Answer all the questions in both section A and B
SHOW ALL CALCULATIONS
SECTION A. (True or False questions)
Indicate whether each of the following statements is true (T) or false (F), please write only
the letter (T or F) in each question.
1. The depreciable life of an asset can significantly affect the pattern of cash flows. The
shorter the depreciable life of an asset, the more quickly the cash flow created by the
depreciation write-off will be received.
2. Non-cash charges are expenses that involve an actual outlay of cash during the period
but are not deducted on the income statement.
3. Given the financial manager's preference for faster receipt of cash flows, a longer
depreciable life is preferred to a shorter one.
4.
Free cash flow (FCF) is the cash flow a firm generates from its normal operations;
calculated as EBIT - taxes + depreciation.
5. The net current asset investment (NCAI) is defined as the change in current assets minus
the change in sum of the accounts payable and accruals.
6. In the statement of cash flows, the financing flows are cash flows that result from debt
and equity financing transactions, including incurrence and repayment of debt, cash
inflow from the sale of stock, and cash outflows to repurchase stock or pay cash
dividends.
7. Depreciation is considered to be an outflow of cash since the cash must be drawn from
somewhere.
8. It would be correct to define Operating Cash Flow (OCF) as net operating profit after
taxes plus depreciation.
9. Net operating profit after taxes (NOPAT) represents the firm's earnings before interest
and after taxes.
10. The firm's free cash flow (FCF) represents the amount of cash flow available to investors
(stockholders and bondholders) after the firm has met all operating needs and after
having paid for net fixed asset investments and net current asset investments.
SECTION B (MCQ)
Choose the correct alternative from the following questions. PLEASE SHOW your
calculations
1. Allocation of the historic costs of fixed assets against the annual revenue they generate
is called
A) net profits.
B) gross profits.
C) depreciation.
D) amortization.
2. In the statement of cash flows, retained earnings are handled through the adjustment
of which
two accounts?
A) Revenue and cost.
B) Assets and liabilities.
C) Depreciation and purchases.
D) Net profits and dividends.
3. The statement of cash flows includes all of the following categories EXCEPT
A) operating flows.
B) investment flows.
C) financing flows.
D) equity flows.
4. All of the following are outflows of cash EXCEPT
A) an increase in inventory.
B) a decrease in accounts receivable.
C) an increase in accounts receivable.
D) a decrease in notes payable.
5. Cash flows associated with the purchase and sale of fixed assets and business interests
are called
A) operating flows.
B) investment flows.
C) financing flows.
D) none of the above.
6. A corporation raises R500, 000 in long-term debt to acquire additional plant capacity.
This is considered
A) an investment cash flow.
B) a financing cash flow.
C) a financing cash flow and investment cash flow, respectively.
D) a financing cash flow and operating cash flow, respectively.
7. For the year ended December 31, 2020, a corporation had cash flow from operating
activities of R12, 000, cash flow from investment activities of - R10, 000, and cash flow from
financing activities of R4, 000. The Statement of Cash Flows would show a
A) net decrease of R18,000 in cash and marketable securities.
B) net decrease of R6,000 in cash and marketable securities.
C) net increase of R6,000 in cash and marketable securities.
D) net increase of R2,000 in cash and marketable securities.
D) none of the above.
8. Calculate a firm's free cash flow if it has net operating profit after taxes of R60,000,
depreciation expense of R10,000, net fixed asset investment requirement of R40,000, a net
current asset requirement of R30,000 and a tax rate of 30%.
A) R0.
B) R30,000.
C) -R30,000.
D) none of the above.
9. RAINBOW Corporation had net fixed assets of R2, 000,000 at the end of 2018 and R1,
800,000 at the end of 2017. In addition, the firm had a depreciation expense of R200, 000
during 2018 and R180, 000 during 2017. Using this information, RAINBOW's net fixed asset
investment for 2018 was
A) R20,000.
B) R0.
C) R380,000.
D) R400,000.
10. RAINBOW Corporation had net current assets of R2, 000,000 at the end of 2016 and R1,
800,000 at the end of 2015. In addition, RAINBOW had net spontaneous current liabilities of
R1, 000,000 in 2016 and R1, 500,000 in 2015. Using this information, RAINBOW's net current
asset investment for 2016 was
A) R700, 000.
B) -R300, 000.
C) R300, 000.
D) -R700, 000.
11. During 2018, RAINBOW Corporation had EBIT of R100,000, a change in net fixed assets
of R400,000, an increase in net current assets of R100,000, an increase in spontaneous
current liabilities of R400,000, a depreciation expense of R50,000, and a tax rate of 30%.
Based on this information, RAINBOW's free cash flow is
A) -R630,000.
B) -R50,000.
C) R650,000.
D) -R30,000.