulated Depreciation.; 17 = 5 + (12 + 1) ­Accumulated Depreciation; => Accumulated Depreciation = $1m.

Question 9

Reed's Birdie Shot,Inc.'s 2018 income statement lists the following income and expenses: EBIT = $555,000,interest expense = $178,000,and taxes = $148,000.Reed's has no preferred stock outstanding and 100,000 shares of common stock outstanding.Calculate the 2018 earnings per share.
A) $3.49
B) $2.29
C) $3.14
D) $2.79

Accepted Answer

[0.555m - 0.178m - 0.148m]/0.1m = $2.29

Question 10

Dogs 4 U Corporation has net cash flow from financing activities for the last year of $10 million.The company paid $8 million in dividends last year.During the year,the change in notes payable on the balance was $9 million,and change in common and preferred stock was $0 million.The end of year balance for long-term debt was $44 million.Calculate the beginning of year balance for long-term debt.
A) $37 million
B) $34 million
C) $33 million
D) $35 million

Accepted Answer

$10 = $9 - $8 - $0 + Change in long-term debt; => change in long-term debt = $9 = Ending Bal - Change in long-term debt; => Beg balance of long-term debt = $35.

Question 11

Reed's Birdie Shot,Inc.'s 2018 income statement lists the following income and expenses: EBIT = $550,000,interest expense = $43,000,and net income = $300,000.Calculate the 2018 taxes reported on the income statement.
A) $85,000
B) $107,000
C) $309,000
D) $207,000

Accepted Answer

[0.550m - 0.043m] - 0.3m = 0.207m

Question 12

Muffin's Masonry,Inc.'s balance sheet lists net fixed assets as $16 million.The fixed assets could currently be sold for $17 million.Muffin's current balance sheet shows current liabilities of $5.5 million and net working capital of $6.5 million.If all the current accounts were liquidated today,the company would receive $10.25 million cash after paying $5.5 million in liabilities.What is the book value of Muffin's Masonry's assets today? What is the market value of these assets?
A) Book Value: $28m; Market Value: $32.75m
B) Book Value: $32m; Market Value: $42.25m
C) Book Value: $32m; Market Value: $32.75m
D) Book Value: $28m; Market Value: $42.25m

Accepted Answer

Step 1: Find CA (book value): = CA - CL = NWC; => CA (book value) = 6.5m + 5.5m = $12m.
Step 2: Find TA (book value): TA = Net FA + CA = $16m + $12m = $28m.
Step 3: Find CA (market value): NWC (market) + CL = $10.25 + $5.5m = $15.75m.
Step 4: Find TA (market value): Net FA + CA = $17m + $15.75m = $32.75m.

Question 13

The 2011 income statement for Duffy's Pest Control shows that depreciation expense is $180 million,EBIT is $420 million,EBT is $240 million,and the tax rate is 30 percent.At the beginning of the year,the balance of gross fixed assets was $1,500 million and net operating working capital was $500 million.At the end of the year gross fixed assets was $1,803 million.Duffy's free cash flow for the year was $425 million.Calculate the end of year balance for net operating working capital.
A) $403 million
B) $300 million
C) $203 million
D) $103 million

Accepted Answer

Step 1: Find OCF: OCF = $420 - ($240 × 0.3) + $180 = $528;
Step 2: Find investment in operating capital: FCF = $425 = $528 - Investment in Op Cap; Investment in operating capital = $103
Step 3: Find ending level of net op. working cap: $103 = ($1,803 - $1,500) + (Ending net op. working capital ­$500);
Ending net op. working capital = $300

Question 14

In 2018,Usher Sports Shop had cash flows from investing activities of ($2,150,000)and cash flows from financing activities of ($3,219,000).The balance in the firm's cash account was $980,000 at the beginning of 2018 and $1,025,000 at the end of the year.Calculate Usher Sports Shop's cash flow from operations for 2018.
A) $6,219,000
B) $5,414,000
C) $4,970,000
D) $5,980,000

Accepted Answer

[1,025,000 - 980,000] = X - 2,150,000 - 3,219,000; => X = Cash flow from operations = $5,414,000

Question 15

All of the following would be a result of changing to the MACRS method of depreciation EXCEPT
A) higher depreciation expense.
B) lower taxes in the early years of a project's life.
C) lower taxable income in the early years of a project's life.
D) All of these choices are correct.

Accepted Answer

The Modified Accelerated Cost Recovery System (MACRS) allows for higher depreciation expense in the early years of an asset's life, which leads to lower taxable income and thus lower taxes in those years. Therefore, all the choices listed are indeed results of switching to MACRS.

Question 16

Ed's Tobacco Shop has total assets of $100 million.Fifty percent of these assets are financed with debt of which $37 million is current liabilities.The firm has no preferred stock but the balance in common stock and paid-in surplus is $32 million.Using this information what is the balance for long-term debt and retained earnings on Ed's Tobacco Shop's balance sheet?
A) $18 million; $27 million
B) $12 million; $12 million
C) $14 million; $29 million
D) $13 million; $18 million

Accepted Answer

Step 1: Find long-term debt: TL = CL + long-term debt = 0.5 × 100 = 50 = 37 + long-term debt; long-term debt = $13 million;
Step 2: Find RE: Total equity = 0.5 × 100 = 50 = CS + P - I - S + RE = 32 + RE; RE = $18 million.

Question 17

You have been given the following information for Corky's Bedding Corp.: Net sales = $15,250,000; Cost of goods sold = $5,750,000; Addition to retained earnings = $4,000,000; Dividends paid to preferred and common stockholders = $995,000; Interest expense = $1,150,000.The firm's tax rate is 30 percent.Calculate the depreciation expense for Corky's Bedding Corp.
A) $1,970,842.88
B) $1,214,285.71
C) $1,521,989.23
D) $1,663,139.36

Accepted Answer

Step 1: NI = Dividends + Addition to RE = 40,000,000.00 + 995,000 = $4,995,000.
Step 2: NI = EBT (1 - tax rate) => EBT = NI/(1 - tax rate) = $4,995,000/(1 - 0.30) = $7,135,714.29.
Step 3: EBIT - Interest = EBT => EBIT = $7,135,714.29 + $1,150,000 = $8,285,714.29.
Step 4: Gross profits = Net sales - COGS = $15,250,000 - $5,750,000 = $9,500,000.
Step 5: Gross profits - Depreciation = EBIT => Depreciation = $9,500,000 - $8,285,714.29 = $1,214,285.71.

Question 18

Hunt Taxidermy,Inc.is concerned about the taxes paid by the company in 2018.In addition to $36.5 million of taxable income,the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy,Inc.Calculate Hunt Taxidermy's taxable income.
A) $40,250,000
B) $38,150,000
C) $36,900,000
D) $36,620,000

Accepted Answer

$36.5m + (0.3)0.4m = 36.620m

Question 19

Which of the following is a use of cash?
A) The firm takes its depreciation expense.
B) The firm sells some of its fixed assets.
C) The firm issues more long-term debt.
D) The firm decreases its accrued wages and taxes.

Accepted Answer

Decreasing accrued wages and taxes involves paying out cash to settle these obligations, thus it is considered a use of cash.

Question 20

Tater and Pepper Corp.reported free cash flows for 2018 of $20 million and investment in operating capital of $15 million.Tater and Pepper listed $8 million in depreciation expense and $12 million in taxes on its 2018 income statement.Calculate Tater and Pepper's 2018 EBIT.
A) $49,000,000
B) $42,000,000
C) $39,000,000
D) $47,000,000

Accepted Answer

FCF = Operating cash flow - Investment in operating capital; $20m = X - $15m; X = $35m OCF = EBIT - Taxes
+ Depreciation; $35m = (EBIT - $12m + $8m); EBIT = $39m

Quiz 2: Reviewing Financial Statements

Oakdale Fashions Inc.had $255,000 in 2018 taxable income.If the firm paid $82,100 in taxes,what is the firm's average tax rate?

Is it possible for a firm to have positive net income and yet to have cash flow problems?

Which of the following is NOT a source of cash?

Ramakrishnan Inc.reported 2018 net income of $20 million and depreciation of $1,500,000.The top part of Ramakrishnan,Inc.'s 2017 and 2018 balance sheets is listed as follows (in millions of dollars) . Calculate the 2018 net cash flow from operating activities for Ramakrishnan,Inc.

Reed's Birdie Shot,Inc.'s 2018 income statement lists the following income and expenses: EBIT = $555,000,interest expense = $178,000,and taxes = $148,000.Reed's has no preferred stock outstanding and 100,000 shares of common stock outstanding.Calculate the 2018 earnings per share.

Reed's Birdie Shot,Inc.'s 2018 income statement lists the following income and expenses: EBIT = $550,000,interest expense = $43,000,and net income = $300,000.Calculate the 2018 taxes reported on the income statement.

All of the following would be a result of changing to the MACRS method of depreciation EXCEPT

Hunt Taxidermy,Inc.is concerned about the taxes paid by the company in 2018.In addition to $36.5 million of taxable income,the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy,Inc.Calculate Hunt Taxidermy's taxable income.

Which of the following is a use of cash?

Tater and Pepper Corp.reported free cash flows for 2018 of $20 million and investment in operating capital of $15 million.Tater and Pepper listed $8 million in depreciation expense and $12 million in taxes on its 2018 income statement.Calculate Tater and Pepper's 2018 EBIT.