财务管理 1-9章练习
CHAPTER 1
Introduction to Financial Management
I. DEFINITIONS
1. The corporate officer generally responsible for tasks related to tax management, cost accounting,
financial accounting, and data processing is the:
A) Corporate Treasurer.
B) Director.
C) Corporate Controller.
D) Chairman of the Board.
E) Vice President of Operations.
2. The corporate officer generally responsible for tasks related to cash and credit management,
financial planning, and capital expenditures is the:
A) Corporate Treasurer.
B) Director.
C) Corporate Controller.
D) Chairman of the Board.
E) Vice President of Operations.
3. The process of planning and managing a firm's long-term investments is called:
A) Working capital management.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.
4. The mixture of debt and equity used by the firm to finance its operations is called:
A) working capital management.
B) financial depreciation.
C) agency cost analysis.
D) capital budgeting.
E) capital structure.
5. The management of the firm's short-term assets and liabilities is called:
A) Working capital management.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.
6. A business owned by a single individual is called a(n):
A) Corporation.
B) Sole proprietorship.
C) Partnership.
D) Closed receivership.
E) Open structure.
7. A business formed by two or more individuals or entities is called a(n):
A) Corporation.
B) Sole proprietorship.
C) Partnership.
D) Closed receivership.
E) Open structure.
8. A business created as a distinct legal entity composed of one or more individuals or entities is
called a(n):
A) Corporation.
B) Sole proprietorship.
C) Partnership.
D) Closed receivership.
E) Open structure.
9. The division of profits and losses between the members of a partnership is formalized in the:
A) Indemnity clause.
B) Indenture contract.
C) Statement of purpose.
D) Partnership agreement.
E) Group charter.
10. The document that legally establishes domicile for a corporation is called the:
A) Indenture contract.
B) Partnership agreement.
C) Amended homestead filing.
D) Bylaws.
E) Articles of incorporation.
11. The rules by which corporations govern themselves are called:
A) Indenture provisions.
B) Indemnity provisions.
C) Partnership agreements.
D) Bylaws.
E) Articles of incorporation.
12. A business entity operated and taxed like a partnership, but with the limited liability feature for
owners, is called a:
A) Limited liability corporation.
B) General partnership.
C) Cartel.
D) Sole proprietorship.
E) Corporation.
13. The primary goal of financial management is to:
A) Maximize current sales.
B) Maximize the current value per share of the existing stock.
C) Avoid financial distress.
D) Minimize operational costs.
E) Maintain steady earnings growth.
14. The possibility of conflict of interest between the stockholders and management of the firm is
called:
A) The shareholders' conundrum.
B) Corporate breakdown.
C) The agency problem.
D) Corporate activism.
E) Legal liability.
15. Agency costs
A) The total dividends paid to shareholders over the lifetime of the firm.
B) The costs that result from default and bankruptcy of the firm.
C) Corporate income subject to double taxation.
D) The costs of the conflict of interest between stockholders and management.
E) The total interest paid to creditors over the lifetime of the firm.
16. A stakeholder is:
A) Given to each stockholder when they first purchase their stock.
B) A proxy vote made at a shareholders meeting.
C) A founding stockholder of the firm.
D) An original creditor of the firm.
E) A person or entity other than a stockholder or creditor who potentially has a claim on the cash
flows of the firm.
17. The original sale of securities by governments and corporations occurs in the:
A) Primary market.
B) Secondary market.
C) Dealer market.
D) Auction market.
E) Liquidation market.
18. The purchase and sale of securities after the original issuance occurs in the:
A) Primary market.
B) Secondary market.
C) Dealer market.
D) Auction market.
E) Liquidation market.
19. A market where dealers buy and sell securities for themselves, at their own risk, is called a(n):
A) Primary market.
B) Secondary market.
C) Dealer market.
D) Auction market.
E) Liquidation market.
20. A market where trading takes place between buyers and sellers directly is called a(n):
A) Primary market.
B) Secondary market.
C) Dealer market.
D) Auction market.
E) Liquidation market.
II CONCEPTS
21. Which of the following does NOT offer the protection of limited liability?
A) corporation
B) limited liability company
C) sole proprietorship
D) limited partnership
E) S corporation
22. The fundamental goal of financial management should be to:
A) Maximize sales.
B) Maximize the current value per share of the existing stock.
C) Avoid financial distress.
D) Maintain steady earnings growth.
E) Maximize profits.
23. Which of the following does NOT address the question: "What are the duties of a financial
manager?"
I. Deciding how much interest to pay the holders of the corporation's bonds.
II. Deciding the mix of long-term debt and equity.
III. Deciding which projects a firm should undertake.
IV. Deciding how much short-term debt to use.
A) I only
B) III only
C) II and III only
D) II, III, and IV only
E) I, II, III, and IV
24. Which of the following statements is true regarding the corporate form of organization compared to
that of the sole proprietorship?
A) The owners of the sole proprietorship have limited liability for the firm's debts.
B) The sole proprietorship is the simplest business form to start-up.
C) The corporation has a limited life.
D) Dividends received by the corporation's shareholders are tax-exempt.
E) It is more difficult to transfer ownership in a corporation.
25. Which of the following is NOT a type of agency cost?
A) The cost of an audit of the firm's financial statements.
B) The cost of a corporate jet provided to the CEO as part of her compensation package.
C) Loans provided to the firm's managers at below-market interest rates.
D) The costs of financing the firm.
E) The cost of providing life insurance to the firm's CFO.
26. Commtel Partners hires Smith Brothers investment bank to negotiate the purchase of the fiber optic
assets of https://www.360docs.net/doc/bf18048769.html,. Identify the parties to this transaction.
A) Smith is the principal and Commtel is the agent.
B) Commtel is the principal and Smith is the agent.
C) Lightware is the principal and Commtel is the agent.
D) Smith is the agent while Lightware and Commtel together are principals.
E) Commtel is the principal and Lightware is the agent.
27. The Board of Directors of Beeline, Inc. have decided to base the salary of its financial manager
entirely upon the market share of the firm. Accordingly,
A) the firm may incur some agency costs since the manager will be focused on the market share of
the firm rather than acting to maximize earnings.
B) the financial manager will always act in the best interest of the shareholders since all agency
costs have been eliminated through salary incentives.
C) this arrangement may be unnecessary, since the goal of the firm is to maximize earnings for
shareholders, and that is most likely accomplished through larger market share.
D) the manager may not act to maximize the current value of the firm's stock, resulting in agency
costs for the firm's stockholders.
E) the firm will incur some agency costs if the manager acts to maximize market share.
28. Which of the following is/are correct regarding agency costs?
I. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments
shareholders would prefer they take.
II. Direct costs occur when shareholders must incur costs to monitor the manager's actions.
III. Direct costs occur when managers buy assets considered necessary by the firm's owners.
A) I only
B) I and II only
C) II only
D) II and III only
E) I, II, and III
29. Which of the following help ensure managers act in the best interest of owners?
I. A compensation package for managers that is a flat cash salary, with no bonuses or options.
II. Managers are promoted only when they have worked for the firm for at least 5 years.
III. The threat that if the firm does poorly, shareholders will use a proxy fight to replace the
existing management.
IV. There is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly.
A) I and II only
B) II and III only
C) III and IV only
D) I and III only
E) I, II, III, and IV
30. Which of the following markets is considered an auction market?
A) The New York Stock Exchange
B) The over-the-counter (OTC) market
C) NASDAQ
31. Why does the double taxation problem exist for corporations?
A) Corporations earn taxable income, pay taxes on that income, and then pay interest to the
bondholders, who also have net taxable income.
B) Corporations earn taxable income and pay taxes on that income.
C) Firms with depreciation expense must repay the tax deduction over time, in addition to their
normal tax liability on taxable corporate income.
D) Corporations earn taxable income, pay taxes on that income, and then pay dividends to the
stockholders, who also have net taxable income.
E) Stockholders are paid a dividend and they have net taxable income.
32. If you are hired as the new CEO of a corporation after graduation, which of the following would
you consider to be your most important criterion for success from the owners perspective?
A) Pursue activities that reduce the overall riskiness of the firm.
B) Pursue activities that result in the largest profits for the year.
C) Pursue activities that maximize your personal wealth.
D) Pursue activities that maximize the current stock price.
E) Pursue activities that lead to the most stable stock price for the year.
33. A financial manager is responsible for deciding whether an investment in new manufacturing
equipment should be financed with debt, preferred stock, or common stock. Which of the following financial management areas would be involved in the decision process?
I. Capital budgeting
II. Capital structure management
III. Working capital management
A) I only
B) II only
C) II and III only
D) I and III only
E) I, II and III
34. You are interested in purchasing 100 shares of stock in a small technology firm that trades in the
United States. You would most likely purchase the shares in ________________.
A) a primary market operated as a money market
B) a primary market operated as an auction market
C) a secondary market operated as a dealer market
D) a primary market operated as a dealer market
E) a secondary market operated as a money market
35. According to the balance sheet model of the firm, corporate finance may be thought of as the
analysis of three primary subject areas. Which of the following correctly lists these areas?
A) Capital structure, capital budgeting, security analysis
B) Capital budgeting, capital structure, capital spending
C) Capital budgeting, capital structure, net working capital
D) Capital structure, net working capital, capital rationing
E) Capital budgeting, capital spending, net working capital
36. Which of the following is NOT considered one of the basic questions of corporate finance?
A) What long-term investments should the firm choose.
B) At what rate of interest should a firm borrow.
C) Where will the firm get the long-term financing to pay for its investments.
D) What mixture of debt and equity should the firm use to fund its operations.
E) How should the firm manage its working capital, i.e., its everyday financial activities.
37. Which of the following is a FALSE statement concerning corporations?
A) The equity that can be raised by the corporation is limited to the current shareholders' personal
wealth.
B) The life of the corporation is unlimited.
C) The corporation has unlimited liability for business debts.
D) When dividends are paid, net corporate profits are essentially taxed twice.
E) It is relatively simple to transfer ownership of corporate shares.
38. Which of the following statements is/are true concerning partnerships?
I. Limited partners are responsible for all debts of the partnership.
II. Limited partners generally do not manage the partnership.
III. In a limited partnership, all partners share equally in the gains or losses.
A) I only
B) II only
C) I and II only
D) II and III only
E) I, II, and III
39. Which of the following correctly finishes this sentence: In the US, ________________.
A) the OTC market has a central location
B) over-the-counter markets are operated as auction markets
C) financial markets function as both primary and secondary markets for debt and equity
securities
D) new issues of securities occur in secondary markets
E) auction markets do not have a physical location
40. Which of the following is a criteria that must be met in order for a firm to be listed on the New York
Stock Exchange?
A) The firm must have at least 3 shareholders owning at least 10,000 shares.
B) The firm must have a minimum number of shares outstanding.
C) The firm must have a market value in excess of $1 billion.
D) The firm must have a minimum of 5 directors.
E) The firm must not have ever suffered negative net income in a given quarter.
41. In the evaluation of cash flow in a capital budgeting decision, which of the following is NOT
relevant?
I. The size of the cash flow.
II. The timing of the cash flow.
III. The risk of the cash flow.
IV. The manager responsible for the accounting of the cash flow.
A) I only
B) I and II only
C) II only
D) II and IV only
E) IV only
42. You want to pool your resources with your best friend and start your own telecommunications firm.
However, you are concerned about the risk this business poses to your accumulated personal wealth.
To limit your exposure, you and your friend should organize the business:
A) As a general partnership
B) As a limited partnership
C) As a sole proprietorship
D) As a corporation
E) As a real estate investment trust
43. Which of the following would NOT be considered a secondary market transaction?
A) A buy order to a broker for shares of stock in a company on NYSE.
B) A buy order to an investment banker for a new IPO stock offering.
C) A buy order to a broker for shares of stock in a company on NASDAQ.
D) A buy order to a dealer for outstanding bonds of a company trading OTC.
E) A buy order to a broker for a stock listed on a regional exchange.
44. Unlimited liability is a characteristic of which of the following form(s) of organization?
A) sole proprietorship
B) limited partnership
C) corporation
D) S corporation
E) limited liability company
45. Which of the following is a true statement concerning a general partnership?
I. Partners are responsible for the debts of the partnership.
II. Partners generally do not manage the partnership.
III. The income of a partnership is taxed at the partners' income tax rate.
A) I only
B) III only
C) I and II only
D) I and III only
E) I, II, and III
46. Which of the following is FALSE concerning the economics of ethical decision-making?
I. The higher the probability of detection, the more likely that one will cheat.
II. The higher the sanctions imposed if detected, the less likely one is to cheat.
III. The expected costs of unethical behavior are lower if information about cheating is rapidly and widely distributed.
A) I only
B) II only
C) I and II only
D) I and III only
E) I, II, and III
47. Which of the following is considered a secondary market transaction?
I. You buy shares in the public offering of a start-up company in the computer industry.
II. Your mother sells you the shares she purchased in your uncle's latest business venture.
III. You buy shares in General Motors from your closest friend.
A) I only
B) II only
C) I and II only
D) II and III only
E) I, II, and III
48. On a typical day in the United States, the largest number of shares are traded:
A) Over the counter.
B) On the New York Stock Exchange.
C) On the American Stock Exchange.
D) On the Philadelphia Stock Exchange.
E) In primary markets.
49. The death of the firm's owner(s) effectively dissolves which type(s) of organization?
I. Sole proprietorship
II. Partnership
III. Corporation
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
50. Which of the following is considered a disadvantage of the corporate form of organization?
I. Ease of the transfer of ownership
II. Limited life
III. Double taxation
A) I only
B) II only
C) III only
D) I and II only
E) I, II, and III
51. A(n) ________________ is a sale of securities which typically does not require registration with
the SEC and is usually sold to a large financial institution.
A) initial public offering
B) over-the-counter transaction
C) primary market transaction
D) secondary market transaction
E) private placement
52. A financial manager is responsible for determining how much long-term debt the firm should use
relative to its use of short-term borrowings. Which function is this manager involved with?
I. Capital budgeting
II. Capital structure management
III. Working capital management
A) I only
B) II only
C) III only
D) I and II only
E) I, II and III
53. A type of small corporation that is taxed like a partnership and thus avoids double taxation is called
a ________________.
A) limited partnership
B) sole proprietorship
C) S corporation
D) limited liability company
E) general partnership
54. Which of the following combinations of attributes would make a capital expenditure project
desirable to a financial manager?
I. The project has positive book value on the company's accounting statements.
II. The value of the cash flow generated by the project exceeds the project's cost.
III. The project's cash flows have acceptable levels of risk and size, but not timing.
A) I only
B) II only
C) III only
D) II and III only
E) I, II, and III
55. A ________________ can lose, in the extreme case, her entire personal net worth.
I. common stockholder
II. limited partner
III. general partner
IV. sole proprietor
A) I only
B) I and II only
C) III and IV only
D) II, III, and IV only
E) II and III only
56. The total market value of the firm's equity is determined by ________________.
A) the firm's accountants
B) the firm's management
C) investors in the stock market
D) investors in the bond market
E) regulators at the Securities and Exchange Commission (SEC)
57. Of the following, which statement regarding agency costs is true?
A) An agency problem exists when there is a conflict of interest between the stockholders and
management of a firm.
B) An agency problem does not exist when there are conflicts of interest between principals and
agents.
C) An indirect agency cost occurs when firm management takes on risky projects that favorably
affect the stock price, even though the managers are worried about keeping their jobs.
D) A corporate expenditure that benefits stockholders but harms management is an agency cost.
E) Agency costs are directly observable in the stock market.
CHAPTER 2
Financial Statements, Taxes, and Cash Flow
I. DEFINITIONS
1. The financial statement showing a firm's accounting value on a particular date is the:
A) Income statement.
B) Balance sheet.
C) Statement of cash flows.
D) Tax reconciliation statement.
E) Bank statement.
2. A current asset is:
A) An item currently owned by the firm.
B) An item that the firm expects to own within the next year.
C) An item currently owned by the firm that will convert to cash within the next 12 months.
D) The amount of cash on hand the firm currently shows on its balance sheet.
E) The market value of all the items currently owned by the firm.
3. The long-term debts of a firm are:
A) Liabilities that come due within the next 12 months.
B) Liabilities that do not come due for at least 12 months.
C) Liabilities owed to the firm's suppliers.
D) Liabilities owed to the firm's shareholders.
E) Liabilities the firm expects to incur within the next 12 months.
4. Net working capital is defined as:
A) Total liabilities minus shareholders' equity.
B) Current liabilities minus shareholders' equity.
C) Fixed assets minus shareholders' equity.
D) Total assets minus total liabilities.
E) Current assets minus current liabilities.
5. A(n) ______________ asset is one which can be quickly converted into cash without significant
loss in value.
A) current
B) fixed
C) intangible
D) liquid
E) long-term
6. Financial leverage refers to:
A) The amount of debt used in a firm's capital structure.
B) The ratio of retained earnings to shareholders' equity.
C) The ratio of paid-in surplus to shareholders' equity.
D) The ratio of cost-of-goods-sold to total sales.
E) The amount of receivables present in the firm's asset structure.
7. The common set of standards and procedures by which audited financial statements are prepared is
known as:
A) The matching principle.
B) The cash flow identity.
C) Generally Accepted Accounting Principles (GAAP).
D) The Freedom of Information Act (FOIA).
E) The 1993 Omnibus Budget Reconciliation Act.
8. The financial statement summarizing a firm's performance over a period of time is the:
A) Income statement.
B) Balance sheet.
C) Statement of cash flows.
D) Tax reconciliation statement.
E) Shareholders' equity sheet.
9. Noncash items
A) The credit sales of a firm.
B) The accounts payable of a firm.
C) Expenses 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.
10. Your ______________ tax rate is the amount of tax payable on the next dollar you earn.
A) deductable
B) residual
C) total
D) average
E) marginal
11. Your ______________ tax rate measures the total taxes you pay divided by your taxable income.
A) deductable
B) residual
C) total
D) average
E) marginal
12. ______________ refers to the cash flow that results from the firm's ongoing, normal business
activities.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
13. ______________ refers to the net spending of the firm on fixed asset purchases.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
14. ______________ refers to the difference between a firm's current assets and its current liabilities.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
15. ______________ refers to the net total cash flow of the firm accruing to its creditors and
stockholders.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
16. ______________ refers to the firm's interest payments less any net new borrowing.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to creditors
17. ______________ refers to the firm's dividend payments less any net new equity raised.
A) Operating cash flow
B) Capital spending
C) Net working capital
D) Cash flow from assets
E) Cash flow to stockholders
18. Cash flow from assets is also known as the firm's ______________.
A) capital structure
B) equity structure
C) hidden cash flow
D) free cash flow
E) historical cash flow
19. Earnings per share is equal to:
A) Net income divided by the total number of shares outstanding.
B) Net income divided by the par value of common stock.
C) Gross income multiplied by the par value of common stock.
D) Operating income divided by the par value of common stock.
E) Net income divided by total stockholders' equity.
20. Dividends per share is equal to:
A) Dividends paid divided by the par value of common stock.
B) Dividends paid divided by the total number of shares outstanding.
C) Dividends paid divided by total stockholders' equity.
D) Dividends paid multiplied by the par value of common stock.
E) Dividends paid multiplied by the total number of shares outstanding.
Answer: B
II CONCEPTS
21. The balance sheet identity states that:
A) Current assets + Fixed assets = Total assets
B) Assets = Liabilities + Shareholders' equity
C) Current liabilities + Long-term debt = Total liabilities
D) Common stock + Paid-in surplus + Retained earnings = Shareholders' equity
E) Cash flow = Market value – Book value
22. Which of the following is NOT typically characterized as a current asset?
A) Inventory
B) Cash on hand
C) Patents
D) Accounts receivable
E) Marketable securities
23. Which of the following would most likely be considered the most liquid asset?
A) A share of IBM common stock
B) A bond issued by a municipal government
C) A piece of collectible artwork
D) A lot of commercial real estate
E) A share of Citibank preferred stock
24. Which of the following is a FALSE statement?
A) Accounting income is rarely equal to firm cash flow.
B) Accounting statements are usually prepared to match the timing of income and expenses.
C) All public companies are required to file timely, audited financial statements for purposes of
public perusal.
D) The balance sheet tells investors exactly what the firm's market value is.
E) Assets are usually recorded on the balance sheet at their acquisition value.
25. Which of the following income statement accounts is a non-cash item?
A) Wages and salaries
B) Interest expense
C) Cost of goods sold
D) Amortization of goodwill
E) Income taxes
26. Suppose you have the 2002 income statement for a firm, along with the 12/31/2001 and 12/31/2002
balance sheets. How would you calculate net capital spending for 2002?
A) Ending net fixed assets (2002) minus beginning net fixed assets (2001) plus 2002 depreciation
B) Beginning net fixed assets (2001) minus ending net fixed assets (2002) plus 2002 depreciation
C) Beginning net fixed assets (2001) plus ending net fixed assets (2002) minus 2002 depreciation
D) Ending net fixed assets (2002) minus beginning net fixed assets (2001) plus 2002 taxes paid
E) Ending net fixed assets (2002) plus beginning net fixed assets (2001) minus 2002 taxes paid
27. An decrease in the financial leverage of a firm as a result of a decrease in outstanding debt
______________ the potential reward to stockholders while ______________ the risk of financial distress or bankruptcy.
A) decreases; decreasing
B) increases; decreasing
C) increases; increasing
D) decreases; increasing
E) does not affect; increasing
28. Which of the following asset account items is generally considered the least liquid?
A) Inventory
B) Net fixed assets
C) Short-term investments
D) Patents and trademarks
E) Accounts receivable
29. Which of the following is/are FALSE regarding the balance sheet and income statement?
I. The income statement reflects a summary of activity that occurs over some period of time while
the balance sheet is a snapshot taken at a single point in time.
II. Both represent a summary of activity that occurs over some time period.
III. The two statements, taken together, give an accurate estimate of the firm's cash flows and market value.
A) I only
B) II only
C) III only
D) I and III only
E) II and III only
30. Which of the following represents a use of the matching principle in accounting?
I. The cost of purchasing an item on account is recorded when the payable is paid.
II. Revenues from a credit sale are recorded when the sale is made.
III. The production costs of inventory are recorded along with the revenue from the sale on the date the sale is made.
A) I only
B) II only
C) III only
D) I and III only
E) II and III only
31. Balance sheet assets ______________.
I. are always equal to total liabilities minus shareholders' equity
II. represent items acquired with the use of the firm's assumed liabilities and equity
III. are listed in order of decreasing liquidity
A) I only
B) II only
C) III only
D) I and III only
E) II and III only
32. Which of the following is NOT needed for the calculation of operating cash flow?
A) Dividends paid
B) EBIT
C) Depreciation
D) Taxes
E) All of the above are needed
33. Which of the following is FALSE regarding book and market values?
A) Financial managers should rely on book values, and not market values, when analyzing the
firm's tax liability.
B) Financial managers should rely on market values, and not book values, when making decisions
for the firm's strategic direction.
C) Book value is an accounting summary of value and is inferior to market value as a source of
current information regarding the true value of the firm.
D) The market value of fixed assets is often difficult to determine.
E) Market value always exceeds book value.
34. Suppose you have the beginning and ending year balance sheets for a firm, along with the year's
income statement. Changes in net working capital (NWC) would be calculated as:
A) Ending NWC plus depreciation minus beginning NWC.
B) Ending NWC minus depreciation minus beginning NWC.
C) Ending NWC plus taxes paid plus beginning NWC.
D) Ending NWC minus beginning NWC.
E) Ending NWC plus beginning NWC.
35. The net new equity raised by a firm during a given year can be calculated as:
A) New equity sales minus equity repurchases plus retained earnings.
B) New equity sales minus equity repurchases plus retained earnings minus dividends paid.
C) New equity sales minus equity repurchases.
D) New equity sales plus retained earnings.
E) New equity sales minus dividends paid.
36. Which of the following DIRECTLY appears in one of the two definitions of cash flow from assets?
A) Addition to retained earnings
B) Goodwill
C) Changes in net working capital
D) Total revenues
E) Cost of goods sold
37. An increase in which of the following will cause operating cash flow to increase, all else the same?
I. Interest expense
II. Depreciation
III. Taxes paid
A) I and II only
B) II and III only
C) I only
D) II only
E) III only
38. An income statement ______________.
A) measures performance as a snapshot on a specific date
B) prepared according to GAAP will show revenue when it accrues
C) includes accrued taxes payable
D) includes expenses only when they are ultimately paid off in cash
E) is an accurate representation of a firm's net cash flows
39. Which of the following statements regarding GAAP and the balance sheet is true?
A) Assets are only carried on the books if they are relatively liquid.
B) Assets are carried on the books at their market value.
C) Assets are carried on the books at their historic cost.
D) Assets are listed in order of increasing relative liquidity.
E) Assets are carried at the larger of historic cost and market value.
40. Which of the following is a use of cash?
A) An increase in short-term loans.
B) An increase in accounts payable.
C) The sale of fixed assets.
D) Dividends paid
E) The sale of new bonds.
41. Which of the following is a source of cash?
A) The purchase of new fixed assets.
B) Dividends paid.
C) The repurchase of outstanding common stock.
D) A decrease in long-term debt.
E) A decrease in inventory.
42. For which of the following balance sheet items will the book value and market value most likely be
closest at the time the balance sheet is prepared?
A) Net fixed assets
B) Common stock
C) Short-term debt
D) Long-term debt
E) Retained earnings
43. A firm with negative net working capital ______________.
A) is technically bankrupt
B) has no cash on hand
C) needs to sell some of its inventory to correct the problem
D) has more current liabilities than current assets
E) most likely will not run short of cash over the next six months
44. Accounts payable are a component of:
A) Net working capital.
B) Current assets.
C) Long-term debt.
D) Fixed assets.
E) Shareholders' equity.
45. Which of the following items is not considered a component of stockholders' equity?
I. Common stock
II. Paid-in surplus
III. Dividends paid
A) I and II only
B) II and III only
C) III only
D) I and III only
E) I, II and III
46. If operating cash flow is negative, then ______________.
A) the firm is bankrupt
B) the firm can pay no dividends
C) cash flow to bondholders must be negative
D) cash flow to stockholders must be positive
E) cash flow from assets may be positive
47. Which of the following would decrease the financial leverage of a firm?
A) Total assets increase and the debt to equity ratio remains constant.
B) Total debt increases and total assets remain constant.
C) Net new equity is sold and existing bonds are paid off.
D) Net new bonds are sold and outstanding common stock is repurchased.
E) Net new bonds are sold and short-term notes payable are paid off.
48. Which of the following statements is FALSE?
A) While marginal and average tax rates often differ, it is the average tax rate that is relevant for
most financial decisions.
B) The book value of an asset on the balance sheet can be very different from its market value.
C) Net income as calculated from the income statement is not the net cash flow of the firm.
D) Non-cash items are expenses charged against revenues that do not directly affect cash flow.
E) The cash flow identity states that all net cash flows earned by the firm are distributed in whole
to its creditors and shareholders.
49. With regard to the dividends paid by a corporation, which of the following is FALSE?
A) The dividends are considered a cash inflow by the shareholders.
B) The dividends are subject to double taxation as a result of corporate and personal taxes.
C) Dividends are a non-cash expense of the firm.
D) Dividends paid reduce retained earnings on a dollar for dollar basis.
E) Dividends paid represent a use of cash by the firm.
50. In 2002, Sensicon Company experienced negative cash flow from assets. It must be the case that:
A) The company is in financial distress.
B) Cash flow to creditors and cash flow to shareholders are both negative.
C) Sensicon's interest payments were greater than its dividend payments.
D) Sensicon's dividend payments were greater than its interest payments.
E) Operating cash flow was less than the combination of additions to net working capital and net
new capital expenditures.
51. XYZ Company had net income of $40 million in 2002. The firm paid no dividends. If there were no
further changes to the stockholders' equity accounts, then ______________ by $40 million.
A) common stock must have increased
B) retained earnings must have increased
C) total shareholders' equity must have decreased
D) paid-in surplus must have decreased
E) the market value of the firm's stock must have decreased
III. Problems
52. A firm has net fixed assets of $8 million on December 31, 2001 and $14.5 million on December 31,
2002. If the depreciation expense for 2002 was $630,000, what was the firm's 2002 capital
spending?
A) $ 8.63 million
B) $22.50 million
C) $ 6.50 million
D) $ 7.13 million
E) $23.13 million
53. Your company paid $50,000 cash for inventory on January 1, 2002. On December 31, 2002, the
entire inventory had been sold for $68,000, and the company's balance sheet showed accounts receivable of $25,000. If inventory is the only cost, then ignoring taxes, what is the company's accounting profit and cash flow for 2002?
A) $50,000; $25,000
B) $75,000;–$43,000
C) $18,000;–$ 7,000
D) –$18,000; $43,000
E) $68,000; $25,000
54. If current assets = $125, net fixed assets = $300, long-term debt = $80, and owners' equity = $275,
what is the value of current liabilities if it is the only other item on the balance sheet?
A) –$ 35
B) $ 35
C) $ 70
D) $240
E) $425
55. If total assets = $900, fixed assets = $550, current liabilities = $250, equity = $175, long-term debt
= $475, and current assets is the only remaining item on the balance sheet, what is the value of net working capital?
A) –$250
B) $100
C) $250
D) $350
E) $500
56. Given the following balance sheet data, calculate net working capital: cash = $25, accounts
receivable = $80, inventory = $120, net fixed assets = $400, accounts payable = $15, short-term debt = $90, and long-term debt = $225.
A) –$ 95
B) $ 30
C) $ 85
D) $120
E) $225
57. Given the following income statement data, calculate net income: sales = $2,500, cost of goods sold
= $1,800, miscellaneous expenses = $200, depreciation = $150, interest expense = $50, tax rate = 35%.
A) $195
B) $230
C) $260
D) $425
E) $575
58. Given the following income statement data, calculate operating cash flow: net sales = $4,200, cost
of goods sold = $2,650, operating expenses = $580, depreciation = $610, interest expense = $200, tax rate = 35%.
A) $554
B) $360
C) $970
D) $304
E) $914
59. If cash flow from operations is $7,300, net capital spending is –$3,500, and net working capital
declines by $1,600, what is cash flow from assets?
A) $ 2,200
B) $ 5,400
C) $ 9,200
D) $10,800
E) $12,400
60. ABC Corporation reported retained earnings of $1,250 on its year-end 2000 balance sheet. During
2002, the company reported a loss of $320 in net income, and it paid out a dividend of $200. What will retained earnings be for ABC's 2002 year-end balance sheet?
A) $ 520
B) $ 730
C) $ 930
D) $1,450
E) Not enough information
61. At year-end 2002, the balance sheet shows current assets = $90, fixed assets = $220, intangible
assets = $30, current liabilities = $60, and long-term liabilities = $200. What is the value of the shareholders' equity account?
A) $ 30
B) $ 50
C) $ 80
D) $ 90
E) $110
62. A firm paid $12 million in dividends during 2002, while also making net common stock
repurchases of $9 million. What was the cash flow to stockholders for 2002?
A) –$ 3 million
B) $ 9 million
C) $12 million
D) $17 million
E) $21 million
63. During 2002, your firm reported net income of $600 and paid a $120 stock dividend. The
December 31, 2001 balance sheet reported the following items: common stock = $500, capital
surplus = $750, retained earnings = $900. What is the value of the retained earnings account for the December 31, 2002 balance sheet?
A) $ 300
B) $ 780
C) $1,020
D) $1,380
E) $1,500
Use the following to answer questions 64-65:
Taxable income Tax rate
$ 0 – $ 50,000 15%
$ 50,001 – $ 75,000 25%
$ 75,001 – $100,000 34%
$100,001 – $335,000 39%
64. If taxable income is $92,000, then the ______________.
A) average tax rate is 21.2%
B) average tax rate is 34.0%
C) marginal tax rate is 15.0%
D) marginal tax rate is 25.0%
E) marginal tax rate is 39.0%
65. Your company reports 2002 taxable income of $300,000. How large is the firm's tax bill?
A) $ 89,750
B) $100,250
C) $108,750
D) $117,000
E) $152,250
66. RDJ Manufacturing had 4 million shares of stock outstanding at the end of 2002. During 2002, the
company reported net income of $20 million, retained earnings of $12 million, and $8 million in dividends paid. What is RDJ's earnings per share?
A) $1.67
B) $2.50
C) $3.00
D) $4.25
E) $5.00
67. If net income = $3,562.50, depreciation expense = $2,000, interest expense = $1,000, and the tax
rate = 25%, what is operating cash flow?
A) $3,974
B) $4,750
C) $6,562
D) $7,338
E) $8,525
68. Given the following information from the 2001 financial statements, calculate cash flow from
assets: operating cash flow = $36,500, net fixed assets declined by $3,000, depreciation expense = $9,000, and net working capital increased by $2,700.
A) $21,800
B) $27,800
C) $36,500
D) $39,800
E) $45,200
69. During 2002, a firm paid $10,000 in interest expense and its long-term debt decreased from
$75,000 to $45,000. What is the 2002 cash flow to creditors?
A) –$30,000
B) –$20,000
C) $10,000
D) $55,000
E) $40,000
70. At the start of the year, the firm has total shareholders' equity = $5,000. If net income during the
year was a $400 loss, dividends paid = $120, and $800 was raised from the sale of new stock, what is the end of year value for total shareholders' equity?
A) $3,680
B) $4,200
C) $5,280
D) $6,080
E) $7,120
Use the following to answer questions 71-74:
Taxable income
$ 0 – $ 50,000 15%
$ 50,001 – $ 75,000 25%
$ 75,001 – $100,000 34%
$ 100,001 – $335,000 39%
$ 335,001 – $10.000 million 34%
$10,000,001 – $15.000 million 35%
$15,000,001 – $18.333 million 38%
$18,333,334 and above 35%
71. If a company has taxable income = $175,000, what is the average tax rate?
A) 29.4%
B) 34.0%
C) 36.8%
D) 39.6%
E) 42.0%
72. If a firm has taxable income = $53,000, how much will it pay in taxes?
A) $6,750
B) $7,500
C) $8,250
D) $8,750
E) $9,500
73. If a firm has taxable income of $17.5 million and a total tax bill of $6.1 million, its marginal tax rate
is ________ .
A) 15%
B) 25%
C) 34%
D) 38%
E) 39%
74. If a firm has taxable income of $17.5 million and a total tax bill of $6.1 million, its average tax rate
is ________.
A) 15.0%
B) 25.9%
C) 34.9%
D) 38.2%
E) 42.2%
Use the following to answer questions 75-82:
Kuipers, Inc.
2002 Income Statement
($ in millions)
Net sales $9,625
Less: Cost of goods sold 5,225
Less: Depreciation 1,890
Earnings before interest and taxes 2,510
Less: Interest paid 850
Taxable income 1,660
Less: Taxes 581
Net income $1,079
Addition to retained earnings
Dividends paid 400