Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   A shortcut to calculate free cash flow (FCF)  is defined as follows:FCF = Net income + Depreciation and Amortization.
B)   Changes in working capital have no effect on free cash flow.
C)   Free cash flow (FCF)  is defined as follows:FCF = EBIT(1 − T) + Depreciation and Amortization− Capital expenditures required to sustain operations− Required changes in net operating working capital.
D)   Free cash flow (FCF)  is defined as follows:FCF = EBIT(1 − T) + Depreciation and Amortization + Capital expenditures.
E)   Net cash provided (used)  by operations is the same as free cash flow (FCF) .F) A) and B)
G) A) and D)

Question 2

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

A)   The company purchases a new piece of equipment.
B)   The company repurchases common stock.
C)   The company pays a dividend.
D)   The company issues new common stock.
E)   The company gives customers more time to pay their bills.F) A) and D)
G) A) and E)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
B)   The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
C)   The balance sheet gives us a picture of the firm's financial position at a point in time.
D)   The income statement gives us a picture of the firm's financial position at a point in time.
E)   The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.F) B) and D)
G) A) and B)

Question 4

Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.

Accepted Answer

A)   Companies' reported net incomes would decline.
B)   Companies' net operating profits after taxes (NOPAT)  would decline.
C)   Companies' physical stocks of fixed assets would increase.
D)   Companies' free cash flows would increase.
E)   Companies' cash positions would decline.F) B) and D)
G) B) and E)

Question 5

Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 25%.How much was its net operating profit after taxes (NOPAT) ?

Accepted Answer

A)   $2,748.96
B)   $2,893.64
C)   $3,045.94
D)   $3,206.25
E)   $3,375.00F) A) and B)
G) C) and D)

Question 6

Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation.The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 25%.In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital.By how much did the firm's net income exceed its free cash flow?

Accepted Answer

A)   $658.83
B)   $693.50
C)   $730.00
D)   $766.50
E)   $804.83F) A) and B)
G) A) and C)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.
B)   MVA gives us an idea about how much value a firm's management has added during the last year.
C)   MVA stands for market value added, and it is defined as follows:MVA = (Shares outstanding) (Stock price)  + Book value of common equity.
D)   EVA stands for economic value added, and it is defined as follows:EVA = EBIT(1 − T)  − (Investor-supplied op.capital)  × (A − T cost of capital) .
E)   EVA gives us an idea about how much value a firm's management has added over the firm's life.F) A) and E)
G) B) and C)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

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

Question 9

On 12/31/2020, Heaton Industries Inc.reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year.On its previous balance sheet, at 12/31/2019, the company had reported $555,000 of retained earnings.No shares were repurchased during 20205.How much in dividends did Heaton pay during 2020?

Accepted Answer

A)   $47,381
B)   $49,875
C)   $52,500
D)   $55,125
E)   $57,881F) B) and C)
G) A) and E)

Question 10

Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

Accepted Answer

A)   $77,000
B)   $80,850
C)   $84,893
D)   $89,137
E)   $93,594F) A) and B)
G) B) and E)

Question 11

Below is the common equity section (in millions)  of Fethe Industries' last two year-end balance sheets:  20202019 Common stock $2,000$1,000 Retained earnings 2,0002,340 Total common equity $4,000$3,340\begin{array} { l r r } & 2020 & 2019 \	ext { Common stock } & \$ 2,000 & \$ 1,000 \	ext { Retained earnings } & 2,000 & 2,340 \	ext { Total common equity } & \$ 4,000 & \$ 3,340\end{array} Common stock  Retained earnings  Total common equity ​2020$2,0002,000$4,000​2019$1,0002,340$3,340​  The company has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

Accepted Answer

A)   The company's net income in 2019 was higher than in 2020.
B)   The company issued common stock in 2020.
C)   The market price of the company's stock doubled in 2020.
D)   The company had positive net income in both 2019 and 2020, but the company's net income in 2019 was lower than it was in 2020.
E)   The company has more equity than debt on its balance sheet. F) A) and B)
G) B) and C)

Question 12

Total net operating capital is equal to net fixed assets.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following items is NOT included in current assets?

Accepted Answer

A)   Short-term, highly liquid, marketable securities.
B)   Accounts receivable.
C)   Inventory.
D)   Bonds.
E)   Cash.F) A) and B)
G) A) and C)

Question 14

HHH Inc.reported $12,500 of sales and $7,025 of operating costs (including depreciation) .The company had $18,750 of investor-supplied operating assets (or capital) , the weighted average cost of that capital (the WACC)  was 9.5%, and the federal-plus-state income tax rate was 25%.What was HHH's Economic Value Added (EVA) , i.e., how much value did management add to stockholders' wealth during the year?

Accepted Answer

A)   $2,098.31
B)   $2,208.75
C)   $2,325.00
D)   $2,441.25
E)   $2,563.31F) B) and E)
G) C) and D)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
B)   Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
C)   In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.
D)   In the statement of cash flows, depreciation charges are reported as a use of cash.
E)   In the statement of cash flows, a decrease in inventories is reported as a use of cash.F) A) and B)
G) A) and C)

Exam 2: Financial Statements, Cash Flow, and Taxes

Which of the following statements is CORRECT?

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Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

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Total net operating capital is equal to net fixed assets.

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following items is NOT included in current assets?

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Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

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Exam 2: Financial Statements, Cash Flow, and Taxes

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

Correct AnswerverifiedShow Answer

Total net operating capital is equal to net fixed assets.

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Which of the following items is NOT included in current assets?

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Ullrich Printing Inc.paid out $21,750 of common dividends during the year.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

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