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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 1

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During 2012, Bascom Bakery Inc. paid out $21,750 of common dividends. 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?

A) $77,000
B) $80,850
C) $84,893
D) $89,137

E) None of the above
F) B) and D)

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Question 2

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The standard financial statements prepared by accountants have to be modified for managerial purposes. Related to these modifications, which of the following statements is correct?

A) The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B) The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.
C) The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide.
D) The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.

E) B) and C)
F) A) and C)

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Question 3

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Which statement about depreciation is true?

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 of 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.

If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they currently do, other things held constant.

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?

What is the tax liability for a small Canadian-controlled private corporation (CCPC) located in British Columbia having earnings before taxes (EBT) of $480,000? The relevant combined federal and provincial corporate income tax rate is 13.5% for taxable income up to $400,000 and 26.5 for the amount exceeding $400,000.

Formed in 2008, ABC Ltd. had taxable income of $95,000 in 2008; $70,000 in 2009; $55,000 in 2010; $80,000 in 2011, and -$150,000 in 2012. What is the adjusted corporate tax payment in 20012? Assume that ABC is a CCPC in Manitoba with a combined federal and provincial corporate income tax rate of 13%.

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Since investors use net income to value the firm, cash flow becomes a secondary consideration simply because cash is for operation only.

Which statement regarding the statement of cash flows is correct?

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

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

The interest and dividends paid by a corporation are considered to be deductible operating expenses; hence, they decrease the firm's tax liability.

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 combined federal and provincial income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and shareholder reporting purposes.

Which statement about the balance sheet is true?

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.

Retained earnings are the existing shareholders' reinvested profit and do not represent cash.

To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?