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Shop What's New Sign inEssentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate) 9th Edition Test Bank
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Chapter 02 Test Bank – Static
Student: ___________________________________________________________________________
1. Net working capital is defined as:
A. the depreciated book value of a firm’s fixed assets.
B. the value of a firm’s current assets.
C. available cash minus current liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
2. The accounting statement that measures the revenues, expenses, and net income of a firm over a
period of time is called the:
A. statement of cash flows.
B. income statement.
C. GAAP statement.
D. balance sheet.
E. net working capital schedule.
3. The financial statement that summarizes a firm’s accounting value as of a particular date is called the:
A. income statement.
B. cash flow statement.
C. liquidity position.
D. balance sheet.
E. periodic operating statement.
4. Which one of the following decreases net income but does not affect the operating cash flow of a firm
that owes no taxes for the current year?
A. Indirect cost
B. Direct cost
C. Noncash item
D. Period cost
E. Variable cost
5. Which one of the following terms is defined as the total tax paid divided by the total taxable income?
A. Average tax rate
B. Variable tax rate
C. Marginal tax rate
D. Absolute tax rate
E. Contingent tax rate
6. The tax rate that determines the amount of tax that will be due on the next dollar of taxable income
earned is called the:
A. average tax rate.
B. variable tax rate.
C. marginal tax rate.
D. fixed tax rate.
E. ordinary tax rate.
7. Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C. operating cash flow minus the change in net working capital minus net capital spending.
D. operating cash flow plus net capital spending plus the change in net working capital.
E. cash flow to shareholders minus net capital spending plus the change in net working capital.
8. Operating cash flow is defined as:
A. a firm’s net profit over a specified period of time.
B. the cash that a firm generates from its normal business activities.
C. a firm’s operating margin.
D. the change in the net working capital over a stated period of time.
E. the cash that is generated and added to retained earnings.
9. Which one of the following has nearly the same meaning as free cash flow?
A. Net income
B. Cash flow from assets
C. Operating cash flow
D. Cash flow to shareholders
E. Addition to retained earnings
10. Cash flow to creditors is defined as:
A. interest paid minus net new borrowing.
B. interest paid plus net new borrowing.
C. operating cash flow minus net capital spending minus the change in net working capital.
D. dividends paid plus net new borrowing.
E. cash flow from assets plus net new equity.
11. Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to creditors.
B. operating cash flow minus cash flow to creditors.
C. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
E. net income minus the addition to retained earnings.
12. Which one of the following is an intangible fixed asset?
A. Inventory
B. Machinery
C. Copyright
D. Account receivable
E. Building
13. Production equipment is classified as:
A. a net working capital item.
B. a current liability.
C. a current asset.
D. a tangible fixed asset.
E. an intangible fixed asset.
14. Net working capital includes:
A. a land purchase.
B. an invoice from a supplier.
C. non-cash expenses.
D. fixed asset depreciation.
E. the balance due on a 15-year mortgage.
15. Over the past year, a firm decreased its current assets and increased its current liabilities. As a result,
the firm’s net working capital:
A. had to increase.
B. had to decrease.
C. remained constant.
D. could have either increased, decreased, or remained constant.
E. was unaffected as the changes occurred in the firm’s current accounts.
16. Net working capital increases when:
A. fixed assets are purchased for cash.
B. inventory is purchased on credit.
C. inventory is sold at cost.
D. a credit customer pays for his or her purchase.
E. inventory is sold at a profit.
17. Shareholders’ equity is equal to:
A. total assets plus total liabilities.
B. net fixed assets minus total liabilities.
C. net fixed assets minus long-term debt plus net working capital.
D. net working capital plus total assets.
E. total assets minus net working capital.
18. Paid-in surplus is classified as:
A. owners’ equity.
B. net working capital.
C. a current asset.
D. a cash expense.
E. long-term debt.
19. Shareholders’ equity is best defined as:
A. the residual value of a firm.
B. positive net working capital.
C. the net liquidity of a firm.
D. cash inflows minus cash outflows.
E. the cumulative profits of a firm over time.
20. All else held constant, the book value of owners’ equity will decrease when:
A. the market value of inventory increases.
B. dividends exceed net income for a period.
C. cash is used to pay an accounts payable.
D. a long-term debt is repaid.
E. taxable income increases.
21. Net working capital decreases when:
A. a new 3-year loan is obtained with the proceeds used to purchase inventory.
B. a credit customer pays his or her bill in full.
C. depreciation increases.
D. a long-term debt is used to finance a fixed asset purchase.
E. a dividend is paid to current shareholders.
22. A firm’s liquidity level decreases when:
A. inventory is purchased with cash.
B. inventory is sold on credit.
C. inventory is sold for cash.
D. an account receivable is collected.
E. proceeds from a long-term loan are received.
23. Highly liquid assets:
A. increase the probability a firm will face financial distress.
B. appear on the right side of a balance sheet.
C. generally produce a high rate of return.
D. can be sold quickly at close to full value.
E. include all intangible assets.
24. Financial leverage:
A. increases as the net working capital increases.
B. is equal to the market value of a firm divided by the firm’s book value.
C. is inversely related to the level of debt.
D. is the ratio of a firm’s revenues to its fixed expenses.
E. increases the potential return to the stockholders.
25. The market value:
A. of accounts receivable is generally higher than the book value of those receivables.
B. of an asset tends to provide a better guide to the actual worth of that asset than does the book
value.
C. of fixed assets will always exceed the book value of those assets.
D. of an asset is reflected in the balance sheet.
E. of an asset is lowered each year by the amount of depreciation expensed for that asset.
26. Which one of the following is included in the market value of a firm but not in the book value?
A. Raw materials
B. Partially built inventory
C. Long-term debt
D. Reputation of the firm
E. Value of a partially depreciated machine
27. The market value of a firm’s fixed assets:
A. will always exceed the book value of those assets.
B. is more predictable than the book value of those assets.
C. in addition to the firm’s net working capital reflects the true value of a firm.
D. is decreased annually by the depreciation expense.
E. is equal to the estimated current cash value of those assets.
28. Market values:
A. reflect expected selling prices given the current economic situation.
B. are affected by the accounting methods selected.
C. are equal to the initial cost minus the depreciation to date.
D. either remain constant or increase over time.
E. are equal to the greater of the initial cost or the current expected sales value.
29. Which one of the following statements concerning the balance sheet is correct?
A. Total assets equal total liabilities minus total equity.
B. Net working capital is equal total assets minus total liabilities.
C. Assets are listed in descending order of liquidity.
D. Current assets are equal to total assets minus net working capital.
E. Shareholders’ equity is equal to net working capital minus net fixed assets plus long-term debt.
30. An income statement prepared according to GAAP:
A. reflects the net cash flows of a firm over a stated period of time.
B. reflects the financial position of a firm as of a particular date.
C. distinguishes variable costs from fixed costs.
D. records revenue when payment for a sale is received.
E. records expenses based on the matching principle.
31. Net income increases when:
A. fixed costs increase.
B. depreciation increases.
C. the average tax rate increases.
D. revenue increases.
E. dividends cease.
32. Based on the recognition principle, revenue is recorded on the financial statements when the:
I. payment is collected for the sale of a good or service.
II. earnings process is virtually complete.
III. value of a sale can be reliably determined.
IV. product is physically delivered to the buyer.
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. I and III only
33. Given a profitable firm, depreciation:
A. increases net income.
B. increases net fixed assets.
C. decreases net working capital.
D. lowers taxes.
E. has no effect on net income.
34. The recognition principle states that:
A. costs should be recorded on the income statement whenever those costs can be reliably
determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as
revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the
sale can be determined.
35. The matching principle states that:
A. costs should be recorded on the income statement whenever those costs can be reliably
determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as
revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the
sale can be determined.
36. Which one of these is correct?
A. Depreciation has no effect on taxes.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Net income is distributed either to dividends or retained earnings.
E. Taxable income equals net income × (1 + Average tax rate).
37. Firms that compile financial statements according to GAAP:
A. record income and expenses at the time they affect the firm’s cash flows.
B. have no discretion over the timing of recording either revenue or expense items.
C. must record all expenses when incurred.
D. can still manipulate their earnings to some degree.
E. record both income and expenses as soon as the amount for each can be ascertained.
38. The concept of marginal taxation is best exemplified by which one of the following?
A. Kirby’s paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B. Johnson’s Retreat paid only $45,000 on total revenue of $570,000 last year.
C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in
taxes.
D. Burlington Centre paid no taxes last year due to carryforward losses.
E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.
39. The corporate tax structure in the U.S. is based on a:
A. maximum tax rate of 38 percent.
B. minimum tax rate of 10 percent.
C. flat rate of 34 percent for the highest income earners.
D. flat-rate tax.
E. modified flat-rate tax.
40. Which one of the following will increase the cash flow from assets for a tax-paying firm, all else
constant?
A. An increase in net capital spending
B. A decrease in the cash flow to creditors
C. An increase in depreciation
D. An increase in the change in net working capital
E. A decrease in dividends paid
41. A negative cash flow to stockholders indicates a firm:
A. had a net loss for the year.
B. had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. repurchased more shares than it sold.
E. received more from selling stock than it paid out to shareholders.
42. If a firm has a negative cash flow from assets every year for several years, the firm:
A. may be continually increasing in size.
B. must also have a negative cash flow from operations each year.
C. is operating at a high level of efficiency.
D. is repaying debt every year.
E. has annual net losses.
43. An increase in which one of the following will increase operating cash flow for a profitable, tax-paying
firm?
A. Fixed expenses
B. Marginal tax rate
C. Net capital spending
D. Inventory
E. Depreciation
44. Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The
cash flow statement for last year must have which one of the following assuming that no new shares were
issued?
A. Positive operating cash flow
B. Negative cash flow from assets
C. Positive net income
D. Negative operating cash flow
E. Positive cash flow to stockholders
45. Net capital spending is equal to:
A. ending net fixed assets minus beginning net fixed assets plus depreciation.
B. beginning net fixed assets minus ending net fixed assets plus depreciation.
C. ending net fixed assets minus beginning net fixed assets minus depreciation.
D. ending total assets minus beginning total assets plus depreciation.
E. ending total assets minus beginning total assets minus depreciation.
46. What is the maximum average tax rate for corporations?
A. 38 percent
B. 25 percent
C. 33 percent
D. 39 percent
E. 35 percent
47. Which one of the following changes during a year will increase cash flow from assets but not affect the
operating cash flow?
A. Increase in depreciation
B. Increase in accounts receivable
C. Increase in accounts payable
D. Decrease in cost of goods sold
E. Increase in sales
48. Cash flow to creditors increases when:
A. interest rates on debt decline.
B. accounts payables decrease.
C. long-term debt is repaid.
D. current liabilities are repaid.
E. new long-term loans are acquired.
49. Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its
entire operations for the period?
A. Positive operating cash flow
B. Negative cash flow to creditors
C. Positive cash flow to stockholders
D. Negative net capital spending
E. Positive cash flow from assets
50. Wes Motors has total assets of $98,300, net working capital of $11,300, owners’ equity of $41,600, and
long-term debt of $38,600. What is the value of the current assets?
A. $21,600
B. $18,100
C. $28,900
D. $29,400
E. $6,800
51. ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, and
long-term debt of $22,100. What is the amount of the net fixed assets?
A. $50,800
B. $56,900
C. $45,500
D. $48,100
E. $53,300
52. Rooster’s currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and
$41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The
inventory has a book value of $53,300 and an estimated market value of $56,500. If the store compiled a
balance sheet as of today, what would be the book value of the current assets?
A. $46,800
B. $55,600
C. $64,700
D. $84,900
E. $96,500
53. Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and
owners’ equity of $21,100. What is the value of the net working capital?
A. $9,800
B. $10,400
C. $18,900
D. $21,300
E. $23,200
54. W. S. Movers had $138,600 in net fixed assets at the beginning of the year. During the year, the
company purchased $27,400 in new equipment. It also sold, at a price of $5,300, some old equipment that
had a book value of $2,100. The depreciation expense for the year was $6,700. What is the net fixed asset
balance at the end of the year?
A. $146,900
B. $159,300
C. $163,900
D. $157,200
E. $148,400
55. Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900.
During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in
depreciation expense. How much did the company spend to buy new fixed assets?
A. -$23,900
B. $9,200
C. $36,800
D. $40,700
E. $37,400
56. The Green Carpet has current liabilities of $72,100 and accounts receivable of $107,800. The firm has
total assets of $443,500 and net fixed assets of $323,700. The owners’ equity has a book value of
$191,400. What is the amount of the net working capital?
A. $50,100
B. $47,700
C. $6,500
D. -$18,800
E. -$29,700
57. Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets
of $380,200. What is the value of the current liabilities?
A. $61,700
B. $88,40000
C. $102,900
D. $96,700
E. $111,500
58. Blythe Industries reports the following account balances: inventory of $417,600, equipment of
$2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is
the amount of the current assets?
A. $46,700
B. $56,000
C. $783,400
D. $975,000
E. $699,700
59. Donner United has total owners’ equity of $18,800. The firm has current assets of $23,100, current
liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?
A. $5,400
B. $12,500
C. $13,700
D. $29,800
E. $43,000
60. Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan
payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100
of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?
A. $45,100
B. $53,300
C. $58,200
D. $63,300
E. $85,900
61. The Toy Store has beginning retained earnings of $318,423. For the year, the company earned net
income of $11,318 and paid dividends of $7,500. The company also issued $25,000 worth of new stock.
What is the value of the retained earnings account at the end of the year?
A. $320,445
B. $322,695
C. $327,375
D. $322,241
E. $335,255
62. Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had
common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the
year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the
net new equity raised during the year?
A. $34,000
B. $42,500
C. $25,000
D. $21,500
E. $0
63. The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company
reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of
$478. The tax rate is 34 percent. What is the retained earnings balance at the end of the year?
A. $21,947.30
B. $22,193.95
C. $22,233.24
D. $23,783.24
E. $21,883.25
64. Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year, the company
earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased
$3,500 of stock from one of its shareholders. What is the value of the owners’ equity at year end?
A. $61,100
B. $67,600
C. $64,900
D. $64,400
E. $68,100
65. Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of
$34,700, and long-term debt of $23,000. What is the value of the owners’ equity?
A. $36,900
B. $66,700
C. $71,600
D. $89,400
E. $106,300
66. Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be
collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were
purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be
sold today for $138,000. What is the total book value of the firm’s assets?
A. $327,800
B. $293,200
C. $346,800
D. $412,100
E. $415,600
67. Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $189,000. The building is
currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at
$32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently
owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the
firm’s assets?
A. $251,000
B. $241,000
C. $232,600
D. $214,400
E. $379,000
68. Lew’s Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900,
inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that
if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for
$349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market
value of the firm’s assets?
A. $332,800
B. $458,200
C. $374,200
D. $495,500
E. $487,100
69. Marcie’s has sales of $179,600,depreciation of $14,900, costs of goods sold of $138,200, and other
costs of $28,400. The tax rate is 35 percent. What is the net income?
A. -$1,235
B. $382
C. $1,204
D. $14,660
E. $13,665
70. AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is
$43,800,interest paid is $11,200, and dividends for the year are $4,500. The tax rate is 33 percent. What is
the addition to retained earnings?
A. $38,804
B. $34,304
C. $28,120
D. $29,804
E. $30,450
71. Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650. The company
had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 34 percent, what
was the amount of the depreciation expense?
A. $2,407
B. $1,908
C. $2,503
D. $3,102
E. $3,414
72. Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest
paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?
A. $7,778
B. $9,324
C. $10,380
D. $8,671
E. $5,886
73. For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to
retained earnings of $24,200. What is the amount of the dividends paid?
A. $100
B. $7,500
C. $7,600
D. $15,100
E. $16,700
74. MNM & Co incurred depreciation expenses of $36,810 last year. The sales were $903,480 and the
addition to retained earnings was $11,530. The firm paid interest of $7,711 and dividends of $7,500. The
tax rate was 33 percent. What was the amount of the costs incurred by the company?
A. $822,845
B. $689,407
C. $742,306
D. $830,556
E. $780,400
75. For the year, Uptowne Furniture had sales of $818,790, costs of $748,330, and interest paid of
$24,450. The depreciation expense was $56,100 and the tax rate was 34 percent. At the beginning of the
year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year,
retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What is
the amount of the dividends paid for the year?
A. $5,266
B. $6,466
C. $7,566
D. $7,066
E. $6,898
76. Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in
income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?
A. 28.00 percent
B. 30.33 percent
C. 33.33 percent
D. 35.00 percent
E. 27.56 percent
77. Rusty Antiques has a marginal tax rate of 39percent and an average tax rate of 26.9 percent. If the firm
owes $37,265 in taxes, how much taxable income did it earn?
A. $137,098
B. $136,800
C. $138,532
D. $139,957
E. $137,750
78. Red’s Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined
that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this
level of income?
A. 39 percent
B. 38 percent
C. 35 percent
D. 34 percent
E. 33 percent
79. Use the following tax table to answer this question:
BT Trucking has taxable income of $617,429. How much does it owe in taxes?
A. $96,025.86
B. $240,797.31
C. $118,542.79
D. $209,925.86
E. $201,354.82
80. Use the following tax table to answer this question:
Comfy Inn earned $218,310 in taxable income for the year. How much tax does the company owe?
A. $86,311.20
B. $85,140.90
C. $68,390.90
D. $69,998.20
E. $65,240.10
81. The Plaza Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes
paid of $21,590. A partial listing of its balance sheet accounts is as follows:
What is the amount of the cash flow from assets?
A. $26,359
B. $47,949
C. $61,487
D. $43,909
E. $35,953
82. National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net
working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed
assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new
equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?
A. $21,811
B. $41,194
C. $36,189
D. $26,410
E. $67,015
83. The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is
$28,400 and the interest paid is $8,400. What is the amount of the firm’s operating cash flow if the tax rate
is 34 percent?
A. $87,620
B. $89,540
C. $91,220
D. $93,560
E. $95,240
84. Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled
$361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was35 percent.
What was the amount of the operating cash flow?
A. $64,232
B. $65,306
C. $57,556
D. $70,056
E. $70,568
85. The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets
of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What
is the amount of the net capital spending?
A. -$22,360
B. -$4,780
C. $23,720
D. $58,340
E. $69,800
86. The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interest
expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets
increased by $28,600. What is the amount of the net capital spending for the year?
A. $13,000
B. $21,600
C. $28,600
D. $60,400
E. $70,200
87. Andre’s Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year,
the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the
past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working
capital?
A. -$2,800
B. -$1,400
C. $1,400
D. $2,100
E. $2,800
88. The balance sheet of Binger, Inc. has the following balances:
What is the amount of the change in net working capital?
A. -$1,800
B. -$7,400
C. $1,800
D. -$8,100
E. $8,100
89. During the past year, Yard Services paid $36,800 in interest along with $2,000 in dividends. The
company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its
old debt by $18,400. What is the amount of the cash flow to creditors?
A. $8,200
B. $55,200
C. $2,400
D. $39,200
E. $15,800
90. A firm has earnings before interest and taxes of $27,130,net income of $16,220, and taxes of $5,450
for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is
the amount of the cash flow to creditors?
A. -$14,040
B. $0
C. -$4,660
D. $14,040
E. $4,660
91. A balance sheet shows beginning values of $56,300 for current liabilities and$289,200 for long-term
debt. The ending values are $61,900 and $318,400, respectively. The income statement shows interest
paid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?
A. $29,200
B. $40,450
C. $34,800
D. $70,150
E. $58,900
92. For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the
firm’s stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?
A. -$14,300
B. -$9,700
C. $12,300
D. $14,300
E. $18,900
93. Six months ago, Benders Gym repurchased $140,000 of its common stock. The company pays regular
dividends totaling $18,500 per quarter. What is the amount of the cash flow to stockholders for the past
year if 1,200 new shares were issued and sold for $38 a share?
A. -$10,000
B. -$20,400
C. $28,500
D. $74,000
E. $168,400
94. The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400
for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of
$47,900. What is the amount of the cash flow to stockholders for the last year?
A. -$171,500
B. -$86,700
C. $21,200
D. $95,700
E. $39,700
95. Donegal’s has compiled the following information:
What is the operating cash flow for the year?
A. $90,900
B. $96,700
C. $114,700
D. $93,500
E. $102,600
96. Home Supply, Inc. has compiled the following information:
For 2016, the cash flow from assets is _____ and the cash flow to stockholders is ______.
A. $5,600; $300
B. $5,600; $15,100
C. $5,600; $14,500
D. $6,300; $300
E. $6,300; $14,500
97. The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400,
interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?
A. $61,930
B. $66,211
C. $67,516
D. $76,428
E. $83,219
98. Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600,
interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is
the addition to retained earnings?
A. $36,909
B. $34,645
C. $44,141
D. $37,208
E. $40,615
99. Roscoe’s fixed assets were purchased three years ago for $1.8 million. These assets can be sold to
Stewart’s today for $1.2 million. Roscoe’s current balance sheet shows net fixed assets of $960,000,
current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated
today, the company would receive $518,000 cash. The book value of the firm’s assets today is _____ and
the market value is ____.
A. $1,081,000; $1,308,000
B. $1,081,000; $1,718,000
C. $1,307,000; $1,429,000
D. $1,429,000; $1,308,000
E. $1,429,000; $1,718,000
100. Daniel’s Market has sales of $43,800, costs of $40,400, depreciation expense of $2,500, and interest
expense of $1,100. If the tax rate is 34 percent, what is the operating cash flow, OCF? Assume tax losses
can be carried forward and utilized.
A. $3,332
B. $3,279
C. $3,511
D. $3,468
E. $3,013
101. On December 31, 2015, The Play House had net fixed assets of $812,650 while the December 31,
2016 balance sheet showed net fixed assets of $784,900. Depreciation for 2016 was $84,900. What was
the firm’s net capital spending for 2016?
A. $51,600
B. $42,410
C. $57,150
D. $54,400
E. $46,620
102. Suzette’s Market had long-term debt of $638,100 at the beginning of the year compared to $574,600
at year-end. If the interest expense was $42,300, what was the firm’s cash flow to creditors?
A. $21,200
B. $26,700
C. $54,900
D. $102,400
E. $105,800
103. Assume a company has sales of $423,800, production costs of $297,400, other expenses of $18,500,
depreciation expense of $36,300, interest expense of $2,100, taxes of $23,600, and dividends of $12,000.
In addition, you’re told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in
outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition
to net working capital?
A. $11,500
B. $24,500
C. $15,800
D. $37,500
E. $30,400
104. Able Co. has $267,000 in taxable income and Bravo Co. has $1,600,000 in taxable income. Suppose
both firms have identified a new project that will increase taxable income by $10,000. The additional project
will increase Able Co.’s taxes by _____ and Bravo Co.’s taxes by ____.
A. $1,500; $1,500
B. $1,500; $3,400
C. $3,400; $3,900
D. $3,900; $3,400
E. $3,400; $3,400
105. Dixie’s sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses,
and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the
company had an interest expense of $74,000 and a tax rate of 34 percent. What is the operating cash flow
for the year?
A. $227,560
B. $271,420
C. $223,330
D. $285,400
E. $217,700
106. For Year 2016, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation
expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year,
net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end
of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400.
The tax rate was 34 percent. What is the cash flow from assets for 2016?
A. $9,914
B. $11,114
C. $9,360
D. $10,514
E. $11,970
Chapter 02 Test Bank – Static Key
1. Net working capital is defined as:
A. the depreciated book value of a firm’s fixed assets.
B. the value of a firm’s current assets.
C. available cash minus current liabilities.
D. total assets minus total liabilities.
E. current assets minus current liabilities.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
2. The accounting statement that measures the revenues, expenses, and net income of a firm over a
period of time is called the:
A. statement of cash flows.
B. income statement.
C. GAAP statement.
D. balance sheet.
E. net working capital schedule.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
3. The financial statement that summarizes a firm’s accounting value as of a particular date is called the:
A. income statement.
B. cash flow statement.
C. liquidity position.
D. balance sheet.
E. periodic operating statement.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
4. Which one of the following decreases net income but does not affect the operating cash flow of a firm
that owes no taxes for the current year?
A. Indirect cost
B. Direct cost
C. Noncash item
D. Period cost
E. Variable cost
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Noncash items
5. Which one of the following terms is defined as the total tax paid divided by the total taxable income?
A. Average tax rate
B. Variable tax rate
C. Marginal tax rate
D. Absolute tax rate
E. Contingent tax rate
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
6. The tax rate that determines the amount of tax that will be due on the next dollar of taxable income
earned is called the:
A. average tax rate.
B. variable tax rate.
C. marginal tax rate.
D. fixed tax rate.
E. ordinary tax rate.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
7. Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.
C. operating cash flow minus the change in net working capital minus net capital spending.
D. operating cash flow plus net capital spending plus the change in net working capital.
E. cash flow to shareholders minus net capital spending plus the change in net working capital.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
8. Operating cash flow is defined as:
A. a firm’s net profit over a specified period of time.
B. the cash that a firm generates from its normal business activities.
C. a firm’s operating margin.
D. the change in the net working capital over a stated period of time.
E. the cash that is generated and added to retained earnings.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
9. Which one of the following has nearly the same meaning as free cash flow?
A. Net income
B. Cash flow from assets
C. Operating cash flow
D. Cash flow to shareholders
E. Addition to retained earnings
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Free cash flow
10. Cash flow to creditors is defined as:
A. interest paid minus net new borrowing.
B. interest paid plus net new borrowing.
C. operating cash flow minus net capital spending minus the change in net working capital.
D. dividends paid plus net new borrowing.
E. cash flow from assets plus net new equity.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
11. Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to creditors.
B. operating cash flow minus cash flow to creditors.
C. dividends paid plus the change in retained earnings.
D. dividends paid minus net new equity raised.
E. net income minus the addition to retained earnings.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to stockholders
12. Which one of the following is an intangible fixed asset?
A. Inventory
B. Machinery
C. Copyright
D. Account receivable
E. Building
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
13. Production equipment is classified as:
A. a net working capital item.
B. a current liability.
C. a current asset.
D. a tangible fixed asset.
E. an intangible fixed asset.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
14. Net working capital includes:
A. a land purchase.
B. an invoice from a supplier.
C. non-cash expenses.
D. fixed asset depreciation.
E. the balance due on a 15-year mortgage.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
15. Over the past year, a firm decreased its current assets and increased its current liabilities. As a result,
the firm’s net working capital:
A. had to increase.
B. had to decrease.
C. remained constant.
D. could have either increased, decreased, or remained constant.
E. was unaffected as the changes occurred in the firm’s current accounts.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
16. Net working capital increases when:
A. fixed assets are purchased for cash.
B. inventory is purchased on credit.
C. inventory is sold at cost.
D. a credit customer pays for his or her purchase.
E. inventory is sold at a profit.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
17. Shareholders’ equity is equal to:
A. total assets plus total liabilities.
B. net fixed assets minus total liabilities.
C. net fixed assets minus long-term debt plus net working capital.
D. net working capital plus total assets.
E. total assets minus net working capital.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
18. Paid-in surplus is classified as:
A. owners’ equity.
B. net working capital.
C. a current asset.
D. a cash expense.
E. long-term debt.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
19. Shareholders’ equity is best defined as:
A. the residual value of a firm.
B. positive net working capital.
C. the net liquidity of a firm.
D. cash inflows minus cash outflows.
E. the cumulative profits of a firm over time.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
20. All else held constant, the book value of owners’ equity will decrease when:
A. the market value of inventory increases.
B. dividends exceed net income for a period.
C. cash is used to pay an accounts payable.
D. a long-term debt is repaid.
E. taxable income increases.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
21. Net working capital decreases when:
A. a new 3-year loan is obtained with the proceeds used to purchase inventory.
B. a credit customer pays his or her bill in full.
C. depreciation increases.
D. a long-term debt is used to finance a fixed asset purchase.
E. a dividend is paid to current shareholders.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
22. A firm’s liquidity level decreases when:
A. inventory is purchased with cash.
B. inventory is sold on credit.
C. inventory is sold for cash.
D. an account receivable is collected.
E. proceeds from a long-term loan are received.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Liquidity
23. Highly liquid assets:
A. increase the probability a firm will face financial distress.
B. appear on the right side of a balance sheet.
C. generally produce a high rate of return.
D. can be sold quickly at close to full value.
E. include all intangible assets.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Liquidity
24. Financial leverage:
A. increases as the net working capital increases.
B. is equal to the market value of a firm divided by the firm’s book value.
C. is inversely related to the level of debt.
D. is the ratio of a firm’s revenues to its fixed expenses.
E. increases the potential return to the stockholders.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Capital structure
25. The market value:
A. of accounts receivable is generally higher than the book value of those receivables.
B. of an asset tends to provide a better guide to the actual worth of that asset than does the book
value.
C. of fixed assets will always exceed the book value of those assets.
D. of an asset is reflected in the balance sheet.
E. of an asset is lowered each year by the amount of depreciation expensed for that asset.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
26. Which one of the following is included in the market value of a firm but not in the book value?
A. Raw materials
B. Partially built inventory
C. Long-term debt
D. Reputation of the firm
E. Value of a partially depreciated machine
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
27. The market value of a firm’s fixed assets:
A. will always exceed the book value of those assets.
B. is more predictable than the book value of those assets.
C. in addition to the firm’s net working capital reflects the true value of a firm.
D. is decreased annually by the depreciation expense.
E. is equal to the estimated current cash value of those assets.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
28. Market values:
A. reflect expected selling prices given the current economic situation.
B. are affected by the accounting methods selected.
C. are equal to the initial cost minus the depreciation to date.
D. either remain constant or increase over time.
E. are equal to the greater of the initial cost or the current expected sales value.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
29. Which one of the following statements concerning the balance sheet is correct?
A. Total assets equal total liabilities minus total equity.
B. Net working capital is equal total assets minus total liabilities.
C. Assets are listed in descending order of liquidity.
D. Current assets are equal to total assets minus net working capital.
E. Shareholders’ equity is equal to net working capital minus net fixed assets plus long-term debt.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
30. An income statement prepared according to GAAP:
A. reflects the net cash flows of a firm over a stated period of time.
B. reflects the financial position of a firm as of a particular date.
C. distinguishes variable costs from fixed costs.
D. records revenue when payment for a sale is received.
E. records expenses based on the matching principle.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
31. Net income increases when:
A. fixed costs increase.
B. depreciation increases.
C. the average tax rate increases.
D. revenue increases.
E. dividends cease.
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Blooms: Remember
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
32. Based on the recognition principle, revenue is recorded on the financial statements when the:
I. payment is collected for the sale of a good or service.
II. earnings process is virtually complete.
III. value of a sale can be reliably determined.
IV. product is physically delivered to the buyer.
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. I and III only
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
33. Given a profitable firm, depreciation:
A. increases net income.
B. increases net fixed assets.
C. decreases net working capital.
D. lowers taxes.
E. has no effect on net income.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
34. The recognition principle states that:
A. costs should be recorded on the income statement whenever those costs can be reliably
determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as
revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the
sale can be determined.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
35. The matching principle states that:
A. costs should be recorded on the income statement whenever those costs can be reliably
determined.
B. costs should be recorded when paid.
C. the costs of producing an item should be recorded when the sale of that item is recorded as
revenue.
D. sales should be recorded when the payment for that sale is received.
E. sales should be recorded when the earnings process is virtually completed and the value of the
sale can be determined.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
36. Which one of these is correct?
A. Depreciation has no effect on taxes.
B. Interest paid is a noncash item.
C. Taxable income must be a positive value.
D. Net income is distributed either to dividends or retained earnings.
E. Taxable income equals net income × (1 + Average tax rate).
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
37. Firms that compile financial statements according to GAAP:
A. record income and expenses at the time they affect the firm’s cash flows.
B. have no discretion over the timing of recording either revenue or expense items.
C. must record all expenses when incurred.
D. can still manipulate their earnings to some degree.
E. record both income and expenses as soon as the amount for each can be ascertained.
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Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Generally Accepted Accounting Principles (GAAP)
38. The concept of marginal taxation is best exemplified by which one of the following?
A. Kirby’s paid $120,000 in taxes while its primary competitor paid only $80,000 in taxes.
B. Johnson’s Retreat paid only $45,000 on total revenue of $570,000 last year.
C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in
taxes.
D. Burlington Centre paid no taxes last year due to carryforward losses.
E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
39. The corporate tax structure in the U.S. is based on a:
A. maximum tax rate of 38 percent.
B. minimum tax rate of 10 percent.
C. flat rate of 34 percent for the highest income earners.
D. flat-rate tax.
E. modified flat-rate tax.
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Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
40. Which one of the following will increase the cash flow from assets for a tax-paying firm, all else
constant?
A. An increase in net capital spending
B. A decrease in the cash flow to creditors
C. An increase in depreciation
D. An increase in the change in net working capital
E. A decrease in dividends paid
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
41. A negative cash flow to stockholders indicates a firm:
A. had a net loss for the year.
B. had a positive cash flow to creditors.
C. paid dividends that exceeded the amount of the net new equity.
D. repurchased more shares than it sold.
E. received more from selling stock than it paid out to shareholders.
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Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to stockholders
42. If a firm has a negative cash flow from assets every year for several years, the firm:
A. may be continually increasing in size.
B. must also have a negative cash flow from operations each year.
C. is operating at a high level of efficiency.
D. is repaying debt every year.
E. has annual net losses.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
43. An increase in which one of the following will increase operating cash flow for a profitable, tax-paying
firm?
A. Fixed expenses
B. Marginal tax rate
C. Net capital spending
D. Inventory
E. Depreciation
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
44. Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The
cash flow statement for last year must have which one of the following assuming that no new shares were
issued?
A. Positive operating cash flow
B. Negative cash flow from assets
C. Positive net income
D. Negative operating cash flow
E. Positive cash flow to stockholders
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to stockholders
45. Net capital spending is equal to:
A. ending net fixed assets minus beginning net fixed assets plus depreciation.
B. beginning net fixed assets minus ending net fixed assets plus depreciation.
C. ending net fixed assets minus beginning net fixed assets minus depreciation.
D. ending total assets minus beginning total assets plus depreciation.
E. ending total assets minus beginning total assets minus depreciation.
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Capital spending
46. What is the maximum average tax rate for corporations?
A. 38 percent
B. 25 percent
C. 33 percent
D. 39 percent
E. 35 percent
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
47. Which one of the following changes during a year will increase cash flow from assets but not affect the
operating cash flow?
A. Increase in depreciation
B. Increase in accounts receivable
C. Increase in accounts payable
D. Decrease in cost of goods sold
E. Increase in sales
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
48. Cash flow to creditors increases when:
A. interest rates on debt decline.
B. accounts payables decrease.
C. long-term debt is repaid.
D. current liabilities are repaid.
E. new long-term loans are acquired.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
49. Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its
entire operations for the period?
A. Positive operating cash flow
B. Negative cash flow to creditors
C. Positive cash flow to stockholders
D. Negative net capital spending
E. Positive cash flow from assets
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
50. Wes Motors has total assets of $98,300, net working capital of $11,300, owners’ equity of $41,600, and
long-term debt of $38,600. What is the value of the current assets?
A. $21,600
B. $18,100
C. $28,900
D. $29,400
E. $6,800
Current liabilities = $98,300-38,600 -41,600 = $18,100 Current assets = $11,300 + 18,100 = $29,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
51. ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, and
long-term debt of $22,100. What is the amount of the net fixed assets?
A. $50,800
B. $56,900
C. $45,500
D. $48,100
E. $53,300
Net fixed assets = $22,100 + 46,600- 15,400 = $53,300
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
52. Rooster’s currently has $5,200 in cash. The company owes $31,700 to suppliers for merchandise and
$41,500 to the bank for a long-term loan. Customers owe the company $26,400 for their purchases. The
inventory has a book value of $53,300 and an estimated market value of $56,500. If the store compiled a
balance sheet as of today, what would be the book value of the current assets?
A. $46,800
B. $55,600
C. $64,700
D. $84,900
E. $96,500
Current assets = $5,200 + 26,400 + 53,300 = $84,900
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
53. Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and
owners’ equity of $21,100. What is the value of the net working capital?
A. $9,800
B. $10,400
C. $18,900
D. $21,300
E. $23,200
Net working capital = $21,100 + 8,600 -19,300 = $10,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
54. W. S. Movers had $138,600 in net fixed assets at the beginning of the year. During the year, the
company purchased $27,400 in new equipment. It also sold, at a price of $5,300, some old equipment that
had a book value of $2,100. The depreciation expense for the year was $6,700. What is the net fixed asset
balance at the end of the year?
A. $146,900
B. $159,300
C. $163,900
D. $157,200
E. $148,400
Ending net fixed assets = $138,600 + 27,400 -2,100 -6,700 = $157,200
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
55. Plenti-Good Foods has ending net fixed assets of $98,700 and beginning net fixed assets of $84,900.
During the year, the firm sold assets with a total book value of $13,200 and also recorded $9,800 in
depreciation expense. How much did the company spend to buy new fixed assets?
A. -$23,900
B. $9,200
C. $36,800
D. $40,700
E. $37,400
New fixed asset purchases = $98,700 + 9,800 + 13,200-84,900 = $36,800
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
56. The Green Carpet has current liabilities of $72,100 and accounts receivable of $107,800. The firm has
total assets of $443,500 and net fixed assets of $323,700. The owners’ equity has a book value of
$191,400. What is the amount of the net working capital?
A. $50,100
B. $47,700
C. $6,500
D. -$18,800
E. -$29,700
Net working capital = $443,500-323,700 -72,100 = $47,700
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Net working capital
57. Dockside Warehouse has net working capital of $42,400, total assets of $519,300, and net fixed assets
of $380,200. What is the value of the current liabilities?
A. $61,700
B. $88,40000
C. $102,900
D. $96,700
E. $111,500
Current liabilities = $519,300 -380,200 -42,400 = $96,700
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
58. Blythe Industries reports the following account balances: inventory of $417,600, equipment of
$2,028,300, accounts payable of $224,700, cash of $51,900, and accounts receivable of $313,900. What is
the amount of the current assets?
A. $46,700
B. $56,000
C. $783,400
D. $975,000
E. $699,700
Current assets = $51,900 + 313,900 + 417,600 = $783,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
59. Donner United has total owners’ equity of $18,800. The firm has current assets of $23,100, current
liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?
A. $5,400
B. $12,500
C. $13,700
D. $29,800
E. $43,000
Long-term debt = $36,400 -18,800 -12,200 = $5,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
60. Cornerstone Markets has beginning long-term debt of $64,500, which is the principal balance of a loan
payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100
of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?
A. $45,100
B. $53,300
C. $58,200
D. $63,300
E. $85,900
Ending long-term debt = $64,500 -16,300 + 4,100 + 11,000 = $63,300
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
61. The Toy Store has beginning retained earnings of $318,423. For the year, the company earned net
income of $11,318 and paid dividends of $7,500. The company also issued $25,000 worth of new stock.
What is the value of the retained earnings account at the end of the year?
A. $320,445
B. $322,695
C. $327,375
D. $322,241
E. $335,255
Retained earnings = $318,423 + 11,318-7,500 = $322,241
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
62. Leslie Printing has net income of $26,310 for the year. At the beginning of the year, the firm had
common stock of $55,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the
year, the firm had total equity of $142,430. The firm paid dividends of $32,500. What is the amount of the
net new equity raised during the year?
A. $34,000
B. $42,500
C. $25,000
D. $21,500
E. $0
Net new equity = $142,430- 55,000 – 11,200 – ($48,420+26,310- 32,500) = $34,000
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
63. The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company
reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of
$478. The tax rate is 34 percent. What is the retained earnings balance at the end of the year?
A. $21,947.30
B. $22,193.95
C. $22,233.24
D. $23,783.24
E. $21,883.25
Net income = ($83,490 -68,407 -8,200 -478) ×(1 -.34) = $4,227.30 Ending retained earnings =
$18,670 + 4,227.30-950 = $21,947.30
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
64. Bleu Berri Farms had equity of $58,900 at the beginning of the year. During the year, the company
earned net income of $8,200 and paid $2,500 in dividends. Also during the year, the company repurchased
$3,500 of stock from one of its shareholders. What is the value of the owners’ equity at year end?
A. $61,100
B. $67,600
C. $64,900
D. $64,400
E. $68,100
Ending owners’ equity = $58,900 + 8,200 -2,500 -3,500 = $61,100
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
65. Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of
$34,700, and long-term debt of $23,000. What is the value of the owners’ equity?
A. $36,900
B. $66,700
C. $71,600
D. $89,400
E. $106,300
Owners’ equity = $29,800 + 64,800 -23,000 = $71,600
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Balance sheet
66. Pier Imports has cash of $41,100 and accounts receivable of $54,200, all of which is expected to be
collected. The inventory cost $82,300 and can be sold today for $116,500. The fixed assets were
purchased at a total cost of $234,500 of which $118,900 has been depreciated. The fixed assets can be
sold today for $138,000. What is the total book value of the firm’s assets?
A. $327,800
B. $293,200
C. $346,800
D. $412,100
E. $415,600
Total book value = $41,100 + 54,200 + 82,300 + 234,500 -118,900 = $293,200
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
67. Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $189,000. The building is
currently valued at $209,000. The firm has other fixed assets that cost $56,000 and are currently valued at
$32,000. To date, the firm has recorded a total of $49,000 in depreciation on the various assets it currently
owns. Current liabilities are $36,600 and net working capital is $18,400. What is the total book value of the
firm’s assets?
A. $251,000
B. $241,000
C. $232,600
D. $214,400
E. $379,000
Book value = $189,000 + 56,000 -49,000 + 18,400 + 36,600 = $251,000
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
68. Lew’s Auto Repair has cash of $18,600, accounts receivable of $34,500, accounts payable of $28,900,
inventory of $97,800, long-term debt of $142,000, and net fixed assets of $363,800. The firm estimates that
if it wanted to cease operations today it could sell the inventory for $85,000 and the fixed assets for
$349,000. The firm could collect 100 percent of its receivables as they are secured. What is the market
value of the firm’s assets?
A. $332,800
B. $458,200
C. $374,200
D. $495,500
E. $487,100
Market value = $18,600 + 34,500 + 85,000 + 349,000 = $487,100
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
69. Marcie’s has sales of $179,600,depreciation of $14,900, costs of goods sold of $138,200, and other
costs of $28,400. The tax rate is 35 percent. What is the net income?
A. -$1,235
B. $382
C. $1,204
D. $14,660
E. $13,665
Net income = ($179,600 -138,200 -28,400 -14,900)(1 -.35) = -$1,235
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
70. AV Sales has net revenue of $513,000 and costs of $406,800. The depreciation expense is
$43,800,interest paid is $11,200, and dividends for the year are$4,500. The tax rate is 33 percent. What is
the addition to retained earnings?
A. $38,804
B. $34,304
C. $28,120
D. $29,804
E. $30,450
Addition to retained earnings = [($513,000 -406,800-43,800 -11,200)(1 -.33)] – $4,500 = Addition to
retained earnings = $29,804
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
71. Last year, The Pizza Joint added $6,230 to retained earnings from sales of $104,650. The company
had costs of $87,300, dividends of $2,500, and interest paid of $1,620. Given a tax rate of 34 percent, what
was the amount of the depreciation expense?
A. $2,407
B. $1,908
C. $2,503
D. $3,102
E. $3,414
Earnings before interest and taxes = [($6,230 + 2,500)/(1 -.34)] + $1,620 = $14,847 Depreciation =
$104,650-87,300-14,847 = $2,503
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
72. Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest
paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?
A. $7,778
B. $9,324
C. $10,380
D. $8,671
E. $5,886
Net income = ($509,600 -448,150 -36,100 -12,400)(1 -.28) = $9,324
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
73. For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to
retained earnings of $24,200. What is the amount of the dividends paid?
A. $100
B. $7,500
C. $7,600
D. $15,100
E. $16,700
Dividends paid = $31,800 -24,200 = $7,600
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
74. MNM & Co incurred depreciation expenses of $36,810 last year. The sales were $903,480 and the
addition to retained earnings was $11,530. The firm paid interest of $7,711 and dividends of $7,500. The
tax rate was 33 percent. What was the amount of the costs incurred by the company?
A. $822,845
B. $689,407
C. $742,306
D. $830,556
E. $780,400
Earnings before interest and taxes = [($7,500 + 11,530)/(1 -.33)] + $7,711 = $36,114 Costs = $903,48036,810-36,114 = $830,556
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
75. For the year, Uptowne Furniture had sales of $818,790, costs of $748,330, and interest paid of
$24,450. The depreciation expense was $56,100 and the tax rate was 34 percent. At the beginning of the
year, the firm had retained earnings of $172,270 and common stock of $260,000. At the end of the year,
retained earnings was $158,713 and common stock was $280,000. Any tax losses can be used. What is
the amount of the dividends paid for the year?
A. $5,266
B. $6,466
C. $7,566
D. $7,066
E. $6,898
Net income = [($818,790 -748,330-56,100 -24,450)(1 -.34)] =-$6,659 Dividends paid = -$6,659 ($158,713-172,270) = $6,898
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
76. Neiger Flours owes $16,929 in taxes on taxable income of $61,509. If the firm earns $100 more in
income, it will owe an additional $48 in taxes. What is the average tax rate on income of $61,609?
A. 28.00 percent
B. 30.33 percent
C. 33.33 percent
D. 35.00 percent
E. 27.56 percent
Average tax rate = ($16,929 + 48)/$61,609 = .2756, or 27.56 percent
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
77. Rusty Antiques has a marginal tax rate of 39percent and an average tax rate of 26.9 percent. If the firm
owes $37,265 in taxes, how much taxable income did it earn?
A. $137,098
B. $136,800
C. $138,532
D. $139,957
E. $137,750
Tax = $37,265 / .269 = $138,532
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
78. Red’s Tractors owes $52,311 in taxes on a taxable income of $608,606. The company has determined
that it will owe $56,211 in tax if its taxable income rises to $620,424. What is the marginal tax rate at this
level of income?
A. 39 percent
B. 38 percent
C. 35 percent
D. 34 percent
E. 33 percent
Marginal tax rate = ($56,211 -52,311)/($620,424-608,606) = .33, or 33 percent
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
79. Use the following tax table to answer this question:
BT Trucking has taxable income of $617,429. How much does it owe in taxes?
A. $96,025.86
B. $240,797.31
C. $118,542.79
D. $209,925.86
E. $201,354.82
Total tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($235,000) + .34($617,429-335,000) =
$209,925.86 Because the marginal and average tax rates are the same at this level of income, the tax can
also be computed as: Total tax = .34($617,429) = $209,925.86
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
80. Use the following tax table to answer this question:
Comfy Inn earned $218,310 in taxable income for the year. How much tax does the company owe?
A. $86,311.20
B. $85,140.90
C. $68,390.90
D. $69,998.20
E. $65,240.10
Total tax = .15($50,000) + .25($25,000) + .34($25,000) + .39($218,310-100,000) Total tax = $68,390.90
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
81. The Plaza Cafe has an operating cash flow of $83,770, depreciation expense of $43,514, and taxes
paid of $21,590. A partial listing of its balance sheet accounts is as follows:
What is the amount of the cash flow from assets?
A. $26,359
B. $47,949
C. $61,487
D. $43,909
E. $35,953
Cash flow from assets = $83,770- ($597,913-599,608 + 43,514) – [($129,204-139,827) – ($138,590143,215)] = $47,949
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
82. National Importers paid $38,600 in dividends and $24,615 in interest over the past year while net
working capital increased from $15,506 to $17,411. The company purchased $38,700 in net new fixed
assets and had depreciation expenses of $14,784. During the year, the firm issued $20,000 in net new
equity and paid off $23,800 in long-term debt. What is the amount of the cash flow from assets?
A. $21,811
B. $41,194
C. $36,189
D. $26,410
E. $67,015
Cash flow from assets = ($24,615 + 23,800) + ($38,600-20,000) = $67,015
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
83. The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is
$28,400 and the interest paid is $8,400. What is the amount of the firm’s operating cash flow if the tax rate
is 34 percent?
A. $87,620
B. $89,540
C. $91,220
D. $93,560
E. $95,240
EBIT = $821,300 -698,500 -28,400 = $94,400 Tax = ($94,400 -8,400) ×.34 = $29,240 OCF =
$94,400 + 28,400 -29,240 = $93,560
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
84. Outdoor Sports paid $12,500 in dividends and $9,310 in interest over the past year. Sales totaled
$361,820 with costs of $267,940. The depreciation expense was $16,500 and the tax rate was35 percent.
What was the amount of the operating cash flow?
A. $64,232
B. $65,306
C. $57,556
D. $70,056
E. $70,568
EBIT = $361,820-267,940-16,500 = $77,380 Tax = ($77,380-9,310) ×.35 = $23,824.50 OCF =
$77,380 + 16,500 -23,824.50 = $70,056
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
85. The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets
of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What
is the amount of the net capital spending?
A. -$22,360
B. -$4,780
C. $23,720
D. $58,340
E. $69,800
Net capital spending = $371,920 -348,200 + 46,080 = $69,800
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Capital spending
86. The financial statements of Blue Fin Marina reflect depreciation expenses of $41,600 and interest
expenses of $27,900 for the year. The current assets increased by $31,800 and the net fixed assets
increased by $28,600. What is the amount of the net capital spending for the year?
A. $13,000
B. $21,600
C. $28,600
D. $60,400
E. $70,200
Net capital spending = $28,600 + 41,600 = $70,200
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Capital spending
87. Andre’s Dog House had current assets of $67,200 and current liabilities of $71,100 last year. This year,
the current assets are $82,600 and the current liabilities are $85,100. The depreciation expense for the
past year is $9,600 and the interest paid is $8,700. What is the amount of the change in net working
capital?
A. -$2,800
B. -$1,400
C. $1,400
D. $2,100
E. $2,800
Change in net working capital = ($82,600 -85,100) – ($67,200 -71,100) = $1,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Change in net working capital
88. The balance sheet of Binger, Inc. has the following balances:
What is the amount of the change in net working capital?
A. -$1,800
B. -$7,400
C. $1,800
D. -$8,100
E. $8,100
Change in net working capital = ($32,800 + 51,600 + 129,200-53,600) – ($30,300 + 48,200 + 126,500 43,200) = -$1,800
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Change in net working capital
89. During the past year, Yard Services paid $36,800 in interest along with $2,000 in dividends. The
company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its
old debt by $18,400. What is the amount of the cash flow to creditors?
A. $8,200
B. $55,200
C. $2,400
D. $39,200
E. $15,800
Cash flow to creditors = $36,800 -16,000 + 18,400 = $39,200
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
90. A firm has earnings before interest and taxes of $27,130,net income of $16,220, and taxes of $5,450
for the year. While the firm paid out $31,600 to pay off existing debt it then later borrowed $42,000. What is
the amount of the cash flow to creditors?
A. -$14,040
B. $0
C. -$4,660
D. $14,040
E. $4,660
Interest = $27,130 -16,220 -5,450 = $5,460 Cash flow to creditors = $5,740 + 31,600-42,000 = -$4,660
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
91. A balance sheet shows beginning values of $56,300 for current liabilities and$289,200 for long-term
debt. The ending values are $61,900 and $318,400, respectively. The income statement shows interest
paid of $29,700 and dividends of $19,000. What is the amount of the net new borrowing?
A. $29,200
B. $40,450
C. $34,800
D. $70,150
E. $58,900
Net new borrowing = $318,400-289,200 = $29,200
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
92. For the past year, LP Gas, Inc., had cash flow from assets of $38,100 of which $21,500 flowed to the
firm’s stockholders. The interest paid was $2,300. What is the amount of the net new borrowing?
A. -$14,300
B. -$9,700
C. $12,300
D. $14,300
E. $18,900
Cash flow to creditors = $38,100 -21,500 = $16,600 Net new borrowing = $2,300 – 16,600 = -$14,300
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
93. Six months ago, Benders Gym repurchased $140,000 of its common stock. The company pays regular
dividends totaling $18,500 per quarter. What is the amount of the cash flow to stockholders for the past
year if 1,200 new shares were issued and sold for $38 a share?
A. -$10,000
B. -$20,400
C. $28,500
D. $74,000
E. $168,400
Cash flow to stockholders = ($18,500 ×4) -[(1,200 × $38) – $140,000] = $168,400
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to stockholders
94. The Underground Cafe has an operating cash flow of $187,000 and a cash flow to creditors of $71,400
for the past year. The firm reduced its net working capital by $28,000 and incurred net capital spending of
$47,900. What is the amount of the cash flow to stockholders for the last year?
A. -$171,500
B. -$86,700
C. $21,200
D. $95,700
E. $39,700
Cash flow to stockholders = [$187,000 – 47,900 -(-$28,000)]- $71,400 = $95,700
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to stockholders
95. Donegal’s has compiled the following information:
What is the operating cash flow for the year?
A. $90,900
B. $96,700
C. $114,700
D. $93,500
E. $102,600
Operating cash flow = $406,300-218,900-38,600-34,100 = $114,700
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
96. Home Supply, Inc. has compiled the following information:
For 2016, the cash flow from assets is _____ and the cash flow to stockholders is ______.
A. $5,600; $300
B. $5,600; $15,100
C. $5,600; $14,500
D. $6,300; $300
E. $6,300; $14,500
2016 operating cash flow = $718,900-562,300-42,100-20,200 = $94,300 Change in net working capital =
($9,500 + 59,000 + 128,300 -58,700) – ($18,200 + 54,200 +121,600 -42,600) = -$13,300 Net capital
spending = $539,700-481,400 + 43,700 = $102,000 Cash flow from assets = $94,300-102,000 -(-$13,300)
= $5,600 Cash flow to creditors = $11,400- ($293,500-287,400) = $5,300 Addition to retained earnings =
$89,800-65,400 = $24,400 Net income = $718,900-562,300-42,100 -43,700 -11,400 -20,200 = $39,200
Dividends paid = $39,200 – 24,400= $14,800 Cash flow to stockholders = $14,800-($294,500 -280,000) =
$300 Cash flow from assets = $5,300 + 300 = $5,600
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 3 Challenge
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flows
97. The Carpentry Shop has sales of $398,600, costs of $254,800, depreciation expense of $26,400,
interest expense of $1,600, and a tax rate of 34 percent. What is the net income for this firm?
A. $61,930
B. $66,211
C. $67,516
D. $76,428
E. $83,219
Net income = ($398,600 -254,800 -26,400 -1,600) (1 -.34) = $76,428
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
98. Andersen’s Nursery has sales of $318,400, costs of $199,400, depreciation expense of $28,600,
interest expense of $1,100, and a tax rate of 35 percent. The firm paid out $23,400 in dividends. What is
the addition to retained earnings?
A. $36,909
B. $34,645
C. $44,141
D. $37,208
E. $40,615
Addition to retained earnings = [($318,400 -199,400 -28,600 -1,100)(1 -.35)] – $23,400 Addition to retained
earnings = $34,645
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-02 Distinguish accounting income from cash flow.
Section: 2.2 The Income Statement
Topic: Income statement
99. Roscoe’s fixed assets were purchased three years ago for $1.8 million. These assets can be sold to
Stewart’s today for $1.2 million. Roscoe’s current balance sheet shows net fixed assets of $960,000,
current liabilities of $348,000, and net working capital of $121,000. If all the current assets were liquidated
today, the company would receive $518,000 cash. The book value of the firm’s assets today is _____ and
the market value is ____.
A. $1,081,000; $1,308,000
B. $1,081,000; $1,718,000
C. $1,307,000; $1,429,000
D. $1,429,000; $1,308,000
E. $1,429,000; $1,718,000
Book value = $121,000 + 348,000 + 960,000 = $1,429,000 Market value = $518,000 + 1,200,000 =
$1,718,000
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
Section: 2.1 The Balance Sheet
Topic: Market and book values
100. Daniel’s Market has sales of $43,800, costs of $40,400, depreciation expense of $2,500, and interest
expense of $1,100. If the tax rate is 34 percent, what is the operating cash flow, OCF? Assume tax losses
can be carried forward and utilized.
A. $3,332
B. $3,279
C. $3,511
D. $3,468
E. $3,013
EBIT = $43,800-40,400 -2,500 = $900 Tax = ($900-1,100) ×.34 = -$68 OCF = $900 + 2,500 -(-$68)
= $3,468
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
101. On December 31, 2015, The Play House had net fixed assets of $812,650 while the December 31,
2016 balance sheet showed net fixed assets of $784,900. Depreciation for 2016 was $84,900. What was
the firm’s net capital spending for 2016?
A. $51,600
B. $42,410
C. $57,150
D. $54,400
E. $46,620
Net capital spending = $784,900-812,650 + 84,900 = $57,150
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Capital spending
102. Suzette’s Market had long-term debt of $638,100 at the beginning of the year compared to $574,600
at year-end. If the interest expense was $42,300, what was the firm’s cash flow to creditors?
A. $21,200
B. $26,700
C. $54,900
D. $102,400
E. $105,800
Cash flow to creditors = $42,300 – ($574,600 -638,100) = $105,800
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Basic
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow to creditors
103. Assume a company has sales of $423,800, production costs of $297,400, other expenses of $18,500,
depreciation expense of $36,300, interest expense of $2,100, taxes of $23,600, and dividends of $12,000.
In addition, you’re told that during the year the firm issued $4,500 in new equity and redeemed $6,500 in
outstanding long-term debt. If net fixed assets increased by $7,400 during the year, what was the addition
to net working capital?
A. $11,500
B. $24,500
C. $15,800
D. $37,500
E. $30,400
OCF = $423,800 -297,400 -18,500 -23,600 = $84,300 NCS = $7,400 + 36,300 = $43,700 CFA = CFC +
CFS = [$2,100 – (-6,500)] + [$12,000 -4,500] = $16,100 Add to NWC = OCF – NCS – CFA = $84,300 43,700 -16,100 = $24,500
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Change in net working capital
104. Able Co. has $267,000 in taxable income and Bravo Co. has $1,600,000 in taxable income. Suppose
both firms have identified a new project that will increase taxable income by $10,000. The additional project
will increase Able Co.’s taxes by _____ and Bravo Co.’s taxes by ____.
A. $1,500; $1,500
B. $1,500; $3,400
C. $3,400; $3,900
D. $3,900; $3,400
E. $3,400; $3,400
Able Co. tax = $10,000 ×.39 = $3,900 Bravo Co. tax = $10,000 ×.34 = $3,400
AACSB: Analytical Thinking
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
Section: 2.3 Taxes
Topic: Taxes
105. Dixie’s sales for the year were $1,678,000. Cost of goods sold, administrative and selling expenses,
and depreciation expenses were $1,141,000, $304,000, and $143,000, respectively. In addition, the
company had an interest expense of $74,000 and a tax rate of 34 percent. What is the operating cash flow
for the year?
A. $227,560
B. $271,420
C. $223,330
D. $285,400
E. $217,700
EBIT = [($1,678,000 -1,141,000 -304,000 -143,000 = $90,000 Tax = ($90,000 -74,000) ×.34 =
$5,440 OCF = $90,000 + 143,000 -5,440 = $227,560
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Operating cash flow
106. For Year 2016, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation
expense of $1,900, interest expense of $1,300, and dividends paid of $1,000. At the beginning of the year,
net fixed assets were $14,300, current assets were $8,700, and current liabilities were $6,600. At the end
of the year, net fixed assets were $13,900, current assets were $9,200, and current liabilities were $7,400.
The tax rate was 34 percent. What is the cash flow from assets for 2016?
A. $9,914
B. $11,114
C. $9,360
D. $10,514
E. $11,970
EBIT = [($42,900 -26,800-1,900) = $14,200 Taxes = ($14,200 – 1,300)(.34)= $4,386 OCF = $14,200 +
1,900 – 4,386 = $11,714 CFA = $11,714- ($13,900 -14,300 + 1,900) – [($9,200 -7,400) -($8,700 -6,600)] =
$10,514
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 2 Intermediate
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
Section: 2.4 Cash Flow
Topic: Cash flow from assets
Chapter 02 Test Bank – Static Summary
Category
# of Questions
AACSB: Analytical Thinking
57
Accessibility: Keyboard Navigation
99
Blooms: Analyze
57
Blooms: Remember
20
Blooms: Understand
29
Difficulty: 1 Basic
66
Difficulty: 2 Intermediate
39
Difficulty: 3 Challenge
1
Learning Objective: 02-01 Differentiate between accounting value (or book value) and market value.
39
Learning Objective: 02-02 Distinguish accounting income from cash flow.
20
Learning Objective: 02-03 Explain the difference between average and marginal tax rates.
11
Learning Objective: 02-04 Determine a firms cash flow from its financial statements.
36
Section: 2.1 The Balance Sheet
39
Section: 2.2 The Income Statement
20
Section: 2.3 Taxes
11
Section: 2.4 Cash Flow
36
Topic: Balance sheet
21
Topic: Capital spending
4
Topic: Capital structure
1
Topic: Cash flow from assets
8
Topic: Cash flow to creditors
7
Topic: Cash flow to stockholders
5
Topic: Cash flows
1
Topic: Change in net working capital
3
Topic: Free cash flow
1
Topic: Generally Accepted Accounting Principles (GAAP)
4
Topic: Income statement
15
Topic: Liquidity
2
Topic: Market and book values
8
Topic: Net working capital
7
Topic: Noncash items
1
Topic: Operating cash flow
7
Topic: Taxes
11
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