Question 1

Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

Accepted Answer

Since interest paid is a tax deduction, it effectively reduces the corporation's taxable income, resulting in lower taxes paid. On the other hand, dividends do not receive any tax deduction, which means that they are paid out of after-tax profits. Therefore, corporations may be inclined to use more debt financing since interest payments decrease their tax liability.

Question 2

Net operating working capital is equal to the operating current assets minus the operating current liabilities.

Accepted Answer

Net operating working capital is defined as the difference between current operating assets and current operating liabilities.

Question 3

If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, it would probably encourage com¬panies to use more debt financing than they presently do, other things held constant.

Accepted Answer

False

Question 4

Total net operating capital is equal to net fixed assets.

Accepted Answer

Total net operating capital (TNOC) is equal to net fixed assets plus net working capital.

Question 5

On its 2008 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million. On its 2009 balance sheet, the balance of retained earnings was also equal to $510 million. Which of the following statements is most correct?
A) The company must have had net income equal to zero in 2009.
B) The company did not pay a dividend in 2009.
C) If the company's net income in 2009 was $200 million, dividends paid must have also equaled $200 million.
D) If the company lost money in 2009, they must have paid a dividend.
E) None of the statements above is correct.

Accepted Answer

The retained earnings remained the same from 2008 to 2009, indicating that any net income earned was entirely paid out as dividends. If the net income was $200 million, then $200 million must have been paid as dividends to keep the retained earnings unchanged.

Question 6

Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased. What could explain these events?
A) Aldrin issued long-term debt.
B) Aldrin repurchased some of its common stock.
C) Aldrin sold some of its assets.
D) Statements a and b are correct.
E) Statements a and c are correct.

Accepted Answer

If Aldrin issued long-term debt (A), this inflow of cash would increase its cash balance on the balance sheet even if its net cash flow was negative. Similarly, if Aldrin sold some of its assets (C), this would also result in an inflow of cash and an increase in its cash balance on the balance sheet, even if its net cash flow was negative. Therefore, only statements a and c are correct.

Question 7

The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of retained earnings.

Accepted Answer

This statement is true.

Question 8

On the balance sheet, total assets must always equal total liabilities. The amount remaining is what is used to finance the firm and includes equity and long-term debt.

Accepted Answer

On a balance sheet, total assets must equal the sum of total liabilities and equity, not just total liabilities. Equity represents the owners' claim after liabilities are settled.

Question 9

Retained earnings is the cash that has been generated by the firm through its operations which has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and thus, these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

Accepted Answer

Retained earnings are not necessarily kept in cash or near-cash accounts; they represent the cumulative net income not distributed as dividends and can be reinvested in the business, used to pay off debt, or held in various forms of assets, not just cash.

Question 10

In order to accurately estimate cash flow from operations, depreciation must be added back to net income. The reason for this is that even though depreciation is deducted from revenue it is really a non-cash charge.

Accepted Answer

Depreciation is a non-cash charge that reduces net income but does not actually involve any cash outflow. Therefore, it must be added back to net income in order to accurately calculate cash flow from operations.

Question 11

Non-cash assets are expected to produce cash over time but the amount of cash they eventually produce could be higher or lower than the values at which the assets are carried on the books.

Accepted Answer

Non-cash assets, such as investments or property, are carried on the books at their original cost or fair value. However, the amount of cash they eventually produce can fluctuate based on market conditions or other factors, leading to potential differences between the carrying value and the actual cash generated.

Question 12

The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.

Accepted Answer

Annual report information gives investors important insights into a company's financial performance, strategy, and risks, which can help them make informed decisions about investing in the company's stock or bonds. Investors use this information to form expectations about future earnings and dividends, as well as the riskiness of those cash flows. Therefore, the key importance of annual report information is indeed its use by investors in this way.

Question 13

Net operating profit after taxes (NOPAT) is the amount of profit a company would have from its operations if it had no interest income or interest expense.

Accepted Answer

This is the correct definition of NOPAT. It is a measure of a company's profitability that only considers income from its operations, not including any interest income or expenses.

Question 14

The retained earnings account on the balance sheet does not represent cash and in fact, represents a claim against the existing assets of the firm. This implies that retained earnings are in fact the reinvested earnings of stockholders.

Accepted Answer

Retained earnings represent the portion of net income that is not distributed as dividends and is instead reinvested in the business. It is a component of stockholders' equity, which means it represents the owners' claim on the assets of the company. Retained earnings are not cash, but rather a measure of the amount of earnings that have accumulated over time and have not been distributed to shareholders.

Question 15

The time dimension is important in financial statement analysis. While the balance sheet and income statements represent the firm's financial position at a point in time, the statement of cash flows reports changes that were made to the firm's accounts over a period of time.

Accepted Answer

The answer of The time dimension is important in financial...

Question 16

In accounting, emphasis is placed on determining net income. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary consideration is cash flow because that's what is used to run the business.

Accepted Answer

In finance, the primary emphasis is on cash flow rather than net income, as cash flow is crucial for valuing a firm and ensuring its operations, while net income is more of an accounting measure.

Question 17

The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time.

Accepted Answer

The balance sheet is a financial statement that shows the financial position of a business at a specific point in time, while the income statement measures a company's financial performance over a specific period of time (usually a quarter or a year).

Question 18

The income statement measures the flow of funds into (i.e., revenue) and out of (i.e., expenses) the firm over a certain time period. It is always based on accounting data.

Accepted Answer

The income statement is indeed based on accounting data and measures the flow of funds into and out of the firm over a certain time period.

Question 19

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Accepted Answer

Interest paid by a corporation is deductible, reducing taxable income, but dividends are not deductible and do not affect tax liability.

Question 20

The fact that a percentage of the interest income received by a corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Accepted Answer

The answer of The fact that a percentage of the...

Quiz 7: Accounting for Financial Management