Corporate Finance, 12e (Ross)
Chapter 1 Introduction to Corporate Finance
1) The treasurer and the controller of a corporation generally report to the:
A) board of directors.
B) chairman of the board.
C) chief executive officer.
D) president.
E) chief financial officer.
Answer: E
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Management organization and roles
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2) Which one of the following statements correctly depicts the common chain of command in a
corporation?
A) The information systems manager reports to the treasurer.
B) The credit manager reports to the treasurer.
C) The controller reports to the chief executive officer.
D) The tax manager reports to the treasurer.
E) The capital expenditures manager reports to the controller.
Answer: B
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Management organization and roles
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3) Which one of the following is a capital budgeting decision?
A) Determining how much debt should be borrowed from a particular lender
B) Deciding whether or not a new production facility should be built
C) Deciding when to repay a long-term debt
D) Determining how much inventory to keep on hand
E) Deciding how much credit to grant to a particular customer
Answer: B
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Capital budgeting
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4) Which one of these is a correct definition?
A) Net working capital equals current assets plus current liabilities.
B) Current liabilities are debts that must be repaid in 18 months or less.
C) Current assets are assets with short lives, such as accounts receivable.
D) Long-term debt is defined as a residual claim on a firm's assets.
E) Tangible assets are fixed assets such as patents.
Answer: C
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Introduction to corporate finance
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5) The corporate controller is generally responsible for which one of these functions?
A) Capital expenditures
B) Cash management
C) Tax reporting
D) Financial planning
E) Credit management
Answer: C
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Management organization and roles
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6) The corporate treasurer oversees which one of these areas?
A) Financial planning
B) Cost accounting
C) Tax reporting
D) Information systems
E) Financial accounting
Answer: A
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Management organization and roles
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AACSB: Reflective Thinking
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7) A firm's capital structure refers to the firm's:
A) mixture of various types of production equipment.
B) investment selections for its excess cash reserves.
C) combination of cash and cash equivalents.
D) combination of accounts appearing on the left side of its balance sheet.
E) proportions of financing from current and long-term debt and equity.
Answer: E
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Capital structure
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8) Short-term finance deals with:
A) the timing of cash flows.
B) acquiring and selling fixed assets.
C) financing long-term projects.
D) capital budgeting.
E) issuing additional shares of common stock.
Answer: A
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Cash management - general
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9) Which one of these accounts is included in net working capital?
A) Copyright
B) Manufacturing equipment
C) Common stock
D) Long-term debt
E) Inventory
Answer: E
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Net working capital
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10) The process of planning and managing a firm's long-term assets is called:
A) working capital management.
B) cash management.
C) cost accounting management.
D) capital budgeting.
E) capital structure management.
Answer: D
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Capital budgeting
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11) Any debt that must be repaid within the next year is recorded on the balance sheet as:
A) a current liability.
B) long-term debt.
C) an intangible asset.
D) accounts receivable.
E) a current asset.
Answer: A
Difficulty: 1 Easy
Section: 1.1 What is Corporate Finance?
Topic: Balance sheet
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12) The cheapest business entity to form is typically the:
A) limited liability company.
B) joint stock company.
C) general partnership.
D) limited partnership.
E) sole proprietorship.
Answer: E
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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13) A business owned by a single individual is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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14) Which one of the following statements concerning a sole proprietorship is correct?
A) A sole proprietorship is difficult to form.
B) The business profits are taxed twice at the federal level.
C) The business profits are taxed separately from the personal income of the owner.
D) The owner may be forced to sell his/her personal assets to pay company debts.
E) A sole proprietorship has an unlimited life.
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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15) Which one of the following statements concerning a sole proprietorship is correct?
A) The ability to raise capital is limited by the owner's personal wealth.
B) The proprietorship pays taxes at the corporate tax rate.
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C) The ownership of the
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another individual.
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D) The company must pay income taxes separate from the taxes paid by the owner.
E) The legal costs to form a sole proprietorship are quite substantial.
Answer: A
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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16) Which one of these characteristics best describes the primary advantage of being a limited
partner rather than a general partner?
A) Entitlement to a larger portion of the partnership's income
B) Day-to-day management control of the business
C) Profits free of any income taxation
D) Overall control of the partnership
E) Personal financial liability limited to the capital invested
Answer: E
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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17) A general partner:
A) has less legal liability than a limited partner.
B) can end the partnership by withdrawing.
C) faces double taxation of profits whereas a limited partner does not.
D) cannot lose more than the amount of his/her equity investment.
E) is the term applied only to corporations which invest in partnerships.
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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18) A partnership:
A) is taxed the same as a corporation.
B) terminates at the death of any limited partner.
C) creates an unlimited liability for all general partners for the partnership's debts.
D) has the same ability as a corporation to raise capital.
E) allows for easy transfer of interest from one general partner to another.
Answer: C
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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19) One advantage of a partnership is the:
A) personal liability for all of the firm's debts.
B) limited life of the entity.
C) limited liability protection for all of the partners.
D) relatively low formation cost.
E) ease of transferring full ownership.
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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20) One disadvantage of the corporate form of business ownership is the:
A) limited liability protection provided for all owners.
B) firm's ability to raise cash.
C) unlimited life of the firm.
D) difficulties encountered when changing ownership.
E) double taxation of profits.
Answer: E
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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21) Which one of the following statements is correct?
A) Both partnerships and corporations incur double taxation.
B) Sole proprietorships and partnerships are taxed in a similar fashion.
C) Partnerships are the most complicated type of business to form.
D) Both partnerships and corporations have limited liability for general partners and
shareholders.
E) All types of business formations have limited lives.
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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22) The articles of incorporation:
A) can be used to remove the firm's management.
B) are amended annually by the firm's stockholders.
C) set forth the rights granted to shareholders.
D) set forth the rules by which the corporation regulates its existence.
E) can set forth the conditions under which the firm can avoid double taxation.
Answer: C
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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23) Corporate bylaws:
A) establish the name of the corporation.
B) establish the rights granted to its shareholders.
C) set forth the purpose of the firm.
D) establish the rules by which the corporation regulates its existence.
E) set forth the number of members of the initial board of directors.
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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24) Which statement concerning corporations is correct?
A) There are time limits placed on the transfer of ownership.
B) The ability to raise capital is limited to that of a general partnership.
C) Primary shareholders have unlimited liability for corporate debts.
D) The entity can outlive all of its initial owners.
E) When the last original owner dies or withdraws, the entity is terminated.
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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25) Given the corporate form of business organization, ownership:
A) must be granted with equal rights assigned to each and every shareholder.
B) transfers are unlimited.
C) can only be transferred with the approval of the board of directors.
D) is controlled by the corporate officers.
E) must be held by non-management owners.
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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26) The owners of a limited liability company generally prefer:
A) being taxed like a corporation.
B) having liability exposure similar to that of a sole proprietor.
C) being taxed personally on all business income.
D) having liability exposure similar to that of a general partner.
E) being taxed like a corporation with liability like a partnership.
Answer: C
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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27) In a general partnership, the general partners have ________ liability for the firm's debts and
have ________ control over day-to-day operations.
A) limited; no
B) unlimited; total
C) limited; total
D) unlimited; no
E) unlimited; limited
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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28) Which one of the following business types is best suited to raising large amounts of capital?
A) Sole proprietorship
B) Limited liability company
C) Corporation
D) General partnership
E) Limited partnership
Answer: C
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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29) Which type of business organization has the respective rights and privileges of a legal
person?
A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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30) A business formed by two or more individuals who each have unlimited personal liability for
all of the firm's debts isCopyright
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A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) limited liability company.
Answer: C
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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31) The understanding of the work and cash to be contributed to a partnership by each member
of that partnership is formalized in the:
A) indemnity clause.
B) indenture contract.
C) statement of purpose.
D) partnership agreement.
E) group charter.
Answer: D
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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32) A business created as a distinct legal entity is called a:
A) corporation.
B) sole proprietorship.
C) general partnership.
D) limited partnership.
E) unlimited liability company.
Answer: A
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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33) In a limited partnership, each limited partner's liability for the partnership's debts is:
A) limited to his or her personal net worth.
B) limited to the amount he or she invested into the partnership.
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C) limited to his or herCopyright
total earnings
from
the partnership.
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D) unlimited.
E) limited to the total amount invested by all partners.
Answer: B
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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34) A business entity that provides each owner with limited liability while the firm is operated
and taxed like a partnership is called a:
A) limited liability company.
B) general partnership.
C) limited proprietorship.
D) limited partnership.
E) corporation.
Answer: A
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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35) Partnership profits:
A) are fully distributed as taxable income to the partners.
B) are distributed to general partners with interest paid to limited partners.
C) are distributed to the partners on an aftertax basis.
D) are generally reinvested in the firm rather than being distributed.
E) are generally held by the partnership and later distributed as dividend payments.
Answer: A
Difficulty: 1 Easy
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
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36) Financial managers primarily create firm value by:
A) maximizing current dividends.
B) investing in assets that generate cash in excess of their cost.
C) lowering the earnings per share.
D) increasing the firm's market share.
E) maximizing current sales.
Answer: B
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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37) Accounting profits and cash flows are generally:
A) the same since they reflect current laws and accounting standards.
B) the same since accounting profits reflect the timing of cash flows.
C) different because of GAAP rules regarding the recognition of income.
D) different because cash inflows must occur before revenue recognition.
E) the same due to the requirements of GAAP.
Answer: C
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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38) Which one of these is a cash outflow from a corporation?
A) Sale of an asset
B) Tax payment
C) Sale of common stock
D) Issuance of debt
E) Profit retained by the firm
Answer: B
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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39) A firm creates value by:
A) having a greater cash inflow from its stockholders than its outflow to them.
B) paying more cash to its creditors and stockholders than the amount it received from them.
C) borrowing long-term debt.
D) generating sales whether or not payment is received for all of those sales.
E) purchasing assets that create cash inflows equal to the cost of those assets.
Answer: B
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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40) If a firm is currently profitable, then:
A) its current cash inflows must exceed its current cash outflows.
B) its reported sales exceed its costs.
C) its cash flows are known with certainty.
D) it will always have sufficient cash to pay its bills in a timely manner.
E) the timing of the related cash flows is irrelevant.
Answer: B
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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41) Which one of these statements is correct?
A) Individuals tend to prefer later cash flows over current cash flows.
B) The value of an investment depends on the size, timing, and risk of the investment's cash
flows.
C) When selecting one of two projects, managers should select the project with the higher total
expected cash flow.
D) Most investors prefer greater risk over less risk.
E) Accountants record sales and expenses after the related cash flows occur.
Answer: B
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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42) Closet Keeper is considering a new project. Which one of these estimated project values has
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the greatest level of certainty?
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A) The amount of the cash inflow in Year 3
B) The timing of the last cash inflow from the project
C) The initial project cost
D) The risk of a pessimistic scenario occurring
E) The amount of the cash inflow in Year 1
Answer: C
Difficulty: 1 Easy
Section: 1.3 The Importance of Cash Flows
Topic: Cash flows
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43) Financial managers should primarily strive to:
A) minimize costs while increasing current dividends.
B) maximize the current profits of the firm.
C) maximize the current value per share of existing stock.
D) maximize current dividends even if doing so adds financial distress costs to the firm.
E) maximize current market share in every market in which the firm participates.
Answer: C
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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44) The decisions made by financial managers should all be ones which increase the:
A) size of the firm.
B) growth rate of the firm.
C) marketability of the managers.
D) market value of the existing owners' equity.
E) firm's current sales.
Answer: D
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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45) Which one of the following actions by a financial manager creates an agency problem?
A) Borrowing money when doing so creates value for the firm
B) Lowering selling prices that will result in increased firm value
C) Agreeing to expand the company at the expense of stockholders' value
D) Agreeing to pay management bonuses based on the market value of the firm's stock
E) Refusing to spend current cash on an unprofitable project
Answer: C
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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46) The primary goal of financial management is to:
A) maximize current dividends per share of the existing stock.
B) maximize the current value per share of the existing stock.
C) avoid financial distress.
D) minimize operational costs and maximize firm efficiency.
E) maintain steady growth in both sales and net earnings.
Answer: B
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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47) Which one of these represents the best means of increasing current shareholder value?
A) Maximizing the capital rate of the firm
B) Increasing the current value of the overall firm
C) Forsaking all new projects
D) Minimizing the overall size of the firm
E) Decreasing the number of employees
Answer: B
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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48) A financial manager should make decisions based on:
A) the effects those decisions will have on current profits.
B) the best interests of the current employees.
C) the welfare of the current shareholders.
D) minimizing the firm's tax liability.
E) their personal goals and ambitions.
Answer: C
Difficulty: 1 Easy
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
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49) A conflict of interest between the stockholders and managers of a firm is referred to as the:
A) stockholders' liability.
B) corporate breakdown.
C) agency problem.
D) corporate activism.
E) legal liability.
Answer: C
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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50) Which one of these is most apt to be an agency problem?
A) Increasing the dividend payments to shareholders
B) Paying off debt in a timely manner
C) Increasing the sales of a profitable division
D) Forsaking a profitable project because it involves some risk
E) Selling an unprofitable division of the firm
Answer: D
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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51) Which one of the following is least apt to help convince managers to work in the best interest
of the stockholders?
A) Threat of a takeover of the firm by unsatisfied stockholders
B) Implementation of a stock option plan
C) Salary raises based on length of service
D) Management compensation tied to the market value of the firm's stock
E) Threat of a proxy fight
Answer: C
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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52) Which form of business structure typically has the greatest potential for agency problems?
A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company
Answer: D
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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53) A proxy fight occurs when:
A) the board of directors disagree on the members of the management team.
B) a group solicits voting rights to replace the board of directors.
C) a competitor offers to sell their ownership interest in the firm.
D) the firm files for bankruptcy.
E) the firm is declared insolvent.
Answer: B
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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54) The ultimate control of a corporation lies in the hands of the corporate:
A) board of directors.
B) stockholders.
C) president.
D) chief executive officer.
E) chairman of the board.
Answer: B
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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55) Members of the board of directors are selected by:
A) shareholder voting.
B) company management.
C) the firm's Chief Executive Officer.
D) the largest five shareholders.
E) the firm's managers and employees.
Answer: A
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Management organization and roles
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56) Stock options granted to a corporation's managers are primarily designed to:
A) reduce agency costs.
B) increase current profits.
C) replace salary increases.
D) reward long-term employment.
E) replace promotions.
Answer: A
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
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57) Which one of these best fits the description of an agency cost?
A) The costs of increasing the dividend payment per share
B) The benefits received from reducing production costs per unit
C) The payment of corporate income taxes
D) The payment required for an outside audit of the firm
E) The payment of interest on a firm's debts
Answer: D
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Agency costs and problems
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
58) Which one of the following parties is considered a stakeholder of a firm?
A) Customer
B) Short-term creditor
C) Long-term creditor
D) Preferred stockholder
E) Common stockholder
Answer: A
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Introduction to corporate finance
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
59) A stakeholder is any person or entity:
A) owning shares of stock of a corporation.
B) owning bonds or other long-term debt issued by a corporation.
C) that initially started a firm and currently has management control over that firm.
D) to whom the firm currently owes money.
E) other than a stockholder or creditor who potentially has a financial interest in a firm.
Answer: E
Difficulty: 1 Easy
Section: 1.5 The Agency Problem and Control of the Corporation
Topic: Introduction to corporate finance
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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60) One intent of the Sarbanes Oxley Act of 2002 is to:
A) prevent minority investors from making demands on corporations.
B) protect corporate directors from frivolous lawsuits.
C) guarantee the repayment of all future personal loans to corporate officers and directors.
D) protect investors from corporate abuses.
E) require all public corporations to "go dark" within the next twenty years.
Answer: D
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Understand
AACSB: Reflective Thinking
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61) The Sarbanes-Oxley Act requires public corporations to:
A) assess the company's internal control structure at least quarterly.
B) distribute at least 90 percent of their profits in dividends on an annual basis.
C) list any deficiencies in internal controls.
D) file annual audit reports if the firm has "gone dark".
E) disclose all personal loans to corporate officers or directors made after 2002.
Answer: C
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
62) Insider trading is:
A) prohibited by the Securities Act of 1933.
B) prohibited by the Securities Exchange Act of 1934.
C) impossible in today's efficient markets.
D) highly discouraged, but still legal.
E) prohibited by the Sarbanes-Oxley Act of 2002.
Answer: B
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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63) The basic regulatory framework for the public trading of securities in the United States was
provided by the:
A) New York Stock Exchange when it was founded.
B) Securities Exchange Act of 1934.
C) Federal Reserve Bank.
D) Securities Act of 1933 and the Securities Exchange Act of 1934.
E) Sarbanes-Oxley Act in 2002.
Answer: D
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
64) The Securities Act of 1933 focuses on:
A) all stock transactions.
B) the sales of existing securities.
C) the issuance of new securities.
D) insider trading.
E) Federal Deposit Insurance Corporation (FDIC) insurance.
Answer: C
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
65) The intent of the registration statement required for all new securities by the Securities Act of
1933 is to:
A) provide a governmental evaluation of the risks associated with those new securities.
B) set the price at which the securities will be offered.
C) guarantee the profitability of the new securities.
D) prevent any insider trading.
E) provide all necessary information to allow a potential investor to make an informed decision.
Answer: E
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
66) Which of these have been cited as results from a corporation "going dark"?
Copyrightand
© 2019
McGraw-Hill
A) Increased market liquidity
lower
costs Education. All rights reserved.
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B) Lower audit costs and lower interest rates on bank loans
C) Increased access to capital and lower costs associated with that capital
D) Increased audit costs and stock price increases
E) Limited access to capital markets and stock price declines
Answer: E
Difficulty: 1 Easy
Section: 1.6 Regulation
Topic: Ethics, governance, and regulation
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
67) List and briefly describe the three basic areas addressed by a financial manager.
Answer: The three areas are:
∙ Capital budgeting: The identification and management of investment opportunities that are
worth more to the firm than they cost to acquire.
∙ Capital structure: The determination of the optimal mixture of current and long-term debt
and equity used to finance a firm's operations.
∙ Working capital management: The daily control over the firm's short-term assets and
liabilities.
Difficulty: 2 Medium
Section: 1.1 What is Corporate Finance?
Topic: Financial management decisions
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) What advantages and disadvantages does the corporate form of organization have compared
to sole proprietorships and general partnerships?
Answer: The advantages of the corporate form of organization over sole proprietorships and
general partnerships are the ease of transferring ownership, the owners' limited liability for
business debts, the ability to raise more capital, and the opportunity of an unlimited life for the
business. The key disadvantages are double taxation and higher formation costs.
Difficulty: 2 Medium
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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69) Why might a professional group select the LLC form of business over a general partnership
or a corporate structure?
Answer: A limited liability company (LLC) limits the liability of each partner for the debts of
the partnership to the amount that partner invested in the firm. Under a general partnership, each
partner is fully liable for all of the partnership's debts. An LLC avoids the double taxation of
profits since the profits are distributed to partners and taxed as personal income. Thus, an LLC is
taxed like a partnership while offering the limited liability to owners like a corporation.
Difficulty: 2 Medium
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) Why might a highly successful sole proprietor change the structure of his/her firm to the
corporate form of ownership if that change results in the sharing of profits with other investors?
Answer: A sole proprietorship has a limited life, limited access to additional capital, and
unlimited liability for the owner. By switching to the corporate form, the sole proprietor can
obtain additional capital while reducing his/her potential liability to the amount he/she invested
in the firm. Also, the sole proprietor can sell a portion of the business enabling him/her to
diversify their holdings while still maintaining majority control if desired. The primary downside
of the change is the incurrence of double taxation.
Difficulty: 2 Medium
Section: 1.2 The Corporate Firm
Topic: Forms of business organization
Bloom's: Analyze
AACSB: Analytical Thinking
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71) What should be the primary goal of the financial manager of a corporation? Explain why this
is appropriate.
Answer: The appropriate goal is to maximize the current value of the outstanding stock. This
goal focuses on enhancing the returns to the current stockholders who are the owners of the firm.
Other goals, such as maximizing sales or earnings, focus too narrowly on accounting profits and
ignore the importance of market values in managerial finance.
Difficulty: 2 Medium
Section: 1.4 The Goal of Financial Management
Topic: Goal of financial management
Bloom's: Apply
AACSB: Knowledge Application
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Corporate Finance 12th Edition Ross Test Bank
Copyright © 2019 McGraw-Hill Education. All rights reserved.
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Corporate Finance, 12e (Ross)
Chapter 2
Financial Statements and Cash Flow
1) Which one of these accounts appears on the right-hand side of a balance sheet?
A) Property, plant, and equipment
B) Accumulated retained earnings
C) Accumulated depreciation
D) Cash and equivalents
E) Intangible assets
An
sw
er:
B
Di
ffi
cul
ty:
1
Ea
sy
Section: 2.1 The
Balance Sheet Topic:
Balance sheet
Bloom's:
Understand
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
2) The entire book value of the residual ownership of a corporation is known as
the:
A) total equity.
B) intangible assets.
C) retained earnings.
D) capital surplus.
E) total assets.
An
sw
er:
A
Di
ffi
cul
Copyright © 2019 McGraw-Hill Education. All rights reserved.
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ty:
1
Ea
sy
Section: 2.1 The
Balance Sheet Topic:
Balance sheet
Bloom's:
Understand
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
1
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3) Which account represents the book value of all of a corporation's net profits less its dividend
payments?
A) Capital surplus
B) Accumulated retained earnings
C) Treasury stock
D) Common stock
E) Preferred stock
Answer: B
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Which one of the following is a current liability?
A) Amount due to a supplier in 18 months
B) Note payable in nine months
C) Estimated taxes just paid
D) Loan payment due in 13 months
E) Amount due from a customer in 30 days
Answer: B
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) An increase in total assets:
A) means that net working capital is also increasing.
B) requires an investment in fixed assets.
C) means that stockholders' equity must also increase.
D) must be offset by an equal increase in liabilities and stockholders' equity.
E) can only occur when a firm has positive net income.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2
Copyright © 2019 McGraw-Hill Education. All rights reserved.
6) Which one of the following assets is generally the most liquid?
A) Inventory
B) Buildings
C) Accounts receivable
D) Equipment
E) Patents
Answer: C
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Understand
AACSB: Reflective Thinking
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7) Which one of the following statements concerning liquidity is correct?
A) Liquid assets generally earn higher rates of return than fixed assets.
B) If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.
C) Liquid assets are defined as those assets obtained within the past year.
D) The less liquidity a firm has, the lower the probability the firm will encounter financial
difficulties.
E) Balance sheet accounts are listed in order of decreasing liquidity.
Answer: E
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Understand
AACSB: Reflective Thinking
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8) Liquidity is:
A) a measure of the use of debt in a firm's capital structure.
B) equal to current assets minus current liabilities.
C) equal to the market value of a firm's total assets minus its total liabilities.
D) valuable to a firm even though liquid assets tend to be less profitable to own.
E) generally most associated with intangible assets.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Understand
AACSB: Reflective Thinking
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3
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9) Which one of the following accounts is included in stockholders' equity?
A) Long-term debt
B) Deferred taxes
C) Plant and equipment
D) Accumulated retained earnings
E) Dividends paid
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10) Book value:
A) is equivalent to market value for firms with fixed assets.
B) is based on historical cost.
C) generally tends to exceed market value when fixed assets are included.
D) is more of a financial than an accounting valuation.
E) is adjusted whenever the market value of an asset changes.
Answer:
B
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Understand
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
11) If you sell an asset, you are most apt to receive which value for that asset?
A) Market value
B) Original cost minus accumulated depreciation
C) Historical value
D) Book value
E) Carrying value
Answer:
A
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Remember
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
4
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12) Which one of these equations is an accurate expression of the balance sheet?
A) Assets ≡ Liabilities − Stockholders' equity
B) Stockholders' equity ≡ Assets + Liabilities
C) Liabilities ≡ Stockholders' equity − Assets
D) Assets ≡ Stockholders' equity − Liabilities
E) Stockholders' equity ≡ Assets − Liabilities
Answer: E
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
13) Which one of these accounts is classified as a fixed asset on the balance sheet?
A) Intangible assets
B) Accounts payable
C) Preferred stock
D) Inventory
E) Accounts receivable
Answer: A
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14) On a balance sheet, deferred taxes are classified as:
A) stockholders' equity.
B) a current asset.
C) a long-term liability.
D) a fixed asset.
E) a current liability.
Answer: C
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5
Copyright © 2019 McGraw-Hill Education. All rights reserved.
15) If a firm's financial managers successfully meet their primary goal, then the firm's:
A) debts will exceed its equity.
B) market value will exceed its book value.
C) net working capital will exceed its long-term debt.
D) carrying value will exceed its market value.
E) equity will exceed its assets.
Answer:
B
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Remember
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
16) An asset that can be quickly converted into cash without significant loss in value is referred
to as being:
A) marketable.
B) tangible.
C) intangible.
D) liquid.
E) fixed.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17) Which one of these is related to an increase in the book value of the stockholders' equity in a
profitable, non-dividend paying firm? Assume no shares of stock are repurchased or sold.
A) A decrease in the book value of inventory
B) An increase in earnings per share
C) An increase in the market value of the firm's buildings
D) An increase in the market value of the firm's long-term debt
E) An increase in non-cash expenses
Answer:
B
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Understand
AACSB:
Reflective
Thinking
Accessibility: Keyboard Navigation
6
Copyright © 2019 McGraw-Hill Education. All rights reserved.
18) Assets are listed on the balance sheet in order of:
A) decreasing liquidity.
B) acquisition.
C) increasing size.
D) market value relative to book value.
E) book value.
Answer: A
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19) An increase in treasury stock:
A) increases the total equity of the firm.
B) is the result of a firm issuing new shares of stock to the federal government.
C) increases the number of shares outstanding.
D) results from a repurchase of outstanding shares of stock.
E) requires repayment at some point in the future.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
20) The book value of assets:
A) is determined under Generally Accepted Accounting Principles (GAAP) and is based on the
cost of those assets.
B) represents the true market value of those assets according to GAAP.
C) is always the best measure of the company's value to an investor.
D) is always higher than the replacement cost of the assets.
E) is shown on the firm's income statement.
Answer: A
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Generally Accepted Accounting Principles (GAAP)
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7
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21) Under Generally Accepted Accounting Principles (GAAP), a firm's assets are reported at:
A) market value.
B) liquidation value.
C) market value less accumulated depreciation.
D) historical cost less accumulated depreciation.
E) liquidation value less accumulated depreciation.
Answer: D
Difficulty: 1 Easy
Section: 2.1 The Balance Sheet
Topic: Generally Accepted Accounting Principles (GAAP)
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
22) The income statement:
A) measures performance for one specific day.
B) ignores any income other than operating revenues.
C) excludes deferred tax expense.
D) treats dividends paid as a cash expense.
E) includes noncash expenses.
Answer: E
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
23) According to Generally Accepted Accounting Principles (GAAP), revenue is recognized as
income when:
A) a contract is signed to perform a service or deliver a good.
B) the transaction is complete and the goods or services are delivered.
C) payment is requested.
D) income taxes are paid on the revenue earned.
E) managers decide to recognize it.
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8
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24) The financial statement summarizing a firm's accounting performance over a period of time
is the:
A) income statement.
B) balance sheet.
C) statement of cash flows.
D) tax reconciliation statement.
E) statement of equity.
Answer: A
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
25) Noncash items refer to:
A) the credit sales of a firm.
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) all accounts on the balance sheet other than cash on hand.
Answer: D
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26) For a firm with long-term debt, net income must be equal to:
A) Pretax income − Interest expense − Taxes.
B) EBIT − Taxes.
C) Taxes + Addition to retained earnings.
D) Operating income × (1 − Marginal tax rate).
E) Dividends + Addition to retained earnings.
Answer: E
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9
Copyright © 2019 McGraw-Hill Education. All rights reserved.
27) As seen on the income statement of a tax-paying firm:
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 pays interest.
C) depreciation is shown as an expense but does not affect the tax expense.
D) depreciation reduces both the pretax income and the net income.
E) interest expense is added to earnings before interest and taxes to compute pretax income.
Answer: D
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
28) All else held constant, the earnings per share will decrease as the:
A) net income increases.
B) number of shares outstanding increases.
C) total revenue of the firm increases.
D) tax rate decreases.
E) costs decrease.
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29) Which one of these statements is correct?
A) Pretax income is equal to net income minus taxes.
B) The addition to retained earnings is equal to net income plus dividends.
C) Operating income is equal to operating revenue minus cost of goods sold.
D) Only current taxes are included in the tax expense.
E) Earnings per share can be negative but dividends per share cannot.
Answer: E
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10
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30) Earnings per share:
A) will increase if net income increases and the number of shares outstanding decreases.
B) will increase if net income decreases and the number of shares outstanding increases.
C) is defined as the addition to retained earnings divided by the number of shares outstanding.
D) is the total amount of dividends paid per year on a per share basis.
E) must increase at the same rate as the net income.
Answer: A
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
31) Earnings per share will increase when:
A) depreciation decreases.
B) the number of shares outstanding increase.
C) operating income decreases.
D) dividends per share decrease.
E) the average tax rate increases.
Answer: A
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32) Assuming the number of shares outstanding and total earnings remains constant, an increase
in dividends per share will:
A) reduce the earnings per share.
B) reduce the addition to retained earnings.
C) reduce net income.
D) increase total equity.
E) increase total assets.
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11
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33) Which one of these is a non-cash item?
A) Deferred taxes
B) Interest expense
C) Current taxes
D) Dividends
E) Selling expenses
Answer: A
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) For a tax-paying firm, an increase in the depreciation expense of $1 will:
A) reduce net income by $1.
B) increase net income by $1.
C) reduce net income by more than $1.
D) reduce net income by less than $1.
E) increase net income by less than $1.
Answer: D
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
35) According to Generally Accepted Accounting Principles (GAAP), the cost of goods sold
expenses are:
A) recorded as incurred.
B) recorded when paid.
C) matched with revenues.
D) matched with production levels.
E) expensed as management desires.
Answer: C
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
12
Copyright © 2019 McGraw-Hill Education. All rights reserved.
36) Depreciation for a profitable firm:
A) decreases both operating 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 non-cash expense which increases the net operating income.
E) decreases net fixed assets, net income, and operating cash flows.
Answer: A
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Noncash items
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
37) Which one of these is most apt to be a fixed, cash expense in the short run?
A) Raw materials cost
B) Bond interest
C) Commissions paid to sales representatives
D) Depreciation
E) Manufacturing labor costs
Answer: B
Difficulty: 1 Easy
Section: 2.2 The Income Statement
Topic: Fixed and variable costs
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38) When you are making a financial decision, the most relevant tax rate is the
when the tax rate schedule is progressive.
A) average
B) fixed
C) marginal
D) total
E) variable
Answer: C
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Understand
AACSB: Reflective Thinking
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13
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rate
39) Which term defines the tax rate that applies to the next dollar of taxable income earned?
A) Deductible
B) Residual
C) Total
D) Average
E) Marginal
Answer: E
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Remember
AACSB: Reflective Thinking
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40) As of 2018, the U.S. corporate tax rate is:
A) based on a progressive tax rate schedule.
B) based on a tiered, multi-rate flat tax.
C) a flat tax of 34 percent.
D) zero with all corporate taxable income passed to shareholders.
E) a flat rate of 21 percent.
Answer: E
Difficulty: 1 Easy
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
41) A firm starts its year with positive net working capital. During the year, the firm acquires
more short-term debt than it does short-term assets. This means that:
A) the ending net working capital must be negative.
B) both accounts receivable and inventory decreased during the year.
C) the beginning current assets were less than the beginning current liabilities.
D) accounts payable increased and inventory decreased during the year.
E) the ending net working capital can be positive, negative, or equal to zero.
Answer: E
Difficulty: 1 Easy
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Understand
AACSB: Reflective Thinking
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42) For a growing firm, the change in net working capital is generally:
A) positive.
B) negative.
C) highly erratic.
D) highly negative.
E) equal to zero.
Answer: A
Difficulty: 1 Easy
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
43) An increase in which one of the following will cause the operating cash flow to increase for a
profitable firm?
A) Depreciation
B) Cash
C) Net working capital
D) Taxes
E) Administrative expenses
Answer: A
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Understand
AACSB: Reflective Thinking
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44) Which one of these does not affect the cash flow to creditors?
A) Interest paid on long-term debt
B) New mortgage on a building
C) Increase in accounts payable
D) Mortgage interest payment
E) Reduction in long-term debt
Answer: C
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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45) A firm's dividend payments less any net new equity raised is referred to as the firm's:
A) operating cash flow.
B) capital spending.
C) net working capital.
D) cash flow from creditors.
E) cash flow to stockholders.
Answer: E
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Remember
AACSB: Reflective Thinking
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46) Which one of these will cause an increase in the cash flow to creditors for the current year?
A) Collection of a refund for the overpayment of a loan
B) Payoff of a 36-month loan after the first 15 months
C) Payment of a late charge on an account payable to a supplier
D) Acquiring a new loan that will be repaid in one lump sum 24 months from now
E) Purchasing inventory using credit offered by a supplier
Answer: B
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
47) The cash flow to stockholders must be positive when:
A) the dividends paid are less than the amount of 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) the cash flow from assets is positive and exceeds the cash flow to creditors.
E) both the cash flow to assets and the cash flow to creditors are positive.
Answer: D
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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48) Cash flow from assets:
A) equals net income plus non-cash items.
B) can be positive, negative, or equal to zero.
C) equals operating cash flow minus net capital spending.
D) equals the addition to retained earnings.
E) equals operating cash flow minus the cash flow to creditors.
Answer: B
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Understand
AACSB: Reflective Thinking
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49) Net capital spending is equal to the:
A) net change in total assets plus depreciation.
B) net change in fixed assets plus depreciation.
C) net income plus depreciation.
D) difference between the market and book values of the total assets.
E) change in total assets.
Answer: B
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Understand
AACSB: Reflective Thinking
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50) Cash flow to stockholders is defined as:
A) cash dividends paid.
B) repurchases of equity less new equity sold minus cash dividends paid.
C) cash flow from financing less cash flow to creditors.
D) cash dividends paid plus repurchases of equity minus new equity financing.
E) cash flow from assets plus cash flow to creditors.
Answer: D
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Understand
AACSB: Reflective Thinking
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51) Free cash flow is:
A) the money generated from the sale of new shares of stock.
B) another term for operating cash flow.
C) the cash generated by decreasing net working capital.
D) cash that the firm can distribute to creditors and stockholders.
E) the net income of a firm after taxes have been paid.
Answer: D
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Free cash flow
Bloom's: Remember
AACSB: Reflective Thinking
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52) The cash flow of the firm must be equal to the:
A) cash flow to stockholders minus the cash flow to creditors.
B) cash flow to creditors minus the cash flow to stockholders.
C) cash flow to governments plus the cash flow to stockholders.
D) cash flow to stockholders plus the cash flow to creditors.
E) aftertax operating cash flow.
Answer: D
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Remember
AACSB: Reflective Thinking
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53) The cash flow resulting from a firm's ongoing, normal business activities is referred to as the:
A) operating cash flow.
B) net capital spending.
C) additions to net working capital.
D) free cash flow.
E) cash flow to investors.
Answer: A
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Remember
AACSB: Reflective Thinking
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54) Capital spending is equal to:
A) ending net fixed assets minus beginning net fixed assets.
B) ending net fixed assets minus beginning net fixed assets plus depreciation.
C) ending total assets minus beginning total assets.
D) ending total assets minus beginning total assets plus depreciation.
E) beginning total assets plus asset purchases minus asset sales.
Answer: B
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Capital spending
Bloom's: Remember
AACSB: Reflective Thinking
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55) Operating cash flow is defined as:
A) Pretax income − Taxes.
B) Net income − Dividends.
C) EBIT + Depreciation − Taxes.
D) Pretax income + Depreciation.
E) Cash flow to investors + Taxes.
Answer: C
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
56) Payments to creditors that include interest and the repayment of principal are referred to as:
A) the cash flow to stockholders.
B) the reduction in net working capital.
C) debt service.
D) operating cash flow.
E) the change in net working capital.
Answer: C
Difficulty: 1 Easy
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Remember
AACSB: Reflective Thinking
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57) In the accounting statement of cash flows, which one of these is calculated by adding back
noncash expenses to net income and adjusting for changes in current assets and liabilities?
A) Cash flow from investing activities
B) Cash flow from financing activities
C) Net working capital
D) Cash flow from operations
E) Cash flow to investors
Answer: D
Difficulty: 1 Easy
Section: 2.6 The Accounting Statement of Cash Flows
Topic: Statement of cash flows
Bloom's: Understand
AACSB: Reflective Thinking
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58) The accounting statement of cash flows consists of the cash flows from:
A) operations, investing activities, and financing activities.
B) operations, investing activities, and divesting activities.
C) internal activities, external activities, and financing activities.
D) balance sheet accounts only.
E) income statement accounts only.
Answer: A
Difficulty: 1 Easy
Section: 2.6 The Accounting Statement of Cash Flows
Topic: Statement of cash flows
Bloom's: Understand
AACSB: Reflective Thinking
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59) In the accounting statement of cash flows, interest expense is:
A) ignored completely.
B) included as a financing activity.
C) included both as an operating and as a financing activity.
D) included as an investing activity.
E) included in operations.
Answer: E
Difficulty: 1 Easy
Section: 2.6 The Accounting Statement of Cash Flows
Topic: Statement of cash flows
Bloom's: Understand
AACSB: Reflective Thinking
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60) One of the reasons why cash flow analysis is popular is because:
A) cash flows are more subjective than net income.
B) deferred taxes require future cash payment.
C) cash flows are strictly defined by Generally Accepted Accounting Principles (GAAP).
D) it is difficult to manipulate, or spin the cash flows.
E) operating cash flows are found on the income statement.
Answer: D
Difficulty: 1 Easy
Section: 2.7 Cash Flow Management
Topic: Cash flows
Bloom's: Understand
AACSB: Reflective Thinking
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61) Total equity is $1,620, fixed assets are $1,810, long-term debt is $650, and short-term debt is
$300. What is the amount of current assets?
A) $760
B) $360
C) $1,140
D) $480
E) $790
Answer: A
Explanation: Current assets = $1,620 + 650 + 300 − 1,810
Current assets = $760
Difficulty: 2 Medium
Section: 2.1 The Balance Sheet
Topic: Balance sheet
Bloom's: Apply
AACSB: Knowledge Application
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62) Southwest Co. has equipment with a book value of $3,560 that could be sold today for
$3,900. Its inventory is valued at $1,780 and could be sold immediately to a competitor at a
discount of 25 percent. The firm has $260 in cash and customers owe the firm $950, of which 98
percent is collectible. What is the current market value of the firm's assets?
A) $6,086
B) $5,536
C) $6,426
D) $6,316
E) $5,946
Answer: C
Explanation: Market value of assets = $260 + .98($950) + (1 − .25)($1,780) + $3,900
Market value of assets = $6,426
Difficulty: 2 Medium
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Analyze
AACSB:
Analytical
Thinking
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63) Martha's Enterprises spent $4,100 to purchase equipment three years ago. This equipment is
currently valued at $2,700 on today's balance sheet but could actually be sold for $3,200. Net
working capital is $400 and long-term debt is $2,300. Assuming the equipment is the firm's only
fixed asset, what is the book value of shareholders' equity?
A) $1,300
B) $800
C) $1,600
D) $1,900
E) $2,200
Answer: B
Explanation: Book value of equity = $400 + 2,700 − 2,300
Book value of equity = $800
Difficulty: 2 Medium
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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64) Mart's Boutique has sales of $820,000 and costs of $540,000. Interest expense is $36,000 and
depreciation is $59,000. The tax rate is 21 percent. What is the net income?
A) $221,200
B) $146,150
C) $105,000
D) $179,250
E) $139,050
Answer: B
Explanation: Net income = ($820,000 − 540,000 − 59,000 − 36,000)(1 − .21)
Net income = $146,150
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Apply
AACSB: Knowledge Application
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65) Upton Industries has revenues of $42,629, interest expense of $1,230, depreciation of
$2,609, cost of goods sold of $23,704, dividends paid of $1,200, and administrative expenses of
$7,040. Assume the tax rate is 22 percent. What is the addition to retained earnings?
A) $5,075.88
B) $4,630.19
C) $3,766.67
D) $4,903.18
E) $5,230.04
Answer: A
Explanation: Net income = ($42,629 − 23,704 − 7,040 − 2,609 − 1,230)(1 − .22)
Net income = $6,275.88
Addition to retained earnings = $6,275.88 − 1,200
Addition to retained earnings = $5,075.88
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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66) This year, Johnson Mills has annual revenue of $37,800, cost of goods sold of $23,200, and
administrative expenses of $6,300. The firm paid $700 in dividends, $280 in interest, and has a
total tax rate of 21 percent. The firm will add $2,810 to retained earnings. What is the
depreciation expense?
A) $2,300
B) $3,709
C) $2,640
D) $780
E) $3,577
Answer: E
Explanation: Net income = $700 + 2,810
Net income = $3,510
Pretax income = $3,510/(1 − .21)
Pretax income = $4,443
Depreciation expense = $37,800 − 23,200 − 6,300 − 280 − 4,443
Depreciation expense = $3,577
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Analyze
AACSB: Analytical Thinking
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67) Delfinio's has total revenues of $4,315, selling and administrative expenses of $611,
depreciation of $309, cost of goods sold of $2,403, taxes of $178, dividends of $80, and interest
expense of $168. What is the amount of the non-cash items?
A) $481
B) $477
C) $248
D) $309
E) $567
Answer: D
Explanation: Non-cash items = Depreciation = $309
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Noncash items
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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68) Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The
administrative expenses were $4,370, depreciation was $812, dividends paid were $285, and the
interest expense was $103. What was the cost of goods sold if the total tax rate was 23 percent?
A) $20,225
B) $24,385
C) $18,457
D) $14,815
E) $21,393
Answer: C
Explanation: Net income = $285 + 411
Net income = $696
Pretax income = $696/(1 − .23)
Pretax income = $904
COGS = $24,646 − 4,370 − 812 − 103 − 904
COGS = $18,457
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility:
Keyboard Navigation
69) Daniels Transport has operating income of $68,200, interest expense of $210, dividends paid
of $320, depreciation of $12,400, other income of $2,100, common stock of $48,500 with a par
value of $1 per share, and retained earnings of $29,700. What is the earnings per share if the tax
rate is 21 percent?
A) $1.14
B) $1.21
C) $.82
D) $.96
E) $1.33
Answer: A
Explanation: Net income = ($68,200 + 2,100 − 210)(1 − .21)
Net income = $55,371.10
EPS = $55,371.10/($48,500/$1)
EPS = $1.14
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Per-share valuations
Bloom's: Analyze
AACSB: Analytical Thinking
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70) Given the personal income tax rates as shown, what is the average tax rate for an individual
with taxable income of $118,700?
Taxable Income
0 −
9,525
9,526 −
38,700
38,701 −
82,500
82,501 − 157,500
A) 24.00 percent
B) 22.36 percent
C) 19.00 percent
D) 21.94 percent
E) 21.00 percent
Tax Rate
10%
12
22
24
$
Answer: C
Explanation: Tax = .10($9,525) + .12($38,700 − 9,525) + .22($82,500 − 38,700) +
.24($118,700 − 82,500)
Tax = $22,777.50
Average tax rate = $22,777.50/$118,700
Average tax rate = .19, or 19%
Difficulty: 2 Medium
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Apply
AACSB: Knowledge Application
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71) AC Motors is a sole proprietorship that has taxable income of $94,200. How much additional
tax will be owed if the taxable income increases by $14,300 based on the following tax rates?
Assume this is the sole source of income for the owner.
$
A) $3,862
B) $3,039
C) $3,406
D) $3,432
E) $3,678
Taxable Income
0 −
9,525
9,526 − 38,700
38,701 − 82,500
82,501 − 157,500
Tax Rate
10%
12
22
24
Answer: D
Explanation: Additional tax = .24($14,300)
Additional tax = $3,432
Difficulty: 2 Medium
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Analyze
AACSB: Analytical Thinking
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72) Assume Juno's paid $368,060 in taxes on taxable income of $1,673,000 last year. This year,
the firm paid $401,545 in taxes on taxable income of $1,818,586. Assume the tax rates were the
same for both years. What are the marginal and average tax rates for this year?
A) 21 percent; 21 percent
B) 22 percent; 21 percent
C) 23 percent; 22 percent
D) 22 percent; 22 percent
E) 23 percent; 21 percent
Answer: C
Explanation: Marginal tax rate = ($401,545 − 368,060)/($1,818,586 − 1,673,000)
Marginal tax rate = .23, or 23%
Average tax rate = $401,545/$1,818,586
Average tax rate = .22, or 22%
Difficulty: 2 Medium
Section: 2.3 Taxes
Topic: Taxes
Bloom's: Analyze
AACSB: Analytical Thinking
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73) A firm has $820 in inventory, $3,200 in fixed assets, $1,210 in accounts receivable, $890 in
accounts payable, and $360 in cash. What is the amount of the net working capital?
A) $4,700
B) $5,590
C) $3,600
D) $2,390
E) $1,500
Answer: E
Explanation: NWC = $360 + 1,210 + 820 − 890
NWC = $1,500
Difficulty: 2 Medium
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Analyze
AACSB: Analytical Thinking
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74) A firm has $820 in inventory, $3,200 in fixed assets, $670 in accounts receivable, $390 in
accounts payable, $500 in long-term debt, and $360 in cash. What is the amount of the net
working capital?
A) $890
B) $960
C) $3,600
D) $3,340
E) $1,460
Answer: E
Explanation: NWC = $360 + 670 + 820 − 390
NWC = $1,460
Difficulty: 2 Medium
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
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75) At the beginning of the year, a firm had total assets of $51,400, fixed assets of $32,800, and
current liabilities of $13,280. At the end of the year, the current assets are $14,800, the fixed
assets are $34,100, and the current liabilities are $14,210. What is the change in net working
capital for the year?
A) −$18,930
B) −$6,950
C) $11,470
D) −$4,730
E) $9,110
Answer: D
Explanation: ΔNWC = ($14,800 − 14,210) − ($51,400 − 32,800 − 13,280)
ΔNWC = −$4,730
Difficulty: 2 Medium
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Analyze
AACSB: Analytical Thinking
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76) Blauser's started the year with $280 in cash, $924 in inventory, $361 in accounts payable,
$1,687 in equipment, and $414 in accounts receivable. At year's end, the firm had $311 in cash,
$1,594 in equipment, $1,003 in inventory, $426 in accounts receivable, and $398 in accounts
payable. What was the change in net working capital during the year?
A) −$860
B) $191
C) $85
D) −$94
E) −$206
Answer: C
Explanation: ΔNWC = ($311 + 426 + 1,003 − 398) − ($280 + 414 + 924 − 361)
ΔNWC = $85
Difficulty: 2 Medium
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Analyze
AACSB: Analytical Thinking
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77) Foxglove Interiors has net fixed assets of $38,215, long-term debt of $22,400, cash of $560,
accounts payable $4,611, inventory of $11,408, and accounts receivable of $3,462. How much
net working capital does the firm have?
A) $11,634
B) $26,634
C) $13,117
D) $10,819
E) $14,736
Answer: D
Explanation: NWC = $560 + 3,462 + 11,408 − 4,611
NWC = $10,819
Difficulty: 2 Medium
Section: 2.4 Net Working Capital
Topic: Net working capital
Bloom's: Apply
AACSB: Knowledge Application
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78) A debt-free firm has total sales of $22,980, costs of $14,715, and depreciation of $6,045.
What is the operating cash flow at a tax rate of 23 percent?
A) $1,465.20
B) $2,410.80
C) $8,340.00
D) $7,754.40
E) $9,019.80
Answer: D
Explanation: EBIT = $22,980 − 14,715 − 6,045
EBIT = $2,220
Tax = $2,220(.23)
Tax = $510.60
OCF = $2,220 + 6,045 − 510.60
OCF = $7,754.40
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Analyze
AACSB: Analytical Thinking
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79) Awnings Inc. has beginning net fixed assets of $234,100 and ending net fixed assets of
$243,600. Assets valued at $42,500 were sold during the year. Depreciation was $62,500. What
is the amount of net capital spending?
A) −$42,500
B) $9,500
C) $72,000
D) $53,000
E) $29,500
Answer: C
Explanation: Net capital spending = $243,600 − 234,100 + 62,500
Net capital spending = $72,000
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Capital spending
Bloom's: Analyze
AACSB: Analytical Thinking
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80) At the beginning of the year, long-term debt of a firm is $2,400 and total debt is $3,150. At
the end of the year, long-term debt is $2,800 and total debt is $4,370. The interest paid is $40.
What is the amount of the cash flow to creditors?
A) $440
B) −$40
C) $1,260
D) $1,180
E) −$360
Answer: E
Explanation: CF(B) = $40 − ($2,800 − 2,400)
CF(B) = −$360
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Analyze
AACSB: Analytical Thinking
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81) Pete's Boats has beginning long-term debt of $840 and ending long-term debt of $790. The
beginning and ending total debt balances are $1,220 and $1,360, respectively. The interest paid is
$30. What is the amount of the cash flow to creditors?
A) $80
B) −$110
C) $110
D) $20
E) −$80
Answer: A
Explanation: CF(B) = $30 − ($790 − 840)
CF(B) = $80
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Analyze
AACSB: Analytical Thinking
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82) For the year, Peggy Grey's Cookies had net income of $8,110. The firm paid out 30 percent
of the net income to its shareholders as dividends and also paid $210 in interest. During the year,
the company repurchased $500 worth of common stock and borrowed $250. What is the cash
flow to stockholders?
A) $2,933
B) $1,893
C) $1,933
D) $2,433
E) $2,893
Answer: A
Explanation: CF(S) = .30($8,110) − (−$500)
CF(S) = $2,933
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Analyze
AACSB: Analytical Thinking
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83) Thompson's Jet Skis has operating cash flow of $11,618. Depreciation is $2,345 and interest
paid is $395. A net total of $485 was paid on long-term debt. The firm spent $6,180 on fixed
assets and decreased net working capital by $420. What is the cash flow of the firm?
A) $5,858
B) $8,203
C) $9,228
D) $5,018
E) $7,363
Answer: A
Explanation: CF(A) = $11,618 − 6,180 − (−$420)
CF(A) = $5,858
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Analyze
AACSB: Analytical Thinking
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84) Lester's Markets has total revenues of $3,811, costs of $2,902, depreciation of $315, interest
expense of $168, and taxes of $89. At the beginning of the year, the firm had current assets of
$2,150, total assets of $4,908, and total liabilities of $1,964. At the end of the year, the current
assets are $2,202, total assets are $5,103, and total liabilities are $1,952. What is the amount of
net capital spending for the year?
A) −$182
B) $133
C) $458
D) $510
E) $285
Answer: C
Explanation: Net capital spending = ($5,103 − 2,202) − ($4,908 − 2,150) + $315
Net capital spending = $458
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Capital spending
Bloom's: Analyze
AACSB: Analytical Thinking
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85) The General Store has total revenue of $4,116, depreciation of $319, selling and
administrative expenses of $554, interest expense of $162, dividends of $75, cost of goods sold
of $2,354, and taxes of $186. What is the operating cash flow?
A) $1,118
B) $795
C) $1,147
D) $1,022
E) $720
Answer: D
Explanation: OCF = $4,116 − 2,354 − 554 − 186
OCF = $1,022
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Apply
AACSB: Knowledge Application
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86) Right Way Movers has interest expense of $168, total revenues of $38,411, costs of $28,515,
depreciation of $306, and taxes of $1,979. The beginning balance sheet has total assets of
$48,354, net fixed assets of $31,202, current liabilities of $14,207, and total liabilities of
$29,407. The ending balance sheet shows total assets of $49,305, net fixed assets of $33,406,
current liabilities of $17,318, and total liabilities of $30,404. What is the annual cash flow of the
firm?
A) $9,771
B) −$2,160
C) $15,168
D) $8,474
E) $2,857
Answer: A
Explanation: OCF = $38,411 − 28,515 − 1,979
OCF = $7,917
Net capital spending = $33,406 − 31,202 + 306
Net capital spending = $2,510
ΔNWC = ($49,305 − 33,406 − 17,318) − ($48,354 − 31,202 − 14,207)
ΔNWC = −$4,364
CF(A) = $7,917 − 2,510 − (−$4,364)
CF(A) = $9,771
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Analyze
AACSB: Analytical Thinking
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87) For a given year, Mfg. Corp. had taxable income of $1,630 and a tax rate of 23 percent. The
firm neither issued nor repurchased shares of stock but did decrease its retained earnings by
$310. What is the cash flow to stockholders?
A) $1,749.50
B) $535.50
C) $959.50
D) $1,242.50
E) $1,565.10
Answer: E
Explanation: Net income = $1,630(1 − .23)
Net income = $1,255.10
CF(S) = $1,255.10 − (−$310)
CF(S) = $1,565.10
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Analyze
AACSB: Analytical Thinking
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88) Northern Express paid $85 in dividends and $110 in interest expense during a given year.
During that same year, the firm issued $40 in new equity shares, issued new debt of $65, and
repaid $23 of old debt. What is the cash flow to creditors for that year?
A) $152
B) $146
C) $237
D) $68
E) $46
Answer: D
Explanation: CF(B) = $110 − ($65 − 23)
CF(B) = $68
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Analyze
AACSB: Analytical Thinking
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89) At the beginning of this year, Blauser Industries had net fixed assets of $21,506 and total
assets of $32,687. At year's end, net fixed assets are $20,492 and total assets are $32,915. The
annual depreciation expense is $1,520. What is net capital spending for this year?
A) −$850
B) $506
C) −$1,292
D) −$2,534
E) $1,748
Answer: B
Explanation: Net capital spending = $20,492 − 21,506 + 1,520
Net capital spending = $506
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Capital spending
Bloom's: Apply
AACSB: Knowledge Application
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90) For the year, Jensen's has depreciation of $2,058, dividends paid of $125, interest expense of
$382, an addition to retained earnings of $3,408, and an increase in common stock of $2,500.
The total tax rate is 21 percent. What is the operating cash flow?
A) $6,460
B) $5,973
C) $5,325
D) $5,735
E) $6,408
Answer: B
Explanation: Net income = $125 + 3,408
Net income = $3,533
Pre-tax income = $3,533/(1 − .21)
Pre-tax income = $4,472.15
EBIT = $4,472.15 + 382
EBIT = $4,854.15
OCF = $4,854.15 + 2,058 − ($4,472.15 − 3,533)
OCF = $5,973
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Analyze
AACSB: Analytical Thinking
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91) Ledger Properties has the following financial information:
Current Year
$ 48,915
12,106
816
29,715
1,408
32,711
14,652
15,000
16,506
12,200
7,365
290
Revenues
Administrative expenses
Interest expense
Cost of goods sold
Depreciation
Net fixed assets
Current liabilities
Common stock
Current assets
Long-term debt
Retained earnings
Dividends paid
Prior Year
$ 43,610
11,602
468
26,309
1,387
31,984
14,625
14,000
14,687
?
4,246
275
What is the cash flow of the firm for the current year if the tax rate is 22 percent?
A) $1,885
B) $1,042
C) $2,297
D) $2,096
E) $2,517
Answer: D
Explanation: Pretax income = $48,915 − 29,715 − 12,106 − 1,408 − 816
Pretax income = $4,870
Tax = .22($4,870)
Tax = $1,071
OCF = $48,915 − 29,715 − 12,106 − 1,071
OCF = $6,023
Net capital spending = $32,711 − 31,984 + 1,408
Net capital spending = $2,135
Change in NWC = ($16,506 − 14,652) − ($14,687 − 14,625)
Change in NWC = $1,792
Cash flow of the firm = $6,023 − 2,135 − 1,792
Cash flow of the firm = $2,096
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Analyze
AACSB: Analytical Thinking
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92) For a given year, Rogers Express paid $318 in interest, $460 in dividends, and $368 in taxes.
The firm had a net income of $1,220, depreciation of $1,560, an increase in net working capital
of $220, an increase in net fixed assets of $950, and a decrease in long-term debt of $260. There
were no changes in the equity accounts other than the change in retained earnings. What is the
annual cash flow of the firm?
A) $3,148
B) $1,610
C) $2,780
D) $1,038
E) $50
Answer: D
Explanation: CF(B) = $318 + 260
CF(B) = $578
CF(S) = $460
CF(A) = $578 + 460
CF(A) = $1,038
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Analyze
AACSB: Analytical Thinking
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93) JK Meadows has beginning current liabilities of $14,602 and total liabilities of $35,418. At
the end of the year, the current liabilities are $15,311 and the total liabilities are $37,604. During
the year, the firm paid $680 in dividends and $1,320 in interest. What is the cash flow to
creditors?
A) $3,230
B) $2,797
C) $3,135
D) −$157
E) −$267
Answer: D
Explanation: CFC = $1,320 − [($37,604 − 15,311) − ($35,418 − 14,602)]
CFC = −$157
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to creditors
Bloom's: Analyze
AACSB: Analytical Thinking
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94) During the year, Lasko's repaid $12,500 in long-term debt, borrowed $8,400, paid $611 in
interest and $740 in dividends, and had an operating cash flow of $16,207. The firm acquired
$33,500 in new fixed assets and sold $8,400 of old assets. Net working capital declined by
$1,592 during the year. What is the annual cash flow to stockholders?
A) $1,200
B) −$2,590
C) −$8,828
D) −$12,012
E) $2,800
Answer: D
Explanation: Cash flow of the firm = $16,207 − 33,500 + 8,400 − (−$1,592)
Cash flow of the firm = −$7,301
CFC = $611 + 12,500 − 8,400
CFC = $4,711
CFS = −$7,301 − 4,711
CFS = −$12,012
Difficulty: 3 Hard
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow to stockholders
Bloom's: Evaluate
AACSB: Analytical Thinking
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95) Last year, Webster Farms had annual revenue of $87,200, depreciation of $11,600, cost of
goods sold of $54,700, and administrative expenses of $8,300. The firm paid $3,200 in dividends
and paid taxes of $2,646. What was the operating cash flow?
A) $21,500
B) $18,300
C) $23,100
D) $21,554
E) $23,700
Answer: D
Explanation: OCF = $87,200 − 54,700 − 8,300 − 2,646
OCF = $21,554
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Analyze
AACSB: Analytical Thinking
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96) Last year, Oscar's Dog Treats had a cash flow to creditors of $2,840 and a cash flow to
stockholders of $1,630. The firm spent a net of $1,420 on fixed assets and reduced net working
capital by $330. What was the operating cash flow?
A) $6,190
B) $5,560
C) $3,500
D) $1,320
E) $4,901
Answer: B
Explanation: CF(A) = $2,840 + 1,630
CF(A)= $4,470
$4,470 = OCF − $1,420 − (−$330)
OCF = $5,560
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Analyze
AACSB: Analytical Thinking
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97) Quick Marts increased its cash by $418 this year. The firm's statement of cash flows shows
total cash flow from financing activities of $246 and total cash flow from investing activities of
−$184. What is the total cash flow from operations on this accounting statement?
A) $480
B) $356
C) $427
D) $367
E) $391
Answer: B
Explanation: $418 = Total cash flow from operations − 184 + 246
Total cash flow from operations = $356
Difficulty: 2 Medium
Section: 2.6 The Accounting Statement of Cash Flows
Topic: Statement of cash flows
Bloom's: Apply
AACSB: Knowledge Application
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98) JJ's has net sales of $48,920, depreciation of $711, cost of goods sold of $31,890,
administrative costs of $11,210, interest expense of $680, dividends paid of $450, and taxes of
$974. What is the cash flow from operations as it will appear on the accounting statement of cash
flows if the firm spent $274 on net working capital?
A) $3,892
B) $3,056
C) $4,066
D) $3,667
E) $3,391
Answer: A
Explanation: Cash flow from operations = $48,920 − 31,890 − 11,210 − 680 − 974 − 274
Cash flow from operations = $3,892
Note that the accounting statement of cash flows includes the interest expense as an operating
activity.
Difficulty: 2 Medium
Section: 2.6 The Accounting Statement of Cash Flows
Topic: Statement of cash flows
Bloom's: Analyze
AACSB: Analytical Thinking
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99) Define liquidity and explain what a firm would need to do to ensure all of the current assets
displayed on its balance sheet are liquid.
Answer: Liquid assets are those that can be sold quickly with little or no loss in value. To
ensure the current assets are liquid, the firm needs to review its accounts receivable to ensure the
accounts are collectible and also review its inventory to ensure it can be sold for at least its
recorded book value.
Difficulty: 2 Medium
Section: 2.1 The Balance Sheet
Topic: Liquidity
Bloom's: Apply
AACSB: Knowledge Application
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100) Discuss the difference between book values and market values on the balance sheet and
explain the best method for determining the value of a firm to its stockholders.
Answer: The accounts on the balance sheet are generally carried at historical cost, not market
values. Although the book value of current assets and current liabilities may closely approximate
market values, the same cannot be said for the rest of the balance sheet accounts. Ultimately,
stockholders should focus on the firm's stock price, which is a market value measure, for the
value of their investment in the firm.
Difficulty: 2 Medium
Section: 2.1 The Balance Sheet
Topic: Market and book values
Bloom's: Analyze
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101) Note that in all of our computations to determine the cash flows of a firm, we never include
the addition to retained earnings. Why not? Is this an oversight?
Answer: The addition to retained earnings is not a cash flow; it is simply an accounting entry
that links the income statement to the balance sheet and shows that the earnings of the firm
accrue to stockholders.
Difficulty: 2 Medium
Section: 2.2 The Income Statement
Topic: Income statement
Bloom's: Analyze
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102) From a financial perspective, why is interest expense excluded from the operating cash
flow?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its
day-to-day operations. Interest expense arises from a financing decision and thus is considered in
finance as a cash flow to creditors.
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Apply
AACSB: Knowledge Application
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103) Explain why the income statement is not a good representation of cash flow.
Answer: Most income statements contain some noncash items, such as depreciation, which
reduce net income but do not affect the cash flows. More importantly, however, income
statements are prepared using GAAP guidelines which record revenues and expenses as sales are
completed, not when their corresponding cash flows occur.
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flows
Bloom's: Analyze
AACSB: Analytical Thinking
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104) Depreciation is classified as a noncash item because no cash is spent when depreciation is
recorded. Why are expenses that have been accrued, but not yet paid, not also considered to be
noncash items and therefore excluded from operating cash flow just as depreciation is excluded?
Answer: Accrued expenses will appear in accounts payable and affect the change in net
working capital. Via the change in net working capital, these unpaid expenses are subtracted
from the operating cash flow to determine the cash flow of the firm. This method allows for the
computation of the cash flows based solely on financial statement information which is generally
easy to obtain. Depreciation, on the other hand, is the expensing of a fixed asset cost that was
paid for when the asset was acquired.
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Operating cash flow
Bloom's: Analyze
AACSB: Analytical Thinking
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105) Interpret, in words, what the cash flow of the firm represents by discussing operating cash
flow, changes in net working capital, and additions to fixed assets.
Answer: Operating cash flow is the cash flow a firm generates from its day-to-day operations.
In other words, it is the cash flow generated as a result of putting the firm's assets to work.
Changes in net working capital and fixed assets represent investments a firm needs for its
operations. That is, a firm typically takes some of the cash flow it generates from using assets
and reinvests it in new assets. Cash flow of the firm, then, is the cash flow a firm generates by
employing its assets, net of any asset acquisitions.
Difficulty: 2 Medium
Section: 2.5 Cash Flow of the Firm
Topic: Cash flow from assets
Bloom's: Analyze
AACSB: Analytical Thinking
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Corporate Finance 12th Edition Ross Test Bank
106) Why is cash flow management important?
Answer: Generally Accepted Accounting Principles (GAAP) allow significant
subjective decisions to be made in many key areas. The use of cash flow as a
metric to evaluate a company comes from the idea that there is less subjectivity
involved and therefore, it is harder to spin the numbers.
Difficulty: 2 Medium
Section: 2.7 Cash Flow
Management Topic: Cash
flows
Bloom's: Analyze
AACSB: Analytical
Thinking
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