Test bank corporate finance 8e ros chap002

cash flow to creditors SECTION: 2.4 TOPIC: OPERATING CASH FLOW TYPE: DEFINITIONS 12.. cash flow to creditors SECTION: 2.4 TOPIC: NET CAPITAL SPENDING TYPE: DEFINITIONS... SECTION: 2.4 TO

Multiple Choice Questions

1 The financial statement summarizing the value of a firm's equity on a particular date is the:

a income statement

B balance sheet.

c statement of cash flows

d cash flow statement

e dividend statement

SECTION: 2.1

TOPIC: BALANCE SHEET

TYPE: DEFINITIONS

2 A current asset is best defined as:

a an asset, such as equipment, that is currently owned by a firm

b an asset the firm expects to own within the next year

C an asset which is expected to be converted into cash within the next year.

d the amount of cash on hand the firm currently shows on its balance sheet

e the market value of the inventory currently owned by the firm

SECTION: 2.1

TOPIC: CURRENT ASSETS

TYPE: DEFINITIONS

3 Net working capital is defined as:

a total liabilities minus shareholders' equity

b current liabilities minus shareholders' equity

c fixed assets minus long-term liabilities

d total assets minus total liabilities

E current assets minus current liabilities.

SECTION: 2.1

TOPIC: NET WORKING CAPITAL

TYPE: DEFINITIONS

4 A(n) asset is one which can be quickly converted into cash without significant loss in value

5 Financial leverage refers to the:

A use of debt in a firm's capital structure.

b ratio of retained earnings to shareholders' equity

c ratio of paid-in surplus to shareholders' equity

d ratio of sales to total assets

e ratio of current assets to long-term assets

b Cash flow identity

C Generally Accepted Accounting Principles (GAAP).

d Financial Leverage Reporting Principles (FLRP)

e Standard Market Value Guidelines (SMVG)

AACSB TOPIC: ETHICS

SECTION: 2.2

TOPIC: GAAP

TYPE: DEFINITIONS

7 The financial statement summarizing a firm's performance over a period of time is the:

A income statement.

b balance sheet

c statement of cash flows

d tax reconciliation statement

e market value report

SECTION: 2.2

TOPIC: INCOME STATEMENT

TYPE: DEFINITIONS

8 Noncash items refer to:

a the talents of the firm's employees which are not reflected in the financial statements

b the accounts payable of a firm

c the costs incurred for the purchase of intangible fixed assets

D expenses charged against revenues that do not directly affect cash flow.

e sales which are made on credit

10 Your _ tax rate measures the total taxes you pay divided by your total taxable income

c net working capital

d cash flow from assets

e cash flow to creditors

SECTION: 2.4

TOPIC: OPERATING CASH FLOW

TYPE: DEFINITIONS

12 Which term refers to the net expenditures by a firm on fixed asset purchases?

a net new equity

B net capital spending

c net working capital

d cash flow from assets

e cash flow to creditors

SECTION: 2.4

TOPIC: NET CAPITAL SPENDING

TYPE: DEFINITIONS

13 The difference between a firm's current assets and its current liabilities is called:

a operating cash flow

b capital spending

C net working capital.

d cash flow from assets

e cash flow to creditors

a operating cash flow

b net capital spending

c net working capital

D cash flow from assets.

e cash flow to stockholders

SECTION: 2.4

TOPIC: CASH FLOW FROM ASSETS

TYPE: DEFINITIONS

15 The cash flow related to interest payments less any net new borrowing is called the:

a operating cash flow

b capital spending

c net working capital

d cash flow from assets

E cash flow to creditors.

SECTION: 2.4

TOPIC: CASH FLOW TO CREDITORS

TYPE: DEFINITIONS

16 Cash flow to stockholders is defined as the:

a total amount of interest and dividends paid during the past year

b change in total equity over the past year

c cash flow from assets plus the cash flow to creditors

d operating cash flow minus the cash flow to creditors

E dividend payments less any net new equity raised.

c hidden cash flow

D free cash flow.

e historical cash flow

SECTION: 2.4

TOPIC: FREE CASH FLOW

TYPE: DEFINITIONS

18 Net income divided by the total number of outstanding shares is referred to as the:

A earnings per share.

19 The dividend per share is the amount of:

a net income the firm earned per share during the period

B cash paid to investors on each share of outstanding stock.

c cash the firm received from its operations divided by the number of shares outstanding

d interest paid during the period divided by the number of shares outstanding

e cash received for each share of stock sold during the period

b I and III only

c I, II, and IV only

d III and IV only

e II, III, and IV only

SECTION: 2.1

TOPIC: CURRENT ASSETS

TYPE: CONCEPTS

22 Which one of the following represents a portion of a firm's value but yet is excluded from the assets appearing on a balance sheet?

a excess cash placed in an investment account

B good reputation of the company

c equipment owned by the firm

d money due from a customer

e an item held by the firm for future sale

SECTION: 2.1

TOPIC: BALANCE SHEET ASSETS

TYPE: CONCEPTS

23 Which of the following are included in current liabilities?

I note payable to a supplier in eight months

II amount due from a customer next month

III account payable to a supplier that is due next week

IV loan payable to the bank in fourteen months

A I and III only

b II and III only

c III and IV only

d II, III, and IV only

e I, II, and III only

SECTION: 2.1

TOPIC: CURRENT LIABILITIES

TYPE: CONCEPTS

24 Which one of the following statements concerning net working capital is correct?

a Net working capital is positive when current liabilities exceed current assets

b Net working capital includes cash, accounts receivables, equipment, and accounts payable

C Inventory is a part of net working capital.

d The change in net working capital is equal to the beginning net working capital minus the ending net working capital

e Net working capital is equal to total assets minus current liabilities

SECTION: 2.1

25 Which one of the following statements concerning net working capital is correct?

a The lower the net working capital the greater the ability of a firm to meet its current obligations

b The change in net working capital is equal to current assets minus current liabilities

C A decrease in accounts payable increases net working capital, all else constant.

d Net working capital is equal to long-term assets minus long-term liabilities

e Net working capital is a part of the operating cash flow

27 Which one of the following statements concerning liquidity is correct?

a If you can sell an asset today, it is a liquid asset

b If you can sell an asset within the next twelve months it is considered highly liquid

c Inventory is more liquid than accounts receivable

d Balance sheet accounts are listed in order of ascending liquidity

E An asset must be sellable quickly at full value to be considered liquid.

SECTION: 2.1

TOPIC: LIQUIDITY

TYPE: CONCEPTS

28 Liquidity is:

a equal to net working capital

b another term for current assets

c equal to the market value of a firm's total assets minus its current liabilities

D valuable to a firm even though holding liquid assets is not very profitable.

e generally associated with intangible assets

II patents and copyrights

III paid-in surplus

IV notes payable

a I and II only

b II and IV only

c I and IV only

d II and III only

E I and III only

SECTION: 2.1

TOPIC: SHAREHOLDERS' EQUITY

TYPE: CONCEPTS

30 Shareholders' equity:

a increases anytime total assets increases

b is equal to total assets plus total liabilities

c decreases whenever new shares of stock are issued

d includes long-term debt, preferred stock, and common stock

E represents the residual value of a firm.

SECTION: 2.1

TOPIC: SHAREHOLDERS' EQUITY

TYPE: CONCEPTS

31 The higher the degree of financial leverage employed by a firm, the:

A higher the probability that the firm will encounter financial distress.

b lower the amount of debt incurred

c less debt a firm has per dollar of total assets

d higher the number of outstanding shares of stock

e lower the balance in accounts payable

SECTION: 2.1

TOPIC: FINANCIAL LEVERAGE

TYPE: CONCEPTS

32 The book value of a firm is:

a equivalent to the firm's market value provided that the firm has some fixed assets

B based on historical cost.

c generally greater than the market value when fixed assets are included

d more of a financial than an accounting valuation

e adjusted to the market value whenever the market value exceeds the stated book value

34 As seen on an income statement:

a interest is deducted from income and increases the total taxes incurred

b the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses

c depreciation is shown as an expense but does not affect the taxes payable

D depreciation reduces both the taxable income and the net income.

e interest expense is added to earnings before interest and taxes to get taxable income

SECTION: 2.2

TOPIC: INCOME STATEMENT

TYPE: CONCEPTS

35 All else constant, the earnings per share will increase if the:

a net income decreases

b number of shares outstanding increases

c total revenue of the firm decreases

D tax rate decreases.

e operating costs increase

SECTION: 2.2

TOPIC: EARNINGS PER SHARE

TYPE: CONCEPTS

36 According to Generally Accepted Accounting Principles:

a depreciation may or may not be recorded at management's discretion

b income is recorded based on the matching principle

c costs are recorded based on the realization principle

d depreciation is recorded based on the recognition principle

E costs of goods sold are recorded based on the matching principle.

AACSB TOPIC: ETHICS

SECTION: 2.2

TOPIC: REALIZATION PRINCIPLE

TYPE: CONCEPTS

37 Depreciation:

A reduces both taxes and net income.

b increases the net fixed assets as shown on the balance sheet

c reduces both the net fixed assets and the costs of a firm

d is a noncash expense which increases the net operating income

e decreases net fixed assets, net income, and operating cash flows

40 The cash flow from assets is equal to:

a operating cash flow minus the change in net working capital plus net capital spending

b cash flow to creditors minus the cash flow to shareholders

c earnings before interest and taxes plus depreciation minus taxes

D earnings before interest and taxes plus depreciation minus taxes minus net capital spending

minus the change in net working capital

e the cash flow to shareholders minus the cash flow to creditors

b net capital spending

c net working capital

42 A negative cash flow from assets indicates that:

a a firm is borrowing money

b a firm is acquiring new fixed assets

c a firm has a net loss for the period

D outside funding is being utilized.

e newly issued shares of stock are being sold

SECTION: 2.4

TOPIC: CASH FLOW FROM ASSETS

TYPE: CONCEPTS

43 Which one of the following will decrease a firm's operating cash flow?

a a decrease in wages paid

b an increase in sales

C a decrease in the depreciation expense

d a decrease in the marginal tax rate

e a decrease in net working capital

a the ending net working capital must be negative

b either accounts receivable or inventory had to decrease during the year

c the beginning current assets were less than the beginning current liabilities

d accounts payable had to decrease during the year

E the ending net working capital might be positive, negative, or equal to zero.

SECTION: 2.4

TOPIC: CHANGE IN NET WORKING CAPITAL

TYPE: CONCEPTS

45 Net capital spending:

a is equal to ending fixed assets minus beginning fixed assets

B is equal to zero if the decrease in the fixed assets account is equal to the depreciation

expense

c reflects the net changes in total assets over a stated period of time

d is equivalent to the cash flow from assets minus the operating cash flow minus the change

in net working capital

e is equal to the change in the inventory balance for the period

SECTION: 2.4

TOPIC: NET CAPITAL SPENDING

TYPE: CONCEPTS

46 Which one of the following must increase the cash flow to creditors?

A an increase in the cash flow from assets accompanied by a decrease in the cash flow to

stockholders

b acquiring new long-term debt

c decreasing the dividend paid

d a decrease in both the cash flow to stockholders and the cash flow from assets

e the repayment of an old loan and the acquisition of a new loan

SECTION: 2.4

TOPIC: CASH FLOW TO CREDITORS

TYPE: CONCEPTS

47 Cash flow to stockholders must be positive when:

A dividends paid exceed the net new equity raised.

b the net sale of common stock exceeds the amount of dividends paid

c no income is distributed but new shares of stock are sold

d both the cash flow to assets and the cash flow to creditors are negative

e both the cash flow to assets and the cash flow to creditors are positive

SECTION: 2.4

TOPIC: CASH FLOW TO STOCKHOLDERS

TYPE: CONCEPTS

48 A firm has $680 in inventory, $2,320 in fixed assets, $280 in accounts receivables, $490

in accounts payable, and $130 in cash What is the amount of the current assets?

49 A firm has net working capital of $820 Long-term debt is $3,260, total assets are $5,920 and fixed assets are $3,410 What is the amount of the total liabilities?

AACSB TOPIC: ANALYTIC

SECTION: 2.1

TOPIC: SHAREHOLDERS' EQUITY

TYPE: PROBLEMS

51 Your firm has total assets of $1,400, fixed assets of $600, long-term debt of $700, and short-term debt of $100 What is the amount of net working capital?

Net working capital = $1,400 $600 $100 = $700

AACSB TOPIC: ANALYTIC

SECTION: 2.1

TOPIC: NET WORKING CAPITAL

TYPE: PROBLEMS

52 Knight Insurance has shareholders' equity of $136,900 The firm owes a total of $71,400

of which 30 percent is payable within the next year The firm has net fixed assets of $152,800.What is the amount of the net working capital?

53 Six years ago, Thompson Distributors purchased a mailing machine at a cost of $368,000 This equipment is currently valued at $172,200 on today's balance sheet but could actually be sold for $211,400 This is the only fixed asset the firm owns Net working capital is $121,000 and long-term debt is $82,500 What is the book value of shareholders' equity?

Book value of shareholders' equity = $172,200 + $121,000 $82,500 = $210,700

AACSB TOPIC: ANALYTIC

55 The Corner Store paid $1,100 in dividends and $850 in interest this past year Common stock increased by $500 and retained earnings decreased by $260 What is the net income for the year?

56 Amy's Dress Shoppe has sales of $421,000 with costs of $342,000 Interest expense is

$18,000 and depreciation is $33,000 The tax rate is 34 percent What is the net income?

57 Given the tax rates as shown, what is the average tax rate for a firm with taxable income

AACSB TOPIC: ANALYTIC

SECTION: 2.3

TOPIC: MARGINAL TAX RATE

TYPE: PROBLEMS

58 The tax rates are as shown California Surfin' currently has taxable income of $86,750 How much additional tax will the firm owe if taxable income increases by $16,500?

59 The Burger Joint paid $420 in dividends and $611 in interest expense The addition to retained earnings is $397.74 and net new equity is $750 The tax rate is 34 percent Sales are

$6,250 and depreciation is $710 What are the earnings before interest and taxes?

Earnings before interest and taxes = $987,611 $724,268 $39,740 = $223,603; Tax =

$223,603 34 = $76,025.02; Operating cash flow = $223,603 + $39,740 $76,025.02 =