Finance

Q: Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $) Assets 2016Cash and securities $ 1,554.0Accounts receivable 9,660.0Inventories 13,440.0Total current assets $24,654.0Net plant and equipment 17,346.0Total assets $42,000.0Liabilities and Equity Accounts payable $ 7,980.0Notes payable 5,880.0Accruals 4,620.0Total current liabilities $18,480.0Long-term bonds 10,920.0Total debt $29,400.0Common stock 3,360.0Retained earnings 9,240.0Total common equity $12,600.0Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016Net sales $58,800.0Operating costs except depr'n $54,978.0Depreciation $ 1,029.0Earnings bef int and taxes (EBIT) $ 2,793.0Less interest 1,050.0Earnings before taxes (EBT) $ 1,743.0Taxes $ 610.1Net income $ 1,133.0Other data: Shares outstanding (millions) 175.00Common dividends $ 509.83Int rate on notes payable & L-T bonds 6.25%Federal plus state income tax rate 35%Year-end stock price $77.69Refer to the data for Pettijohn Inc.What is the firm's debt-to-assets ratio?a. 45.93%b. 51.03%c. 56.70%d. 63.00%e. 70.00%

Q: Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $) Assets 2016Cash and securities $ 1,554.0Accounts receivable 9,660.0Inventories 13,440.0Total current assets $24,654.0Net plant and equipment 17,346.0Total assets $42,000.0Liabilities and Equity Accounts payable $ 7,980.0Notes payable 5,880.0Accruals 4,620.0Total current liabilities $18,480.0Long-term bonds 10,920.0Total debt $29,400.0Common stock 3,360.0Retained earnings 9,240.0Total common equity $12,600.0Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016Net sales $58,800.0Operating costs except depr'n $54,978.0Depreciation $ 1,029.0Earnings bef int and taxes (EBIT) $ 2,793.0Less interest 1,050.0Earnings before taxes (EBT) $ 1,743.0Taxes $ 610.1Net income $ 1,133.0Other data: Shares outstanding (millions) 175.00Common dividends $ 509.83Int rate on notes payable & L-T bonds 6.25%Federal plus state income tax rate 35%Year-end stock price $77.69Refer to the data for Pettijohn Inc.What is the firm's EBITDA coverage?a. 3.29b. 3.46c. 3.64d. 3.82e. 4.01

Q: Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?a. 7.32b. 7.70c. 8.09d. 8.49e. 8.92

Q: A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a. 47.33%b. 49.82%c. 52.45%d. 55.21%e. 58.11%

Q: Bostian, Inc. has total assets of $625,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?a. $158,750b. $166,688c. $175,022d. $183,773e. $192,962

Q: Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?a. 4.72b. 4.97c. 5.23d. 5.51e. 5.80

Q: Hutchinson Corporation has zero debt-it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?a. $155,800b. $164,000c. $172,200d. $180,810e. $189,851

Q: Which of the following statements is CORRECT?a. If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.b. If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.c. A firm's use of debt will have no effect on its profit margin on sales.d. If two firms differ only in their use of debt-i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates-but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.e. The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

Q: If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT? a. Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. b. The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm. c. Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm. d. Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm. e. The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Q: Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. a. True b. False

Q: The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations. a. True b. False

Q: Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. a. True b. False

Q: Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $) Assets 2016Cash and securities $ 1,554.0Accounts receivable 9,660.0Inventories 13,440.0Total current assets $24,654.0Net plant and equipment 17,346.0Total assets $42,000.0Liabilities and Equity Accounts payable $ 7,980.0Notes payable 5,880.0Accruals 4,620.0Total current liabilities $18,480.0Long-term bonds 10,920.0Total debt $29,400.0Common stock 3,360.0Retained earnings 9,240.0Total common equity $12,600.0Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016Net sales $58,800.0Operating costs except depr'n $54,978.0Depreciation $ 1,029.0Earnings bef int and taxes (EBIT) $ 2,793.0Less interest 1,050.0Earnings before taxes (EBT) $ 1,743.0Taxes $ 610.1Net income $ 1,133.0Other data: Shares outstanding (millions) 175.00Common dividends $ 509.83Int rate on notes payable & L-T bonds 6.25%Federal plus state income tax rate 35%Year-end stock price $77.69 Refer to the data for Pettijohn Inc.What is the firm's inventory turnover ratio?a. 4.17b. 4.38c. 4.59d. 5.82e. 5.07

Q: Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $) Assets 2016Cash and securities $ 1,554.0Accounts receivable 9,660.0Inventories 13,440.0Total current assets $24,654.0Net plant and equipment 17,346.0Total assets $42,000.0Liabilities and Equity Accounts payable $ 7,980.0Notes payable 5,880.0Accruals 4,620.0Total current liabilities $18,480.0Long-term bonds 10,920.0Total debt $29,400.0Common stock 3,360.0Retained earnings 9,240.0Total common equity $12,600.0Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016Net sales $58,800.0Operating costs except depr'n $54,978.0Depreciation $ 1,029.0Earnings bef int and taxes (EBIT) $ 2,793.0Less interest 1,050.0Earnings before taxes (EBT) $ 1,743.0Taxes $ 610.1Net income $ 1,133.0Other data: Shares outstanding (millions) 175.00Common dividends $ 509.83Int rate on notes payable & L-T bonds 6.25%Federal plus state income tax rate 35%Year-end stock price $77.69 Refer to the data for Pettijohn Inc.What is the firm's total assets turnover?a. 0.90b. 1.12c. 1.40d. 1.68e. 2.02

Q: Pettijohn Inc.The balance sheet and income statement shown below are for Pettijohn Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.Balance Sheet (Millions of $) Assets 2016Cash and securities $ 1,554.0Accounts receivable 9,660.0Inventories 13,440.0Total current assets $24,654.0Net plant and equipment 17,346.0Total assets $42,000.0Liabilities and Equity Accounts payable $ 7,980.0Notes payable 5,880.0Accruals 4,620.0Total current liabilities $18,480.0Long-term bonds 10,920.0Total debt $29,400.0Common stock 3,360.0Retained earnings 9,240.0Total common equity $12,600.0Total liabilities and equity $42,000.0 Income Statement (Millions of $) 2016Net sales $58,800.0Operating costs except depr'n $54,978.0Depreciation $ 1,029.0Earnings bef int and taxes (EBIT) $ 2,793.0Less interest 1,050.0Earnings before taxes (EBT) $ 1,743.0Taxes $ 610.1Net income $ 1,133.0Other data: Shares outstanding (millions) 175.00Common dividends $ 509.83Int rate on notes payable & L-T bonds 6.25%Federal plus state income tax rate 35%Year-end stock price $77.69 Refer tothe data for Pettijohn Inc.What is the firm's days sales outstanding? Assume a 360-day year for this calculation.a. 48.17b. 50.71c. 53.38d. 56.19e. 59.14

Q: Muscarella Inc. has the following balance sheet and income statement data:Cash $ 14,000 Accounts payable $ 42,000Receivables 70,000 Other current liabilities 28,000Inventories 210,000 Total CL $ 70,000 Total CA $294,000 Long-term debt 70,000Net fixed assets 126,000 Common equity 280,000 Total assets $420,000 Total liab. and equity $420,000Sales $280,000 Net income $ 21,000 The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?a. 4.28%b. 4.50%c. 4.73%d. 4.96%e. 5.21%

Q: Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?a. $164,330b. $172,979c. $182,083d. $191,188e. $200,747

Q: Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.a. 7.95b. 8.37c. 8.81d. 9.27e. 9.74

Q: Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO âˆ’ Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.a. 6.20b. 6.53c. 6.86d. 7.20e. 7.56

Q: Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?a. $267.34b. $281.41c. $296.22d. $311.81e. $328.22

Q: Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?a. 2.03b. 2.13c. 2.25d. 2.36e. 2.48

Q: Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?a. Increase the number of years over which fixed assets are depreciated for tax purposes.b. Pay down the accounts payables.c. Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.d. Pay workers more frequently to decrease the accrued wages balance.e. Reduce the inventory turnover ratio without affecting sales or operating costs.

Q: Which of the following statements is CORRECT? a. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline. b. If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength. c. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase. d. There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things. e. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

Q: Which of the following statements is CORRECT? a. If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease. b. A reduction in inventories held would have no effect on the current ratio. c. An increase in inventories would have no effect on the current ratio. d. If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase. e. A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

Q: It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets. a. True b. False

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: Refer to the data for Pettijohn Inc.What is the firm's quick ratio?a. 0.49b. 0.61c. 0.73d. 0.87e. 1.05

Q: Refer to the data for Pettijohn Inc.What is the firm's current ratio?a. 0.97b. 1.08c. 1.20d. 1.33e. 1.47

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: A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? a. Use cash to increase inventory holdings. b. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. c. Use cash to repurchase some of the company's own stock. d. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. e. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

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: Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than that of B.a. Trueb. 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. Trueb. False

Q: One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.a. Trueb. 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: 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 40%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?a. $1,357.13b. $1,428.56c. $1,503.75d. $1,578.94e. $1,657.88

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. $399.11b. $420.11c. $442.23d. $465.50e. $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. $21,788b. $22,935c. $24,142d. $25,413e. $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.

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: 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: Which of the following statements is CORRECT? a. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance. b. Dividends paid reduce the net income that is reported on a company's income statement. c. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. d. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year. e. Accounts receivable are reported as a current liability on the balance sheet.

Q: Lucy's Music Emporium opened its doors on January 1, 2015, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2015 management realized that the assets would last for only 15 years. The firm's accountants plan to report the 2015 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements? 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 2015 earnings per share would increase. e. The firm's cash position in 2015 and 2016 would increase.

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: 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: A security analyst obtained the following information from Prestopino Products' financial statements: Retained earnings at the end of 2014 were $700,000, but retained earnings at the end of 2015 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 flow (NCF) for 2015 was $150,000. On the basis of this information, which of the following statements is CORRECT? a. Prestopino had negative net income in 2015. b. Prestopino's depreciation expense in 2015 was less than $150,000. c. Prestopino had positive net income in 2015, but its income was less than its 2014 income. d. Prestopino's NCF in 2015 must be higher than its NCF in 2014. e. Prestopino's cash on the balance sheet at the end of 2015 must be lower than the cash it had on the balance sheet at the end of 2014.

Q: Analysts following Armstrong Products recently noted that the company's operating net cash flow 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 last 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 had high amortization expenses.

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 35%. How much was its net cash flow?a. $3,284.75b. $3,457.63c. $3,639.61d. $3,831.17e. $4,032.81

Q: JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets?a. $4,831.31b. $5,085.59c. $5,353.25d. $5,635.00e. $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' net 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 flow, 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 flow (NCF) is often defined as follows: Net Cash Flow = Net Income + Depreciation and Amortization Charges.

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. $77,000b. $80,850c. $84,893d. $89,137e. $93,594

Q: On 12/31/2015, 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 12/31/2014, the company had reported $555,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did Heaton pay during 2015?a. $47,381b. $49,875c. $52,500d. $55,125e. $57,881

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 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 net 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: Which of the following statements is CORRECT? a. The maximum federal tax rate on personal income in 2014 was 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, which in 2014 could go up to 35%, but dividends received were taxed at a maximum rate of 15%. d. The maximum federal tax rate on corporate income in 2014 was 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: 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 35%. 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. $673.27b. $708.70c. $746.00d. $783.30e. $822.47

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 35%. 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 and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.a. -$383.84; $206.68b. -$404.04; $217.56c. -$425.30; $229.01d. -$447.69; $241.06e. -$471.25; $253.75

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 35%. 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. $1,770.00b. $1,858.50c. $1,951.43d. $2,049.00e. $2,151.45

Q: Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?Cash $ 20.00 Accounts payable $ 30.00Short-term investments 50.00 Accruals 50.00Accounts receivable 20.00 Notes payable 30.00Inventory 60.00 Current liabilities $110.00 Current assets $150.00 Long-term debt 70.00Gross fixed assets $140.00 Common stock 30.00Accumulated deprec. 40.00 Retained earnings 40.00Net fixed assets $100.00 Total common equity $ 70.00Total assets $250.00 Total liab. & equity $250.00a. $114.00b. $120.00c. $126.00d. $132.30e. $138.92

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