chapter 3 quiz

Question 1

Calculate the EBIT (Operating Income) for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense.
A. $500,000
B. $380,000
C. $0
D. ($120,000)

Answer 1

D. ($120 000)

Question 2

Dhaliwall Groceries has a net loss for the year of $5100, depreciation expense of $25,500, increase in operations (excluding depreciation) of $4,750, and the purchase of capital assets for $3525, there was also a net cash inflow from financing of $7000. What is the amount of net free cash flow?
A. $29,325
B. $35,675
C. $19,125
D. -$20,075

Answer 2

C. $19,125

Question 3

Johnson’s Nursery has net income of $42,500, depreciation expense of $1,800, interest expense of $900, taxes of $1,600, additions to net working capital of $2,300, and capital expenditures of $11,700. What is the amount of the free cash flow?
A. $30,300
B. $34,400
C. $31,200
D. $28,700

Answer 3

A. 30,300??

Question 4

Revenue increases by $200 and the cost of goods sold is 78%. What dollar amount of extra taxes will be owed if the marginal tax rate is 35%?
A. $70.00
B. $44.00
C. $54.60
D. $15.40

Answer 4

B. $44.00

Question 5

You have gathered this information on a firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%. What is the free cash flow?
A. $141,000
B. $168,000
C. $78,000
D. $142,000

Answer 5

A. $141,000

Question 6

Assume a single taxpayer is taxed at 10% on the first $9,075 of taxable income, 15% on the next $27,825 of income, and at 25% for the following $52,450 of income. What is the average tax rate for that individual if her taxable income is $41,350?
A. 14.98%
B. 16.67%
C. 16.13%
D. 19.98%

Answer 6

A. 14.98%

Question 7

What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 18% if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000?
A. 15%
B. 33%
C. 18%
D. 25%

Answer 7

B. 33%

Question 8

Which of the following assets is likely to be considered the most liquid?
A. marketable securities
B. net fixed assets
C. accounts payable
D. inventories

Answer 8

A. marketable securities

Question 9

Which of the following items should not be included in a listing of current assets?
A. marketable securities
B. accounts payable
C. accounts receivable
D. inventories

Answer 9

B. accounts payable

Question 10

Which of the following could account for a firm that has a negative net income, yet has a positive amount of cash provided by operations?
A. the net loss was greater than the amount of depreciation expense.
B. inventory increased significantly more than accounts payable.
C. accounts receivable decreased by significantly more than accounts payable.
D. the cash balance increased significantly

Answer 10

A. the net loss was greater than the amount of depreciation expense

Question 11

Which one of the following best explains the combination of a high level of net income combined with a low level of cash flow during an accounting period?
A. high depreciation expense
B. reduction of inventory levels
C. acquisition of capital equipment
D. increase in accounts payable

Answer 11

D. increase in account payable

Question 12

Which of these statements related to free cash flow is correct?
A. free cash flow must be fully distributed to the firm’s debtors and shareholders.
B. free cash flow must be positive for a firm to acquire new fixed assets.
C. all, or part, of free cash flow can be used to increase a firm’s cash reserves.
D. when capital expenditures are positive, free cash flow will exceed the cash flow from operations

Answer 12

C, all, or part, of free cash flow an be used to increase a firm’s cash reserves

Question 13

Depreciation expense is used to:
A. allocate costs to all departments of the firm.
B. determine when an asset is fully paid off.
C. allocate historical cost over the life of an asset.
D. equate the historical cost and market values of an asset

Answer 13

C. allocate historical cost over the life of an asset

Question 14

Increases to Retained earnings result from:
A. the sale of additional shares of stock to investors.
B. income not paid to shareholders.
C. an excess of assets over liabilities.
D. market values that exceed book values

Answer 14

B. income not paid to shareholders

Question 15

Which one of these will increase a firm’s cash balance?
A. an increase in inventory
B. a decrease in accounts payable
C. an increase in common stock
D. an increase in new equipment

Answer 15

B. a decrease in accounts payable

Question 16

Which of the following is more likely to be correct if market value of equity is less than book value of equity?
A. investors anticipate excellent earning potential.
B. investors anticipate low earning potential relative to the level of risk.
C. assets have been fully depreciated.
D. the company is bankrupt

Answer 16

B. investors anticipate low earning potential relative to the level of risk

Question 17

A balance sheet portrays the value of a firm’s assets and liabilities:
A. over an annual period.
B. over any stated period of time.
C. at any stated point in time.
D. only at the end of the calendar year

Answer 17

C. at any stated period of time

Question 18

Which of the following is correct for a fully depreciated asset?
A. market value is zero.
B. market value is greater than book value.
C. book value is greater than market value.
D. the relationship between market and book values is indeterminable.

Answer 18

A. market value is zero

Question 19

Which of the following will occur in a statement of cash flows as a result of paying cash dividends?
A. cash flows from operations will increase.
B. cash flows from investments will decrease.
C. cash flows from financing will decrease.
D. cash balances will not be affected.

Answer 19

C. cash flows from financing will decrease

Question 20

Which of the following categories of a statement of cash flows is affected by the payment of interest expense?
A. cash flows from operations
B. cash flows from noncash expenses
C. cash flows from investments
D. cash flows from financing

Answer 20

D. cash flows from financing