Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.
B)   If a firm reports positive net income, its EVA must also bePositive.
C)   One drawback of EVA as a performance measure is that it mistakenlyAssumes that equity capital is free.
D)   One way to increase EVA is to generate the same level of operatingIncome but with less investor-supplied capital.
E)   Actions that increase reported net income will always increase net cash flow.F) B) and D)
G) B) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   Dividends paid reduce the net income that is reported on a company's income statement.
B)   If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline inIts current assets as shown on the balance sheet.
C)   If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end ofThe year.
D)   Accounts receivable are reported as a current liability on theBalance sheet.
E)   If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.F) B) and E)
G) A) and B)

Question 3

On the balance sheet, total assets must always equal total liabilities and equity.

Accepted Answer

A) True 
 B)False

Question 4

A security analyst obtained the following information from Prestopino Products' financial statements:  ∙\bullet∙ Retained earnings at the end of 2009 were $700,000, but retained earnings at the end of 2010 had declined to $320,000.
 ∙\bullet∙ The company does not pay dividends.
 ∙\bullet∙ The company's depreciation expense is its only non-cash expense; it has no amortization charges.
 ∙\bullet∙ The company has no non-cash revenues.
 ∙\bullet∙ The company's net cash flow (NCF)  for 2010 was $150,000.
On the basis of this information, which of the following statements is CORRECT?

Accepted Answer

A)   Prestopino had negative net income in 2010.
B)   Prestopino's depreciation expense in 2010 was less than $150,000.
C)   Prestopino had positive net income in 2010, but its income was lessThan its 2009 income.
D)   Prestopino's NCF in 2010 must be higher than its NCF in 2009.
E)   Prestopino's cash on the balance sheet at the end of 2010 must be lower than the cash it had on the balance sheet at the end of 2009. F) A) and C)
G) A) and B)

Question 5

JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets.

Accepted Answer

A)   $4,831.31
B)   $5,085.59
C)   $5,353.25
D)   $5,635.00
E)   $5,916.75F) B) and D)
G) B) and C)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixedAssets.
B)   The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage housesWhere cash is on deposit.
C)   The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes inWorking capital.
D)   The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by sellingNew common stock.
E)   The statement of cash flows shows how much the firm's cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents) --increased or decreased during a given year.F) None of the above
G) A) and B)

Question 7

On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Accepted Answer

A)   If the company lost money in 2010, they must have paid dividends.
B)   The company must have had zero net income in 2010.
C)   The company must have paid out half of its earnings as dividends.
D)   The company must have paid no dividends in 2010.
E)   Dividends could have been paid in 2010, but they would have had toEqual the earnings for the year.F) None of the above
G) All of the above

Question 8

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

Question 9

Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Accepted Answer

A) True 
 B)False

Question 10

Last year, Tucker Technologies had (1)  a negative net cash flow from operations, (2)  a negative free cash flow, and (3)  an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Accepted Answer

A)   The company had a sharp increase in its inventories.
B)   The company had a sharp increase in its accrued liabilities.
C)   The company sold a new issue of common stock.
D)   The company made a large capital investment early in the year.
E)   The company had a sharp increase in its depreciation and amortization expenses.F) B) and E)
G) B) and C)

Question 11

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

A) True 
 B)False

Question 12

The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

Accepted Answer

A) True 
 B)False

Question 13

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate?

Accepted Answer

A)   $1,770.00
B)   $1,858.50
C)   $1,951.43
D)   $2,049.00
E)   $2,151.45F) C) and D)
G) B) and D)

Question 14

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI)  to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BBI's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Accepted Answer

A)   The provision will reduce the company's net cash flow.
B)   The provision will increase the company's tax payments.
C)   Net fixed assets on the balance sheet will increase.
D)   The provision will increase the company's net income.
E)   Net fixed assets on the balance sheet will decrease.F) B) and D)
G) None of the above

Question 15

Barnes' Brothers has the following data for the year ending 12/31/10: Net income = $600; Net operating profit after taxes (NOPAT)  = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA) ?

Accepted Answer

A)   $399.11
B)   $420.11
C)   $442.23
D)   $465.50
E)   $490.00F) B) and C)
G) A) and C)

Question 16

Below is the common equity section (in millions)  of Teweles Technology's last two year-end balance sheets: Teweles 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 2009 was higher than in 2008.
B)   Teweles issued common stock in 2009.
C)   The market price of Teweles' stock doubled in 2009.
D)   Teweles had positive net income in both 2008 and 2009, but theCompany's net income in 2009 was lower than it was in 2008.
E)   The company has more equity than debt on its balance sheet.F) None of the above
G) B) and E)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other thingsHeld constant.
B)   A firm can show a large amount of retained earnings on its balanceSheet yet need to borrow cash to make required payments.
C)   Common equity includes common stock and retained earnings, lessAccumulated depreciation.
D)   The retained earnings account as shown on the balance sheet showsThe amount of cash that is available for paying dividends.
E)   If a firm reports a loss on its income statement, then the retainedEarnings account as shown on the balance sheet will be negative.F) C) and D)
G) A) and D)

Question 18

Total net operating capital is equal to net fixed assets.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   The balance sheet for a given year, say 2008, is designed to give us an idea of what happened to the firm during that year.
B)   The balance sheet for a given year, say 2008, tells us how much money the company earned during that year.
C)   The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP) .
D)   For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.
E)   A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.F) All of the above
G) B) and E)

Question 20

A good bit of relatively simple arithmetic is involved in some of these problems, and although the calculations are simple, it will take students some time to set up the problem and do the arithmetic. We allow for this when assigning problems for a timed test. Also, students must use a number of definitions to answer some of the questions, and to avoid excessive memorization, we provide students with a list of formulas and definitions for use on exams.
-Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ?

Accepted Answer

A)   $27.50
B)   $28.88
C)   $30.32
D)   $31.83
E)   $33.43F) D) and E)
G) A) and B)

Exam 2: Financial Statements, Cash Flow, and Taxes

Below is the common equity section (in millions) of Teweles Technology's last two year-end balance sheets: Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Correct Answer
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The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.

Correct Answer
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Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

Correct Answer
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JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets.

Correct Answer
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On the balance sheet, total assets must always equal total liabilities and equity.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Total net operating capital is equal to net fixed assets.

Correct Answer
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Last year, Tucker Technologies had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Correct Answer
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Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Exam 2: Financial Statements, Cash Flow, and Taxes

Below is the common equity section (in millions) of Teweles Technology's last two year-end balance sheets: Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.

Correct AnswerverifiedShow Answer

Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

On its 2010 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

Correct AnswerverifiedShow Answer

JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets.

Correct AnswerverifiedShow Answer

On the balance sheet, total assets must always equal total liabilities and equity.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Total net operating capital is equal to net fixed assets.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Last year, Tucker Technologies had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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