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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 21

True/False

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The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time,while the income statement measures the firm's financial position at a point in time.

A) True
B) False

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Question 22

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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.
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) A) and B)
F) A) and C)

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Question 23

Multiple Choice

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Which of the following is NOT considered a "good" use of free cash flow?

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

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?

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

Below are the 2011 and 2012 year-end balance sheets for Wolken Enterprises:​​​ $\begin{array}{lrr}\text { Assets: } & 2012 & 2011 \\\text { Cash } & \$ 200,000 & \$ 170,000 \\\text { Accounts receivable } & 864,000 & 700,000 \\\text { Inventories } & 2,000,000 & 1,400,000 \\\text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \\\text { Net fixed assets } & 6,000,000 & 5,600,000 \\\text { Total assets } & \$ 9,064,000 & \$ 7,870,000\end{array}$ $\begin{array}{rr}\text { Liabilities and equity: } \\\text { Accounts payable } &&\$ 1,400,000 & \$ 1,090,000 \\\text { Notes payable } &&1,600,000 & 1,800,000 \\\text { Total current liabilities } &\underline{\$ 3,000,000 }&& \underline{\$ 2,890,000} \\\text {Long-term debt} &&2,400,000 & 2,400,000 \\\text { Common stock } &&3,000,000 & 2,000,000 \\\text {Retained earnings } &&\underline{664,000} & 580,000 \\\text {Total common equity} &&\$ 3,664,000 & \$ 2,580,000 \\\text { Total liabilities and equity } &\underline{ \$ 9,064,000 }&& \$ 7,870,000\end{array}$ ​Wolken has never paid a dividend on its common share,and it issued $2,400,000 of 10-year non-callable,long-term debt in 2011.As of the end of 2012,none of the principal on this debt had been repaid.Assume that the company's sales in 2011 and 2012 were the same.Which of the following statements must be correct?

Zumbahlen Inc.has the following balance sheet.How much total operating capital does the firm have? $\begin{array}{|l|r|l|l|r|}\hline \text { Cash } & \$ 20.00 & &\text { Accounts payable } & \$ 30.00 \\\hline \text { Short-term investments } & 50.00 & &\text { Accruals } & 50.00 \\\hline \text { Accounts receivable } & 20.00 && \text { Notes payable } & 30.00 \\\text { Inventory } & \underline{60.00} && \text { Current Liabilities } & \underline{110.00} \\\hline \text { Current assets } & & &\text { Long-term debt } & 70.00 \\\hline\text { Gross fixed assets } & \$ 140.00 && \text { Common stock } & 30.00 \\\hline \text { Accumulated depreciation } & \underline{40.00}& & \text { Retained earnings } & \underline{40.00} \\\hline \text { Net fixed assets } & \$ 100.00 & &\text { Total common equity } & \$ 70.00 \\\hline \text { Total assets } & \$ 250.00 && \text { Total liability \& equity } & \$ 250.00\\\hline\end{array}$

Net income available to shareholders excludes which of the following?

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.

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

A firm reports Net After-Tax Income of $250,000.Its board of directors declared preferreddividends of $35,000.If the firm has 90,000 common shareholders,what would be the firm's EPS for the fiscal year?

Which statement regarding financial statements is true?

The fact that interest income received by a corporation is 50% taxable encourages firms to use more debt financing than equity financing.

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.

An individual made $48,000 last year paying $12,480 in taxes.What is the taxpayer's average tax rate?

Assume that Pappas Company commenced operations on January 1,2011,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 15 years,but in December 2008 management realized that the assets would last for only 10 years.The firm's accountants plan to report the 2011 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

In 2012,XYZ Inc.located in Ontario had income from operation of $3,850,000,received interest of $150,000,paid $200,000 in interest,received dividends from another Canadian corporation of $100,000,and paid $400,000 in dividends to its common shareholders.If the applicable income tax rate is 33%,what is the corporation's tax liability?

Which statement regarding the statement of cash flows is correct?