Q&A Hero

Q: The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged. a. True b. False

Q: A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid. a. True b. False

Q: The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets. a. True b. False

Q: Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? a. The transaction would improve both firms' financial strength as measured by their current ratios. b. The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. c. The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. d. The transaction would have no effect on the firm' financial strength as measured by their current ratios. e. The transaction would lower both firm' financial strength as measured by their current ratios.

Q: Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio? a. Use cash to reduce long-term bonds outstanding. b. Borrow using short-term notes payable and use the cash to increase inventories. c. Use cash to reduce accruals. d. Use cash to reduce accounts payable. e. Use cash to reduce short-term notes payable.

Q: Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio? a. Use cash to reduce accounts payable. b. Borrow using short-term notes payable and use the proceeds to reduce accruals. c. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. d. Use cash to reduce accruals. e. Use cash to reduce short-term notes payable.

Q: A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? a. Issue new common stock and use the proceeds to acquire additional fixed assets. b. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. c. Issue new common stock and use the proceeds to increase inventories. d. Speed up the collection of receivables and use the cash generated to increase inventories. e. Use some of its cash to purchase additional inventories.

Q: Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant? a. The total assets turnover decreases. b. The TIE declines. c. The DSO increases. d. The EBITDA coverage ratio increases. e. The current and quick ratios both decline.

Q: Considered alone, which of the following would increase a company's current ratio? a. An increase in accounts payable. b. An increase in net fixed assets. c. An increase in accrued liabilities. d. An increase in notes payable. e. An increase in accounts receivable.

Q: Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's. a. True b. False

Q: High current and quick ratios always indicate that a firm is managing its liquidity position well. a. True b. False

Q: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position. a. True b. False

Q: The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash. a. True b. False

Q: Which of the following statements is CORRECT? a. "Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value. b. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." c. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing." d. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing." e. Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

Q: One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger. a. True b. False

Q: Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods. a. True b. False

Q: The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed. a. True b. False

Q: Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength. a. True b. False

Q: Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 25%. How much was its net operating profit after taxes (NOPAT)? a. $2,748.96 b. $2,893.64 c. $3,045.94 d. $3,206.25 e. $3,375.00

Q: Which of the following statements is CORRECT? a. The maximum federal tax rate on personal income can exceed 50%. b. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible. c. Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, but dividends received are taxed at a maximum rate of 20%. d. The maximum federal tax rate on corporate income is 50%. e. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

Q: Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? a. The company would have to pay less taxes. b. The company's taxable income would fall. c. The company's interest expense would remain constant. d. The company would have less common equity than before. e. The company's net income would increase.

Q: DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change? a. The firm's reported net income would increase. b. The firm's operating income (EBIT) would increase. c. The firm's taxable income would increase. d. The firm's net cash flow provided (used) by operations would increase. e. The firm's tax payments would increase.

Q: The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes. a. LeMond's tax liability for the year will be lower. b. LeMond's taxable income will be lower. c. LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year. d. LeMond's cash position will improve (increase). e. LeMond's reported net income after taxes for the year will be lower.

Q: Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes. a. Net fixed assets on the balance sheet will decrease. b. The provision will reduce the company's free cash flow. c. The provision will increase the company's tax payments. d. Net fixed assets on the balance sheet will increase. e. The provision will increase the company's net income.

Q: Which of the following statements is CORRECT? a. All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income. b. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses. c. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. d. Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income. e. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

Q: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. a. True b. False

Q: The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability. a. True b. False

Q: If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant. a. True b. False

Q: The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision. a. True b. False

Q: HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 25%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year? a. $2,098.31 b. $2,208.75 c. $2,325.00 d. $2,441.25 e. $2,563.31

Q: Barnes' Brothers has the following data for the year ending 12/31/2015: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA)? a. $399.11 b. $420.11 c. $442.23 d. $465.50 e. $490.00

Q: Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings. The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share. How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA? a. $21,788 b. $22,935 c. $24,142 d. $25,413 e. $26,750

Q: Which of the following statements is CORRECT? a. One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital. b. If a firm reports positive net income, its EVA must also be positive. c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. d. One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital. e. Actions that increase reported net income will always increase net cash flow from operations.

Q: Which of the following statements is CORRECT? a. The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses. b. MVA gives us an idea about how much value a firm's management has added during the last year. c. MVA stands for market value added, and it is defined as follows: MVA = (Shares outstanding)(Stock price) + Book value of common equity. d. EVA stands for economic value added, and it is defined as follows: EVA = EBIT(1 − T) − (Investor-supplied op. capital) (A − T cost of capital). e. EVA gives us an idea about how much value a firm's management has added over the firm's life.

Q: Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow? a. $658.83 b. $693.50 c. $730.00 d. $766.50 e. $804.83

Q: Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firm's net after-tax income to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes. a. −$442.89 b. −$466.20 c. −$490.73 d. −$516.56 e. −$543.75

Q: Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 25%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate? a. $2,050.00 b. $2,152.50 c. $2,260.13 d. $2,373.13 e. $2,491.79

Q: Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?Cash$ 20.00Accounts payable$ 30.00Short-term investments50.00Accruals50.00Accounts receivable20.00Notes payable 30.00Inventory 60.00 Current liabilities$110.00 Current assets$150.00Long-term debt70.00Gross fixed assets$140.00Common stock30.00Accumulated deprec. 40.00Retained earnings 40.00Net fixed assets$100.00Total common equity$ 70.00Total assets$250.00Total liab. & equity$250.00a. $114.00b. $120.00c. $126.00d. $132.30e. $138.92

Q: Tibbs Inc. had the following data for the most recent year: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)? a. 14.91% b. 15.70% c. 16.52% d. 17.39% e. 18.26%

Q: Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?Cash$ 10Accounts payable$ 20Short-term investments Accruals20Accounts receivable50Notes payable 50Inventory 40 Current liabilities$ 90 Current assets$130Long-term debt0Net fixed assets 100Common equity30 Retained earnings 50Total assets$230Total liab. & equity$230a. $54.00b. $60.00c. $66.00d. $72.60e. $79.86

Q: TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year? a. $383 b. $425 c. $468 d. $514 e. $566

Q: NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets. All of these assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR's total investor-provided operating capital? a. $4,694,128 b. $4,941,188 c. $5,201,250 d. $5,475,000 e. $5,748,750

Q: Swinnerton Clothing Company's balance sheet showed total current assets of $2,250, all of which were required in operations. Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes. What was its net operating working capital that was financed by investors? a. $1,454 b. $1,530 c. $1,607 d. $1,687 e. $1,771

Q: Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? a. The company had a sharp increase in its depreciation and amortization expenses. b. The company had a sharp increase in its inventories. c. The company had a sharp increase in its accrued liabilities. d. The company sold a new issue of common stock. e. The company made a large capital investment early in the year.

Q: Which of the following statements is CORRECT? a. A shortcut to calculate free cash flow (FCF) is defined as follows: FCF = Net income + Depreciation and Amortization. b. Changes in working capital have no effect on free cash flow. c. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T) + Depreciation and Amortization − Capital expenditures required to sustain operations − Required changes in net operating working capital. d. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 − T)+ Depreciation and Amortization + Capital expenditures. e. Net cash provided (used) by operations is the same as free cash flow (FCF).

Q: For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT? a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units. c. The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. d. The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP. e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

Q: The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned. a. True b. False

Q: Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense. a. True b. False

Q: Total net operating capital is equal to net fixed assets. a. True b. False

Q: Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales $2,000.00 Costs 1,200.00 Depreciation 100.00 EBIT $ 700.00 Interest expense 200.00 EBT $ 500.00 Taxes (25%) 125.00 Net income $375.00 a. $427.62 b. $450.12 c. $473.81 d. $498.75 e. $525.00

Q: EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have? Sales $1,800.00 Costs 1,400.00 Depreciation 250.00 EBIT $ 150.00 Interest expense 70.00 EBT $ 80.00 Taxes (25%) 20.00 Net income $60.00 a. $101.53 b. $106.88 c. $112.50 d. $118.13 e. $124.03

Q: JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash provided (used) by operations, assuming it had no amortization expense, added $200 to inventories, sold none of its fixed assets, and had a $200 increase in accounts payable? a. $4,831.31 b. $5,085.59 c. $5,353.25 d. $5,635.00 e. $5,916.75

Q: Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes. a. Companies' reported net incomes would decline. b. Companies' net operating profits after taxes (NOPAT) would decline. c. Companies' physical stocks of fixed assets would increase. d. Companies' free cash flows would increase. e. Companies' cash positions would decline.

Q: Which of the following statements is CORRECT? a. Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits. b. The more depreciation a firm reports, the higher its tax bill, other things held constant. c. People sometimes talk about the firm's net cash provided (used) by operations, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line." d. Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow. e. Net cash provided (used) by operations is often defined as follows: Net cash flow provided (used) by operations = Net Income + Noncash Adjustments + Working Capital Adjustments.

Q: In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business. a. True b. False

Q: Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance? a. The company's operating income declined. b. The company's expenditures on fixed assets declined. c. The company's cost of goods sold increased. d. The company's depreciation and amortization expenses declined. e. The company's interest expense increased.

Q: Jessie's Bobcat Rentals' operations provided a negative net cash flow last year, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles? a. The company had high depreciation expenses. b. The company repurchased some of its common stock. c. The company dramatically increased its capital expenditures. d. The company retired a large amount of its long-term debt. e. The company sold some of its fixed assets.

Q: Which of the following statements is CORRECT? a. If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative. b. Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant. c. A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments. d. Common equity includes common stock and retained earnings, less accumulated depreciation. e. The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

Q: Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. a. -534.38 b. -562.50 c. -590.63 d. -620.16 e. -651.16

Q: Lucys Music Emporium purchased $50 million in fixed assets in January and their accountant told them that they would have to depreciate the assets over 20 years (they use the same depreciation calculations for shareholder reporting and income tax purposes). In December they learned that their accountant did not have a college degree and fired him. They hired a new accountant with a college degree and she told them that they could depreciate the assets over 15 years. How would the new depreciation assumption affect the company's financial statements relative to the old assumption? a. The firm's net liabilities would increase. b. The firm's reported net fixed assets would increase. c. The firm's EBIT would increase. d. The firm's reported earnings per share would increase. e. The firm's cash position would increase, all else held equal.

Q: Which of the following statements is CORRECT? a. In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash. b. Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity. c. In the statement of cash flows, a decrease in accounts payable is reported as a use of cash. d. In the statement of cash flows, depreciation charges are reported as a use of cash. e. In the statement of cash flows, a decrease in inventories is reported as a use of cash.

Q: Which of the following statements is CORRECT? a. The statement of cash flows shows how much the firm's cash⎯the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)⎯increased or decreased during a given year. b. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. c. The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. d. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. e. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

Q: A security analyst obtained the following information from Prestopino Products' financial statements: ∙ Retained earnings at the end of the previous year were $700,000, but retained earnings at the end of the current year had declined to $320,000. ∙ The company does not pay dividends. ∙ The company's depreciation expense is its only non-cash expense; it has no amortization charges. ∙ The company has no non-cash revenues. ∙ The company's net cash provided (used) by operations for the current year was $150,000. On the basis of this information, which of the following statements is CORRECT? a. Prestopino had negative net income in the current year. b. Prestopino's depreciation expense in the current year was less than $150,000. c. Prestopino had positive net income in the current year, but its income was less than its previous year's income. d. Prestopino's cash flow provided by operations in the current year must be higher than in the previous year. e. Prestopino's cash on the balance sheet at the end of the current year must be lower than the cash it had on the balance sheet at the previous year.

Q: Analysts following Armstrong Products recently noted that the company's net cash flow from operations increased over the prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? a. The company issued new long-term debt. b. The company cut its dividend. c. The company made a large investment in a profitable new plant. d. The company sold a division and received cash in return. e. The company issued new common stock.

Q: Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow provided (used) by operations year, even though the cash on its balance sheet increased? a. The company repurchased 20% of its common stock. b. The company sold a new issue of bonds. c. The company made a large investment in new plant and equipment. d. The company paid a large dividend. e. The company issued preferred stock.

Q: Which of the following statements is CORRECT? a. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. b. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. c. The balance sheet gives us a picture of the firm's financial position at a point in time. d. The income statement gives us a picture of the firm's financial position at a point in time. e. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

Q: The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time. a. True b. False

Q: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue. a. True b. False

Q: Ullrich Printing Inc. paid out $21,750 of common dividends during the year. It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250. How much net income did the firm earn during the year? a. $77,000 b. $80,850 c. $84,893 d. $89,137 e. $93,594

Q: On 12/31/2020, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/2019, the company had reported $555,000 of retained earnings. No shares were repurchased during 20205. How much in dividends did Heaton pay during 2020? a. $47,381 b. $49,875 c. $52,500 d. $55,125 e. $57,881

Q: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings. a. True b. False

Q: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings. a. True b. False

Q: Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 25%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes. a. $3,789.87 b. $3,989.33 c. $4,199.30 d. $4,420.31 e. $4,641.33

Q: Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%. How much was the firm's taxable income, or earnings before taxes (EBT)? a. $3,230.00 b. $3,400.00 c. $3,570.00 d. $3,748.50 e. $3,935.93

Q: Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 25%. How much was Lindley's operating income, or EBIT? a. $3,462 b. $3,644 c. $3,836 d. $4,038 e. $4,250

Q: Which of the following statements is CORRECT? a. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. b. Typically, a firm's DPS should exceed its EPS. c. Typically, a firm's EBIT should exceed its EBITDA. d. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. e. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

Q: Which of the following statements is CORRECT? a. The income statement for a given year is designed to give us an idea of how much the firm earned during that year. b. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." c. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP). d. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). e. If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash provided (used) by operating activities.

Q: The income statement shows the difference between a firm's income and its costs⎯i.e., its profits⎯during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period. a. True b. False

Q: Hunter Manufacturing Inc.'s December 31, 2019 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2020, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/2020, assuming that Hunter neither issued nor retired any common stock during 2020? a. $20.90 b. $22.00 c. $23.10 d. $24.26 e. $25.47

Q: Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ? a. $27.50 b. $28.88 c. $30.32 d. $31.83 e. $33.43