Deck 13: From Financial Statements to Economic Cash Flows

Question 1

Which of the following is considered a long-term accrual?

A)accounts payable
B)depreciation
C)inventory
D)accounts receivable

Answer 1

depreciation

Question 2

Which of the following financial statements provides a snapshot view of the firm at a given point in time?

A)income statement
B)balance sheet
C)cash flow statement
D)Both B and C.

Answer 2

balance sheet

Question 3

The term that applies when an intangible asset, such as a patent, is expensed over time rather than fully expensed at the time of purchase is

A)goodwill write-down.
B)depletion.
C)depreciation.
D)amortization.

Answer 3

amortization.

Question 4

Assume a firm purchases a piece of equipment that costs $500,000 and will be depreciated using straight-line depreciation over 5 years for tax purposes. If the firm is in the 34%
Marginal tax bracket, what will its annual tax savings due to the depreciation be?

A)$330,000
B)$ 66,000
C)$ 34,000
D)$170,000

Question 5

Which of the following are subtracted from sales in order to arrive at operating income? I. Cost of goods sold
II. Selling, general, and administrative expenses
III. Depreciation and amortization
IV. Interest expense

A)I, II, III, and IV
B)I, II, and III only
C)I only
D)I and II only

Question 6

The annual report of a firm is filed with the SEC in Form

A)10K
B)10Q
C)8K
D)1040A

Question 7

Dupke Discount Office Supply Stores had sales of $12 million in 2007. Its cost of goods sold was $9 million, and it had selling, general, and administrative expenses of $1.1 million. The
Firm paid $100,000 in interest expense and $50,000 in dividends to its shareholders. For
Simplicity, assume a flat tax rate of 40%. Dupke's net income for 2007 was

A)$1.90 million.
B)$1.08 million.
C)$1.75 million.
D)$3.00 million.

Question 8

Which of the following would not be considered a short-term accrual?

A)accounts payable
B)accounts receivable
C)pre-paid expenses
D)cash

Question 9

The Arc Corporation has a depreciation expense of $30,000 and is in the 25% marginal tax bracket. The depreciation provides a tax savings of

A)$30,000
B)$15,000
C)$7,500
D)$2,250

Question 10

Which of the following accounts will not be found on a firm's income statement?

A)deferred taxes
B)selling, general, and administrative expenses
C)depreciation expense
D)All of the above can be found on a firm's income statement.

Question 11

The Ace Dairy Corporation is considering the purchase of a new machine that will cost $91,000. The machine is expected to increase revenues by $27,000 a year and cash expenses by
$8,000. The machine will be depreciated using straight-line depreciation under IRS rules over
7 years. The firm pays taxes at a marginal rate of 40%. Calculate the incremental annual cash
Flows if Ace Dairy purchases the machine.

A)$16,600
B)$13,200
C)$3,600
D)$26,200

Question 12

A certain asset costs $147,000. It has a real physical life of 7 years and a 3-year life for accounting purposes. If straight-line depreciation is used, what depreciation expense will be
Recorded on the income statement that is provided to shareholders (i.e., the one that is
Prepared using GAAP?)

A)$36,750
B)$21,000
C)$49,000
D)$29,400

Question 13

The most important financial statement from the viewpoint of a financial analyst is the

A)balance sheet
B)owners' equity statement
C)cash flow statement
D)income statement

Question 14

Calumet Cabinets Corporation had sales of $3.2 million in 2007. Its cost of goods sold was $1.4 million, and it had $1.3 million in selling, general, and administrative expenses. It paid interest
Of $50,000 and dividends to its shareholders of $10,000. For simplicity, assume a flat tax rate of
40%. The firm's operating profit in 2007 was

A)$0.35 million.
B)$1.8 million.
C)$0.50 million.
D)$0.45 million.

Question 15

The B. Bowden Company is evaluating the purchase of a new stadium, the B.B. Dome. The new stadium would cost Bowden $100,000,000 and would be depreciated for tax purposes
Using straight-line depreciation over 20 years. It is expected that the new stadium will
Increase revenues by $400,000,000 a year and cash expenses by $200,000,000 a year. Calculate
The incremental annual cash flows if B. Bowden undertakes the stadium project Assume a
Marginal tax rate of 35%.

A)$200,000,000
B)$ 97,500,000
C)$147,500,000
D)None of the above answers is correct.

Question 16

Which of the following needs to be done in order to convert net income to a number that is closer to cash flow?

A)subtract capital expenditures and the depreciation expense from net income
B)add capital expenditures to net income and subtract the depreciation expense from net income
C)subtract capital expenditures from net income and add the depreciation expense to net income
D)add back capital expenditures and the depreciation expense to net income

Question 17

A certain asset costs $84,000. It has a real physical life of 10 years, but it can be depreciated using straight-line depreciation over 7 years for tax accounting purposes. If a firm is in the
34% tax bracket, what will the tax savings from the depreciation be?

A)$7,920
B)$4,080
C)$2,856
D)$5,544

Question 18

Which of the following is a short-term accrual?

A)capital expenditures
B)bad debt losses
C)depreciation
D)taxes payable

Question 19

Which of the following accounts will not be found on a firm's balance sheet?

A)prepaid expenses
B)taxes payable
C)deferred taxes
D)depreciation expense

Question 20

How is the cost of a machine treated differently by a financial analyst doing an NPV
analysis and an accountant preparing financial statements?

Question 21

The following information is provided for a firm:
Refer to the information above. Calculate the firm's actual after-tax cash flow for year 2.

A)$378 million
B)$598 million
C)$596 million
D)$398 million

Question 22

All else equal, if a firm invests an additional $100,000 in inventory during the year,

A)cash flow from investing activities will increase by $100,000.
B)cash flow from operating activities will decrease by $100,000.
C)cash flow from investing activities will decrease by $100,000.
D)cash flow from operating activities will increase by $100,000.

Question 23

Assume that an existing piece of equipment of a firm is being depreciated at $10,000 a year under current tax laws. The firm is considering replacing it with a new machine that will be
Depreciated at $15,000 a year. What will be the annual tax savings on the incremental
Depreciation provided by the new machine if the firm is in a 40% marginal tax bracket?

A)$3,000
B)$9,000
C)$2,000
D)$6,000

Question 24

Assume your firm will consist of just one machine. The machine costs $126,000 and has a physical life of 10 years. Tax laws require that it be depreciated over 7 years, using straight-line depreciation. The machine produces $50,000 a year in sales and requires cash expenses of $15,000 a year. All sales are cash sales, and your firm's marginal tax rate is 40%. Your overall cost of capital is 14% a year, and this is the appropriate rate at which to discount both the before-tax project cash flows and the cash flows to Uncle Sam. Your firm has $80,000 of debt at an interest rate of 10% a year. Your first interest payment is due in year 1. Your last interest payment and the principal on the debt are due in year 10.
Refer to the information above. If you can assume perfect capital markets, what is the NPV of the levered ownership of the firm? Round your answer to the nearest dollar.

A)+$14,414
B)+$21,094
C)-$65,586
D)None of the above is correct.

Question 25

The following information is provided for a firm:
Refer to the information above. Calculate the firm's real after-tax cash flow for year 3.

A)$471 million
B)$542.8 million
C)$545 million
D)None of the above is correct.

Question 26

Will the total GAAP depreciation at the end of a project equal the amount of
depreciation that is reported for tax purposes? If so, why is the difference in accounting
methods even an issue?

Question 27

The following information is provided for a firm:
Refer to the information above. How much will the firm report in its deferred taxes liability account in year 2?

A)$6 million
B)$2 million
C)$4 million
D)None of the above is correct.

Question 28

True, False, or Uncertain: "Adding depreciation, depletion, and amortization back to
operating profit gives us EBITDA, which is the actual cash flow from operations of the
firm." Explain.

Question 29

In 2006, the Skeeter Corporation had deferred taxes of $348 on the liability side of its balance sheet. In 2007, the amount was $224. This means that Skeeter had a

A)cash outflow of $224 in 2007.
B)cash outflow of $124 in 2007.
C)cash inflow of $124 in 2007.
D)cash inflow of $224 in 2007.

Question 30

Which of the following is a correct adjustment to derive cash flow from the net income figure for a firm?

A)subtract an increase in inventory
B)add an increase in accounts receivable
C)subtract an increase in income taxes payable
D)add an increase in capital expenditures

Question 31

Which of the following is a correct adjustment to derive cash flow from the net income figure for a firm?

A)subtract any increase in accounts payable
B)subtract any decrease in accounts receivable
C)add any increase in accounts payable
D)add any increase in inventory

Question 32

Which of the following transactions is most likely to affect the deferred taxes account of a firm?

A)The firm delays its payments to its suppliers.
B)The firm sells goods on credit.
C)The firm experiences an extraordinary loss due to a natural disaster.
D)The firm uses one method of depreciation for reporting to shareholders and another for tax reporting.

Question 33

The following information is provided for a firm:
Refer to the information above. How much will the firm report in its deferred taxes liability account in year 3?

A)$6.2 million
B)$1.8 million
C)$8.2 million
D)$3.8 million

Question 34

Which of the following is a correct adjustment to make when translating net income into cash flow?

A)add back any increase in accounts payable or other payables
B)add back any increase in accounts receivables or inventory
C)subtract any decrease in accounts payable or other payables
D)Both A and B are correct adjustments to make.

Question 35

The following information is provided for a firm: a. Calculate the amount of deferred taxes that the firm will report on its balance sheet
in years 2 and 3.
b. Calculate the real after-tax cash flows for the firm in years 2 and 3.

Question 36

Given that depreciation is not an actual cash flow, why do financial analysts even
concern themselves with this number?

Question 37

The Trimark Corporation is considering replacing an existing machine that cost $125,000 three years ago with one that will cost $200,000 today. The existing machine is being depreciated for
Tax purposes over 5 years using straight-line depreciation. The new machine would be
Depreciated over 5 years using straight-line depreciation as well. Trimark pays taxes at a
Marginal rate of 40%. If Trimark buys the new machine, what will be the annual tax savings
From the incremental depreciation for each of the first five years?

A)$15,000 for the first two years and $40,000 for the last three years
B)$6,000 for the first two years and $16,000 for the last three years
C)$6,000 for all five years
D)$16,000 for all five years

Question 38

Assume your firm will consist of just one machine. The machine costs $126,000 and has a physical life of 10 years. Tax laws require that it be depreciated over 7 years, using straight-line depreciation. The machine produces $50,000 a year in sales and requires cash expenses of $15,000 a year. All sales are cash sales, and your firm's marginal tax rate is 40%. Your overall cost of capital is 14% a year, and this is the appropriate rate at which to discount both the before-tax project cash flows and the cash flows to Uncle Sam. Your firm has $80,000 of debt at an interest rate of 10% a year. Your first interest payment is due in year 1. Your last interest payment and the principal on the debt are due in year 10.
Refer to the information above. Calculate the NPV of the project.

A)-$72,796
B)+$21,094
C)+$ 5,151
D)+$14,414

Question 39

Deferred taxes are

A)taxes that need never be paid due to a credit received from the federal government.
B)a current liability account.
C)taxes that must be paid within the next month.
D)none of the above.

Question 40

Which of the following is not a net working capital account?

A)accounts receivable
B)accounts payable
C)cash
D)deferred taxes

Question 41

Felix Industries' 2007 annual report contained the following information: What net effect did these accounts have on the firm's 2007 cash flow?

A)decreased cash flow by $30,000
B)increased cash flow by $10,000
C)increased cash flow by $30,000
D)decreased cash flow by $10,000

Question 42

The 2006 and 2007 income statements and balance sheets for Hi-Gro Industries are provided below: Assume that the difference in the gross plant, property, and equipment account reflects Hi-Gro's capital expenditures and that the change in its long-term debt account reflects its net issuance of debt. Assume, also, that the actual taxes paid in 2007 were $1,131,000.
Refer to the information above. Calculate Hi-Gro's cash flow to levered equity shareholders.

A)+$134,000
B)-$1,167,000
C)-$1,056,000
D)+$23,000

Question 43

Which of the following actions can a firm take to make its cash flow look better in any given year?

A)increase its inventory
B)offer more liberal credit terms to its customers
C)delay payments to its suppliers
D)none of the above

Question 44

The Morning Star News Agency reported an operating profit of $140,000 in 2007. Its depreciation expense was $13,000, and it invested $20,000 in new equipment during the year.
In addition, its accounts receivable increased by $10,000; its inventory increased by $5,000, its
Accounts payable increased by $8,000; and its taxes payable decreased by $3,000. If the firm
Paid taxes of $14,000 in 2007, what was its free cash flow?

A)$ 83,000
B)$109,000
C)$103,000
D)$129,000

Question 45

Jemco Corporation's 2007 Statement of Cash Flows is provided below: Jemco had $9,200 in interest expense in 2007.
Refer to the information above. Calculate Jemco's equity cash flow.

A)-$ 900
B)+$ 8,300
C)+$17,500
D)-$56,000

Question 46

The Trinidad Tire Company reported an operating profit of $100,000 in 2007. Its depreciation expense was $20,000, and it invested $30,000 in new equipment during the year. In addition,
Its accounts receivable decreased by $3,000; its inventory decreased by $10,000; its accounts
Payable increased by $6,000; and its taxes payable decreased by $5,000. If the firm paid taxes
Of $10,000 in 2007, what was its free cash flow?

A)$66,000
B)$86,000
C)$26,000
D)$94,000

Question 47

Jemco Corporation's 2007 Statement of Cash Flows is provided below: Jemco had $9,200 in interest expense in 2007.
Refer to the information above. Calculate Jemco's project cash flow.

A)+$ 8,300
B)+$17,500
C)-$56,000
D)-$26,700

Question 48

Jacobi Industries produced the following income statement in 2007: Other financial data for the firm for 2006 and 2007 were as follows: Calculate Jacobi's free cash flow from operations for 2007.

A)$ 98,630
B)$ 66,430
C)$ 64,740
D)$100,620

Question 49

The Genetica Corporation produced the following income statement in 2007: Other financial data for the firm for 2006 and 2007 were as follows: Calculate Genetica's free cash flow from operations for 2007.

A)$1,080,000
B)$ 190,000
C)$ 410,000
D)$ 830,000

Question 50

What is the net effect on a firm's cash flow if its net working capital decreases from one
year to the next? Why does this make sense?

Question 51

A firm's annual report contains the following information: What net effect did these accounts have on the cash flow of the firm in 2007?

Question 52

The Sinbad Corporation's 2007 annual report contained the following information: What net effect did these accounts have on the firm's 2007 cash flow?

A)decreased cash flow by $10,000
B)decreased cash flow by $12,000
C)increased cash flow by $12,000
D)increased cash flow by $10,000

Question 53

All else equal, if a firm reduces its accounts payable by $20,000 during the year,

A)cash flow from investing activities will increase by $20,000.
B)cash flow from operating activities will increase by $20,000.
C)cash flow from operating activities will decrease by $20,000.
D)cash flow from investing activities will decrease by $20,000.

Question 54

Which of the following might be a warning sign that management is attempting to deceive investors when reporting a high cash flow?

A)a large increase in its accounts payable from one year to the next
B)a large increase in its depreciation expense from one year to the next
C)a large decrease in its accounts payable from one year to the next
D)a large decrease in its accounts receivable from one year to the next

Question 55

When comparing two firms based on their short-term accrual-to-sales ratios, what
two things must you ensure are the same for both firms in order to make a valid
comparison?

Question 56

The 2006 and 2007 income statements and balance sheets for Hi-Gro Industries are provided below: Assume that the difference in the gross plant, property, and equipment account reflects Hi-Gro's capital expenditures and that the change in its long-term debt account reflects its net issuance of debt. Assume, also, that the actual taxes paid in 2007 were $1,131,000.
Refer to the information above. Calculate Hi-Gro's free cash flow to both debt and equity investors (i.e., the project cash flows)for 2007.

A)+$339,000
B)-$461,000
C)+$399,000
D)-$643,000

Question 57

You are examining a firm's cash flow statement and see that a large part of its increase
in cash flow from operating activities for the year is due to a change in its accounts
payable from the previous year. What, specifically, does this mean?

Question 58

Dividend payments to shareholders is a

A)cash flow from operating activities
B)cash flow from financing activities
C)cash flow from investing activities
D)None of the above is correct.

Question 59

A firm reported $400,000 in net income in 2007. The firm invested $50,000 in equipment during the year and reported a depreciation expense of $21,000. Its account receivable
Decreased by $10,000; its inventory increased by $8,000; its accounts payable increased by
$3,000; and its taxes payable decreased by $2,000. Calculate the firm's operating cash flow.
(Assume no other transactions affected the firm's 2007 cash flow.)

A)$330,000
B)$368,000
C)$374,000
D)None of the above is correct.

Question 60

The Miners' Deli is considering the purchase of a new computer system for inventory control purposes. It is thought that better inventory management will save the firm $20,000 a year in
Cash expenses although it is not expected to have any effect on revenues. It is also expected
That the deli will be able to reduce its investment in inventory by $5,000 a year. No other net
Working capital accounts are expected to be affected. The system will cost $80,000 and will be
Depreciated using straight-line depreciation over 5 years for tax purposes. The firm pays taxes
At a marginal rate of 25%. What are the annual incremental cash flows for this project?

A)$14,000
B)$24,000
C)$19,000
D)None of the above answers is correct.

Question 61

The 2007 financial statements for Freedom Air, Incorporated are provided below:
Refer to the information above. Use Freedom Air's financial statement information to
calculate the project cash flows (i.e., free cash flows)available to the debt and equity
investors.

Question 62

The 2007 financial statements for Freedom Air, Incorporated are provided below:
Refer to the information above. Use Freedom Air's financial statement information to
calculate the cash flows available to levered equity shareholders.

Question 63

The 2006 and 2007 income statements and balance sheets of Omega International, Inc.
are provided below: Assume that the change in the gross plant, property, and equipment account
represents the capital expenditures of the firm in 2007 and that the actual taxes paid by
Omega in 2007 were $1,020,000. Calculate Omega's free cash flow for 2007.