Chapter 2 Homework Review

Question 1

HUD Company had a beginning retained earnings of $31,385. For the year, the company had net income of $7,940 and paid dividends of $3,310. The company also issued $5,610 in new stock during the year. What is the ending retained earnings balance?

A) $34,695
B) $36,015
C) $41,625
D) $36,995
E) $30,405

Answer 1

$36,015

Retained earnings= $31,385 + ($7,940- $3,310) = $36,015

Question 2

At the beginning of the year, a firm has current assets of $315 and current liabilities of $219. At the end of the year, the current assets are $467 and the current liabilities are $259. What is the change in net working capital?

A) $112
B) $192
C) $0
D) −$112
E) $152

Answer 2

$112

Change in Net Working Capital= ($467- $259) - ($315 - $219) = $112.

Question 3

Kyra had taxable income of $128,267 last year. Her marginal tax rate was 35 percent and her average tax rate was 24 percent. How much did she have to pay in taxes for the year?

A) $27,839
B) $30,784
C) $29,541
D) $44,893
E) $29,197

Answer 3

$30,784

Taxes= $128,267(.24) = $30,784

Question 4

A company is obligated to pay its creditors $6,865 at the end of the year. If the value of the company’s assets equals $7,161 at that time, what is the value of shareholders’ equity?

A) $14,026
B) −$148
C) $0
D) −$296
E) $296

Answer 4

$296

Equity= Max[($7161 - $6,865), 0] = $296

Question 5

Prepare an income statement from the following information (please round the number to the nearest cent if necessary).

Sales $741,400
COGS $171,250
General & Admin Expenses $56,729
Depreciation Expense $6,278
Interest Expense $7,500
Income Taxes Rate 21%

Answer 5

Sales $741,400
COGS $171,250
Gross Profit $570,150
Depreciation $6,278
General & Admin Expenses $56,729
EBIT $507,143
Interest $7,500
Taxable Income $499,643
Income Tax $104,925.03
Net Income $394,717.97

Question 6

Given the information below, compute the firm’s free cash flow.

Dividend $37
Change in Common Stock $8
Change in Inventories $22
Change in Accounts Receivable $73
Change in Other Current Assets $25
EBIT $213
Interest Expense $45
Net Income $6
Depreciation $29
Change in Accounts Payable $42
Change in Gross Fixed Assets $55
Income Taxes $35

Answer 6

Free Cash Flow (Cash Flow from Assets)
EBIT $213
Depreciation $29
Income Tax $35

Operating Cash Flow $207

Change in Long-Term Assets $55

Change in Current Assets
Change in Accounts Receivable $73
Change in Inventories $22
Change in Other Current Assets $25

Change in Current Liabilities
Change in Accounts Payable $42

Changes in Net Working Capital $78

Free Cash Flow $74

Question 7

Given the information below, compute the firm’s financing cash flow.

Dividend $37
Change in Common Stock $8
Change in Inventories $22
Change in Accounts Receivable $73
Change in Other Current Assets $25
EBIT $213
Interest Expense $45
Net Income $6
Depreciation $29
Change in Accounts Payable $42
Change in Gross Fixed Assets $55
Income Taxes $35

Answer 7

Financing Cash Flow
Dividend $37
Interest $45
Change in Common Stock $8
Change in Debt $0

Financing Cash Flow $74