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Exam 6: Accounting for Financial Management

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Question 31

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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.

F) A) and B)
G) B) and C)

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Question 32

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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) $47,381
B) $49,875
C) $52,500
D) $55,125
E) $57,881

F) B) and D)
G) C) and D)

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Question 33

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On the balance sheet, total assets must always equal total liabilities and equity.

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?

Which of the following statements is CORRECT?

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?

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.

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

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.

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?

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?

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?

Total net operating capital is equal to net fixed assets.

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?

Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have? $\begin{array}{llr}\text { Cash } & \$ 20.00 \text { Accounts payable } & \$ 30.00 \\\text { Short-term investments } & 50.00 \text { Accruals } & 50.00 \\\text { Accounts receivable } & 20.00 \text { Notes payable } & 30.00 \\\text { Inventory } & 60.00\text { Current liabilities } &\$ 110.00 \\\text { Current assets } & \$ 150.00 \text { Long-term debt } & 70.00 \\\text { Gross fixed assets } & \$ 140.00 \text { Common stock } & 30.00 \\\text { Accumulated deprec. } & 40.00 \text { Retained earnings }& 40.00 \\\text { Net fixed assets } & \$ 100.00 \text { Total common equity } & \$70.00\\\text {Total assets } &\text { \$ 250.00 Total liab. \& equity } & \$ 250.00\end{array}$

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?

Which of the following statements is CORRECTσ

Below are the year-end balance sheets for Wolken Enterprises: $\begin{array}{lcll}\text { Assets: } & 2015 &2014\\\text { Cash } & \$ 200,000 &\$ 170,000\\\text { Accounts receivable } & 864,000 &700,000\\\text { Inventories } & 2.000,000&1.400 .000\\\text {Net fixed assets }&\$ 3,064,000 &\$ 2270000\\\text { Total current assets }&6,000,000 &5,600,000\\\text { Total current assets }&\$ 9,064,000 &\$ 7,870,000\\\text { Liabilities and equity: }\\ \text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \\\text { Notes payable } &1,600,000 & 1,800,000\\\text { Total current liabilities } &\$ 3,000,000&\$ 2.890,000\\\text { Long-term debt } & 2,400,000 & 2,400,000 \\\text { Common stock } & 3,000,000 & 2,000,000 \\\text { Retained earnings } & 664,000 & 580,000\\\text { Total common equity} &\$ 3,664,000 & \$ 2,580,000 \\\text {Total liabilities and equity } &\$ 9,064,000&\$ 7870000\\\end{array}$ Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company's sales in 2014 and 2015 were the same. Which of the following statements must be CORRECTσ

Which of the following statements is CORRECTσ

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 differσ