Ch. 2

Question 1

Net working capital is defined as:

A. the depreciation book value of a firm’s fixed assets
B. the value of a firm’s current assets
C. available cash minus current liabilities
D. total assets minus total liabilities
E. current assets minus current liabilities

Answer 1

E. current assets minus current liabilities

Question 2

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

A.  statement of cash flows
B.  income statement
C.  GAAP statement
D.  balance sheet
E.  net working capital schedule

Answer 2

B. income statement

Question 3

The financial statement that summarizes a firm’s accounting value as of a particular date is called the:

A.  income statement
B.  cash flow statement
C.  liquidity position
D.  balance sheet
E.  periodic operating statement

Answer 3

D. balance sheet

Question 4

Which on e of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

A.  indirect cost
B.  direct cost
C.  noncash item
D.  period cost
E.  variable cost

Answer 4

C. noncash item

Question 5

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A.  average tax rate
B.  variable tax rate
C.  marginal tax rate
D.  absolute tax rate
E.  contingent tax rate

Answer 5

A. average tax rate

Question 6

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

A.  average tax rate
B.  variable tax rate
C.  marginal tax rate
D.  fixed tax rate
E.  ordinary tax rate

Answer 6

C. marginal tax rate

Question 7

Cash flow from assets is defined as:

A. the cash flow to shareholders minus the cash flow to creditors
B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders
C. operating cash flow minus the change in net working capital minus net capital spending
D. operating cash flow plus capital spending plus the change in net working capital
E. cash flow to shareholders minus net capital spending plus the change in net working capital

Answer 7

C. operating cash flow minus the change in net working capital minus net capital spending

Question 8

Operating cash flow is defined as:

A. a firm’s net profit over a specified period of time
B. the cash that a firm generates from its normal business activities
C. a firm’s operating margin
D. the change in the net working capital over a stated period of time
E. the cash that is generated and added to retained earnings

Answer 8

B. the cash that a firm generates from its normal business activities.

Question 9

Which one of the following has nearly the same meaning as free cash flow?

A.  Net income
B.  Cash flow from assets
C.  Operating cash flow
D.  Cash flow to shareholders
E.  Addition to retained earnings

Answer 9

B. Cash flow from assets

Question 10

Cash flow to creditors is defined as:

A. interest paid minus net new borrowing.
B. interest paid plus net new borrowing.
C. operating cash flow minus net capital spending minus the change in net working capital.
D. dividends paid plus net new borrowing.
E. cash flow from assets plus net new equity.

Answer 10

A. interest paid minus net new borrowing.

Question 11

Cash flow to stockholders is defined as:

A. cash flow from assets plus cash flow to creditors.
B. operating cash flow minus cash flow to creditors.
C. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
E. net income minus the addition to retained earnings.

Answer 11

D. dividends paid minus net new equity raised.

Question 12

Which one of the following is an intangible fixed asset?

A.  Inventory
B.  Machinery
C.  Copyright
D.  Account receivable
E.  Building

Answer 12

C. Copyright

Question 13

Production equipment is classified as:

A.  a net working capital item.
B.  a current liability.
C.  a current asset.
D.  a tangible fixed asset.
E.  an intangible fixed asset.

Answer 13

D. a tangible fixed asset.

Question 14

Net working capital includes:

A.  a land purchase.
B.  an invoice from a supplier.
C.  non-cash expenses.
D.  fixed asset depreciation.
E.  the balance due on a 15-year mortgage.

Answer 14

B. an invoice from a supplier.

Question 15

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm’s net working capital:

A. had to increase.
B. had to decrease.
C. remained constant.
D. could have either increased, decreased, or remained constant.
E. was unaffected as the changes occurred in the firm’s current accounts.

Answer 15

B. had to decrease.

Question 16

Net working capital increases when:

A.  fixed assets are purchased for cash.
B.  inventory is purchased on credit.
C.  inventory is sold at cost.
D.  a credit customer pays for his or her purchase.
E.  inventory is sold at a profit.

Answer 16

E. inventory is sold at a profit.

Question 17

Shareholders’ equity is equal to:

A. total assets plus total liabilities.
B. net fixed assets minus total liabilities.
C. net fixed assets minus long-term debt plus net working capital.
D. net working capital plus total assets.
E. total assets minus net working capital.

Answer 17

C. net fixed assets minus long-term debt plus net working capital.

Question 18

Paid-in surplus is classified as:

A.  owners’ equity.
B.  net working capital.
C.  a current asset.
D.  a cash expense.
E.  long-term debt.

Answer 18

A. owners’ equity.

Question 19

Shareholders’ equity is best defined as:

A.  the residual value of a firm.
B.  positive net working capital.
C.  the net liquidity of a firm.
D.  cash inflows minus cash outflows.
E.  the cumulative profits of a firm over time.

Answer 19

A. the residual value of a firm.

Question 20

All else held constant, the book value of owners’ equity will decrease when:

A. the market value of inventory increases.
B. dividends exceed net income for a period.
C. cash is used to pay an accounts payable.
D. a long-term debt is repaid.
E. taxable income increases.

Answer 20

B. dividends exceed net income for a period.

Question 21

Net working capital decreases when:

A. a new 3-year loan is obtained with the proceeds used to purchase inventory.
B. a credit customer pays his or her bill in full.
C. depreciation increases.
D. a long-term debt is used to finance a fixed asset purchase.
E. a dividend is paid to current shareholders.

Answer 21

E. a dividend is paid to current shareholders.

Question 22

A firm’s liquidity level decreases when:

A.  inventory is purchased with cash.
B.  inventory is sold on credit.
C.  inventory is sold for cash.
D.  an account receivable is collected.
E.  proceeds from a long-term loan are received.

Answer 22

A. inventory is purchased with cash.

Question 23

Highly liquid assets:

A. increase the probability a firm will face financial distress.
B. appear on the right side of a balance sheet.
C. generally produce a high rate of return.
D. can be sold quickly at close to full value.
E. include all intangible assets.

Answer 23

D. can be sold quickly at close to full value.

Question 24

Financial leverage:

A. increases as the net working capital increases.
B. is equal to the market value of a firm divided by the firm’s book value.
C. is inversely related to the level of debt.
D. is the ratio of a firm’s revenues to its fixed expenses.
E. increases the potential return to the stockholders.

Answer 24

E. increases the potential return to the stockholders.

Question 25

The market value:

A. of accounts receivable is generally higher than the book value of those receivables.
B. of an asset tends to provide a better guide to the actual worth of that asset than does the book value.
C. of fixed assets will always exceed the book value of those assets.
D. of an asset is reflected in the balance sheet.
E. of an asset is lowered each year by the amount of depreciation expensed for that asset.

Answer 25

B. of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

Question 26

Which one of the following is included in the market value of a firm but not in the book value?

A.  Raw materials
B.  Partially built inventory
C.  Long-term debt
D.  Reputation of the firm
E.  Value of a partially depreciated machine

Answer 26

D. Reputation of the firm

Question 27

The market value of a firm’s fixed assets:

A. will always exceed the book value of those assets.
B. is more predictable than the book value of those assets.
C. in addition to the firm’s net working capital reflects the true value of a firm.
D. is decreased annually by the depreciation expense.
E. is equal to the estimated current cash value of those assets.

Answer 27

E. is equal to the estimated current cash value of those assets.

Question 28

Market values:

A. reflect expected selling prices given the current economic situation.
B. are affected by the accounting methods selected.
C. are equal to the initial cost minus the depreciation to date.
D. either remain constant or increase over time.
E. are equal to the greater of the initial cost or the current expected sales value.

Answer 28

A. reflect expected selling prices given the current economic situation.

Question 29

Which one of the following statements concerning the balance sheet is correct?

A. Total assets equal total liabilities minus total equity.
B. Net working capital is equal total assets minus total liabilities.
C. Assets are listed in descending order of liquidity.
D. Current assets are equal to total assets minus net working capital.
E. Shareholders’ equity is equal to net working capital minus net fixed assets plus long-term debt.

Answer 29

C. Assets are listed in descending order of liquidity.

Question 30

An income statement prepared according to GAAP:

A. reflects the net cash flows of a firm over a stated period of time.
B. reflects the financial position of a firm as of a particular date.
C. distinguishes variable costs from fixed costs.
D. records revenue when payment for a sale is received.
E. records expenses based on the matching principle.

Answer 30

E. records expenses based on the matching principle.

Question 31

Net income increases when:

A.  fixed costs increase.
B.  depreciation increases.
C.  the average tax rate increases.
D.  revenue increases.
E.  dividends cease.

Answer 31

D. revenue increases.

Question 32

Based on the recognition principle, revenue is recorded on the financial statements when the:

I. payment is collected for the sale of a good or service.

II. earnings process is virtually complete.

III. value of a sale can be reliably determined.

IV. product is physically delivered to the buyer.

A.  I and II only
B.  I and IV only
C.  II and III only
D.  II and IV only
E.  I and III only

Answer 32

C. II and III only

Question 33

Given a profitable firm, depreciation:

A.  increases net income.
B.  increases net fixed assets.
C.  decreases net working capital.
D.  lowers taxes.
E.  has no effect on net income.

Answer 33

D. lowers taxes.

Question 34

The recognition principle states that:

A. costs should be recorded on the income statement whenever those costs can be reliably determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Answer 34

E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Question 35

The matching principle states that:

A. costs should be recorded on the income statement whenever those costs can be reliably determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

Answer 35

C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Question 36

Which one of these is correct?

A. Depreciation has no effect on taxes.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Net income is distributed either to dividends or retained earnings.
E. Taxable income equals net income × (1 + Average tax rate).

Answer 36

D. Net income is distributed either to dividends or retained earnings.

Question 37

Firms that compile financial statements according to GAAP:

A. record income and expenses at the time they affect the firm’s cash flows.
B. have no discretion over the timing of recording either revenue or expense items.
C. must record all expenses when incurred.
D. can still manipulate their earnings to some degree.
E. record both income and expenses as soon as the amount for each can be ascertained.

Answer 37

D. can still manipulate their earnings to some degree.

Question 38

The concept of marginal taxation is best exemplified by which one of the following?

A. Kirby’s paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B. Johnson’s Retreat paid only $45,000 on total revenue of $570,000 last year.
C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.
D. Burlington Centre paid no taxes last year due to carryforward losses.
E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

Answer 38

C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Question 39

The corporate tax structure in the U.S. is based on a:

A.  maximum tax rate of 38 percent.
B.  minimum tax rate of 10 percent.
C.  flat rate of 34 percent for the highest income earners.
D.  flat-rate tax.
E.  modified flat-rate tax.

Answer 39

E. modified flat-rate tax.

Question 40

Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

A. An increase in net capital spending
B. A decrease in the cash flow to creditors
C. An increase in depreciation
D. An increase in the change in net working capital
E. A decrease in dividends paid

Answer 40

C. An increase in depreciation

Question 41

A negative cash flow to stockholders indicates a firm:

A. had a net loss for the year.
B. had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. repurchased more shares than it sold.
E. received more from selling stock than it paid out to shareholders.

Answer 41

E. received more from selling stock than it paid out to shareholders.

Question 42

If a firm has a negative cash flow from assets every year for several years, the firm:

A. may be continually increasing in size.
B. must also have a negative cash flow from operations each year.
C. is operating at a high level of efficiency.
D. is repaying debt every year.
E. has annual net losses.

Answer 42

A. may be continually increasing in size.

Question 43

An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

A.  Fixed expenses
B.  Marginal tax rate
C.  Net capital spending
D.  Inventory
E.  Depreciation

Answer 43

E. Depreciation

Question 44

Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

A.  Positive operating cash flow
B.  Negative cash flow from assets
C.  Positive net income
D.  Negative operating cash flow
E.  Positive cash flow to stockholders

Answer 44

E. Positive cash flow to stockholders

Question 45

Net capital spending is equal to:

A. ending net fixed assets minus beginning net fixed assets plus depreciation.
B. beginning net fixed assets minus ending net fixed assets plus depreciation.
C. ending net fixed assets minus beginning net fixed assets minus depreciation.
D. ending total assets minus beginning total assets plus depreciation.
E. ending total assets minus beginning total assets minus depreciation.

Answer 45

A. ending net fixed assets minus beginning net fixed assets plus depreciation.

Question 46

What is the maximum average tax rate for corporations?

A.  38 percent
B.  25 percent
C.  33 percent
D.  39 percent
E.  35 percent

Answer 46

E. 35 percent

Question 47

Which one of the following changes during a year will increase cash flow from assets but not affect the operating cash flow?

A.  Increase in depreciation
B.  Increase in accounts receivable
C.  Increase in accounts payable
D.  Decrease in cost of goods sold
E.  Increase in sales

Answer 47

C. Increase in accounts payable

Question 48

Cash flow to creditors increases when:

A.  interest rates on debt decline.
B.  accounts payables decrease.
C.  long-term debt is repaid.
D.  current liabilities are repaid.
E.  new long-term loans are acquired.

Answer 48

C. long-term debt is repaid.

Question 49

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

A.  Positive operating cash flow
B.  Negative cash flow to creditors
C.  Positive cash flow to stockholders
D.  Negative net capital spending
E.  Positive cash flow from assets

Answer 49

E. Positive cash flow from assets

Question 50

Wes Motors has total assets of $98,300, net working capital of $11,300, owners’ equity of $41,600, and long-term debt of $38,600. What is the value of the current assets?

A.  $21,600
B.  $18,100
C.  $28,900
D.  $29,400
E.  $6,800

Answer 50

D. $29,400

Current liabilities = $98,300-38,600 -41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400

Question 51

ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, and long-term debt of $22,100. What is the amount of the net fixed assets?

A.  $50,800
B.  $56,900
C.  $45,500
D.  $48,100
E.  $53,300

Answer 51

E. $53,300

Net fixed assets = $22,100 + 46,600- 15,400 = $53,300

Question 52

Rooster’s currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and $41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $56,500. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

A.  $46,800
B.  $55,600
C.  $64,700
D.  $84,900
E.  $96,500

Answer 52

D. $84,900

Current assets = $5,200 + 26,400 + 53,300 = $84,900

Question 53

Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners’ equity of $21,100. What is the value of the net working capital?

A.  $9,800
B.  $10,400
C.  $18,900
D.  $21,300
E.  $23,200

Answer 53

B. $10,400

Net working capital = $21,100 + 8,600 -19,300 = $10,400

Question 54

W. S. Movers had $138,600 in net fixed assets at the beginning of the year. During the year, the company purchased $27,400 in new equipment. It also sold, at a price of $5,300, some old equipment that had a book value of $2,100. The depreciation expense for the year was $6,700. What is the net fixed asset balance at the end of the year?

A.  $146,900
B.  $159,300
C.  $163,900
D.  $157,200
E.  $148,400

Answer 54

D. $157,200

Ending net fixed assets = $138,600 + 27,400 -2,100 -6,700 = $157,200

Question 55

Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900. During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in depreciation expense. How much did the company spend to buy new fixed assets?

A.  -$23,900
B.  $9,200
C.  $36,800
D.  $40,700
E.  $37,400

Answer 55

C. $36,800

New fixed asset purchases = $98,700 + 9,800 + 13,200-84,900 = $36,800

Question 56

The Green Carpet has current liabilities of $72,100 and accounts receivable of $107,800. The firm has total assets of $443,500 and net fixed assets of $323,700. The owners’ equity has a book value of $191,400. What is the amount of the net working capital?

A.  $50,100
B.  $47,700
C.  $6,500
D.  -$18,800
E.  -$29,700

Answer 56

B. $47,700

Net working capital = $443,500-323,700 -72,100 = $47,700

Question 57

Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets of $380,200. What is the value of the current liabilities?

A.  $61,700
B.  $88,40000
C.  $102,900
D.  $96,700
E.  $111,500

Answer 57

D. $96,700

Current liabilities = $519,300 -380,200 -42,400 = $96,700

Question 58

Blythe Industries reports the following account balances: inventory of $417,600, equipment of $2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is the amount of the current assets?

A.  $46,700
B.  $56,000
C.  $783,400
D.  $975,000
E.  $699,700

Answer 58

C. $783,400

Current assets = $51,900 + 313,900 + 417,600 = $783,400

Question 59

Donner United has total owners’ equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

A.  $5,400
B.  $12,500
C.  $13,700
D.  $29,800
E.  $43,000

Answer 59

A. $5,400

Long-term debt = $36,400 -18,800 -12,200 = $5,400

Question 60

Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

A.  $45,100
B.  $53,300
C.  $58,200
D.  $63,300
E.  $85,900

Answer 60

D. $63,300

Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300

Question 61

The Toy Store has beginning retained earnings of $318,423. For the year, the company earned net income of $11,318 and paid dividends of $7,500. The company also issued $25,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

A.  $320,445
B.  $322,695
C.  $327,375
D.  $322,241
E.  $335,255

Answer 61

D. $322,241

Retained earnings = $318,423 + 11,318-7,500 = $322,241

Question 62

Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the net new equity raised during the year?

A.  $34,000
B.  $42,500
C.  $25,000
D.  $21,500
E.  $0

Answer 62

A. $34,000

Net new equity = $142,430- 55,000 - 11,200 - ($48,420+26,310- 32,500) = $34,000

Question 63

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 34 percent. What is the retained earnings balance at the end of the year?

A.  $21,947.30
B.  $22,193.95
C.  $22,233.24
D.  $23,783.24
E.  $21,883.25

Answer 63

A. $21,947.30

Net income = ($83,490 -68,407 -8,200 -478) ×(1 -.34) = $4,227.30 Ending retained earnings = $18,670 + 4,227.30-950 = $21,947.30

Question 64

Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year, the company earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased $3,500 of stock from one of its shareholders. What is the value of the owners’ equity at year end?

A.  $61,100
B.  $67,600
C.  $64,900
D.  $64,400
E.  $68,100

Answer 64

A. $61,100

Ending owners’ equity = $58,900 + 8,200 -2,500 -3,500 = $61,100

Question 65

Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’ equity?

A.  $36,900
B.  $66,700
C.  $71,600
D.  $89,400
E.  $106,300

Answer 65

C. $71,600

Owners’ equity = $29,800 + 64,800 -23,000 = $71,600

Question 66

Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be sold today for $138,000. What is the total book value of the firm’s assets?

A.  $327,800
B.  $293,200
C.  $346,800
D.  $412,100
E.  $415,600

Answer 66

B. $293,200

Total book value = $41,100 + 54,200 + 82,300 + 234,500 -118,900 = $293,200

Question 67

Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $189,000. The building is currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at $32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the firm’s assets?

A.  $251,000
B.  $241,000
C.  $232,600
D.  $214,400
E.  $379,000

Answer 67

A. $251,000

Book value = $189,000 + 56,000 -49,000 + 18,400 + 36,600 = $251,000

Question 68

Lew’s Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900, inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for $349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market value of the firm’s assets?

A.  $332,800
B.  $458,200
C.  $374,200
D.  $495,500
E.  $487,100

Answer 68

E. $487,100

Market value = $18,600 + 34,500 + 85,000 + 349,000 = $487,100

Question 69

Marcie’s has sales of $179,600,depreciation of $14,900, costs of goods sold of $138,200, and other costs of $28,400. The tax rate is 35 percent. What is the net income?

A.  -$1,235
B.  $382
C.  $1,204
D.  $14,660
E.  $13,665

Answer 69

A. -$1,235

Net income = ($179,600 -138,200 -28,400 -14,900)(1 -.35) = -$1,235

Question 70

AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is $43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is 33 percent. What is the addition to retained earnings?

A.  $38,804
B.  $34,304
C.  $28,120
D.  $29,804
E.  $30,450

Answer 70

D. $29,804

Addition to retained earnings = [($513,000 -406,800-43,800 -11,200)(1 -.33)] - $4,500 = Addition to retained earnings = $29,804

Question 71

Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650. The company had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 34 percent, what was the amount of the depreciation expense?

A.  $2,407
B.  $1,908
C.  $2,503
D.  $3,102
E.  $3,414

Answer 71

C. $2,503

Earnings before interest and taxes = [($6,230 + 2,500)/(1 -.34)] + $1,620 = $14,847 Depreciation = $104,650-87,300-14,847 = $2,503

Question 72

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

A.  $7,778
B.  $9,324
C.  $10,380
D.  $8,671
E.  $5,886

Answer 72

B. $9,324

Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324

Question 73

For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

A.  $100
B.  $7,500
C.  $7,600
D.  $15,100
E.  $16,700

Answer 73

C. $7,600

Dividends paid = $31,800 -24,200 = $7,600

Question 74

MNM & Co incurred depreciation expenses of $36,810 last year. The sales were $903,480 and the addition to retained earnings was $11,530. The firm paid interest of $7,711 and dividends of $7,500. The tax rate was 33 percent. What was the amount of the costs incurred by the company?

A.  $822,845
B.  $689,407
C.  $742,306
D.  $830,556
E.  $780,400

Answer 74

D. $830,556

Earnings before interest and taxes = [($7,500 + 11,530)/(1 -.33)] + $7,711 = $36,114 Costs = $903,480-36,810-36,114 = $830,556

Question 75

For the year, Uptowne Furniture had sales of $818,790, costs of $748,330, and interest paid of $24,450. The depreciation expense was $56,100 and the tax rate was 34 percent. At the beginning of the year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year, retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What is the amount of the dividends paid for the year?

A.  $5,266
B.  $6,466
C.  $7,566
D.  $7,066
E.  $6,898

Answer 75

E. $6,898

Net income = [($818,790 -748,330-56,100 -24,450)(1 -.34)] =-$6,659 Dividends paid = -$6,659 - ($158,713-172,270) = $6,898

Question 76

Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?

A.  28.00 percent
B.  30.33 percent
C.  33.33 percent
D.  35.00 percent
E.  27.56 percent

Answer 76

E. 27.56 percent

Average tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent

Question 77

Rusty Antiques has a marginal tax rate of 39percent and an average tax rate of 26.9 percent. If the firm owes $37,265 in taxes, how much taxable income did it earn?

A.  $137,098
B.  $136,800
C.  $138,532
D.  $139,957
E.  $137,750

Answer 77

C. $138,532

Tax = $37,265 / .269 = $138,532

Question 78

Red’s Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this level of income?

A.  39 percent
B.  38 percent
C.  35 percent
D.  34 percent
E.  33 percent

Answer 78

E. 33 percent

Marginal tax rate = ($56,211 -52,311)/($620,424-608,606) = .33, or 33 percent

Question 79

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Answer 79

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Question 80

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Answer 80

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Question 81

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Answer 81

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Question 82

National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?

A.  $21,811
B.  $41,194
C.  $36,189
D.  $26,410
E.  $67,015

Answer 82

E. $67,015

Cash flow from assets = ($24,615 + 23,800) + ($38,600-20,000) = $67,015

Question 83

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm’s operating cash flow if the tax rate is 34 percent?

A.  $87,620
B.  $89,540
C.  $91,220
D.  $93,560
E.  $95,240

Answer 83

D. $93,560

EBIT = $821,300 -698,500 -28,400 = $94,400 Tax = ($94,400 -8,400) ×.34 = $29,240 OCF = $94,400 + 28,400 -29,240 = $93,560

Question 84

Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled $361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was35 percent. What was the amount of the operating cash flow?

A.  $64,232
B.  $65,306
C.  $57,556
D.  $70,056
E.  $70,568

Answer 84

D. $70,056

EBIT = $361,820-267,940-16,500 = $77,380 Tax = ($77,380-9,310) ×.35 = $23,824.50 OCF = $77,380 + 16,500 -23,824.50 = $70,056

Question 85

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

A.  -$22,360
B.  -$4,780
C.  $23,720
D.  $58,340
E.  $69,800

Answer 85

E. $69,800

Net capital spending = $371,920 -348,200 + 46,080 = $69,800

Question 86

The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interest expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets increased by $28,600. What is the amount of the net capital spending for the year?

A.  $13,000
B.  $21,600
C.  $28,600
D.  $60,400
E.  $70,200

Answer 86

E. $70,200

Net capital spending = $28,600 + 41,600 = $70,200

Question 87

Andre’s Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year, the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working capital?

A.  -$2,800
B.  -$1,400
C.  $1,400
D.  $2,100
E.  $2,800

Answer 87

C. $1,400

Change in net working capital = ($82,600 -85,100) - ($67,200 -71,100) = $1,400

Question 88

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Answer 88

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Question 89

During the past year, Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors?

A.  $8,200
B.  $55,200
C.  $2,400
D.  $39,200
E.  $15,800

Answer 89

D. $39,200

Cash flow to creditors = $36,800 -16,000 + 18,400 = $39,200

Question 90

A firm has earnings before interest and taxes of $27,130,net income of $16,220, and taxes of $5,450 for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is the amount of the cash flow to creditors?

A.  -$14,040
B.  $0
C.  -$4,660
D.  $14,040
E.  $4,660

Answer 90

C. -$4,660

Interest = $27,130 -16,220 -5,450 = $5,460 Cash flow to creditors = $5,740 + 31,600-42,000 = -$4,660

Question 91

A balance sheet shows beginning values of $56,300 for current liabilities and$289,200 for long-term debt. The ending values are $61,900 and $318,400, respectively. The income statement shows interest paid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?

A.  $29,200
B.  $40,450
C.  $34,800
D.  $70,150
E.  $58,900

Answer 91

A. $29,200

Net new borrowing = $318,400-289,200 = $29,200

Question 92

For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the firm’s stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?

A.  -$14,300
B.  -$9,700
C.  $12,300
D.  $14,300
E.  $18,900

Answer 92

A. -$14,300

Cash flow to creditors = $38,100 -21,500 = $16,600 Net new borrowing = $2,300 - 16,600 = -$14,300

Question 93

Six months ago, Benders Gym repurchased $140,000 of its common stock. The company pays regular dividends totaling $18,500 per quarter. What is the amount of the cash flow to stockholders for the past year if 1,200 new shares were issued and sold for $38 a share?

A.  -$10,000
B.  -$20,400
C.  $28,500
D.  $74,000
E.  $168,400

Answer 93

E. $168,400

Cash flow to stockholders = ($18,500 ×4) -[(1,200 × $38) - $140,000] = $168,400

Question 94

The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400 for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of $47,900. What is the amount of the cash flow to stockholders for the last year?

A.  -$171,500
B.  -$86,700
C.  $21,200
D.  $95,700
E.  $39,700

Answer 94

D. $95,700

Cash flow to stockholders = [$187,000 - 47,900 -(-$28,000)]- $71,400 = $95,700

Question 95

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Question 96

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Question 97

The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400, interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?

A.  $61,930
B.  $66,211
C.  $67,516
D.  $76,428
E.  $83,219

Answer 97

D. $76,428

Net income = ($398,600 -254,800 -26,400 -1,600) (1 -.34) = $76,428

Question 98

Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600, interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is the addition to retained earnings?

A.  $36,909
B.  $34,645
C.  $44,141
D.  $37,208
E.  $40,615

Answer 98

B. $34,645

Addition to retained earnings = [($318,400 -199,400 -28,600 -1,100)(1 -.35)] - $23,400 Addition to retained earnings = $34,645

Question 99

Roscoe’s fixed assets were purchased three years ago for $1.8 million. These assets can be sold to Stewart’s today for $1.2 million. Roscoe’s current balance sheet shows net fixed assets of $960,000, current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated today, the company would receive $518,000 cash. The book value of the firm’s assets today is _____ and the market value is ____.

A.  $1,081,000; $1,308,000
B.  $1,081,000; $1,718,000
C.  $1,307,000; $1,429,000
D.  $1,429,000; $1,308,000
E.  $1,429,000; $1,718,000

Answer 99

E. $1,429,000; $1,718,000

Book value = $121,000 + 348,000 + 960,000 = $1,429,000 Market value = $518,000 + 1,200,000 = $1,718,000

Question 100

Daniel’s Market has sales of $43,800, costs of $40,400, depreciation expense of $2,500, and interest expense of $1,100. If the tax rate is 34 percent, what is the operating cash flow, OCF? Assume tax losses can be carried forward and utilized.

A.  $3,332
B.  $3,279
C.  $3,511
D.  $3,468
E.  $3,013

Answer 100

D. $3,468

EBIT = $43,800-40,400 -2,500 = $900 Tax = ($900-1,100) ×.34 = -$68 OCF = $900 + 2,500 -(-$68) = $3,468

Question 101

On December 31, 2015, The Play House had net fixed assets of $812,650 while the December 31, 2016 balance sheet showed net fixed assets of $784,900. Depreciation for 2016 was $84,900. What was the firm’s net capital spending for 2016?

A.  $51,600
B.  $42,410
C.  $57,150
D.  $54,400
E.  $46,620

Answer 101

C. $57,150

Net capital spending = $784,900-812,650 + 84,900 = $57,150

Question 102

Suzette’s Market had long-term debt of $638,100 at the beginning of the year compared to $574,600 at year-end. If the interest expense was $42,300, what was the firm’s cash flow to creditors?

A.  $21,200
B.  $26,700
C.  $54,900
D.  $102,400
E.  $105,800

Answer 102

E. $105,800

Cash flow to creditors = $42,300 - ($574,600 -638,100) = $105,800

Question 103

Assume a company has sales of $423,800, production costs of $297,400, other expenses of $18,500, depreciation expense of $36,300, interest expense of $2,100, taxes of $23,600, and dividends of $12,000. In addition, you’re told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition to net working capital?

A.  $11,500
B.  $24,500
C.  $15,800
D.  $37,500
E.  $30,400

Answer 103

B. $24,500

OCF = $423,800 -297,400 -18,500 -23,600 = $84,300 NCS = $7,400 + 36,300 = $43,700 CFA = CFC + CFS = [$2,100 - (-6,500)] + [$12,000 -4,500] = $16,100 Add to NWC = OCF - NCS - CFA = $84,300 -43,700 -16,100 = $24,500

Question 104

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Answer 104

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Question 105

Dixie’s sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the company had an interest expense of $74,000 and a tax rate of 34 percent. What is the operating cash flow for the year?

A.  $227,560
B.  $271,420
C.  $223,330
D.  $285,400
E.  $217,700

Answer 105

A. $227,560

EBIT = [($1,678,000 -1,141,000 -304,000 -143,000 = $90,000 Tax = ($90,000 -74,000) ×.34 = $5,440 OCF = $90,000 + 143,000 -5,440 = $227,560

Question 106

For Year 2016, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year, net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400. The tax rate was 34 percent. What is the cash flow from assets for 2016?

A.  $9,914
B.  $11,114
C.  $9,360
D.  $10,514
E.  $11,970

Answer 106

D. $10,514

EBIT = [($42,900 -26,800-1,900) = $14,200 Taxes = ($14,200 - 1,300)(.34)= $4,386 OCF = $14,200 + 1,900 - 4,386 = $11,714 CFA = $11,714- ($13,900 -14,300 + 1,900) - [($9,200 -7,400) -($8,700 -6,600)] = $10,514