Chapter 02

Reviewing Financial Statements

  

Multiple Choice Questions
 

1. Which financial statement reports a firm’s assets, liabilities, and equity at a particular point in time? 
A. Balance Sheet
B. Income Statement
C. Statement of Retained Earnings
D. Statement of Cash Flows

 

2. Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time—generally one year? 
A. Balance Sheet
B. Income Statement
C. Statement of Retained Earnings
D. Statement of Cash Flows

 

3. Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period? 
A. Balance Sheet
B. Income Statement
C. Statement of Retained Earnings
D. Statement of Cash Flows

 

4. Which financial statement reconciles net income earned during a given period and any cash dividends paid within that period using the change in retained earnings between the beginning and end of the period? 
A. Balance Sheet
B. Income Statement
C. Statement of Retained Earnings
D. Statement of Cash Flows

 

5. On which of the four major financial statements would you find the common stock and paid-in surplus? 
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Statement of Retained Earnings

 

6. On which of the four major financial statements would you find the increase in inventory? 
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Statement of Retained Earnings

 

7. On which of the four major financial statements would you find net plant and equipment? 
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Statement of Retained Earnings

 

8. For which of the following would one expect the book value of the asset to differ widely from its market value? 
A. Cash
B. Accounts receivable
C. Inventory
D. Fixed assets

 

9. Common stockholders’ equity divided by number of shares of common stock outstanding is the formula for calculating 
A. Earnings per share (EPS)
B. Dividends per share (DPS)
C. Book value per share (BVPS)
D. Market value per share (MVPS)

 

10. This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns. 
A. Average tax rate
B. Marginal tax rate
C. Progressive tax system
D. Earnings before tax

 

11. An equity-financed firm will 
A. pay more in income taxes than a debt-financed firm.
B. pay less in income taxes than a debt-financed firm.
C. pay the same in income taxes as a debt-finance firm.
D. not pay any income taxes.

 

12. This is cash flow available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm. 
A. Net income available to common stockholders
B. Cash flow from operations
C. Net cash flow
D. Free cash flow

 

13. Which of the following activities result in an increase in a firm’s cash? 
A. Decrease fixed assets
B. Decrease accounts payable
C. Pay dividends
D. Repurchase of common stock

 

14. These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets. 
A. Cash flows from operations
B. Cash flows from investing activities
C. Cash flows from financing activities
D. Net change in cash and cash equivalents

 

15. If a company reports a large amount of net income on its income statement during a year, the firm will have 
A. positive cash flow.
B. negative cash flow.
C. zero cash flow.
D. Any of these scenarios are possible.

 

16. Free cash flow is defined as 
A. Cash flows available for payments to stockholders of a firm after the firm has made payments to all others will claims against it.
B. Cash flows available for payments to stockholders and debt holders of a firm after the firm has made payments necessary to vendors.
C. Cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
D. Cash flows available for payments to stockholders and debt holders of a firm that would be tax-free to the recipients.

 

17. The Sarbanes-Oxley Act requires public companies to ensure that these individuals have considerable experience applying generally accepted accounting principles (GAAP) for financial statements. 
A. External auditors
B. Internal auditors
C. Chief Financial Officers
D. Corporate boards’ audit committees

 

18. Balance Sheet You are evaluating the balance sheet for Campus Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $400,000, Accounts receivable = $200,000, Inventory = $100,000, Accrued wages and taxes = $10,000, Accounts payable = $300,000, and Notes payable = $600,000. What is Campus’s net working capital? 
A. -$210,000
B. $700,000
C. $910,000
D. $1,610,000

 

19. Balance Sheet Jack and Jill Corporation’s year-end 2009 balance sheet lists current assets of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill’s total stockholders’ equity? 
A. $495,000
B. $555,000
C. $1,050,000
D. There is not enough information to calculate total stockholder’s equity.

 

20. Income Statement Bullseye, Inc.’s 2010 income statement lists the following income and expenses: EBIT = $900,000, Interest expense = $85,000, and Net income = $570,000. What is the 2010 Taxes reported on the income statement? 
A. $245,000
B. $330,000
C. $815,000
D. There is not enough information to calculate 2010 Taxes.

 

21. Income Statement Barnyard, Inc.’s 2010 income statement lists the following income and expenses: EBIT = $500,000, Interest expense = $45,000, and Taxes = $152,000. Barnyard’s has no preferred stock outstanding and 200,000 shares of common stock outstanding. What are its 2010 earnings per share? 
A. $2.50
B. $2.275
C. $1.74
D. $1.515

 

22. Corporate Taxes Eccentricity, Inc. had $300,000 in 2010 taxable income. Using the tax schedule from Table 2-3, what is the company’s 2010 income taxes, average tax rate, and marginal tax rate, respectively?

   
A. $22,250, 7.42%, 39%
B. $78,000, 26.00%, 39%
C. $100,250, 33.42%, 39%
D. $139,250, 46.42%, 39%

 

23. Corporate Taxes Swimmy, Inc. had $400,000 in 2010 taxable income. Using the tax schedule from Table 2-3, what is the company’s 2010 income taxes, average tax rate, and marginal tax rate, respectively?

   
A. $22,100, 5.53%, 34%
B. $113,900, 28.48%, 34%
C. $136,000, 34.00%, 34%
D. $136,000, 39.00%, 34%

 

24. Corporate Taxes Scuba, Inc. is concerned about the taxes paid by the company in 2010. In addition to $5 million of taxable income, the firm received $80,000 of interest on state-issued bonds and $500,000 of dividends on common stock it owns in Boating Adventures, Inc. What is Scuba’s tax liability, average tax rate, and marginal tax rate, respectively? 
A. $1,637,100, 31.79%, 34%
B. $1,751,000, 34.00%, 34%
C. $1,870,000, 34.00%, 34%
D. $1,983,900, 36.07%, 34%

 

25. Statement of Cash Flows Paige’s Properties Inc. reported 2008 net income of $5 million and depreciation of $1,500,000. The top part Paige’s Properties, Inc.’s 2007 and 2008 balance sheets is listed below (in millions of dollars).

  

What is the 2008 net cash flow from operating activities for Paige’s Properties, Inc.? 
A. -$13,500,000
B. $1,500,000
C. $5,000,000
D. $6,500,000

 

26. Statement of Cash Flows In 2008, Upper Crust had cash flows from investing activities of ($250,000) and cash flows from financing activities of ($150,000). The balance in the firm’s cash account was $90,000 at the beginning of 2008 and $105,000 at the end of the year. What was Upper Crust’s cash flow from operations for 2008? 
A. $15,000
B. $105,000
C. $400,000
D. $415,000

 

27. Statement of Cash Flows In 2010, Lower Case Productions had cash flows from investing activities of +$50,000 and cash flows from financing activities of +$100,000. The balance in the firm’s cash account was $80,000 at the beginning of 2010 and $65,000 at the end of the year. What was Lower Case’s cash flow from operations for 2010? 
A. $-15,000
B. $-150,000
C. $-165,000
D. $65,000

 

28. Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm’s free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23 million, paid taxes of $4 million, and its depreciation expense was $8 million. Crew Cut’s gross fixed assets increased by $10 million from 2007 to 2008. The firm’s current assets increased by $6 million and spontaneous current liabilities increased by $4 million. What is Crew Cut’s operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions? 
A. $23, $10, $13
B. $23, $12, $11
C. $27, $10, $17
D. $27, $12, $15

 

29. Free Cash Flow You are considering an investment in Cruise, Inc. and want to evaluate the firm’s free cash flow. From the income statement, you see that Cruise earned an EBIT of $202 million, paid taxes of $51 million, and its depreciation expense was $75 million. Cruise’s gross fixed assets increased by $70 million from 2007 to 2008. The firm’s current assets decreased by $10 million and spontaneous current liabilities increased by $6 million. What is Cruise’s operating cash flow, investment in operating capital, and free cash flow for 2008, respectively, in millions? 
A. $202, $70, $130
B. $226, $70, $156
C. $226, $54, $172
D. $226, $74, $152

 

30. Free Cash Flow Catering Corp. reported free cash flows for 2008 of $8 million and investment in operating capital of $2 million. Catering listed $1 million in depreciation expense and $2 million in taxes on its 2008 income statement. What was Catering’s 2008 EBIT? 
A. $7 million
B. $10 million
C. $11 million
D. $13 million

 

31. Statement of Retained Earnings TriCycle, Corp. began the year 2008 with $25 million in retained earnings. The firm earned net income of $7 million in 2008 and paid $1 million to its preferred stockholders and $3 million to its common stockholders. What is the year-end 2008 balance in retained earnings for TriCycle? 
A. $25 million
B. $28 million
C. $32 million
D. $36 million

 

32. Statement of Retained Earnings Night Scapes, Corp. began the year 2008 with $10 million in retained earnings. The firm suffered a net loss of $2 million in 2008 and yet paid $2 million to its preferred stockholders and $1 million to its common stockholders. What is the year-end 2008 balance in retained earnings for Night Scapes? 
A. $5 million
B. $8 million
C. $9 million
D. $15 million

 

33. Statement of Retained Earnings Use the following information to find dividends paid to common stockholders during 2008.

   
A. $3 million
B. $4 million
C. $10 million
D. $17 million

 

34. Balance Sheet Harvey’s Hamburger Stand has total assets of $3 million of which $1 million are current assets. Cash makes up 20 percent of the current assets and accounts receivable makes up another 5 percent of current assets. Harvey’s gross plant and equipment has a book value of $1.5 million and other long-term assets have a book value of $1 million. Using this information, what is the balance of inventory and the balance of depreciation on Harvey’s Hamburger Stand’s balance sheet? 
A. $250,000, $500,000
B. $250,000, $1 million
C. $750,000, $500,000
D. $750,000, $1 million

 

35. Balance Sheet School Books, Inc. has total assets of $18 million of which $6 million are current assets. Cash makes up 10 percent of the current assets and accounts receivable makes up another 40 percent of current assets. School Books’ gross plant and equipment has an original cost of $13 million and other long-term assets have a cost value of $2 million. Using this information, what are the balance of inventory and the balance of depreciation on School Books’ balance sheet? 
A. $3 million, $2 million
B. $3 million, $3 million
C. $2.4 million, $2 million
D. $2.4 million, $3 million

 

36. Balance Sheet Ted’s Taco Shop has total assets of $5 million. Forty percent of these assets are financed with debt of which $400,000 is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $1 million. Using this information what is the balance for long-term debt and retained earnings on Ted’s Taco Shop’s balance sheet? 
A. $400,000, $1 million
B. $1.6 million, $2 million
C. $1.6 million, $3 million
D. $2 million, $3 million

 

37. Balance Sheet Hair Etc. has total assets of $15 million. Twenty percent of these assets are financed with debt of which $1 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $8 million. Using this information what is the balance for long-term debt and retained earnings on Hair Etc.’s balance sheet? 
A. $1 million, $8 million
B. $2 million, $4 million
C. $2 million, $8 million
D. $3 million, $4 million

 

38. Market Value versus Book Value Acme Bricks balance sheet lists net fixed assets as $40 million. The fixed assets could currently be sold for $50 million. Acme’s current balance sheet shows current liabilities of $15 million and net working capital of $12 million. If all the current accounts were liquidated today, the company would receive $77 million cash after paying $15 million in liabilities. What is the book value of Acme’s assets today? What is the market value of these assets? 
A. $12 million, $77 million
B. $27 million, $92 million
C. $40 million, $50 million
D. $67 million, $142 million

 

39. Market Value versus Book Value Glo’s Glasses balance sheet lists net fixed assets as $20 million. The fixed assets could currently be sold for $25 million. Glo’s current balance sheet shows current liabilities of $7 million and net working capital of $3 million. If all the current accounts were liquidated today, the company would receive $9 million cash after paying $7 million in liabilities. What is the book value of Glo’s assets today? What is the market value of these assets? 
A. $10 million, $16 million
B. $10 million, $35 million
C. $30 million, $35 million
D. $30 million, $41 million

 

40. Market Value versus Book Value Rupert’s Rims balance sheet lists net fixed assets as $15 million. The fixed assets could currently be sold for $17 million. Rupert’s current balance sheet shows current liabilities of $5 million and net working capital of $3 million. If all the current accounts were liquidated today, the company would receive $6 million cash after paying $5 million in liabilities. What is the book value of Rupert’s assets today? What is the market value of these assets? 
A. $8 million, $23 million
B. $23 million, $25 million
C. $23 million, $28 million
D. $31 million, $28 million

 

41. Debt versus Equity Financing You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $600,000. AllDebt, Inc. finances its $1.2 million in assets with $1 million in debt (on which it pays 10 percent interest annually) and $.2 million in equity. AllEquity, Inc. finances its $1.2 million in assets with no debt and $1.2 million in equity. Both firms pay a tax rate of 30 percent on their taxable income. What are the asset funders’ (the debt holders and stockholders’) resulting return on assets for the two firms? 
A. 29.17%, and 35%, respectively
B. 37.5%, and 35%, respectively
C. 37.5%, and 37.5%, respectively
D. 50%, and 50%, respectively

 

42. Debt versus Equity Financing You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders’ (the debt holders and stockholders’) resulting return on assets for the two firms? 
A. 27.5%, and 30%, respectively
B. 31.67%, and 30%, respectively
C. 33%, and 30%, respectively
D. 50%, and 50%, respectively

 

43. Debt versus Equity Financing You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $400,000. AllDebt, Inc. finances its $800,000 in assets with $600,000 in debt (on which it pays 5 percent interest annually) and $200,000 in equity. AllEquity, Inc. finances its $800,000 in assets with no debt and $800,000 in equity. Both firms pay a tax rate of 30 percent on their taxable income. What are the asset funders’ (the debt holders and stockholders’) resulting return on assets for the two firms? 
A. 32.375%, and 35.00%,respectively
B. 36.125%, and 35.00%, respectively
C. 46.25%, and 50%, respectively
D. 50%, and 50%, respectively

 

44. Income Statement You have been given the following information for Fina’s Furniture Corp.:
net sales = $25,500,000;
cost of goods sold = $10,250,000;
addition to retained earnings = $305,000;
dividends paid to preferred and common stockholders = $500,000;
interest expense = $2,000,000.
The firm’s tax rate is 30 percent. What is the depreciation expense for Fina’s Furniture Corp? 
A. $12,100,000
B. $12,400,000
C. $14,100,000
D. $14,400,000

 

45. Income Statement You have been given the following information for Romeo’s Rockers Corp.:
net sales = $5,200,000;
cost of goods sold = $2,100,000;
addition to retained earnings = $1,000,000;
dividends paid to preferred and common stockholders = $400,000;
interest expense = $200,000.
The firm’s tax rate is 30 percent. What is the depreciation expense for Romeo’s Rockers Corp.? 
A. $900,000
B. $1,100,000
C. $1,500,000
D. $1,600,000

 

46. Income Statement You have been given the following information for Nicole’s Neckties Corp.:
net sales = $2,500,000;
cost of goods sold = $1,300,000;
addition to retained earnings = $30,000;
dividends paid to preferred and common stockholders = $300,000;
interest expense = $50,000.
The firm’s tax rate is 40 percent. What is the depreciation expense for Nicole’s Neckties Corp.? 
A. $550,000
B. $600,000
C. $650,000
D. $820,000

 

47. Income Statement You have been given the following information for Sherry’s Sandwich Corp.:
net sales = $300,000;
gross profit = $100,000;
addition to retained earnings = $30,000;
dividends paid to preferred and common stockholders = $8,500;
depreciation expense = $25,000.
The firm’s tax rate is 30 percent. What are the cost of goods sold and the interest expense for Sherry’s Sandwich Corp.? 
A. $20,000, and $200,000, respectively
B. $100,000, and $20,000, respectively
C. $200,000, and $20,000, respectively
D. $200,000, and $36,500, respectively

 

48. Income Statement You have been given the following information for Kaye’s Krumpet Corp.:
net sales = $150,000;
gross profit = $100,000;
addition to retained earnings = $20,000;
dividends paid to preferred and common stockholders = $8,000;
depreciation expense = $50,000.
The firm’s tax rate is 30 percent. What are the cost of goods sold and the interest expense for Kaye’s Krumpet Corp.? 
A. $10,000, and $50,000, respectively
B. $50,000, and $10,000, respectively
C. $50,000, and $22,000, respectively
D. $62,000, and $10,000, respectively

 

49. Income Statement You have been given the following information for Ross’s Rocket Corp.:
net sales = $1,000,000;
gross profit = $400,000;
addition to retained earnings = $60,000;
dividends paid to preferred and common stockholders = $90,000;
depreciation expense = $50,000.
The firm’s tax rate is 40 percent. What are the cost of goods sold and the interest expense for Ross’s Rocket Corp.? 
A. $100,000, and $600,000, respectively
B. $600,000, and $100,000, respectively
C. $600,000, and $200,000, respectively
D. $700,000, and $100,000, respectively

 

   

 

50. Corporate Taxes The Carolina Corporation had a 2010 taxable income of $3,000,000 from operations after all operating costs but before

(1) interest charges of $500,000,
(2) dividends received of $75,000,
(3) dividends paid of $1,000,000, and
(4) income taxes.

Using the tax schedule in Table 2.3, what is Carolina’s income tax liability?
What are Carolina’s average and marginal tax rates on taxable income from operations? 
A. $857,650, 28.59%, 34%, respectively
B. $875,500, 29.18%, 34%, respectively
C. $875,500, 34.00%, 34%, respectively
D. $1,020,000, 34.00%, 34%, respectively

 

51. Corporate Taxes The Ohio Corporation had a 2010 taxable income of $50,000,000 from operations after all operating costs but before

(1) interest charges of $500,000,
(2) dividends received of $45,000,
(3) dividends paid of $10,000,000, and
(4) income taxes.

Using the tax schedule in Table 2.3, what is Ohio’s income tax liability?
What are Ohio’s average and marginal tax rates on taxable income from operations? 
A. $6,416,667, 12.83%, 35%, respectively
B. $13,829,725, 27.66%, 35%, respectively
C. $17,329,725, 34.66%, 35%, respectively
D. $17,340,750, 34.68%, 35%, respectively

 

52. Corporate Taxes The Sasnak Corporation had a 2010 taxable income of $4,450,000 from operations after all operating costs but before

(1) interest charges of $750,000,
(2) dividends received of $900,000,
(3) dividends paid of $500,000, and
(4) income taxes.

Using the tax schedule in Table 2.3, what is Sasnak’s income tax liability?
What are Sasnak’s average and marginal tax rates on taxable income from operations? 
A. $1,349,800, 30.33%, 34%, respectively
B. $1,349,800, 34.00%, 34%, respectively
C. $1,564,000, 34.00%, 34%, respectively
D. $1,564,000, 35.15%, 34%, respectively

 

53. Corporate Taxes The AOK Corporation had a 2008 taxable income of $2,200,000 from operations after all operating costs but before

(1) interest charges of $90,000,
(2) dividends received of $750,000,
(3) dividends paid of $80,000, and
(4) income taxes.

Using the tax schedule in Table 2.3, what is AOK’s income tax liability?
What are AOK’s average and marginal tax rates on taxable income from operations? 
A. $793,900, 34%, 34%, respectively
B. $793,900, 36.0864%, 34%, respectively
C. $972,400, 34%, 34%, respectively
D. $972,400, 44.2%, 34%, respectively

 

54. Corporate Taxes Suppose that in addition to the $5.5 million of taxable income from operations, Emily’s Flowers, Inc. received $500,000 of interest on state-issued bonds and $300,000 of dividends on common stock it owns in Amy’s Iris Bulbs, Inc.
Using the tax schedule in Table 2.3 what is Emily’s Flowers’ income tax liability?
What are Emily’s Flowers’ average and marginal tax rates on total taxable income? 
A. $1,900,600, 34%, 34%, respectively
B. $1,972,000, 34%, 34%, respectively
C. $2,070,600, 34%, 34%, respectively
D. $2,142,000, 34%, 34%, respectively

 

55. Corporate Taxes Suppose that in addition to the $300,000 of taxable income from operations, Liam’s Burgers, Inc. received $25,000 of interest on state-issued bonds and $50,000 of dividends on common stock it owns in Sodas, Inc.
Using the tax schedule in Table 2.3 what is Liam’s income tax liability?
What are Liam’s average and marginal tax rates on total taxable income? 
A. $106,100, 33.68%, 39%, respectively
B. $122,850, 39.00%, 39%, respectively
C. $129,500, 34.53%, 39%, respectively
D. $139,250, 37.13%, 39%, respectively

 

56. Statement of Cash Flows Fina’s Faucets, Inc. has net cash flows from operating activities for the last year of $17 million. The income statement shows that net income is $15 million and depreciation expense is $6 million. During the year, the change in inventory on the balance sheet was an increase of $4 million, change in accrued wages and taxes was an increase of $1 million and change in accounts payable was an increase of $1 million. At the beginning of the year the balance of accounts receivable was $5 million. What was the end of year balance for accounts receivable? 
A. $2 million
B. $3 million
C. $7 million
D. $9 million

 

57. Statement of Cash Flows Zoe’s Dog Biscuits, Inc. has net cash flows from operating activities for the last year of $226 million. The income statement shows that net income is $150 million and depreciation expense is $85 million. During the year, the change in inventory on the balance sheet was an increase of $14 million, change in accrued wages and taxes was an increase of $15 million and change in accounts payable was an increase of $10 million. At the beginning of the year the balance of accounts receivable was $45 million. What was the end of year balance for accounts receivable? 
A. $20 million
B. $25 million
C. $45 million
D. $65 million

 

58. Statement of Cash Flows Nickolas’s Nut Farms, Inc. has net cash flows from operating activities for the last year of $25 million. The income statement shows that net income is $15 million and depreciation expense is $6 million. During the year, the change in inventory on the balance sheet was a decrease of $4 million, change in accrued wages and taxes was a decrease of $1 million and change in accounts payable was a decrease of $1 million. At the beginning of the year the balance of accounts receivable was $5 million. What was the end of year balance for accounts receivable? 
A. $2 million
B. $3 million
C. $7 million
D. $9 million

 

59. Statement of Cash Flows Crispy Corporation has net cash flow from financing activities for the last year of $20 million. The company paid $5 million in dividends last year. During the year, the change in notes payable on the balance sheet was an increase of $2 million, and change in common and preferred stock was an increase of $3 million. The end of year balance for long-term debt was $45 million. What was their beginning of year balance for long-term debt? 
A. $15 million
B. $20 million
C. $25 million
D. $35 million

 

60. Statement of Cash Flows Full Moon Productions Inc. has net cash flow from financing activities for the last year of $105 million. The company paid $15 million in dividends last year. During the year, the change in notes payable on the balance sheet was an increase of $40 million, and change in common and preferred stock was an increase of $50 million. The end of year balance for long-term debt was $50 million. What was their beginning of year balance for long-term debt? 
A. $5 million
B. $20 million
C. $30 million
D. $35 million

 

61. Statement of Cash Flows Café Creations Inc. has net cash flow from financing activities for the last year of $25 million. The company paid $15 million in dividends last year. During the year, the change in notes payable on the balance sheet was a decrease of $40 million, and change in common and preferred stock was an increase of $50 million. The end of year balance for long-term debt was $40 million. What was their beginning of year balance for long-term debt? 
A. $10 million
B. $20 million
C. $30 million
D. $40 million

 

62. Free Cash Flow The 2010 income statement for Pete’s Pumpkins shows that depreciation expense is $250 million, EBIT is $500 million, EBT is $320 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,600 million and net operating working capital was $640 million. At the end of the year gross fixed assets was $2,000 million. Pete’s free cash flow for the year was $630 million. What is their end of year balance for net operating working capital? 
A. $24 million
B. $264 million
C. $654 million
D. $1,064 million

 

63. Free Cash Flow The 2010 income statement for Lou’s Shoes shows that depreciation expense is $2 million, EBIT is $5 million, EBT is $3 million, and the tax rate is 40 percent. At the beginning of the year, the balance of gross fixed assets was $16 million and net operating working capital was $6 million. At the end of the year gross fixed assets was $20 million. Lou’s free cash flow for the year was $4 million. What is their end of year balance for net operating working capital? 
A. $1.8 million
B. $3.8 million
C. $5.8 million
D. $12.2 million

 

64. Free Cash Flow The 2010 income statement for Paige’s Purses shows that depreciation expense is $10 million, EBIT is $25 million, EBT is $15 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $80 million and net operating working capital was $30 million. At the end of the year gross fixed assets was $100 million. Paige’s free cash flow for the year was $20 million. What is their end of year balance for net operating working capital? 
A. $10.5 million
B. $14 million
C. $20.5 million
D. $30.5 million

 

65. Free Cash Flow The 2010 income statement for Betty’s Barstools shows that depreciation expense is $100 million, EBIT is $400 million, and taxes are $120 million. At the end of the year, the balance of gross fixed assets was $510 million. The increase in net operating working capital during the year was $94 million. Betty’s free cash flow for the year was $625 million. What was the beginning of year balance for gross fixed assets? 
A. $359 million
B. $380 million
C. $849 million
D. $1,094 million

 

66. Free Cash Flow The 2010 income statement for John’s Gym shows that depreciation expense is $20 million, EBIT is $80 million, and taxes are $24 million. At the end of the year, the balance of gross fixed assets was $102 million. The increase in net operating working capital during the year was $18 million. John’s free cash flow for the year was $41 million. What was the beginning of year balance for gross fixed assets? 
A. $43 million
B. $85 million
C. $84 million
D. $163 million

 

67. Statement of Retained Earnings Bike and Hike, Inc. started the year with a balance of retained earnings of $100 million and ended the year with retained earnings of $128 million. The company paid dividends of $9 million to the preferred stock holders and $22 million to common stock holders. What was Bike and Hike’s net income for the year? 
A. $28 million
B. $31 million
C. $59 million
D. $128 million

 

68. Statement of Retained Earnings Soccer Starz, Inc. started the year with a balance of retained earnings of $25 million and ended the year with retained earnings of $32 million. The company paid dividends of $2 million to the preferred stock holders and $6 million to common stock holders. What was Soccer Starz’s net income for the year? 
A. $7 million
B. $15 million
C. $40 million
D. $49 million

 

69. Statement of Retained Earnings Jamaican Ice Cream Corp. started the year with a balance of retained earnings of $100 million. The company reported net income for the year of $45 million, paid dividends of $2 million to the preferred stock holders and $15 million to common stock holders. What is Jamaican Ice Cream’s end of year balance in retained earnings? 
A. $38 million
B. $55 million
C. $128 million
D. $162 million

 

70. Income Statement Listed below is the 2008 income statement for Lamps, Inc.

  

The CEO of Lamps wants the company to earn a net income of $12 million in 2009. Cost of goods sold is expected to be 75 percent of net sales, depreciation expense is not expected to change, interest expense is expected to increase to $4 million, and the firm’s tax rate will be 40 percent. What is the net sales needed to produce net income of $12 million? 
A. $29 million
B. $112 million
C. $116 million
D. $124 million

 

71. Income Statement You have been given the following information for Halle’s Holiday Store Corp. for the year 2008:
net sales = $50,000,000;
cost of goods sold = $35,000,000;
addition to retained earnings = $2,000,000;
dividends paid to preferred and common stockholders = $3,000,000;
interest expense = $3,000,000.
The firm’s tax rate is 30 percent.
In 2009, net sales are expected to increase by $5 million,
cost of goods sold is expected to be 65 percent of net sales,
expensed depreciation is expected to be the same as in 2008,
interest expense is expected to be $2,500,000,
the tax rate is expected to be 30 percent of EBT, and
dividends paid to preferred and common stockholders will not change.
What is the addition to retained earnings expected in 2009? 
A. $2,000,000
B. $5,325,000
C. $8,447,500
D. $10,304,643

 

72. Free Cash Flow Martha’s Moving Van 4U, Inc. had free cash flow during 2008 of $1 million, EBIT of $30 million, tax expense of $8 million, and depreciation of $4 million. Using this information, what was Martha’s Accounts Payable ending balance in 2008? 
A. $5 million
B. $15 million
C. $35 million
D. $45 million

 

73. You are evaluating the balance sheet for Goodman’s Bees Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $200,000, Accounts receivable = $1,100,000, Inventory = $2,000,000, Accrued wages and taxes = $500,000, Accounts payable = $600,000, and Notes payable = $100,000. Calculate Goodman’s Bees’ net working capital. 
A. $2,000,000
B. $2,100,000
C. $1,400,000
D. $1,900,000

 

74. Zoeckler Mowing & Landscaping’s year-end 2011 balance sheet lists current assets of $350,000, fixed assets of $325,000, current liabilities of $145,000, and long-term debt of $185,000. Calculate Zoeckler’s total stockholders’ equity. 
A. $115,000
B. $490,000
C. $345,000
D. $500,000

 

75. Reed’s Birdie Shot, Inc.’s 2011 income statement lists the following income and expenses: EBIT = $550,000, Interest expense = $43,000, and Net income = $300,000. Calculate the 2011 Taxes reported on the income statement. 
A. $85,000
B. $107,000
C. $309,000
D. $207,000

 

76. Reed’s Birdie Shot, Inc.’s 2010 income statement lists the following income and expenses: EBIT = $555,000, Interest expense = $178,000, and Taxes = $148,000. Reed’s has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2010 earnings per share. 
A. $3.49
B. $2.29
C. $3.14
D. $2.79

 

77. Oakdale Fashions Inc. had $255,000 in 2011 taxable income. If the firm paid $82,100 in taxes, what is the firm’s average tax rate? 
A. 34.70%
B. 32.20%
C. 29.90%
D. 28.20%

 

78. Hunt Taxidermy, Inc. is concerned about the taxes paid by the company in 2011. In addition to $36.5 million of taxable income, the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy, Inc. Calculate Hunt Taxidermy’s taxable income. 
A. $40,250,000
B. $38,150,000
C. $36,900,000
D. $36,620,000

 

79. Ramakrishnan Inc. reported 2008 net income of $20 million and depreciation of $1,500,000. The top part of Ramakrishnan, Inc.’s 2007 and 2008 balance sheets is listed below (in millions of dollars).

  

Calculate the 2008 net cash flow from operating activities for Ramakrishnan, Inc. 
A. $12,500,000
B. $10,500,000
C. $8,500,000
D. $7,100,000

 

80. In 2011, Usher Sports Shop had cash flows from investing activities of ($2,150,000) and cash flows from financing activities of ($3,219,000). The balance in the firm’s cash account was $980,000 at the beginning of 2011 and $1,025,000 at the end of the year. Calculate Usher Sports Shop’s cash flow from operations for 2011. 
A. $6,219,000
B. $5,414,000
C. $4,970,000
D. $5,980,000

 

81. You are considering an investment in Fields and Struthers, Inc. and want to evaluate the firm’s free cash flow. From the income statement, you see that Fields and Struthers earned an EBIT of $52 million, paid taxes of $10 million, and its depreciation expense was $5 million. Fields and Struthers’ gross fixed assets increased by $38 million from 2010 to 2011. The firm’s current assets increased by $20 million and spontaneous current liabilities increased by $12 million. Calculate Fields and Struthers’ operating cash flow (OCF), investment in operating capital (IOC) and free cash flow (FCF) for 2011. 
A. OCF = $42,000,000; IOC = $37,000,000; FCF = $5,000,000
B. OCF = $47,000,000; IOC = $37,000,000; FCF = $10,000,000
C. OCF = $42,000,000; IOC = $46,000,000; FCF = -$4,000,000
D. OCF = $47,000,000; IOC = $46,000,000; FCF = $1,000,000

 

82. Tater and Pepper Corp. reported free cash flows for 2010 of $20 million and investment in operating capital of $15 million. Tater and Pepper listed $8 million in depreciation expense and $12 million in taxes on its 2010 income statement. Calculate Tater and Pepper’s 2010 EBIT. 
A. $49,000,000
B. $42,000,000
C. $39,000,000
D. $47,000,000

 

83. Mr. Husker’s Tuxedos, Corp. began the year 2011 with $205 million in retained earnings. The firm earned net income of $30 million in 2011 and paid $5 million to its preferred stockholders and $12 million to its common stockholders. What is the year-end 2011 balance in retained earnings for Mr. Husker’s Tuxedos? 
A. $193,000,000
B. $200,000,000
C. $213,000,000
D. $218,000,000

 

84. Brenda’s Bar and Grill has total assets of $17 million of which $5 million are current assets. Cash makes up 12 percent of the current assets and accounts receivable makes up another 40 percent of current assets. Brenda’s gross plant and equipment has a cost value of $12 million and other long-term assets have a cost value of $1,000,000. Using this information, what is the balance of inventory and the balance of depreciation on Brenda’s Bar and Grill’s balance sheet? 
A. $2.4 million; $1 million
B. $3.4 million; $2 million
C. $1.4 million; $1 million
D. $0.4 million; $3 million

 

85. Ed’s Tobacco Shop has total assets of $100 million. Fifty percent of these assets are financed with debt of which $37 million is current liabilities. The firm has no preferred stock but the balance in common stock and paid-in surplus is $32 million. Using this information what is the balance for long-term debt and retained earnings on Ed’s Tobacco Shop’s balance sheet? 
A. $18 million; $27 million
B. $12 million; $12 million
C. $14 million; $29 million
D. $13 million; $18 million

 

86. Muffin’s Masonry, Inc.’s balance sheet lists net fixed assets as $16 million. The fixed assets could currently be sold for $17 million. Muffin’s current balance sheet shows current liabilities of $5.5 million and net working capital of $6.5 million. If all the current accounts were liquidated today, the company would receive $10.25 million cash after paying $5.5 million in liabilities. What is the book value of Muffin’s Masonry’s assets today? What is the market value of these assets? 
A. Book Value: $28M; Market Value: $32.75M
B. Book Value: $32M; Market Value: $42.25M
C. Book Value: $32M; Market Value: $32.75M
D. Book Value: $28M; Market Value: $42.25M

 

87. You have been given the following information for Corky’s Bedding Corp.:
Net sales = $15,250,000;
Cost of goods sold = $5,750,000;
Addition to retained earnings = $4,000,000;
Dividends paid to preferred and common stockholders = $995,000;
Interest expense = $1,150,000.
The firm’s tax rate is 30 percent. Calculate the depreciation expense for Corky’s Bedding Corp. 
A. $1,210,000
B. $1,970,000
C. $1,520,000
D. $1,725,000

 

88. Dogs 4 U Corporation has net cash flow from financing activities for the last year of $10 million. The company paid $8 million in dividends last year. During the year, the change in notes payable on the balance was $9 million, and change in common and preferred stock was $0 million. The end of year balance for long-term debt was $44 million. Calculate the beginning of year balance for long-term debt. 
A. $37 million
B. $34 million
C. $33 million
D. $35 million

 

89. The 2011 income statement for Duffy’s Pest Control shows that depreciation expense is $180 million, EBIT is $420 million, EBT is $240 million, and the tax rate is 30 percent. At the beginning of the year, the balance of gross fixed assets was $1,500 million and net operating working capital was $500 million. At the end of the year gross fixed assets was $1,803 million. Duffy’s free cash flow for the year was $425 million. Calculate the end of year balance for net operating working capital. 
A. $403 million
B. $300 million
C. $203 million
D. $103 million

 

90. The CEO of Tom and Sue’s wants the company to earn a net income of $3.25 million in 2010. Cost of goods sold is expected to be 60 percent of net sales, depreciation expense is $2.9 million, interest expense is expected to increase to $1.050 million, and the firm’s tax rate will be 30 percent. Calculate the net sales needed to produce net income of $3.25 million. 
A. $26.02 million
B. $29.36 million
C. $21.48 million
D. $28.25 million

 

91. All of the following would be a result of changing to the MACRS method of depreciation except _______. 
A. Higher depreciation expense
B. Lower taxes in the early years of a project’s life
C. Lower taxable income in the early years of a project’s life
D. All of these.

 

92. Which of the following is NOT a source of cash? 
A. The firm reduces its inventory.
B. The firm pays off some of its long-term debt.
C. The firm has positive net income.
D. The firm sells more common stock.

 

93. Which of the following is a use of cash? 
A. The firm takes its depreciation expense.
B. The firm sells some of its fixed assets.
C. The firm issues more long-term debt.
D. The firm decreases its accrued wages and taxes.

 

94. Is it possible for a firm to have positive net income and yet to have cash flow problems? 
A. No, this is impossible since net income increases the firm’s cash.
B. Yes, this can occur when a firm is growing very rapidly.
C. Yes, this is possible if the firm window-dressed its financial statements.
D. No, this is impossible since net income and cash are highly correlated.

 

95. All of the following are cash flows from operations except _____________. 
A. Increases or decreases in cash
B. Net Income
C. Depreciation
D. Increases or decreases in accounts payable

 

96. All of the following are cash flows from financing except a(n) _________. 
A. Increase in accounts payable
B. Issuing stock
C. Stock repurchases
D. Paying dividends

 

97. Cash flows available to pay the firm’s stockholders and debt holders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm’s ongoing operations is referred to as _________________. 
A. Operating cash flow
B. Net operating working capital
C. Free cash flow
D. None of these.

 

98. Investment in operating capital is __________________________. 
A. The change in assets plus the change in current liabilities
B. The change in gross fixed assets plus depreciation
C. The change in gross fixed assets plus the change in free cash flow
D. None of these.

 

99. A firm had EBIT of $1,000, paid taxes of $225, expensed depreciation at $13, and its gross fixed assets increased by $25. What was the firm’s operating cash flow? 
A. $763
B. $737
C. $813
D. $788

 

100. Which of the following is an example of a capital structure? 
A. 15% current assets and 85% fixed assets
B. 10% current liabilities and 90% long-term debt
C. 20% debt and 80% equity
D. None of these.

 

101. Lemmon Inc. lists fixed assets of $100 on its balance sheet. The firm’s fixed assets have recently been appraised at $140. The firm’s balance sheet also lists current assets at $15. Current assets were appraised at $16.5. Current liabilities book and market values stand at $12 and the firm’s long-term debt is $40. Calculate the market value of the firm’s stockholders’ equity. 
A. $156.5
B. $112.50
C. $104.50
D. $144.50

 

102. A firm has operating income of $1,000, depreciation expense of $185 and its investment in operating capital is $400. The firm is 100% equity financed and has a 35% tax rate. What is the firm’s operating cash flow? 
A. $725
B. $795
C. $835
D. $965

 

103. All of the following are reasons that one should be cautious in interpreting financial statements except ____________. 
A. Firms can take steps to over- or understate earnings at various times.
B. It is difficult to compare two firms that use different depreciation methods.
C. Financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings.
D. All of these are reasons to be cautious in interpreting financial statements.

 

104. Which of the following statements is correct? 
A. The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet.
B. The reason the statement of cash flows is important is because cash is what pays the firm’s obligations, not accounting profit.
C. If a firm has accounting profit, its cash account will always increase.
D. All of these statements are correct.

 

105. ABC Inc. has $100 in cash on its balance at the end of 2009. During 2010, the firm issued $450 in common stock, reduced its notes payable by $40, purchased fixed assets in the amount of $750 and had cash flows from operating activities of $315. How much cash did ABC Inc. have on its balance sheet at the end of 2010? 
A. $75
B. $140
C. $225
D. -$25

 

106. LLV Inc. originally forecasted the following financial data for next year: Sales = $1,000, Cost of goods sold = $675 and Interest expense = $90. The firm believes that COGS will always be 67.5% of sales. Due to increased global demand, the firm is now projecting that sales will be 20% higher than the original forecast. What is the additional net income (as compared to the original forecast) the firm can expect assuming a 35% tax rate? 
A. $59.45
B. $195.00
C. $42.25
D. $74.00

 

107. LLV Inc. originally forecasted the following financial data for next year: Sales = $1,000, Cost of goods sold = $710 and Interest expense = $95. The firm believes that COGS will always be 71% of sales. Due to pressure from shareholders, the firm wants to achieve a net income of $150. Assuming the interest expense will remain the same, how large must sales be to achieve this goal? Assume a 35% tax rate. 
A. $1,403.82
B. $1,3009.18
C. $1,123.34
D. $1,296.51

 

108. A firm has sales of $690, EBIT of $300, depreciation of $40 and fixed assets increased by $265. If the firm’s tax rate is 40% and there were no increases in net operating working capital, what is the firm’s free cash flow? 
A. $15
B. $75
C. -$45
D. -$55

 

109. GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW? 
A. $725 million
B. $917 million
C. $882 million
D. $807 million

 

 

Essay Questions
 

110. LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement below to construct a statement of cash flows for Betty’s Bakery Corp.

  

 

  

 

 

 

 

111. When might earnings management become an ethical consideration? 

 

 

 

 

112. How do taxes influence how corporate managers’ and investors’ structure transactions and capitalize their companies? 

 

 

 

 

113. How would you explain to a friend why market value of a firm is more important to an investor than book value of the firm? 

 

 

 

 

114. What are free cash flows for a firm? What does it mean when a firm’s free cash flow is negative? 

 

 

 

 

115. What are the costs and benefits of holding liquid securities on a firm’s balance sheet?