Question 1

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?

Accepted Answer

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

Question 2

Which of the following statements is CORRECT?

Accepted Answer

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.F) B) and D)
G) A) and E)

Question 3

The income statement shows the difference between a firm's income and its costs⎯i.e. ,its profits⎯during 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.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

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.F) None of the above
G) C) and E)

Question 5

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?

Accepted Answer

A)   $3,462
B)   $3,644
C)   $3,836
D)   $4,038
E)   $4,250F) None of the above
G) B) and D)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   The income statement for a given year is designed to give us an idea of how much the firm earned during that year.
B)   The focal point of the income statement is the cash account,because that account cannot be manipulated by "accounting tricks."
C)   The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP) .
D)   The reported income of two otherwise identical firms must be identical if the firms are publicly owned,provided they follow procedures that are permitted by the Securities and Exchange Commission (SE
C)  .
E)   If a firm follows Generally Accepted Accounting Principles (GAAP) ,then its reported net income will be identical to its reported net cash flow.F) C) and E)
G) A) and B)

Question 7

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 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 $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.

Accepted Answer

A)   −463.13
B)   −487.50
C)   −511.88
D)   −537.47
E)   −564.34F) A) and E)
G) D) and E)

Question 8

The interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

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.F) A) and D)
G) A) and C)

Exam 2: Financial Statements, Cash Flow, and Taxes

Correct Answer
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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.

Correct Answer
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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.

Correct Answer
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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Exam 2: Financial Statements, Cash Flow, and Taxes

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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Correct AnswerverifiedShow Answer

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