Exam

Name___________________________________

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.

1) Which one of these equations is an accurate expression of the balance sheet? 1)

A) Liabilities ≡ Stockholders' equity −Assets
B) Assets ≡ Liabilities −Stockholders' equity
C) Stockholders' equity ≡ Assets −Liabilities
D) Assets ≡ Stockholders' equity −Liabilities
E) Stockholders' equity ≡ Assets + Liabilities
Answer: C

2) Which one of these accounts is classified as a current asset on the balance sheet? 2)
A) preferred stock
B) net plant and equipment
C) accounts payable
D) intangible asset
E) inventory
Answer: E

3) On a balance sheet, deferred taxes are classified as: 3)

A) stockholders' equity.
B) a current asset.
C) a fixed asset.
D) a current liability.
E) a long-term liability.
Answer: E

4) Net working capital is defined as: 4)

A) total assets minus total liabilities.
B) current assets minus current liabilities.
C) fixed assets minus long-term liabilities.
D) current assets plus fixed assets.
E) current assets plus stockholders' equity.
Answer: B

5) An asset that can be quickly converted into cash without significant loss in value is 5)
referred to as being:
A) intangible.
B) fixed.
C) marketable.
D) liquid.
E) tangible.
Answer: D

1
6) The financial statement summarizing a firm's accounting performance over a period of 6)
time is the:
A) income statement.
B) balance sheet.
C) statement of equity.
D) tax reconciliation statement.
E) statement of cash flows.
Answer: A

7) Noncash items refer to: 7)

A) all accounts on the balance sheet other than cash on hand.
B) the credit sales of a firm.
C) the accounts payable of a firm.
D) the costs incurred for the purchase of intangible fixed assets.
E) expenses charged against revenues that do not directly affect cash flow.
Answer: E

8) For a firm with long-term debt, net income is equal to: 8)

A) Taxes + Addition to retained earnings.
B) Pretax income - Interest expense - Taxes.
C) Dividends + Addition to retained earnings.
D) EBIT - Taxes.
E) Pretax income × (1 - Marginal tax rate).
Answer: C

9) Which term defines the tax rate that applies to the next dollar of taxable income earned? 9)
A) deductible
B) residual
C) marginal
D) total
E) average
Answer: C

10) U.S. corporate taxes switch to a constant flat-rate tax once the average tax rate reaches: 10)
A) 40 percent.
B) 35 percent.
C) 32 percent.
D) 33 percent.
E) 28 percent.
Answer: B

2
11) The cash flow resulting from a firm's ongoing, normal business activities is referred to as 11)
the:
A) cash flow to investors.
B) netcapital spending.
C) operating cash flow.
D) additions to net working capital.
E) cash flow to retained earnings.
Answer: C

12) Capital spending is equal to: 12)

A) ending net fixed assets minus beginning net fixed assets plus depreciation.
B) ending total assets minus beginning total assets.
C) ending next fixed assets minus beginning net fixed assets.
D) beginning total assets plus asset purchases minus asset sales.
E) ending total assets minus beginning total assets minus depreciation.
Answer: A

13) Operating cash flow is defined as: 13)

A) EBIT + Depreciation - Taxes.
B) Pretax income - Taxes.
C) Pretax income + Depreciation.
D) Cash flow to investors + Taxes.
E) Net income - Dividends.
Answer: A

14) Inthe accounting statement of cash flows, which one of these is calculated by adding 14)
back noncash expenses to net income and adjusting for changes in current assets and
liabilities?
A) cash flow to investors
B) cash flow from financing activities
C) cash flow from investing activities
D) net working capital
E) cash flow from operating activities
Answer: E

15) Which one of these terms refers to the firm's interest payments less any net new 15)
borrowing?
A) cash flow to stockholders
B) cash flow to creditors
C) net working capital
D) operating cash flow
E) capital spending
Answer: B

3
16) A firm's dividend payments less any net new equity raised is referred to as the firm's: 16)
A) capital spending.
B) cash flow from creditors.
C) net working capital.
D) cash flow to stockholders.
E) operating cash flow.
Answer: D

17) Earnings per share will increase when: 17)

A) depreciation decreases.
B) operating income decreases.
C) the average tax rate increases.
D) the number of shares outstanding increase.
E) dividends per share decrease.
Answer: A

18) Assuming the number of shares outstanding remains constant, an increase in dividends 18)
per share will reduce the:
A) cash flow from assets.
B) net income.
C) earnings per share.
D) cash flow to stockholders.
E) addition to retained earnings.
Answer: E

19) Which one of these is a non-cash item? 19)

A) selling expenses
B) dividends
C) interest expense
D) current taxes
E) depreciation
Answer: E

20) Which one of the following is a current liability? 20)

A) loan payment due in 13 months
B) amount due from a customer in 30 days
C) estimated taxes just paid
D) debt payable to a mortgage company in nine months
E) amount due to a supplier in 18 months
Answer: D

4
21) Anincrease in total assets: 21)
A) means that stockholders' equity must also increase.
B) means that net working capital is also increasing.
C) requires an investment in fixed assets.
D) can only occur when a firm has positive net income.
E) must be offset by an equal increase in liabilities and stockholders' equity.
Answer: E

22) Which one of the following assets is generally the most liquid? 22)
A) patents
B) buildings
C) equipment
D) inventory
E) accounts receivable
Answer: E

23) Which one of the following statements concerning liquidity is correct? 23)
A) If you sold an asset today, it was a liquid asset.
B) If you can sell an asset next year at a price equal to its actual value, the asset is
highly liquid.
C) The less liquidity a firm has, the lower the probability the firm will encounter
financial difficulties.
D) Trademarks and patents are highly liquid.
E) Balance sheet accounts are listed in order of decreasing liquidity.
Answer: E

24) Liquidityis: 24)

A) equal to the market value of a firm's total assets minus its total liabilities.
B) a measure of the use of debt in a firm's capital structure.
C) equal to current assets minus current liabilities.
D) valuable to a firm even though liquid assets tend to be less profitable to own.
E) generally associated with intangible assets.
Answer: D

25) Which one of the following accounts is included in stockholders' equity? 25)
A) accumulated retained earnings
B) long-term debt
C) intangible assets
D) deferred taxes
E) plant and equipment
Answer: A

5
26) Book value: 26)
A) generally tends to exceed market value when fixed assets are included.
B) is adjusted to market value whenever the market value exceeds the stated book
value.
C) is based on historical cost.
D) is more of a financial than an accounting valuation.
E) is equivalent to market value for firms with fixed assets.
Answer: C

27) If you sell an asset, you are most apt to receive which value for that asset? 27)
A) historical value
B) carrying value
C) original cost minus accumulated depreciation
D) book value
E) market value
Answer: E

28) As seen on an income statement: 28)

A) depreciation is shown as an expense but does not affect the tax expense.
B) interest expense is added to earnings before interest and taxes to compute pretax
income.
C) the tax rate is applied to the earnings before interest and taxes when the firm has
both depreciation and interest expenses.
D) interest is deducted from income and increases the total taxes incurred.
E) depreciation reduces both the pretax income and the net income.
Answer: E

29) All else held constant, the earnings per share will: 29)
A) decrease as the total revenue of the firm increases.
B) decrease as the costs decrease.
C) increase as the tax rate increases.
D) decrease as net income increases.
E) decrease as the number of shares outstanding increase.
Answer: E

30) Which one of these statements is correct? 30)

A) Operating income is equal to operating revenue minus cost of goods sold.
B) Earnings per share can be negative but dividends per share cannot.
C) Only current taxes are included in the tax expense.
D) The addition to retained earnings is equal to net income plus dividends.
E) Pretax income is equal to net income minus taxes.
Answer: B

6
31) Earnings per share: 31)
A) is the total amount of dividends paid per year on a per share basis.
B) must increase at the same rate as the total operating revenue.
C) will increase if net income decreases and number of shares outstanding increases.
D) will increase if net income increases and number of shares outstanding decreases.
E) is defined as the addition to retained earnings divided by the number of shares
outstanding.
Answer: D

32) According to the Generally Accepted Accounting Principles, costs are: 32)
A) recorded when paid.
B) expensed as management desires.
C) recorded as incurred.
D) matched with revenues.
E) matched with production levels.
Answer: D

33) Depreciation for a profitable firm: 33)

A) is a non-cash expense which increases the net operating income.
B) reduces both the net fixed assets and the costs of a firm.
C) decreases net income by less than $1 for every $1 of depreciation expense.
D) increases the net fixed assets as shown on the balance sheet.
E) decreases net fixed assets, net income, and operating cash flows.
Answer: C

34) When you are making a financial decision, the most relevant tax rate is the ____ rate. 34)
A) variable B) average C) fixed D) marginal E) total
Answer: D

35) An increase in which one of the following will cause the operating cash flow to increase 35)
for a profitable firm?
A) net working capital
B) depreciation
C) taxes
D) administrative expenses
E) changes in the amount of net fixed capital
Answer: B

7
36) Afirm starts its year with a positive net working capital. During the year, the firm 36)
acquires more short-term debt than it does short-term assets. This means that:
A) the beginning current assets were less than the beginning current liabilities.
B) the ending net working capital will be negative.
C) the ending net working capital can be positive, negative, or equal to zero.
D) accounts payable increased and inventory decreased during the year.
E) both accounts receivable and inventory decreased during the year.
Answer: C

37) The cash flow to creditors includes the firm's cash: 37)
A) outflow when interest is paid on outstanding debt.
B) outflow when payments are paid to suppliers.
C) Inflow when long-term debt is paid off.
D) outflow when new debt is acquired.
E) inflow when accounts payable increases.
Answer: A

38) The cash flow to stockholders must be positive when: 38)

A) the cash flow from assets is positive and also exceeds the cash flow to creditors.
B) the net sale of common stock exceeds the amount of dividends paid.
C) both the cash flow to assets and the cash flow to creditors are positive.
D) the dividends paid are less than the amount of net new equity raised.
E) no income is distributed but new shares of stock are sold.
Answer: A

39) Which one of these will increase the book value of the stockholders' equity in a 39)
profitable, non-dividend paying firm? Assume no shares of stock are repurchased or
sold.
A) an increase in non-cash expenses
B) an increase in the market value of the firm's buildings
C) an increase in the market value of the firm's long-term debt
D) a decrease in the book value of inventory
E) an increase in earnings per share
Answer: E

40) Assets are listed on the balance sheet in order of: 40)
A) increasing size.
B) decreasing liquidity.
C) decreasing size.
D) market value relative to book value.
E) increasing liquidity.
Answer: B

8
41) Anincrease in treasury stock: 41)
A) is the result of a firm issuing new shares to stock to the federal government.
B) requires repayment at some point in the future.
C) increases the total equity of the firm.
D) results from a repurchase of outstanding shares of stock.
E) increases the number of shares outstanding.
Answer: D

42) Thecarrying value or book value of assets: 42)

A) is always higher than the replacement cost of the assets.
B) is shown on the firm's income statement.
C) represents the true market value according to GAAP.
D) is always the best measure of the company's value to an investor.
E) is determined under GAAP and is based on the cost of the asset.
Answer: E

43) Under generally accepted accounting principles (GAAP), a firm's assets are reported at: 43)
A) historical cost less accumulated depreciation.
B) liquidation value.
C) market value.
D) market value less accumulated depreciation.
E) liquidation value less accumulated depreciation.
Answer: A

44) Theincome statement: 44)

A) includes noncash expenses.
B) ignores any income other than operating revenues.
C) treats dividends paid as a cash expense.
D) measures performance for one specific day.
E) excludes deferred tax expense.
Answer: A

45) According to generally accepted accounting principles (GAAP), revenue is recognized 45)
as income when:
A) managers decide to recognize it.
B) payment is requested.
C) income taxes are paid on the revenue earned.
D) the transaction is complete and the goods or services are delivered.
E) a contract is signed to perform a service or deliver a good.
Answer: D

9
46) Cash flow from assets: 46)
A) equals operating cash flow minus net capital spending.
B) can be positive, negative, or equal to zero.
C) equals operating cash flow minus the cash flow to creditors.
D) equals the addition to retained earnings.
E) equals net income plus non-cash items.
Answer: B

47) Netcapital spending is equal to the: 47)

A) net income plus depreciation.
B) net change in total assets plus depreciation.
C) net change in fixed assets plus depreciation.
D) difference between the market and book values of the total assets.
E) change in total assets.
Answer: C

48) Cash flow to stockholders is defined as: 48)

A) cash flow from assets plus cash flow to creditors.
B) cash dividends paid plus repurchases of equity minus new equity financing.
C) cash flow from financing less cash flow to creditors.
D) repurchases of equity less new equity sold minus cash dividends paid.
E) cash dividends paid.
Answer: B

49) Freecash flow is: 49)

A) the net income of a firm after taxes have been paid.
B) the money generated from the sale of new shares of stock.
C) the cash generated by decreasing net working capital.
D) cash that the firm can distribute to creditors and stockholders.
E) another term for operating cash flow.
Answer: D

50) Thecash flow of the firm must be equal to: 50)

A) cash flow to stockholders minus cash flow to creditors.
B) the aftertax operating cash flow.
C) cash flow to governments plus cash flow to stockholders.
D) cash flow to stockholders plus cash flow to creditors.
E) cash flow to creditors minus cash flow to stockholders.
Answer: D

10
51) The statement of cash flows consists of the cash flows from: 51)
A) balance sheet accounts only.
B) operations, investing activities, and financing activities.
C) operations, investing activities, and divesting activities.
D) internal activities, external activities, and financing activities.
E) income statement accounts only.
Answer: B

52) One of the reasons why cash flow analysis is popular is because: 52)
A) deferred taxes require future cash payment.
B) cash flows are more subjective than net income.
C) operating cash flows are found on the income statement.
D) cash flows are strictly defined by generally accepted accounting principles
(GAAP).
E) it is difficult to manipulate, or spin the cash flows.
Answer: E

53) Afirm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts receivable, 53)
$890 in accounts payable, and $360 in cash. What is the amount of the net working
capital?
A) $3,600 B) $5,590 C) $2,390 D) $1,500 E) $4,700
Answer: D

54) Totalassets are $1,450, fixed assets are $790, long-term debt is $750, and short-term 54)
debt is $300. What is the amount of current assets?
A) $300 B) $790 C) $40 D) $360 E) $660
Answer: E

55) Brad'sCompany has equipment with a book value of $500 that could be sold today at a 55)
50 percent discount. Its inventory is valued at $450 and could be sold to a competitor for
that amount. The firm has $100 in cash and customers owe the firm $250, all of which is
collectible. What is the current market value of the firm's assets?
A) $100 B) $550 C) $1,300 D) $600 E) $1,050
Answer: E

56) Martha's Enterprises spent $4,100 to purchase equipment three years ago. This 56)
equipment is currently valued at $2,700 on today's balance sheet but could actually be
sold for $3,200. Net working capital is $400 and long-term debt is $2,300. Assuming the
equipment is the firm's only fixed asset, what is the book value of shareholders' equity?
A) $2,200 B) $800 C) $1,900 D) $1,300 E) $1,600
Answer: B

11
57) Mart'sBoutique has sales of $820,000 and costs of $540,000. Interest expense is 57)
$36,000 and depreciation is $59,000. The tax rate is 35 percent. What is the net income?
A) $105,000 B) $158,600 C) $179,250 D) $120,250 E) $99,600
Answer: D

58) Giventhe tax rates as shown, what is the average tax rate for a firm with taxable income o 58)
$218,700?

Taxable Income Tax Rate (%)

$0 – 50,000 15
50,001 –75,000 25
75,001 –100,000 34
100,001 –335,000 39

A) 39.00% B) 34.64% C) 33.88% D) 31.34% E) 32.09%

Answer: D

59) The
tax rates are as shown. Your firm currently has taxable income of $83,200. How 59)
much additional tax will you owe if you increase your taxable income by $24,600?

Taxable Income Tax Rate (%)

$0 – 50,000 15
50,001 –75,000 25
75,001 –100,000 34
100,001 –335,000 39

A) $9,014 B) $8,754 C) $8,174 D) $9,594 E) $8,364

Answer: B

60) Your firm has total sales of $22,980, costs of $14,715, and depreciation of $6,045. The 60)
tax rate is 34 percent. There are no interest expenses or other income. What is the
operating cash flow?
A) $7,510.20
B) $2,410.80
C) $1,465.20
D) $8,340.00
E) $9,019.80
Answer: A

12
61) Awnings Incorporated has beginning net fixed assets of $234,100 and ending net fixed 61)
assets of $243,600. Assets valued at $42,500 were sold during the year. Depreciation
was $62,500. What is the amount of net capital spending?
A) $72,000 B) $9,500 C) $29,500 D) $53,000 E) −$42,500
Answer: A

62) At the beginning of the year, a firm has current assets of $16,200 and current liabilities 62)
of $13,280. At the end of the year, the current assets are $14,800 and the current
liabilities are $14,210. What is the change in net working capital?
A) $2,330 B) −$50 C) −$2,330 D) $470 E) −$470
Answer: C

63) At the beginning of the year, long-term debt of a firm is $2,400 and total debt is $3,150. 63)
At the end of the year, long-term debt is $2,800 and total debt is $4,370. The interest
paid is $40. What is the amount of the cash flow to creditors?
A) −$40 B) −$360 C) $440 D) $1,260 E) $1,180
Answer: B

64) Pete's Boats has beginning long-term debt of $840 and ending long-term debt of $790. 64)
The beginning and ending total debt balances are $1,220 and $1,360, respectively. The
interest paid is $30. What is the amount of the cash flow to creditors?
A) $110 B) -$80 C) $80 D) -$110 E) $20
Answer: C

65) Peggy Grey's Cookies had net income of $8,110. The firm paid out 30 percent of the net 65)
income to its shareholders as dividends. During the year, the company repurchased $500
worth of common stock. What is the cash flow to stockholders?
A) $2,433 B) $1,933 C) $2,967 D) $2,933 E) $5,177
Answer: D

66) Thompson's Jet Skis has operating cash flow of $11,618. Depreciation is $2,345 and 66)
interest paid is $395. A net total of $485 was paid on long-term debt. The firm spent
$6,180 on fixed assets and decreased net working capital by $420. What is the cash flow
of the firm?
A) $5,018 B) $8,203 C) $7,363 D) $5,858 E) $9,228
Answer: D

67) 67)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

13
 Earnings before interest and taxes (EBIT) $634
Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)
Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

What is the change in the net working capital from 2014 to 2015?
A) $151 million
B) $2,343 million
C) $305 million
D) $1,035 million

14
 E) $674 million
Answer: A

68) 68)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

Earnings before interest and taxes (EBIT) $634

Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)
Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

15
 What is the amount of the non-cash items for 2015?
A) $473 million
B) $481 million
C) $311 million
D) $227 million
E) $0
Answer: C

69) 69)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

Earnings before interest and taxes (EBIT) $634

Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)

16
 Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

What is the amount of the net capital spending for 2015?

A) −$29 million
B) $337 million
C) $1,66 million
D) $26 million
E) $285 million
Answer: B

70) 70)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

Earnings before interest and taxes (EBIT) $634

Interest expense 170

Pretax income $464

Taxes 162

Net income $302

17
 Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)
Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

What is the operating cash flow for 2015?

A) $783 million
B) $867 million
C) $485 million
D) $1,030 million
E) $451 million
Answer: A

71) 71)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

18
 Earnings before interest and taxes (EBIT) $634
Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)
Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

What is the cash flow of the firm for 2015?

A) $590 million
B) $485 million
C) $295 million
D) $1,340 million

19
 E) $310 million
Answer: C

72) 72)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

Earnings before interest and taxes (EBIT) $634

Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)
Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

20
 What is the cash flow to stockholders for 2015?
A) $25 million
B) −$152 million
C) $75 million
D) −$25 million
E) $0
Answer: C

73) 73)
Woodlands Inc.
2015 Income Statement
($ in millions)
Total operating revenues $3,806
Cost of goods sold 2,315
Selling, general, and administrative expenses 546
Depreciation 311

Earnings before interest and taxes (EBIT) $634

Interest expense 170

Pretax income $464

Taxes 162

Net income $302

Dividends 75

Woodlands Inc.
Balance Sheet
($ in millions)

21
 Assets 2015 2014 Liabilities and Stockholders' 2015 2014
Equity
Cash and equivalents $ 503 $ 227 Accounts payable $ 686 $ 613
Accounts receivable 418 522 Long-term debt 1,300 1,350
Inventory 1,239 1,187 Common stock 1,500 1,500
Net property & 2,290 2,264 Capital surplus 745 745
equipment
Intangible assets 360 360 Retained earnings 579 352

Total assets $ $4,560 Total liabilities & $4,810 $4,560

4810 stockholders' equity

What is the cash flow to creditors for 2015?

A) $170 million
B) −$50 million
C) −$120 million
D) $220 million
E) $120 million
Answer: D

22
74) 74)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the net working capital for 2015?

A) $4,955 B) $9,915 C) $11,45 D) $10,005 E) $12,240
Answer: B

75) 75)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the addition to retained earnings for 2015?

A) $3,700 B) $4,630 C) $4,030 D) $4,900 E) $5,230
Answer: C

23
76) 76)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is net capital spending for 2015?

A) $2,057 B) $311 C) $3,459 D) $1,759 E) -$850
Answer: D

77) 77)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the operating cash flow for 2015?

A) $6,460 B) $10,325 C) $9,069 D) $3,753 E) $12,408
Answer: C

24
78) 78)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the cash flow of the firm for 2015?

A) $6,425 B) $885 C) $5,517 D) $7,297 E) $8,042
Answer: A

79) 79)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is net new borrowing for 2015?

A) $8,025 B) -$6,795 C) $5,565 D) -$5,565 E) $6,795
Answer: B

25
80) 80)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the cash flow to creditors for 2015?

A) −$5,565 B) $9,135 C) −$2,705 D) $1,230 E) $8,025
Answer: E

81) 81)
New Town Industries
Tax rate 35% 2015 2014
Revenues $42,629 $37,911
Cost of goods sold 23,704 24,832
Interest 1,230 1,584
Dividends 1,200 600
Depreciation 2,609 2,814
Administrative expenses 7,040 6,820
Cash 3,671 2,969
Inventory 3,968 4,503
Accounts payable 2,325 3,760
Long-term debt 19,105 25,900
Accounts receivable 4,601 5,318
Common stock 22,600 19,800
Net fixed assets 41,260 42,110

What is the cash flow to stockholders for 2015?

A) $1,200 B) –$2,800 C) $2,800 D) –$1,600 E) $1,520
Answer: D

26
 82) Last year, Johnson Mills had annual revenue of $37,800, cost of goods sold of $23,200, 82)
and administrative expenses of $6,300. The firm paid $700 in dividends and had a tax
rate of 35 percent. The firm added $2,810 to retained earnings. The firm had no
long-term debt. What was the depreciation expense?
A) $2,300 B) $1,780 C) $2,900 D) $1,520 E) $2,640
Answer: C

83) Last year, Webster Farms had annual revenue of $87,200, depreciation of $11,600, cost 83)
of goods sold of $54,700, and administrative expenses of $8,300. The firm paid $3,200
in dividends and paid taxes of $4,300. What was the operating cash flow?
A) $23,100 B) $11,500 C) $19,900 D) $8,300 E) $16,700
Answer: C

84) Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The 84)
administrative expenses were $4,370, depreciation was $812, dividends paid were $285,
and the interest expense was $103. What was the cost of goods sold if the firm's tax rate
was 35 percent?
A) $14,815 B) $20,225 C) $21,393 D) $24,385 E) $18,290
Answer: E

85) Oscar's Dog Treats had a cash flow to creditors of $2,840, a cash flow to stockholders of 85)
$1,630 last year. The firm spent a net of $1,420 on fixed assets and reduced net working
capital by $330. What was the operating cash flow?
A) $5,560 B) $6,190 C) $4,9001 D) $1,320 E) $3,500
Answer: A

ESSAY.  Write your answer in the space provided or on a separate sheet of paper.

86) Define liquidity and explain what a firm would need to do to ensure all of the current assets
displayed on its balance sheet are liquid.
Answer: Liquid assets are those that can be sold quickly with little or no loss in value. To ensure the
current assets are liquid, the firm needs to review its accounts receivable to ensure the
accounts are collectible and also review its inventory to ensure it is salable for at least the
amount at which it is recorded.

87) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its
day-to-day operating activities. Interest expense arises from a financing decision and thus is
considered as a cash flow to creditors.

88) Explain why the income statement is not a good representation of cash flow.
Answer: Most income statements contain some noncash items, so these must be accounted for when
calculating cash flows. More importantly, however, since GAAP is used to create income
statements, revenues and expenses are booked when they accrue, not when their
corresponding cash flows occur.

27
89) Discussthe difference between book values and market values on the balance sheet and explain the
best method for determining the value of a firm to its stockholders.
Answer: The accounts on the balance sheet are generally carried at historical cost, not market values.
Although the book value of current assets and current liabilities may closely approximate
market values, the same cannot be said for the rest of the balance sheet accounts. Ultimately,
stockholders should focus on the firm's stock price, which is a market value measure, for the
value of their investment in the firm.

90) Note that in all of our cash flow computations to determine cash flow of the firm, we never include
the addition to retained earnings. Why not? Is this an oversight?
Answer: The addition to retained earnings is not a cash flow. It is simply an accounting entry that links
the income statement to the balance sheet and allows the balance sheet to balance. Any
additions to retained earnings will show up as cash flow changes in other balance sheet
accounts.

91) Depreciationis classified as a noncash item because no cash is spent when depreciation is recorded.
Why are expenses that have been accrued, but not yet paid, not also considered to be noncash items
and therefore excluded from operating cash flow just as depreciation is excluded?
Answer: Accrued expenses that have not been paid will appear in accounts payable and the change in
net working capital. Via the change in net working capital, these unpaid expenses are
subtracted from the operating cash flow to determine the cash flow of the firm. This method
allows for the computation of the cash flows based solely on financial statement information.
Depreciation, on the other hand, is the expensing of a fixed asset cost that was paid for when
the asset was acquired.

92) Sometimes when businesses are critically delinquent on their tax liabilities, the tax authority comes
in and literally seizes the business by chasing all of the employees out of the building and changing
the locks. What does this tell you about the importance of taxes relative to our discussion of cash
flow? Why might a business owner want to avoid such an occurrence?
Answer: Taxes must be paid in cash, and in this case, they are one of the most important components
of cash flow. The reputation of a business can undergo irreparable harm if word gets out that
the tax authorities have confiscated the business, even if only for a couple of hours until the
business owner can come up with the money to clear up the tax problem. The bottom line is if
the owner can't come up with the cash, the tax authority has effectively put them out of
business.

93) Interpret,
in words, what cash flow of the firm represents by discussing operating cash flow,
changes in net working capital, and additions to fixed assets.
Answer: Operating cash flow is the cash flow a firm generates from its day-to-day operations. In other
words, it is the cash inflow generated as a result of putting the firm's assets to work. Changes
in net working capital and fixed assets represent investments a firm makes in these assets.
That is, a firm typically takes some of the cash flow it generates from using assets and
reinvests it in new assets. Cash flow of the firm, then, is the cash flow a firm generates by
employing its assets, net of any acquisitions.

28
94) Whyis cash flow management important?
Answer: GAAP accounting principles allow significant subjective decisions to be made in many key
areas. The use of cash flow as a metric to evaluate a company comes from the idea that there
is less subjectivity involved and therefore, it is harder to spin the numbers.

95) Explainthe difference between product costs and period costs as they relate to the income
statement. Are these terms synonymous with short-run and long -run?
Answer: Product costs are the total production costs incurred during a period - raw materials, direct
labor, and manufacturing overhead - and are reported as cost of goods sold. Period costs are
costs - management and office salaries, office expenses, insurance - that are allocated to a
time period and are recorded as selling, general, and administrative expenses. The terms
short-run and long-run are used to differentiate between fixed and variable costs, depending
upon the length of time required to vary the cost amount.

29