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Exam 2: Financial statements, cash flow, and taxes

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Question 1

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

A) Accrued payroll taxes.
B) Accounts payable.
C) Short-term notes payable to the bank.
D) Accrued wages.
E) Cost of goods sold.

F) C) and D)
G) D) and E)

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Question 2

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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

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Question 3

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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.

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

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?

Total net operating capital is equal to net fixed assets.

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?

Barnes' Brothers has the following data for the year ending 12/31/12: 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) ?

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.

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 40%.How much was Lindley's operating income, or EBIT?

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 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 40%.How much was the firm's taxable income, or earnings before taxes (EBT) ?

Tibbs Inc.had the following data for the year ending 12/31/12: 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) ?

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?

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.

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

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.

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?

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 35%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.

The income statement shows the difference between a firm's income and its costs¾i.e., its profits¾during 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.