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Exam 2: Financial Statements, cash Flow, and Taxes

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Question 21

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A security analyst obtained the following information from Prestopino Products' financial statements: •Retained earnings at the end of 2011 were $700,000,but retained earnings at the end of 2012 had declined to $320,000. •The company does not pay dividends. •The company's depreciation expense is its only non-cash expense; it has no amortization charges. •The company has no non-cash revenues. •The company's net cash flow (NCF) for 2012 was $150,000. On the basis of this information,which of the following statements is CORRECT?

A) Prestopino had negative net income in 2012.
B) Prestopino's depreciation expense in 2012 was less than $150,000.
C) Prestopino had positive net income in 2012, but its income was less than its 2011 income.
D) Prestopino's NCF in 2012 must be higher than its NCF in 2011.
E) Prestopino's cash on the balance sheet at the end of 2012 must be lower than the cash it had on the balance sheet at the end of 2011.

F) C) and D)
G) A) and B)

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Question 22

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Which of the following statements is CORRECT?

A) All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.
B) The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.
C) All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
D) Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.
E) Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

F) A) and E)
G) D) and E)

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Question 23

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In accounting,emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance,the primary emphasis is also on net income because that is what investors use to value the firm.However,a secondary financial consideration is cash flow,because cash is needed to operate the business.

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 40%.What was HHH's Economic Value Added (EVA) ,i.e.,how much value did management add to stockholders' wealth during the year?

Lucy's Music Emporium opened its doors on January 1,2012,and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.The company planned to depreciate its fixed assets over 20 years,but in December 2012 management realized that the assets would last for only 15 years.The firm's accountants plan to report the 2012 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

On 12/31/2013,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 12/31/2012,the company had reported $555,000 of retained earnings.No shares were repurchased during 2013.How much in dividends did Heaton pay during 2013?

Meric Mining Inc.recently reported $15,000 of sales,$7,500 of operating costs other than depreciation,and $1,200 of depreciation.The company had no amortization charges,it had outstanding $6,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.

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?

The income statement shows the difference between a firm's income and its costs-i.e.,its profits-during a specified period of time.However,not all reported income comes in the form or cash,and reported costs likewise may not correctly reflect cash outlays.Therefore,there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

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.

Over the years,Janjigian Corporation's stockholders have provided $15,250 of capital,part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.The firm now has 1,000 shares of common stock outstanding,and it sells at a price of $42.00 per share.How much value has Janjigian's management added to stockholder wealth over the years,i.e.,what is Janjigian's MVA?

Which of the following statements is CORRECT?

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?

Hunter Manufacturing Inc.'s December 31,2012,balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding.During 2013,Hunter had $250,000 of net income,and it paid out $100,000 as dividends.What was the book value per share at 12/31/13,assuming that Hunter neither issued nor retired any common stock during 2013?

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?

Which of the following statements is CORRECT?

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

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects changes in the firm's accounts over that period of time.

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.

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year,even though the cash on its balance sheet increased?