Question 1

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

Accepted Answer

Net operating working capital is calculated by subtracting operating current liabilities from operating current assets.

Question 2

The balance sheet is a financial statement that 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 statement is incorrect. The income statement measures the firm's financial performance over a period of time, while the balance sheet shows the financial position of the firm at a specific point in time.

Question 3

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 accurately describes the primary reason why the annual report is important in finance. It is a crucial source for investors to evaluate the firm's financial health and make informed investment decisions based on their expectations of future financial performance.

Question 4

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

Accepted Answer

The answer of If the tax laws were changed so...

Question 5

The current cash flow from existing assets is highly relevant to the investor.However,since the value of the firm depends primarily upon its growth opportunities,profit projections from those opportunities are the only relevant future flows with which investors are concerned.

Accepted Answer

While growth opportunities and profit projections from those opportunities are important, investors also consider the current cash flow from existing assets as it reflects the firm's ability to generate profit and sustain operations in the present, which is crucial for assessing the firm's overall financial health and stability.

Question 6

The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Accepted Answer

The statement incorrectly refers to a tax provision related to interest income, whereas the tax benefit for corporations usually pertains to the deductibility of interest expenses on debt, not the exclusion of interest income. The tax code allows corporations to deduct interest expenses, which can encourage the use of debt financing, but there is no provision that excludes 70% of interest income from taxable income.

Question 7

To estimate the cash flow from operations,depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

Accepted Answer

Depreciation is a non-cash expense that reduces net income but does not involve an outflow of cash, so it needs to be added back to net income to calculate cash flow from operations.

Question 8

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 values at which these assets are carried on the books.

Accepted Answer

This statement is true. Non-cash assets (such as property or equipment) are recorded on a company's balance sheet at their historical cost or fair market value, but the actual cash flows generated by these assets may be higher or lower than their recorded values over time. This is why companies must regularly assess the value of their assets and make adjustments to their financial statements as necessary.

Question 9

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

Accepted Answer

NOPAT is calculated by subtracting operating expenses and taxes from the revenue. It does not include any interest income or expenses.

Question 10

Its retained earnings is the actual cash that the firm has generated through operations less the cash that has 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 firm's total retained earnings.

Accepted Answer

Retained earnings represent the cumulative amount of net income earned by a company that is retained by the company rather than distributed to its shareholders as dividends. While retained earnings reflect the company's total net income after dividends, they are not necessarily held in cash or near-cash accounts. Retained earnings can be reinvested in the company, including in non-cash assets such as property, plant, and equipment, or used for any other purpose as decided by the company's management.

Question 11

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

The statement is true. Since interest paid is tax deductible, it reduces the taxable income of the corporation and lowers their tax liability, making debt financing a more attractive option compared to paying dividends, which are not tax deductible.

Question 12

Total net operating capital is equal to net fixed assets.

Accepted Answer

Total net operating capital includes both net fixed assets and current assets, while net fixed assets only include long-term assets such as property, plant, and equipment. Therefore, total net operating capital will always be greater than net fixed assets.

Question 13

In accounting,emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance,the primary emphasis is also on net income because that is what investors use to value the firm.However,a secondary financial consideration is cash flow,because cash is needed to operate the business.

Accepted Answer

The answer of In accounting,emphasis is placed on determining net...

Question 14

The 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 can be considered a deductible expense, which can decrease the firm's tax liability, but dividends paid are not deductible and do not affect the corporation's taxes.

Question 15

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects changes in the firm's accounts over that period of time.

Accepted Answer

The statement accurately describes the importance of time dimension in financial statement analysis.

Question 16

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

Accepted Answer

The annual report typically includes these four financial statements.

Question 17

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 or cash,and reported costs likewise may not correctly reflect 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

The statement is true as the income statement may not accurately reflect a firm's actual cash flow due to non-cash items and non-cash expenses.

Question 18

Consider the balance sheet of Wilkes Industries as shown below.Because Wilkes has $800,000 of retained earnings,the company would be able to pay cash to buy an asset with a cost of $200,000.

Accepted Answer

The answer of Consider the balance sheet of Wilkes Industries...

Question 19

The retained earnings account on the balance sheet does not represent cash.Rather,it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

The statement is true. Retained earnings are not cash, but rather represent a portion of the ownership interest that shareholders have in the company's assets. They are the earnings that have been reinvested back into the company, rather than being distributed as dividends to shareholders.

Question 20

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

Accepted Answer

This is the fundamental accounting equation and it must always be in balance. Total assets must equal the sum of total liabilities and equity.

Quiz 6: Accounting for Financial Management