Chapter 2 Financial Statements

1) Which one of the following is classified as a tangible fixed asset?

A) Accounts receivable
B) Production equipment
C) Cash
D) Patent
E) Inventory

2) Which one of the following is a current asset?

A) Accounts payable
B) Trademark
C) Accounts receivable
D) Notes payable
E) Equipment

3) Which one of the following is included in a firm's market value but yet is excluded from the
firm's accounting value?
A) Real estate investment
B) Good reputation of the company
C) Equipment owned by the firm
D) Money due from a customer
E) An item held by the firm for future sale

4) Which one of the following will decrease the value of a firm's net working capital?
A) Using cash to pay a supplier
B) Depreciating an asset
C) Collecting an accounts receivable
D) Purchasing inventory on credit
E) Selling inventory at a loss

5) Which one of the following statements concerning net working capital is correct?
A) Net working capital increases when inventory is purchased with cash.
B) Net working capital excludes inventory.
C) Total assets must increase if net working capital increases.
D) Net working capital may be a negative value.
E) Net working capital is the amount of cash a firm currently has available for spending.

6) Which one of the following accounts is the most liquid?

A) Inventory
B) Building
C) Accounts Receivable
D) Equipment
E) Land

7) Shareholders' equity:
A) is referred to as a firm's financial leverage.
B) is equal to total assets plus total liabilities.
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C) decreases whenever new shares of stock are issued.
D) includes patents, preferred stock, and common stock.
E) represents the residual value of a firm.

8) The book value of a firm is:

A) equivalent to the firm's market value provided that the firm has some fixed assets.
B) based on historical cost.
C) generally greater than the market value when fixed assets are included.
D) more of a financial than an accounting valuation.
E) adjusted to the market value whenever the market value exceeds the stated book value.

9) Which one of the following is the financial statement that shows the accounting value of a
firm's equity as of a particular date?
A) Income statement
B) Creditor's statement
C) Balance sheet
D) Statement of cash flows
E) Dividend statement

10) Net working capital is defined as:

A) total liabilities minus shareholders' equity.
B) current liabilities minus shareholders' equity.
C) fixed assets minus long-term liabilities.
D) total assets minus total liabilities.
E) current assets minus current liabilities.

11) Which one of these sets forth the common set of standards and procedures by which audited
financial statements are prepared?
A) Matching principle
B) Cash flow identity
C) Generally Accepted Accounting Principles
D) Financial Accounting Reporting Principles
E) Standard Accounting Value Guidelines

12) Which term relates to the cash flow that results from a company's ongoing, normal business
activities?
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors

13) Cash flow from assets is also known as the firm's:

A) capital structure.
B) equity structure.
C) hidden cash flow.
D) free cash flow.
E) historical cash flow.
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14) Which one of the following is an expense for accounting purposes but is not an operating
cash flow for financial purposes?
A) Interest expense
B) Taxes
C) Cost of goods sold
D) Labor costs
E) Administrative expenses

15) A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in
accounts payable, and $80 in cash. What is the amount of the net working capital?
A) $970
B) $720
C) $640
D) $3,110
E) $2,860

16) A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390,
and fixed assets are $3,910. What is the amount of the total liabilities?
A) $2,050
B) $2,920
C) $4,130
D) $7,950
E) $6,890

17) Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This
equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for
$92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term
debt is $102,800. What is the book value of shareholders' equity?
A) $31,400
B) $47,700
C) $35,900
D) $249,400
E) $253,900

18) Andre's Bakery has sales of $487,000 with costs of $263,000. Interest expense is $26,000
and depreciation is $42,000. The tax rate is 21 percent. What is the net income?
A) $142,750
B) $123,240
C) $109,000
D) $128,700
E) $134,550

19) Hayes Bakery has sales of $30,600, costs of $15,350, an addition to retained earnings of
$4,221, dividends paid of $469, interest expense of $1,300, and a tax rate of 21 percent. What is
the amount of the depreciation expense?
A) $4,820.13
B) $5,500.89
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C) $8,013.29
D) $8,180.01
E) $9,500.00

20) Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of
$37,000, interest expense of $15,000, and a tax rate of 21 percent. The firm paid $59,000 in cash
dividends. What is the addition to retained earnings?
A) $98,210
B) $81,700
C) $95,200
D) $103,460
E) $121,680

21) What is the average tax rate for a firm with taxable income of $118,740 in 2017?

Taxable Income Tax Rate

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

A) 26.68 percent
B) 34.87 percent
C) 24.89 percent
D) 36.67 percent
E) 39.00 percent

22) RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the
tax rate is 21 percent. The firm is all-equity financed. What is the operating cash flow?
A) $108,410
B) $108,320
C) $109,924
D) $106,417
E) $109,085

23) Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of
$209,411. During the year, assets with a book value of $6,943 were sold. Depreciation for the
year was $42,822. What is the amount of net capital spending?
A) $33,763
B) $40,706
C) $58,218
D) $65,161
E) $67,408

24) CBC Industries has sales of $21,415, interest paid of $1,282, costs of $9,740, and
depreciation of $1,480. What is the operating cash flow if the tax rate is 22 percent?
A) $10,114.14
B) $9,900.86

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C) $8,985.86
D) $8,536.67
E) $9,714.14

25) Williamsburg Markets has an operating cash flow of $4,267 and depreciation of $1,611.
Current assets decreased by $1,356 while current liabilities decreased by $2,662, and net fixed
assets decreased by $382 during the year. What is free cash flow for the year?
A) $1,732
B) $2,247
C) $2,961
D) $3,915
E) $4,267

26) Up Towne Cleaners has taxable income of $48,900 and a tax rate of 21 percent. What is the
change in retained earnings if the firm pays $20,200 in dividends for the year?
A) $18,942
B) $19,948
C) $19,374
D) $18,431
E) $18,574

27) TJH, Inc. purchased $145,000 in new equipment and sold equipment with a net book value
of $68,400 during the year. What is the amount of net capital spending if the depreciation was
$38,600?
A) $115,200
B) $76,600
C) $94,200
D) $38,000
E) −$38,000

28) At the beginning of the year, Trees Galore had current liabilities of $15,932 and total debt of
$68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the
amount of net new borrowing for the year?
A) $5,630
B) −$2,480
C) $3,568
D) $4,677
E) −$2,062

29) BK Enterprises neither sold nor repurchased any shares of stock during the year. The firm
had annual sales of $7,202, depreciation of $1,196, cost of goods sold of $4,509, interest expense
of $318, taxes of $248, beginning-of-year shareholders' equity of $4,808, and end-of-year
shareholders' equity of $4,922. What is the amount of dividends paid during the year?
A) $817
B) $1,009
C) $864
D) $709
E) $515
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30) Global Tours has beginning current assets of $1,360, beginning current liabilities of $940,
ending current assets of $1,720, and ending current liabilities of $1,080. What is the change in
net working capital?
A) $220
B) $170
C) $190
D) $940
E) $1,060