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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 21

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The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

A) True
B) False

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Question 22

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Which of the following statements best describes retained earnings?

A) Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
B) A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
C) The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.
D) If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.

E) B) and D)
F) B) and C)

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Question 23

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An individual made $48,000 last year paying $12,480 in taxes. What is the taxpayer's average tax rate?

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

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 currently do, other things held constant.

Last year Roussakis Company's operations provided a negative net cash flow, 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?

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 combined federal and provincial income tax rate was 40%. How much value did management add to shareholders' wealth during the year?

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises: D Wolken has never paid a dividend on its common share, and it issued $2,400,000 of 10-year non- callable, long-term debt in 2008. As of the end of 2009, none of the principal on this debt had been repaid. Assume that the company's sales in 2008 and 2009 were the same. Which of the following statements must be correct?

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 combined federal and provincial 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 $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.

Income statements must be prepared only on an annual basis.

Which of the following statements best describes the income statement?

Last year, Tucker Technologies 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?

Companies generate income from their "regular" operations and from other sources such as 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 combined federal and provincial income tax rate was 40%. How much was Lindley's operating income, or EBIT?

The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of retained earnings.

The Nantell Corporation just purchased an expensive piece of equipment. Originally, the firm planned to depreciate the equipment over 5 years on a straight-line basis, but now wants 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 change? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?

A security analyst obtained the following information from Prestopino Products' financial statements: - Retained earnings at the end of 2008 were $700,000, but retained earnings at the end of 2009 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 2009 was $150,000. On the basis of this information, which of the following statements is correct?

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 or depreciation charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its combined federal and provincial income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT) ?