Question 1

The value of any asset is the present value of the cash flows the asset is expected to provide.The cash flows a business is able to provide to its investors is its free cash flow.This is the reason that FCF is so important in finance.

Accepted Answer

This statement is true. The concept of free cash flow being important in finance is based on the idea that the value of an asset is related to the cash flows it generates.

Question 2

Net operating working capital is equal to current assets less excess cash minus the difference between current liabilities and notes payable.

Accepted Answer

This is the correct formula for calculating net operating working capital.

Question 3

The balance sheet measures the flow of funds into and out of various accounts over time,while the income statement measures the firm's financial position at a point in time.

Accepted Answer

The opposite is true. The balance sheet provides a snapshot of the firm's financial position at a point in time, while the income statement measures the flow of funds over a period of time (usually a year).

Question 4

Consider the following balance sheet for Games Inc.Because Games has $800,000 of retained earnings,we know that the company would be able to pay cash to buy an asset with a cost of $200,000.
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Accepted Answer

The answer of Consider the following balance sheet for Games...

Question 5

The fact that interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.

Accepted Answer

Interest income received by corporations is generally taxable. The tax law provision actually allows the deduction of interest expense, not income, which can encourage firms to finance with more debt due to the tax shield on interest payments.

Question 6

​Assume that two firms are both following generally accepted accounting principles.Both firms commenced operations two years ago with $1 million of identical fixed assets,and neither firm sold any of those assets or purchased any new fixed assets.The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

Accepted Answer

Even if two firms start with the same amount of identical fixed assets and follow generally accepted accounting principles (GAAP), they may choose different depreciation methods (e.g., straight-line vs. accelerated depreciation) or have different estimates for useful lives and salvage values, leading to different net fixed asset values on their balance sheets.

Question 7

Both interest and dividends paid by a corporation are deductible operating expenses,hence they decrease the firm's taxes.

Accepted Answer

Interest paid by a corporation is a deductible expense which can decrease the firm's taxable income and thus its taxes, but dividends paid are not deductible and do not affect the firm's taxes.

Question 8

EBITDA stands for "earnings before interest,taxes,debt,and assets."

Accepted Answer

EBITDA stands for "earnings before interest, taxes, depreciation, and amortization."

Question 9

The balance sheet represents a snapshot in time,whereas the income statement reports on operations over a period of time.

Accepted Answer

This statement is true. The balance sheet shows the financial position of a company at a specific point in time, while the income statement shows the company's financial performance over a given period, typically a quarter or a year.

Question 10

Companies typically provide four basic financial statements: the fixed income statement,the current income statement,the balance sheet,and the cash flow statement.

Accepted Answer

Companies typically provide four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of shareholders' equity, not the fixed and current income statements.

Question 11

The annual report contains four basic financial statements: the income statement,the balance sheet,the cash flow statement,and the statement of stockholders' equity.

Accepted Answer

The annual report does indeed contain these four basic financial statements.

Question 12

EBIT,often referred to as operating income,stands for "earnings before interest and taxes."

Accepted Answer

EBIT is also known as operating income and represents a company's earnings before interest and taxes are deducted.

Question 13

The amount shown on the December 31,2019 balance sheet as "retained earnings" is equal to the firm's net income for 2019 minus any dividends it paid

Accepted Answer

The retained earnings on the balance sheet represent all of the cumulative earnings that have not been paid out in dividends over the life of the company, not just the current year's net income minus dividends.

Question 14

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends and the riskiness of those cash flows.

Accepted Answer

The statement is true. The annual report provides important financial and operational information about a company, and investors use this information to assess the company's future prospects and make investment decisions.

Question 15

The income statement shows the difference between a firm's income and its costs-i.e. ,its profits-during a specified period of time.However,not all reported income comes in the form of cash,and reported costs likewise may not be consistent with cash outlays.Therefore,there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

Accepted Answer

This statement accurately describes the concept of cash flow and how it differs from reported profits on the income statement.

Question 16

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

Net income and free cash flow are not the same. While net income represents the profits earned by a company, free cash flow represents the cash generated by the company that is available for discretionary use by management, creditors, and investors. Net income is a non-cash measure as it includes depreciation and amortization expenses, whereas free cash flow is a cash measure that deducts capital expenditures from operating cash flows. Therefore, the two figures can differ significantly.

Question 17

Assets other than cash are expected to produce cash over time,but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.

Accepted Answer

Assets such as property, plant, and equipment, as well as investments, are expected to generate cash flows over time. However, these cash flows may be affected by various factors such as market conditions, changes in technology or regulations, and management decisions, which could result in the cash flows being higher or lower than the amounts at which the assets are initially recorded on the books.

Question 18

On the balance sheet,total assets must always equal the sum of total liabilities and equity.

Accepted Answer

This is based on the fundamental accounting equation: Assets = Liabilities + Equity. Therefore, the total of assets will always be equal to the total of liabilities plus equity.

Question 19

Typically,the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year,adds net income,subtracts dividends paid,and ends with total stockholders' equity at the end of the year.Over time,a profitable company will have earnings in excess of the dividends it pays out,resulting in a substantial amount of retained earnings shown on the balance sheet.

Accepted Answer

This statement accurately describes the typical format of the statement of stockholders' equity for a profitable company.

Question 20

Free cash flow (FCF)is,essentially,the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.

Accepted Answer

This is the correct definition of free cash flow.

Quiz 3: Financial Statements,cash Flow and Taxes