Chapter 02 - Financial Statements, Taxes, and Cash Flow

Chapter 02 - Financial Statements, Taxes, and Cash Flow
Chapter 02
Financial Statements, Taxes, and Cash Flow

Multiple Choice Questions

1. Which one of the following is the financial statement that shows the accounting alue of a
firm!s e"uit# as of a particular date$
%. income statement
&. creditor!s statement
C. 'alance sheet
(. statement of cash flows
). diidend statement

2. *et wor+ing capital is defined as,
%. total lia'ilities minus shareholders! e"uit#.
&. current lia'ilities minus shareholders! e"uit#.
C. fixed assets minus long-term lia'ilities.
(. total assets minus total lia'ilities.
). current assets minus current lia'ilities.

-. The common set of standards and procedures '# which audited financial statements are
prepared is +nown as the,
%. matching principle.
&. cash flow identit#.
C. .enerall# %ccepted %ccounting /rinciples.
(. Financial %ccounting 0eporting /rinciples.
). Standard %ccounting 1alue .uidelines.

2. Which one of the following is the financial statement that summari3es a firm!s reenue and
expenses oer a period of time$
%. income statement
&. 'alance sheet
C. statement of cash flows
(. tax reconciliation statement
). mar+et alue report

2-1
4. *oncash items refer to,
%. accrued expenses.
&. inentor# items purchased using credit.
C. the ownership of intangi'le assets such as patents.
(. expenses which do not directl# affect cash flows.
). sales which are made using store credit.

5. The percentage of the next dollar #ou earn that must 'e paid in taxes is referred to as the
66666 tax rate.
%. mean
&. residual
C. total
(. aerage
). marginal

7. The 66666 tax rate is e"ual to total taxes diided '# total taxa'le income.
%. deducti'le
&. residual
C. total
(. aerage
). marginal

8. The cash flow of a firm which is aaila'le for distri'ution to the firm!s creditors and
stoc+holders is called the,
%. operating cash flow.
&. net capital spending.
C. net wor+ing capital.
(. cash flow from assets.
). cash flow to stoc+holders.

2-2
9. Which term relates to the cash flow which results from a firm!s ongoing, normal 'usiness
actiities$
%. operating cash flow
&. capital spending
C. net wor+ing capital
(. cash flow from assets
). cash flow to creditors

10. Cash flow from assets is also +nown as the firm!s,
%. capital structure.
&. e"uit# structure.
C. hidden cash flow.
(. free cash flow.
). historical cash flow.

11. The cash flow related to interest pa#ments less an# net new 'orrowing is called the,
&. capital spending cash flow.
). cash flow to creditors.

12. Cash flow to stoc+holders is defined as,
%. the total amount of interest and diidends paid during the past #ear.
&. the change in total e"uit# oer the past #ear.
C. cash flow from assets plus the cash flow to creditors.
(. operating cash flow minus the cash flow to creditors.
). diidend pa#ments less net new e"uit# raised.

1-. Which one of the following is classified as an intangi'le fixed asset$
%. accounts receia'le
&. production e"uipment
C. 'uilding
(. trademar+
). inentor#

2--
12. Which of the following are current assets$
:. patent
::. :nentor#
:::. accounts pa#a'le
:1. cash
%. : and ::: onl#
&. :: and :1 onl#
C. :, ::, and :1 onl#
(. :, :: and ::: onl#
). ::, :::, and :1 onl#

14. Which one of the following is included in a firm!s mar+et alue 'ut #et is excluded from
the firm!s accounting alue$
%. real estate inestment
&. good reputation of the compan#
C. e"uipment owned '# the firm
(. mone# due from a customer
). an item held '# the firm for future sale

15. Which of the following are included in current lia'ilities$
:. note pa#a'le to a supplier in eight months
::. amount due from a customer next month
:::. account pa#a'le to a supplier that is due next wee+
:1. loan pa#a'le to the 'an+ in fourteen months
%. : and ::: onl#
&. :: and ::: onl#
C. :, ::, and ::: onl#
(. :, :::, and :1 onl#
). :, ::, :::, and :1

17. Which one of the following will increase the alue of a firm!s net wor+ing capital$
%. using cash to pa# a supplier
&. depreciating an asset
C. collecting an accounts receia'le
(. purchasing inentor# on credit
). selling inentor# at a profit

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18. Which one of the following statements concerning net wor+ing capital is correct$
%. *et wor+ing capital increases when inentor# is purchased with cash.
&. *et wor+ing capital must 'e a positie alue.
C. Total assets must increase if net wor+ing capital increases.
(. % decrease in the cash 'alance also decreases net wor+ing capital.
). *et wor+ing capital is the amount of cash a firm currentl# has aaila'le for spending.

%. The lower the alue of net wor+ing capital the greater the a'ilit# of a firm to meet its
current o'ligations.
&. %n increase in net wor+ing capital must also increase current assets.
C. *et wor+ing capital increases when inentor# is sold for cash at a profit.
(. Firms with e"ual amounts of net wor+ing capital are also e"uall# li"uid.
). *et wor+ing capital is a part of the operating cash flow.

20. Which one of the following accounts is the most li"uid$
%. inentor#
&. 'uilding
C. accounts receia'le
(. e"uipment
). land

21. Which one of the following represents the most li"uid asset$
%. ;100 account receia'le that is discounted and collected for ;95 toda#
&. ;100 of inentor# which is sold toda# on credit for ;10-
C. ;100 of inentor# which is discounted and sold for ;97 cash toda#
(. ;100 of inentor# that is sold toda# for ;100 cash
). ;100 accounts receia'le that will 'e collected in full next wee+

22. Which one of the following statements related to li"uidit# is correct$
%. <i"uid assets tend to earn a high rate of return.
&. <i"uid assets are alua'le to a firm.
C. <i"uid assets are defined as assets that can 'e sold "uic+l# regardless of the price o'tained.
(. :nentor# is more li"uid than accounts receia'le 'ecause inentor# is tangi'le.
). %n# asset that can 'e sold within the next #ear is considered li"uid.

2-4
2-. Shareholders! e"uit#,
%. increases in alue an#time total assets increases.
&. is e"ual to total assets plus total lia'ilities.
C. decreases wheneer new shares of stoc+ are issued.
(. includes long-term de't, preferred stoc+, and common stoc+.
). represents the residual alue of a firm.

22. The higher the degree of financial leerage emplo#ed '# a firm, the,
%. higher the pro'a'ilit# that the firm will encounter financial distress.
&. lower the amount of de't incurred.
C. less de't a firm has per dollar of total assets.
(. higher the num'er of outstanding shares of stoc+.
). lower the 'alance in accounts pa#a'le.

24. The 'oo+ alue of a firm is,
%. e"uialent to the firm!s mar+et alue proided that the firm has some fixed assets.
&. 'ased on historical cost.
C. generall# greater than the mar+et alue when fixed assets are included.
(. more of a financial than an accounting aluation.
). ad=usted to the mar+et alue wheneer the mar+et alue exceeds the stated 'oo+ alue.

25. Which of the following are included in the mar+et alue of a firm 'ut are excluded from
the firm!s 'oo+ alue$
:. alue of management s+ills
::. alue of a cop#right
:::. alue of the firm!s reputation
:1. alue of emplo#ee!s experience
%. : onl#
&. :: onl#
C. ::: and :1 onl#
(. :, ::, and ::: onl#
). :, :::, and :1 onl#

2-5
27. >ou recentl# purchased a grocer# store. %t the time of the purchase, the store!s mar+et
alue e"ualed its 'oo+ alue. The purchase included the 'uilding, the fixtures, and the
inentor#. Which one of the following is most apt to cause the mar+et alue of this store to 'e
lower than the 'oo+ alue$
%. a sudden and unexpected increase in inflation
&. the replacement of old inentor# items with more desira'le products
C. improements to the surrounding area '# other store owners
(. construction of a new restricted access highwa# located 'etween the store and the
surrounding residential areas
). addition of a stop light at the main entrance to the store!s par+ing lot

28. Which one of the following is true according to .enerall# %ccepted %ccounting
/rinciples$
%. (epreciation ma# or ma# not 'e recorded at management!s discretion.
&. :ncome is recorded 'ased on the matching principle.
C. Costs are recorded 'ased on the reali3ation principle.
(. (epreciation is recorded 'ased on the recognition principle.
). Costs of goods sold are recorded 'ased on the matching principle.

29. Which one of these is most apt to 'e a fixed cost$
%. raw materials
&. manufacturing wages
C. management 'onuses
(. office salaries
). shipping and freight

-0. Which one of the following costs is most apt to 'e a fixed cost$
%. production la'or cost
&. depreciation
C. raw materials
(. utilities
). sales commissions

2-7
-1. Which of the following are expenses for accounting purposes 'ut are not operating cash
flows for financial purposes$
:. interest expense
::. taxes
:::. costs of goods sold
:1. depreciation
%. :1 onl#
&. :: and :1 onl#
C. : and ::: onl#
(. : and :1 onl#
). :, ::, and :1 onl#

-2. Which one of the following statements related to an income statement is correct$ %ssume
accrual accounting is used.
%. The addition to retained earnings is e"ual to net income plus diidends paid.
&. Credit sales are recorded on the income statement when the cash from the sale is collected.
C. The la'or costs for producing a product are expensed when the product is sold.
(. :nterest is a non-cash expense.
). (epreciation increases the marginal tax rate.

--. Which one of the following statements related to taxes is correct$
%. The marginal tax rate must 'e e"ual to or lower than the aerage tax rate for a firm.
&. The tax for a firm is computed '# multipl#ing the firm!s current marginal tax rate times the
taxa'le income.
C. %dditional income is taxed at a firm!s aerage tax rate.
(. .ien the corporate tax structure in 2008, the highest marginal tax rate is e"ual to the
highest aerage tax rate.
). The marginal tax rate for a firm can 'e either higher or lower than the aerage tax rate.

-2. %s of 2008, which one of the following statements concerning corporate income taxes is
correct$
%. The largest corporations hae an aerage tax rate of -9 percent.
&. The lowest marginal rate is 24 percent.
C. % firm!s tax is computed on an incremental 'asis.
(. % firm!s marginal tax rate will generall# 'e lower than its aerage tax rate once the firm!s
income exceeds ;40,000.
). When anal#3ing a new pro=ect, the aerage tax rate should 'e used.

2-8
-4. (epreciation,
%. reduces 'oth taxes and net income.
&. increases the net fixed assets as shown on the 'alance sheet.
C. reduces 'oth the net fixed assets and the costs of a firm.
(. is a noncash expense which increases the net income.
). decreases net fixed assets, net income, and operating cash flows.

-5. Which one of the following statements related to an income statement is correct$
%. :nterest expense increases the amount of tax due.
&. (epreciation does not affect taxes since it is a non-cash expense.
C. *et income is distri'uted to diidends and paid-in surplus.
(. Taxes reduce 'oth net income and operating cash flow.
). :nterest expense is included in operating cash flow.

-7. Which one of the following statements is correct concerning a corporation with taxa'le
income of ;124,000$
%. *et income minus diidends paid will e"ual the ending retained earnings for the #ear.
&. %n increase in depreciation will increase the operating cash flow.
C. *et income diided '# the num'er of shares outstanding will e"ual the diidends per share.
(. :nterest paid will 'e included in 'oth net income and operating cash flow.
). %n increase in the tax rate will increase 'oth net income and operating cash flow.

-8. Which one of the following will increase the cash flow from assets, all else e"ual$
%. decrease in cash flow to stoc+holders
&. decrease in operating cash flow
C. increase in the change in net wor+ing capital
(. decrease in cash flow to creditors
). decrease in net capital spending

2-9
-9. For a tax-pa#ing firm, an increase in 66666 will cause the cash flow from assets to
increase.
%. depreciation
&. net capital spending
C. change in net wor+ing capital
(. taxes
). production costs

20. Which one of the following must 'e true if a firm had a negatie cash flow from assets$
%. The firm 'orrowed mone#.
&. The firm ac"uired new fixed assets.
C. The firm had a net loss for the period.
(. The firm utili3ed outside funding.
). *ewl# issued shares of stoc+ were sold.

21. %n increase in the depreciation expense will do which of the following$
:. increase net income
::. decrease net income
:::. increase the cash flow from assets
:1. decrease the cash flow from assets
%. : onl#
&. :: onl#
C. : and ::: onl#
(. :: and ::: onl#
). :: and :1 onl#

22. Which one of the following is *?T included in cash flow from assets$
%. accounts pa#a'le
&. inentor#
C. sales
(. interest expense
). cash account

2-10
2-. *et capital spending,
%. is e"ual to ending net fixed assets minus 'eginning net fixed assets.
&. is e"ual to 3ero if the decrease in the net fixed assets is e"ual to the depreciation expense.
C. reflects the net changes in total assets oer a stated period of time.
(. is e"uialent to the cash flow from assets minus the operating cash flow minus the change
in net wor+ing capital.
). is e"ual to the net change in the current accounts.

22. Which one of the following statements related to the cash flow to creditors is correct$
%. :f the cash flow to creditors is positie then the firm must hae 'orrowed more mone# than
it repaid.
&. :f the cash flow to creditors is negatie then the firm must hae a negatie cash flow from
assets.
C. % positie cash flow to creditors represents a net cash outflow from the firm.
(. % positie cash flow to creditors means that a firm has increased its long-term de't.
). :f the cash flow to creditors is 3ero, then a firm has no long-term de't.

24. % positie cash flow to stoc+holders indicates which one of the following with certaint#$
%. The diidends paid exceeded the net new e"uit# raised.
&. The amount of the sale of common stoc+ exceeded the amount of diidends paid.
C. *o diidends were distri'uted 'ut new shares of stoc+ were sold.
(. &oth the cash flow to assets and the cash flow to creditors must 'e negatie.
). &oth the cash flow to assets and the cash flow to creditors must 'e positie.

25. % firm has ;420 in inentor#, ;1,850 in fixed assets, ;190 in accounts receia'les, ;210 in
accounts pa#a'le, and ;70 in cash. What is the amount of the current assets$
%. ;710
&. ;780
C. ;990
(. ;2,2-0
). ;2,520

2-11
27. % firm has net wor+ing capital of ;520. <ong-term de't is ;2,180, total assets are ;5,2-0,
and fixed assets are ;-,910. What is the amount of the total lia'ilities$
%. ;2,040
&. ;2,590
C. ;2,1-0
(. ;4,490
). ;4,850

28. % firm has common stoc+ of ;5,200, paid-in surplus of ;9,100, total lia'ilities of ;8,200,
current assets of ;4,900, and fixed assets of ;21,200. What is the amount of the shareholders!
e"uit#$
%. ;5,900
&. ;14,-00
C. ;18,700
(. ;2-,700
). ;-4,400

29. >our firm has total assets of ;2,900, fixed assets of ;-,200, long-term de't of ;2,900, and
short-term de't of ;1,200. What is the amount of net wor+ing capital$
%. -;100
&. ;-00
C. ;500
(. ;1,700
). ;1,800

40. &onner Collision has shareholders! e"uit# of ;121,800. The firm owes a total of ;125,000
of which 50 percent is pa#a'le within the next #ear. The firm net fixed assets of ;151,900.
What is the amount of the net wor+ing capital$
%. ;24,-00
&. ;-0,-00
C. ;74,500
(. ;85,-00
). ;111,400

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41. Four #ears ago, 1elet /urses purchased a mailing machine at a cost of ;175,000. This
e"uipment is currentl# alued at ;52,400 on toda#!s 'alance sheet 'ut could actuall# 'e sold
for ;48,900. This is the onl# fixed asset the firm owns. *et wor+ing capital is ;47,200 and
long-term de't is ;111,-00. What is the 'oo+ alue of shareholders! e"uit#$
%. ;2,800
&. ;7,700
C. ;10,200
(. ;222,500
). ;2--,000

42. @a+e owns The Corner Aar+et which he is tr#ing to sell so that he can retire and trael.
The Corner Aar+et owns the 'uilding in which it is located. This 'uilding was 'uilt at a cost
of ;527,000 and is currentl# appraised at ;819,000. The counters and fixtures originall# cost
;128,000 and are currentl# alued at ;54,000. The inentor# is alued on the 'alance sheet at
;-19,000 and has a retail mar+et alue e"ual to 1.2 times its cost. @a+e expects the store to
collect 98 percent of the ;21,700 in accounts receia'le. The firm has ;25,800 in cash and has
total de't of ;212,700. What is the mar+et alue of this firm$
%. ;847,5-2
&. ;900,155
C. ;919,000
(. ;1,-12,855
). ;1,---,700

4-. @ensen )nterprises paid ;1,-00 in diidends and ;920 in interest this past #ear. Common
stoc+ increased '# ;1,200 and retained earnings decreased '# ;-10. What is the net income
for the #ear$
%. -;210
&. ;990
C. ;1,510
(. ;1,910
). ;2,190

2-1-
42. %ndre!s &a+er# has sales of ;587,000 with costs of ;292,000. :nterest expense is ;25,000
and depreciation is ;22,000. The tax rate is -4 percent. What is the net income$
%. ;22,740
&. ;22,240
C. ;82,440
(. ;85,240
). ;122,440

44. Ba#lor )"uipment 0ental paid ;74 in diidends and ;411 in interest expense. The
addition to retained earnings is ;218 and net new e"uit# is ;400. The tax rate is -4 percent.
Sales are ;14,900 and depreciation is ;580. What are the earnings 'efore interest and taxes$
%. ;489.25
&. ;1,259.25
C. ;1,--1.42
(. ;1,941.42
). ;1,929.25

45. .ien the tax rates as shown, what is the aerage tax rate for a firm with taxa'le income
of ;-11,-50$

%. 28.24 percent
&. -1.09 percent
C. --.52 percent
(. -4.28 percent
). -9.00 percent

2-12
47. The tax rates are as shown. *eada Aining currentl# has taxa'le income of ;97,800. Cow
much additional tax will the firm owe if taxa'le income increases '# ;21,000$

%. ;8,080
&. ;8,1-0
C. ;8,144
(. ;8,170
). ;8,190

48. Winston :ndustries had sales of ;82-,800 and costs of ;509,900. The firm paid ;-8,200 in
interest and ;18,000 in diidends. :t also increased retained earnings '# ;52,1-8 for the #ear.
The depreciation was ;75,200. What is the aerage tax rate$
%. -2.8- percent
&. --.-- percent
C. -8.17 percent
(. 2-.-9 percent
). 28.87 percent

49. Crandall ?il has total sales of ;1,-29,800 and costs of ;90-,400. (epreciation is ;22,700
and the tax rate is -2 percent. The firm does not hae an# interest expense. What is the
operating cash flow$
%. ;129,142
&. ;171,842
C. ;179,922
(. ;281,217
). ;-09,075

2-14
50. *ielsen %uto /arts had 'eginning net fixed assets of ;218,270 and ending net fixed assets
of ;209,211. (uring the #ear, assets with a com'ined 'oo+ alue of ;5,92- were sold.
(epreciation for the #ear was ;22,822. What is the amount of net capital spending$
%. ;--,75-
&. ;20,705
C. ;48,218
(. ;54,151
). ;57,208

51. %t the 'eginning of the #ear, a firm had current assets of ;121,-05 and current lia'ilities
of ;122,409. %t the end of the #ear, the current assets were ;122,218 and the current lia'ilities
were ;10-,718. What is the change in net wor+ing capital$
%. -;19,579
&. -;11,40-
C. -;9,-87
(. ;1,809
). ;21,90-

52. %t the 'eginning of the #ear, the long-term de't of a firm was ;72,918 and total de't was
;1-8,207. %t the end of the #ear, long-term de't was ;58,219 and total de't was ;124,8-8.
The interest paid was ;5,2-0. What is the amount of the cash flow to creditors$
%. -;18,-28
&. -;1,001
C. ;11,129
(. ;1-,851
). ;19,172

5-. %delson!s )lectric had 'eginning long-term de't of ;22,411 and ending long-term de't of
;28,919. The 'eginning and ending total de't 'alances were ;82,542 and ;78,51-,
respectiel#. The interest paid was ;2,757. What is the amount of the cash flow to creditors$
%. -;1,521
&. -;1,272
C. ;1,272
(. ;7,218
). ;11,174

2-15
52. The (ail# *ews had net income of ;121,500 of which 20 percent was distri'uted to the
shareholders as diidends. (uring the #ear, the compan# sold ;74,000 worth of common
stoc+. What is the cash flow to stoc+holders$
%. -;74,000
&. -;25,-50
C. -;2,020
(. ;12-,520
). ;127,950

54. The <a+eside :nn had operating cash flow of ;28,240. (epreciation was ;5,700 and
interest paid was ;2,280. % net total of ;2,520 was paid on long-term de't. The firm spent
;22,000 on fixed assets and decreased net wor+ing capital '# ;1,--0. What is the amount of
the cash flow to stoc+holders$
%. ;4,100
&. ;7,8-0
C. ;18,020
(. ;19,998
). ;20,580

2-17

55. What is the change in the net wor+ing capital from 2008 to 2009$
%. -;1,192
&. ;1,-05
C. ;1,887
(. ;2,780
). ;4,172

2-18
57. What is the amount of the noncash expenses for 2009$
%. ;720
&. ;1,282
C. ;1,---
(. ;1,511
). ;2,-41

58. What is the amount of the net capital spending for 2009$
%. -;-82
&. ;1,229
C. ;1,802
(. ;2,-74
). ;2,415

59. What is the operating cash flow for 2009$
%. ;2,112
&. ;2,900
C. ;2,984
(. ;-,4-5
). ;2,257

70. What is the cash flow from assets for 2009$
%. ;1,7-2
&. ;2,227
C. ;2,951
(. ;-,914
). ;2,257

71. What is the amount of net new 'orrowing for 2009$
%. -;1,812
&. -;1,7-8
C. ;220
(. ;552
). ;840

2-19
72. What is the cash flow to creditors for 2009$
%. -;-4-
&. -;210
C. ;-00
(. ;2-2
). ;427

7-. What is the amount of diidends paid in 2009$
%. ;0
&. ;472
C. ;800
(. ;2,01-
). ;2,172

72. What is the cash flow to stoc+holders for 2009$
%. -;400
&. -;800
C. ;400
(. ;1,-00
). ;2,100

2-20
74. What is the net wor+ing capital for 2009$
%. -;174
&. ;--8
C. ;1,252
(. ;1,924
). ;2,921

75. What is the change in net wor+ing capital from 2008 to 2009$
%. -;174
&. -;70
C. ;124
(. ;220
). ;-14

77. What is the net capital spending for 2009$
%. ;117
&. ;2-9
C. ;247
(. ;--8
). ;221

%. ;1,225
&. ;1,-57
C. ;1,522
(. ;1,755
). ;1,82-

%. ;1,2-0
&. ;1,480
C. ;1,770
(. ;1,810
). ;1,980

2-21
80. What is net new 'orrowing for 2009$
%. -;1,-00
&. -;1,020
C. ;880
(. ;1,020
). ;1,-00

%. -;1,020
&. -;1,100
C. ;280
(. ;1,480
). ;1,750

%. ;0
&. ;1--
C. ;258
(. ;1,709
). ;1,414

2-22
8-. What is the taxa'le income for 2009$
%. ;1,041.00
&. ;1,-57.78
C. ;1,492.22
(. ;2,775.21
). ;-,091.18

%. ;2,078.00
&. ;2,122.22
C. ;2,252.48
(. ;2,552.00
). ;2,721.22

Essay Questions

84. %ssume #ou are the financial officer of a ma=or firm. The president of the firm has =ust
stated that she wishes to reduce the firm!s inestment in current assets since those assets
proide little, if an#, return to the firm. Cow would #ou respond to this statement$

85. %s long as a firm maintains a positie cash 'alance, wh# is it essential to reiew the firm!s
cash flows$

2-2-
87. The managers of a firm wish to expand the firm!s operations and are tr#ing to determine
the amount of de't financing the firm should o'tain ersus the amount of e"uit# financing that
should 'e raised. The managers hae as+ed #ou to explain the effects that 'oth of these forms
of financing would hae on the cash flows of the firm. Write a short response to this re"uest.

88. (iscuss the difference 'etween 'oo+ alues and mar+et alues and explain which one is
more important to the financial manager and wh#.

89. %ssume #ou are a credit manager in charge of approing commercial loans to 'usiness
firms. :dentif# three aspects of a firm!s cash flows #ou would reiew and explain the t#pe of
information #ou hope to gain from reiewing each of those fie aspects.

2-22

90. &each Front :ndustries has sales of ;425,000, costs of ;294,000, depreciation expense of
;-7,000, interest expense of ;14,000, and a tax rate of -2 percent. The firm paid ;49,000 in
cash diidends. What is the addition to retained earnings$
%. ;75,-20
&. ;81,700
C. ;94,200
(. ;10-,250
). ;121,580

91. The Widget Co. purchased new machiner# three #ears ago for ;2 million. The machiner#
can 'e sold to the 0oman Co. toda# for ;2 million. The Widget Co.!s current 'alance sheet
shows net fixed assets of ;2,400,000, current lia'ilities of ;1,-74,000, and net wor+ing capital
of ;724,000. :f all the current assets were li"uidated toda#, the compan# would receie ;1.9
million in cash. The 'oo+ alue of the Widget Co.!s assets toda# is 66666 and the mar+et
alue of those assets is 66666.
%. ;2,500,000D ;-,900,000
&. ;2,500,000D ;-,124,000
C. ;4,000,000D ;-,124,000
(. ;4,000,000D ;-,900,000
). ;5,400,000D ;-,900,000

92. &o#er )nterprises had ;200,000 in 2008 taxa'le income. What is the firm!s aerage tax
rate 'ased on the rates shown in the following ta'le$

%. 28.24 percent
&. -0.5- percent
C. -2.28 percent
(. -5.40 percent
). -9.00 percent

2-24
9-. We'ster World has sales of ;12,900, costs of ;4,800, depreciation expense of ;1,100, and
interest expense of ;700. What is the operating cash flow if the tax rate is -2 percent$
%. ;2,702
&. ;4,729
C. ;4,202
(. ;7,0-5
). ;7,100

92. The &lue &onnet!s 2008 'alance sheet showed net fixed assets of ;2.2 million, and the
2009 'alance sheet showed net fixed assets of ;2.5 million. The compan#!s income statement
showed a depreciation expense of ;900,000. What was the amount of the net capital spending
for 2009$
%. -;400,000
&. ;200,000
C. ;1,-00,000
(. ;1,700,000
). ;1,800,000

94. The 2008 'alance sheet of .lo'al Tours showed current assets of ;1,-50 and current
lia'ilities of ;920. The 2009 'alance sheet showed current assets of ;1,520 and current
lia'ilities of ;1,120. What was the change in net wor+ing capital for 2009$
%. ;80
&. ;170
C. ;190
(. ;880
). ;920

95. The 2008 'alance sheet of The &each Shoppe showed long-term de't of ;2.1 million, and
the 2009 'alance sheet showed long-term de't of ;2.- million. The 2009 income statement
showed an interest expense of ;240,000. What was the cash flow to creditors for 2009$
%. -;200,000
&. -;140,000
C. ;40,000
(. ;200,000
). ;240,000

2-25
97. The 2008 'alance sheet of The Sports Store showed ;800,000 in the common stoc+
account and ;5.7 million in the additional paid-in surplus account. The 2009 'alance sheet
showed ;872,000 and ;8 million in the same two accounts, respectiel#. The compan# paid
out ;500,000 in cash diidends during 2009. What is the cash flow to stoc+holders for 2009$
%. -;1,-72,000
&. -;772,000
C. -;528,000
(. ;-72,000
). ;1,972,000

98. Suppose #ou are gien the following information for &a#side &a+er#, sales E ;-0,000D
costs E ;14,000D addition to retained earnings E ;2,221D diidends paid E ;259D interest
expense E ;1,-00D tax rate E -0 percent. What is the amount of the depreciation expense$
%. ;2,820
&. ;4,400
C. ;7,000
(. ;8,180
). ;9,400

99. (ee (ee!s Aarina is o'ligated to pa# its creditors ;5,200 toda#. The firm!s assets hae a
current mar+et alue of ;4,900. What is the current mar+et alue of the shareholders! e"uit#$
%. -;500
&. -;400
C. ;0
(. ;400
). ;500

100. (uring 2009, 0:T Corp. had sales of ;454,500. Costs of goods sold, administratie and
selling expenses, and depreciation expenses were ;275,000, ;48,800, and ;48,800,
respectiel#. :n addition, the compan# had an interest expense of ;112,000 and a tax rate of -2
percent. What is the operating cash flow for 2009$ :gnore an# tax loss carr#-'ac+ or carr#-
forward proisions.
%. ;17,920
&. ;21,820
C. ;-0,800
(. ;42,500
). ;77,820

2-27
Chapter 02 Financial Statements, Taxes, and Cash Flow %nswer Be#


1. Which one of the following is the financial statement that shows the accounting alue of a
firm!s e"uit# as of a particular date$
%. income statement
&. creditor!s statement
C. 'alance sheet
(. statement of cash flows
). diidend statement
0efer to section 2.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Balance s(eet

2. *et wor+ing capital is defined as,
%. total lia'ilities minus shareholders! e"uit#.
&. current lia'ilities minus shareholders! e"uit#.
C. fixed assets minus long-term lia'ilities.
(. total assets minus total lia'ilities.
E. current assets minus current lia'ilities.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Net wor)ing ca'ital

2-28
-. The common set of standards and procedures '# which audited financial statements are
prepared is +nown as the,
%. matching principle.
&. cash flow identit#.
C. .enerall# %ccepted %ccounting /rinciples.
(. Financial %ccounting 0eporting /rinciples.
). Standard %ccounting 1alue .uidelines.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: *AA+

2. Which one of the following is the financial statement that summari3es a firm!s reenue and
expenses oer a period of time$
A. income statement
&. 'alance sheet
C. statement of cash flows
(. tax reconciliation statement
). mar+et alue report

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#"
Section: "%"
&o'ic: ,ncome statement

2-29
4. *oncash items refer to,
%. accrued expenses.
&. inentor# items purchased using credit.
C. the ownership of intangi'le assets such as patents.
. expenses which do not directl# affect cash flows.
). sales which are made using store credit.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: Noncas( items

5. The percentage of the next dollar #ou earn that must 'e paid in taxes is referred to as the
66666 tax rate.
%. mean
&. residual
C. total
(. aerage
E. marginal
0efer to section 2.-

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#-
Section: "%-
&o'ic: .arginal ta/ rate

2--0
7. The 66666 tax rate is e"ual to total taxes diided '# total taxa'le income.
%. deducti'le
&. residual
C. total
. aerage
). marginal

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%-
&o'ic: A!erage ta/ rate

8. The cash flow of a firm which is aaila'le for distri'ution to the firm!s creditors and
stoc+holders is called the,
&. net capital spending.
. cash flow from assets.
). cash flow to stoc+holders.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%0
&o'ic: Cas( flow from assets

2--1
9. Which term relates to the cash flow which results from a firm!s ongoing, normal 'usiness
actiities$
A. operating cash flow
&. capital spending
C. net wor+ing capital
(. cash flow from assets
). cash flow to creditors

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: O'erating cas( flow

10. Cash flow from assets is also +nown as the firm!s,
%. capital structure.
&. e"uit# structure.
C. hidden cash flow.
. free cash flow.
). historical cash flow.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: 1ree cas( flow

2--2
11. The cash flow related to interest pa#ments less an# net new 'orrowing is called the,
&. capital spending cash flow.
E. cash flow to creditors.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: Cas( flow to creditors

12. Cash flow to stoc+holders is defined as,
%. the total amount of interest and diidends paid during the past #ear.
&. the change in total e"uit# oer the past #ear.
C. cash flow from assets plus the cash flow to creditors.
(. operating cash flow minus the cash flow to creditors.
E. diidend pa#ments less net new e"uit# raised.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: Cas( flow to stoc)(olders

2---
1-. Which one of the following is classified as an intangi'le fixed asset$
%. accounts receia'le
&. production e"uipment
C. 'uilding
. trademar+
). inentor#

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: ,ntangible fi/ed asset

12. Which of the following are current assets$
:. patent
::. :nentor#
:::. accounts pa#a'le
:1. cash
%. : and ::: onl#
!. :: and :1 onl#
C. :, ::, and :1 onl#
(. :, :: and ::: onl#
). ::, :::, and :1 onl#

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Current assets

2--2
14. Which one of the following is included in a firm!s mar+et alue 'ut #et is excluded from
the firm!s accounting alue$
%. real estate inestment
!. good reputation of the compan#
C. e"uipment owned '# the firm
(. mone# due from a customer
). an item held '# the firm for future sale

AACSB: N/A
Bloom's: Com're(ension
Difficulty: Basic
Section: "%$
&o'ic: .ar)et !alue

15. Which of the following are included in current lia'ilities$
:. note pa#a'le to a supplier in eight months
::. amount due from a customer next month
:::. account pa#a'le to a supplier that is due next wee+
:1. loan pa#a'le to the 'an+ in fourteen months
A. : and ::: onl#
&. :: and ::: onl#
C. :, ::, and ::: onl#
(. :, :::, and :1 onl#
). :, ::, :::, and :1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Current liabilities

2--4
17. Which one of the following will increase the alue of a firm!s net wor+ing capital$
%. using cash to pa# a supplier
&. depreciating an asset
C. collecting an accounts receia'le
(. purchasing inentor# on credit
E. selling inentor# at a profit

AACSB: N/A
Difficulty: ,ntermediate
Section: "%$

%. *et wor+ing capital increases when inentor# is purchased with cash.
&. *et wor+ing capital must 'e a positie alue.
C. Total assets must increase if net wor+ing capital increases.
. % decrease in the cash 'alance also decreases net wor+ing capital.
). *et wor+ing capital is the amount of cash a firm currentl# has aaila'le for spending.

AACSB: N/A
Bloom's: A''lication
Section: "%$

2--5
%. The lower the alue of net wor+ing capital the greater the a'ilit# of a firm to meet its
current o'ligations.
&. %n increase in net wor+ing capital must also increase current assets.
C. *et wor+ing capital increases when inentor# is sold for cash at a profit.
(. Firms with e"ual amounts of net wor+ing capital are also e"uall# li"uid.
). *et wor+ing capital is a part of the operating cash flow.

AACSB: N/A
Section: "%$

20. Which one of the following accounts is the most li"uid$
%. inentor#
&. 'uilding
C. accounts receia'le
(. e"uipment
). land

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Li2uidity

2--7
21. Which one of the following represents the most li"uid asset$
%. ;100 account receia'le that is discounted and collected for ;95 toda#
&. ;100 of inentor# which is sold toda# on credit for ;10-
C. ;100 of inentor# which is discounted and sold for ;97 cash toda#
. ;100 of inentor# that is sold toda# for ;100 cash
). ;100 accounts receia'le that will 'e collected in full next wee+

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: Li2uidity

22. Which one of the following statements related to li"uidit# is correct$
%. <i"uid assets tend to earn a high rate of return.
!. <i"uid assets are alua'le to a firm.
C. <i"uid assets are defined as assets that can 'e sold "uic+l# regardless of the price o'tained.
(. :nentor# is more li"uid than accounts receia'le 'ecause inentor# is tangi'le.
). %n# asset that can 'e sold within the next #ear is considered li"uid.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Li2uidity

2--8
2-. Shareholders! e"uit#,
%. increases in alue an#time total assets increases.
&. is e"ual to total assets plus total lia'ilities.
C. decreases wheneer new shares of stoc+ are issued.
(. includes long-term de't, preferred stoc+, and common stoc+.
E. represents the residual alue of a firm.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: S(are(olders' e2uity

22. The higher the degree of financial leerage emplo#ed '# a firm, the,
A. higher the pro'a'ilit# that the firm will encounter financial distress.
&. lower the amount of de't incurred.
C. less de't a firm has per dollar of total assets.
(. higher the num'er of outstanding shares of stoc+.
). lower the 'alance in accounts pa#a'le.

AACSB: N/A
Section: "%$
&o'ic: 1inancial le!erage

2--9
24. The 'oo+ alue of a firm is,
%. e"uialent to the firm!s mar+et alue proided that the firm has some fixed assets.
!. 'ased on historical cost.
C. generall# greater than the mar+et alue when fixed assets are included.
(. more of a financial than an accounting aluation.
). ad=usted to the mar+et alue wheneer the mar+et alue exceeds the stated 'oo+ alue.

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: Boo) !alue

25. Which of the following are included in the mar+et alue of a firm 'ut are excluded from
the firm!s 'oo+ alue$
:. alue of management s+ills
::. alue of a cop#right
:::. alue of the firm!s reputation
:1. alue of emplo#ee!s experience
%. : onl#
&. :: onl#
C. ::: and :1 onl#
(. :, ::, and ::: onl#
E. :, :::, and :1 onl#

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: .ar)et and boo) !alue

2-20
27. >ou recentl# purchased a grocer# store. %t the time of the purchase, the store!s mar+et
alue e"ualed its 'oo+ alue. The purchase included the 'uilding, the fixtures, and the
inentor#. Which one of the following is most apt to cause the mar+et alue of this store to 'e
lower than the 'oo+ alue$
%. a sudden and unexpected increase in inflation
&. the replacement of old inentor# items with more desira'le products
C. improements to the surrounding area '# other store owners
. construction of a new restricted access highwa# located 'etween the store and the
surrounding residential areas
). addition of a stop light at the main entrance to the store!s par+ing lot

AACSB: N/A
Section: "%$

28. Which one of the following is true according to .enerall# %ccepted %ccounting
/rinciples$
%. (epreciation ma# or ma# not 'e recorded at management!s discretion.
&. :ncome is recorded 'ased on the matching principle.
C. Costs are recorded 'ased on the reali3ation principle.
(. (epreciation is recorded 'ased on the recognition principle.
E. Costs of goods sold are recorded 'ased on the matching principle.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: *AA+

2-21
29. Which one of these is most apt to 'e a fixed cost$
%. raw materials
&. manufacturing wages
C. management 'onuses
. office salaries
). shipping and freight

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: 1i/ed cost

-0. Which one of the following costs is most apt to 'e a fixed cost$
%. production la'or cost
!. depreciation
C. raw materials
(. utilities
). sales commissions

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: 1i/ed cost

2-22
-1. Which of the following are expenses for accounting purposes 'ut are not operating cash
flows for financial purposes$
:. interest expense
::. taxes
:::. costs of goods sold
:1. depreciation
%. :1 onl#
&. :: and :1 onl#
C. : and ::: onl#
. : and :1 onl#
). :, ::, and :1 onl#
0efer to sections 2.2 and 2.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#" and "#0
Section: "%" and "%0
&o'ic: Accounting !ersus cas( flow

-2. Which one of the following statements related to an income statement is correct$ %ssume
accrual accounting is used.
%. The addition to retained earnings is e"ual to net income plus diidends paid.
&. Credit sales are recorded on the income statement when the cash from the sale is collected.
C. The la'or costs for producing a product are expensed when the product is sold.
(. :nterest is a non-cash expense.
). (epreciation increases the marginal tax rate.
0efer to sections 2.2 and 2.-

AACSB: N/A
Learning Obecti!e: "#" and "#-
Section: "%" and "%-

2-2-
--. Which one of the following statements related to taxes is correct$
%. The marginal tax rate must 'e e"ual to or lower than the aerage tax rate for a firm.
&. The tax for a firm is computed '# multipl#ing the firm!s current marginal tax rate times the
taxa'le income.
C. %dditional income is taxed at a firm!s aerage tax rate.
(. .ien the corporate tax structure in 2008, the highest marginal tax rate is e"ual to the
highest aerage tax rate.
E. The marginal tax rate for a firm can 'e either higher or lower than the aerage tax rate.

AACSB: N/A
Bloom's: Knowledge
Section: "%-
&o'ic: &a/ rates

-2. %s of 2008, which one of the following statements concerning corporate income taxes is
correct$
%. The largest corporations hae an aerage tax rate of -9 percent.
&. The lowest marginal rate is 24 percent.
C. % firm!s tax is computed on an incremental 'asis.
(. % firm!s marginal tax rate will generall# 'e lower than its aerage tax rate once the firm!s
income exceeds ;40,000.
). When anal#3ing a new pro=ect, the aerage tax rate should 'e used.

AACSB: N/A
Section: "%-
&o'ic: &a/es

2-22
-4. (epreciation,
A. reduces 'oth taxes and net income.
&. increases the net fixed assets as shown on the 'alance sheet.
C. reduces 'oth the net fixed assets and the costs of a firm.
(. is a noncash expense which increases the net income.
). decreases net fixed assets, net income, and operating cash flows.

AACSB: N/A
&o'ic: De'reciation

-5. Which one of the following statements related to an income statement is correct$
%. :nterest expense increases the amount of tax due.
&. (epreciation does not affect taxes since it is a non-cash expense.
C. *et income is distri'uted to diidends and paid-in surplus.
. Taxes reduce 'oth net income and operating cash flow.
). :nterest expense is included in operating cash flow.

AACSB: N/A

2-24
-7. Which one of the following statements is correct concerning a corporation with taxa'le
income of ;124,000$
%. *et income minus diidends paid will e"ual the ending retained earnings for the #ear.
!. %n increase in depreciation will increase the operating cash flow.
C. *et income diided '# the num'er of shares outstanding will e"ual the diidends per share.
(. :nterest paid will 'e included in 'oth net income and operating cash flow.
). %n increase in the tax rate will increase 'oth net income and operating cash flow.

AACSB: N/A

-8. Which one of the following will increase the cash flow from assets, all else e"ual$
%. decrease in cash flow to stoc+holders
&. decrease in operating cash flow
C. increase in the change in net wor+ing capital
(. decrease in cash flow to creditors
E. decrease in net capital spending

AACSB: N/A
Difficulty: Basic
Section: "%0

2-25
-9. For a tax-pa#ing firm, an increase in 66666 will cause the cash flow from assets to
increase.
A. depreciation
&. net capital spending
C. change in net wor+ing capital
(. taxes
). production costs

AACSB: N/A
Section: "%0

20. Which one of the following must 'e true if a firm had a negatie cash flow from assets$
%. The firm 'orrowed mone#.
&. The firm ac"uired new fixed assets.
C. The firm had a net loss for the period.
. The firm utili3ed outside funding.
). *ewl# issued shares of stoc+ were sold.

AACSB: N/A
Section: "%0

2-27
21. %n increase in the depreciation expense will do which of the following$
:. increase net income
::. decrease net income
:::. increase the cash flow from assets
:1. decrease the cash flow from assets
%. : onl#
&. :: onl#
C. : and ::: onl#
. :: and ::: onl#
). :: and :1 onl#

AACSB: N/A
&o'ic: De'reciation

22. Which one of the following is *?T included in cash flow from assets$
%. accounts pa#a'le
&. inentor#
C. sales
. interest expense
). cash account

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0

2-28
2-. *et capital spending,
%. is e"ual to ending net fixed assets minus 'eginning net fixed assets.
!. is e"ual to 3ero if the decrease in the net fixed assets is e"ual to the depreciation expense.
C. reflects the net changes in total assets oer a stated period of time.
(. is e"uialent to the cash flow from assets minus the operating cash flow minus the change
in net wor+ing capital.
). is e"ual to the net change in the current accounts.

AACSB: N/A
Difficulty: Basic
Section: "%0
&o'ic: Net ca'ital s'ending

22. Which one of the following statements related to the cash flow to creditors is correct$
%. :f the cash flow to creditors is positie then the firm must hae 'orrowed more mone# than
it repaid.
&. :f the cash flow to creditors is negatie then the firm must hae a negatie cash flow from
assets.
C. % positie cash flow to creditors represents a net cash outflow from the firm.
(. % positie cash flow to creditors means that a firm has increased its long-term de't.
). :f the cash flow to creditors is 3ero, then a firm has no long-term de't.

AACSB: N/A
Section: "%0

2-29
24. % positie cash flow to stoc+holders indicates which one of the following with certaint#$
A. The diidends paid exceeded the net new e"uit# raised.
&. The amount of the sale of common stoc+ exceeded the amount of diidends paid.
C. *o diidends were distri'uted 'ut new shares of stoc+ were sold.
(. &oth the cash flow to assets and the cash flow to creditors must 'e negatie.
). &oth the cash flow to assets and the cash flow to creditors must 'e positie.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0

25. % firm has ;420 in inentor#, ;1,850 in fixed assets, ;190 in accounts receia'les, ;210 in
accounts pa#a'le, and ;70 in cash. What is the amount of the current assets$
%. ;710
!. ;780
C. ;990
(. ;2,2-0
). ;2,520
Current assets E ;420 F ;190 F ;70 E ;780

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: Current assets

2-40
27. % firm has net wor+ing capital of ;520. <ong-term de't is ;2,180, total assets are ;5,2-0,
and fixed assets are ;-,910. What is the amount of the total lia'ilities$
%. ;2,040
&. ;2,590
C. ;2,1-0
(. ;4,490
E. ;4,850
Current assets E ;5,2-0 - ;-,910 E ;2,-20
Current lia'ilities E ;2,-20 - ;520 E ;1,580
Total lia'ilities E ;1,580 F ;2,180 E ;4,850

AACSB: Analytic
Bloom's: Synt(esis
Section: "%$

28. % firm has common stoc+ of ;5,200, paid-in surplus of ;9,100, total lia'ilities of ;8,200,
current assets of ;4,900, and fixed assets of ;21,200. What is the amount of the shareholders!
e"uit#$
%. ;5,900
&. ;14,-00
C. ;18,700
(. ;2-,700
). ;-4,400
Shareholders! e"uit# E ;4,900 F ;21,200 - ;8,200 E ;18,700
G*ote, The amount of retained earnings is not proided, so #ou must use total assets minus
total lia'ilities to derie the correct answer.H

AACSB: Analytic
Bloom's: Analysis
Section: "%$

2-41
29. >our firm has total assets of ;2,900, fixed assets of ;-,200, long-term de't of ;2,900, and
short-term de't of ;1,200. What is the amount of net wor+ing capital$
%. -;100
!. ;-00
C. ;500
(. ;1,700
). ;1,800
*et wor+ing capital E ;2,900 - ;-,200 - ;1,200 E ;-00

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "%$

40. &onner Collision has shareholders! e"uit# of ;121,800. The firm owes a total of ;125,000
of which 50 percent is pa#a'le within the next #ear. The firm net fixed assets of ;151,900.
What is the amount of the net wor+ing capital$
%. ;24,-00
!. ;-0,-00
C. ;74,500
(. ;85,-00
). ;111,400
Current lia'ilities E .50 ;125,000 E ;74,500
Total assets E ;121,800 F ;125,000 E ;257,800
Current assets E ;257,800 - ;151,900 E ;104,900
*et wor+ing capital E ;104,900 - ;74,500 E ;-0,-00

AACSB: Analytic
Bloom's: Analysis
Section: "%$

2-42
41. Four #ears ago, 1elet /urses purchased a mailing machine at a cost of ;175,000. This
e"uipment is currentl# alued at ;52,400 on toda#!s 'alance sheet 'ut could actuall# 'e sold
for ;48,900. This is the onl# fixed asset the firm owns. *et wor+ing capital is ;47,200 and
long-term de't is ;111,-00. What is the 'oo+ alue of shareholders! e"uit#$
%. ;2,800
&. ;7,700
C. ;10,200
(. ;222,500
). ;2--,000
&oo+ alue of shareholders! e"uit# E ;52,400 F ;47,200 - ;111,-00 E ;10,200

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: Boo) !alue

42. @a+e owns The Corner Aar+et which he is tr#ing to sell so that he can retire and trael.
The Corner Aar+et owns the 'uilding in which it is located. This 'uilding was 'uilt at a cost
of ;527,000 and is currentl# appraised at ;819,000. The counters and fixtures originall# cost
;128,000 and are currentl# alued at ;54,000. The inentor# is alued on the 'alance sheet at
;-19,000 and has a retail mar+et alue e"ual to 1.2 times its cost. @a+e expects the store to
collect 98 percent of the ;21,700 in accounts receia'le. The firm has ;25,800 in cash and has
total de't of ;212,700. What is the mar+et alue of this firm$
%. ;847,5-2
!. ;900,155
C. ;919,000
(. ;1,-12,855
). ;1,---,700
Aar+et alue of firm E ;819,000 F ;54,000 F 1.2G;-19,000H F .98G;21,700H F ;25,800 -
;212,700 E ;900,155

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: .ar)et !alue

2-4-
4-. @ensen )nterprises paid ;1,-00 in diidends and ;920 in interest this past #ear. Common
stoc+ increased '# ;1,200 and retained earnings decreased '# ;-10. What is the net income
for the #ear$
%. -;210
!. ;990
C. ;1,510
(. ;1,910
). ;2,190
*et income E ;1,-00 F G-;-10H E ;990

AACSB: Analytic
Difficulty: Basic
Section: "%"
&o'ic: Net income

42. %ndre!s &a+er# has sales of ;587,000 with costs of ;292,000. :nterest expense is ;25,000
and depreciation is ;22,000. The tax rate is -4 percent. What is the net income$
%. ;22,740
&. ;22,240
C. ;82,440
(. ;85,240
). ;122,440
*et income E G;587,000 - ;292,000 - ;25,000 - ;22,000H G1 - .-4H E ;82,440

AACSB: Analytic
Difficulty: Basic
Section: "%"
&o'ic: Net income

2-42
44. Ba#lor )"uipment 0ental paid ;74 in diidends and ;411 in interest expense. The
addition to retained earnings is ;218 and net new e"uit# is ;400. The tax rate is -4 percent.
Sales are ;14,900 and depreciation is ;580. What are the earnings 'efore interest and taxes$
%. ;489.25
!. ;1,259.25
C. ;1,--1.42
(. ;1,941.42
). ;1,929.25
*et income E ;74 F ;218 E ;29-
Taxa'le income E ;29-IG1 - .-4H E ;748.25
)arnings 'efore interest and taxes E ;748.25 F ;411 E ;1,259.25

AACSB: Analytic
Section: "%"
&o'ic: 3B,&

45. .ien the tax rates as shown, what is the aerage tax rate for a firm with taxa'le income
of ;-11,-50$

%. 28.24 percent
&. -1.09 percent
C. --.52 percent
(. -4.28 percent
). -9.00 percent
Tax E .14G;40,000H F .24G;24,000H F .-2G;24,000H F .-9G;211,-50H E ;102,580.20
%erage tax rate E ;102,580.20I;-11,-50 E --.52 percent

AACSB: Analytic
Difficulty: Basic
Section: "%-

2-44
47. The tax rates are as shown. *eada Aining currentl# has taxa'le income of ;97,800. Cow
much additional tax will the firm owe if taxa'le income increases '# ;21,000$

A. ;8,080
&. ;8,1-0
C. ;8,144
(. ;8,170
). ;8,190
%dditional tax E .-2G;100,000 - ;97,800H F .-9G;97,800 F ;21,000 - ;100,000H E ;8,080

AACSB: Analytic
Difficulty: Basic
Section: "%-
&o'ic: .arginal ta/

48. Winston :ndustries had sales of ;82-,800 and costs of ;509,900. The firm paid ;-8,200 in
interest and ;18,000 in diidends. :t also increased retained earnings '# ;52,1-8 for the #ear.
The depreciation was ;75,200. What is the aerage tax rate$
A. -2.8- percent
&. --.-- percent
C. -8.17 percent
(. 2-.-9 percent
). 28.87 percent
)arnings 'efore taxes E ;82-,800 - ;509,900 - ;75,200 - ;-8,200 E ;119,-00
*et income E ;18,000 F ;52,1-8 E ;80,1-8
Taxes E ;119,-00 - ;80,1-8 E ;-9,152
Tax rate E ;-9,152I;119,-00 E -2.8- percent

AACSB: Analytic
Bloom's: Analysis
Section: "%-

2-45
49. Crandall ?il has total sales of ;1,-29,800 and costs of ;90-,400. (epreciation is ;22,700
and the tax rate is -2 percent. The firm does not hae an# interest expense. What is the
operating cash flow$
%. ;129,142
&. ;171,842
C. ;179,922
(. ;281,217
E. ;-09,075
)arnings 'efore interest and taxes E ;1,-29,800 - ;90-,400 - ;22,700 E ;20-,500
Tax E ;20-,500 .-2 E ;1-7,222
?perating cash flow E ;20-,500 F ;22,700 - ;1-7,222 E ;-09,075

AACSB: Analytic
Difficulty: Basic
Section: "%0
&o'ic: OC1

50. *ielsen %uto /arts had 'eginning net fixed assets of ;218,270 and ending net fixed assets
of ;209,211. (uring the #ear, assets with a com'ined 'oo+ alue of ;5,92- were sold.
(epreciation for the #ear was ;22,822. What is the amount of net capital spending$
A. ;--,75-
&. ;20,705
C. ;48,218
(. ;54,151
). ;57,208
*et capital spending E ;209,211 - ;218,270 F ;22,822 E ;--,75-

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-47
51. %t the 'eginning of the #ear, a firm had current assets of ;121,-05 and current lia'ilities
of ;122,409. %t the end of the #ear, the current assets were ;122,218 and the current lia'ilities
were ;10-,718. What is the change in net wor+ing capital$
%. -;19,579
&. -;11,40-
C. -;9,-87
(. ;1,809
E. ;21,90-
Change in net wor+ing capital E G;122,218 - ;10-,718H - G;121,-05 - ;122,409H E ;21,90-

AACSB: Analytic
Difficulty: Basic
Section: "%0
&o'ic: C(ange in net wor)ing ca'ital

52. %t the 'eginning of the #ear, the long-term de't of a firm was ;72,918 and total de't was
;1-8,207. %t the end of the #ear, long-term de't was ;58,219 and total de't was ;124,8-8.
The interest paid was ;5,2-0. What is the amount of the cash flow to creditors$
%. -;18,-28
&. -;1,001
C. ;11,129
(. ;1-,851
). ;19,172
Cash flow to creditors E ;5,2-0 - G;58,219 - ;72,918H E ;11,129

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-48
5-. %delson!s )lectric had 'eginning long-term de't of ;22,411 and ending long-term de't of
;28,919. The 'eginning and ending total de't 'alances were ;82,542 and ;78,51-,
respectiel#. The interest paid was ;2,757. What is the amount of the cash flow to creditors$
A. -;1,521
&. -;1,272
C. ;1,272
(. ;7,218
). ;11,174
Cash flow to creditors E ;2,757 - G;28,919 - ;22,411H E -;1,521

AACSB: Analytic
Difficulty: Basic
Section: "%0

52. The (ail# *ews had net income of ;121,500 of which 20 percent was distri'uted to the
shareholders as diidends. (uring the #ear, the compan# sold ;74,000 worth of common
stoc+. What is the cash flow to stoc+holders$
%. -;74,000
!. -;25,-50
C. -;2,020
(. ;12-,520
). ;127,950
Cash flow to stoc+holders E .20G;121,500H - ;74,000 E -;25,-50

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-49
54. The <a+eside :nn had operating cash flow of ;28,240. (epreciation was ;5,700 and
interest paid was ;2,280. % net total of ;2,520 was paid on long-term de't. The firm spent
;22,000 on fixed assets and decreased net wor+ing capital '# ;1,--0. What is the amount of
the cash flow to stoc+holders$
%. ;4,100
&. ;7,8-0
C. ;18,020
(. ;19,998
E. ;20,580
Cash flow from assets E ;28,240 - G-;1,--0H - ;22,000 E ;24,780
Cash flow to creditors E;2,280 - G-;2,520H E ;4,100
Cash flow to stoc+holders E ;24,780 - ;4,100 E ;20,580

AACSB: Analytic
Bloom's: Analysis
Section: "%0

2-50

55. What is the change in the net wor+ing capital from 2008 to 2009$
%. -;1,192
!. ;1,-05
C. ;1,887
(. ;2,780
). ;4,172
Change in net wor+ing capital E G;2,771 - ;1,4-2H - G;5,127 - ;2,192H E ;1,-05

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-51
57. What is the amount of the noncash expenses for 2009$
%. ;720
&. ;1,282
C. ;1,---
. ;1,511
). ;2,-41
The noncash expense is the depreciation in the amount of ;1,511.

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: Noncas( e/'ense

58. What is the amount of the net capital spending for 2009$
%. -;-82
!. ;1,229
C. ;1,802
(. ;2,-74
). ;2,415
*et capital spending E ;17,107 - ;17,289 F ;1,511 E ;1,229

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-52
%. ;2,112
&. ;2,900
C. ;2,984
(. ;-,4-5
E. ;2,257
?perating cash flow E ;-,-95 F ;1,511 - ;720 E ;2,257

AACSB: Analytic
Difficulty: Basic
Section: "%0

A. ;1,7-2
&. ;2,227
C. ;2,951
(. ;-,914
). ;2,257
Change in net wor+ing capital E G;2,771 - ;1,4-2H - G;5,127 - ;2,192H E ;1,-05
*et capital spending E ;17,107 - ;17,289 F ;1,511 E ;1,229
?perating cash flow E ;-,-95 F ;1,511 - ;720 E ;2,257
Cash flow from assets E ;2,257 - ;1,229 - ;1,-05 E ;1,7-2

AACSB: Analytic
Bloom's: Analysis
Section: "%0

2-5-
71. What is the amount of net new 'orrowing for 2009$
%. -;1,812
&. -;1,7-8
C. ;220
(. ;552
E. ;840
*et new 'orrowing E ;10,540 - ;9,800 E ;840

AACSB: Analytic
Difficulty: Basic
Section: "%0
&o'ic: Net new borrowing

%. -;-4-
&. -;210
C. ;-00
. ;2-2
). ;427
Cash flow to creditors E ;1,282 - G;10,540 - ;9,800H E ;2-2

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-52
7-. What is the amount of diidends paid in 2009$
%. ;0
&. ;472
C. ;800
(. ;2,01-
). ;2,172
(iidends paid E ;1,-72 - G;2,595 - ;2,122H E ;800

AACSB: Analytic
Difficulty: Basic
Section: "%"
&o'ic: Di!idends 'aid

%. -;400
&. -;800
C. ;400
. ;1,-00
). ;2,100
Cash flow to stoc+holders E J;1,-72 - G;2,595 - ;2,122HK - G;7,000 - ;7,400H E ;1,-00

AACSB: Analytic
Bloom's: Analysis
Section: "%0

2-54

74. What is the net wor+ing capital for 2009$
%. -;174
&. ;--8
C. ;1,252
. ;1,924
). ;2,921
*et wor+ing capital E ;-1- F ;1,152 F ;1,421 - ;1,041 E ;1,924

AACSB: Analytic
Difficulty: Basic
Section: "%$

2-55
75. What is the change in net wor+ing capital from 2008 to 2009$
A. -;174
&. -;70
C. ;124
(. ;220
). ;-14
Change in net wor+ing capital E G;-1- F ;1,152 F ;1,421 - ;1,041H - G;240 F ;1,092 F ;1,294
- ;717H E -;174

AACSB: Analytic
Bloom's: Analysis
Section: "%0
&o'ic: C(ange in net wor)ing ca'ital

77. What is the net capital spending for 2009$
%. ;117
!. ;2-9
C. ;247
(. ;--8
). ;221
*et capital spending E ;2,12- - ;2,005 F ;122 E ;2-9

AACSB: Analytic
Difficulty: Basic
Section: "%0

2-57
%. ;1,225
&. ;1,-57
C. ;1,522
(. ;1,755
). ;1,82-
?perating cash flow E G;5,22- - ;2,109 - ;122H F ;122 - ;570 E ;1,522

AACSB: Analytic
Bloom's: Analysis
Section: "%0

%. ;1,2-0
!. ;1,480
C. ;1,770
(. ;1,810
). ;1,980
- ;717H E -;174
Cash flow from assets E ;1,522 - ;2-9 - G-;174H E ;1,480

AACSB: Analytic
Bloom's: Analysis
Section: "%0

2-58
80. What is net new 'orrowing for 2009$
A. -;1,-00
&. -;1,020
C. ;880
(. ;1,020
). ;1,-00
*et new 'orrowing E ;1,100 - ;2,200 E -;1,-00

AACSB: Analytic
Difficulty: Basic
Section: "%0
&o'ic: Net new borrowing

%. -;1,020
&. -;1,100
C. ;280
. ;1,480
). ;1,750
Cash flow to creditors E 280 - G-;1,-00H E ;1,480

AACSB: Analytic
Bloom's: Analysis
Section: "%0

2-59
A. ;0
&. ;1--
C. ;258
(. ;1,709
). ;1,414
- ;717H E -;174
Cash flow from assets E ;1,522 - ;2-9 - G-;174H E ;1,480
Cash flow to creditors E 280 - G-;1,-00H E ;1,480
Cash flow to stoc+holders E ;1,480 - ;1,480 E ;0

AACSB: Analytic
Bloom's: Synt(esis
Difficulty: C(allenge
Section: "%0

2-70
8-. What is the taxa'le income for 2009$
%. ;1,041.00
&. ;1,-57.78
C. ;1,492.22
(. ;2,775.21
). ;-,091.18
*et income E ;220 F ;5-1 E ;1,041
Taxa'le income E ;1,041IG1 - .-2H E ;1,492.22

AACSB: Analytic
Bloom's: Analysis
Section: "%"
&o'ic: &a/able income

A. ;2,078.00
&. ;2,122.22
C. ;2,252.48
(. ;2,552.00
). ;2,721.22
*et income E ;220 F ;5-1 E ;1,041
Taxa'le income E ;1,041IG1 - .-2H E ;1,492.22
)arnings 'efore interest and taxes E ;1,492.22 F ;2-8 E ;1,8-0.22
?perating cash flow E ;1,8-0.22 F ;789 - .-2G;1,492.22H E ;2,078.00

AACSB: Analytic
Bloom's: Synt(esis
Section: "%0

2-71
Essay Questions

84. %ssume #ou are the financial officer of a ma=or firm. The president of the firm has =ust
stated that she wishes to reduce the firm!s inestment in current assets since those assets
proide little, if an#, return to the firm. Cow would #ou respond to this statement$
While it is true that current assets proide a low rate of return, those assets are essential to the
firm!s li"uidit#. Should the li"uid assets 'e reduced too low, the firm could face a much
greater pro'lem than a low rate of return. That pro'lem would 'e the ina'ilit# to meet the
firm!s financial o'ligations which could een result in a 'an+ruptc# due to a lac+ of cash flow.
Feed'ac+, 0efer to section 2.1

AACSB: 4eflecti!e t(in)ing
Section: "%$
&o'ic: Li2uidity

85. %s long as a firm maintains a positie cash 'alance, wh# is it essential to reiew the firm!s
cash flows$
Firms can hae positie cash 'alances 'ecause the# are using 'orrowed funds or e"uit#
inestments. For a firm to 'e financiall# health# oer the long-term, it must 'e a'le to
generate cash internall#. Cash flow anal#sis ena'les #ou to determine the sources, and uses, of
a firm!s cash to ealuate the financial health of the firm and ensure that the firm is generating
positie cash flows from its operations.

Bloom's: Analysis
Section: "%0

2-72
87. The managers of a firm wish to expand the firm!s operations and are tr#ing to determine
the amount of de't financing the firm should o'tain ersus the amount of e"uit# financing that
should 'e raised. The managers hae as+ed #ou to explain the effects that 'oth of these forms
of financing would hae on the cash flows of the firm. Write a short response to this re"uest.
(e't financing will re"uire cash outflows for 'oth interest and principal pa#ments. The
interest outflow will 'e partiall# offset '# a decrease in the cash outflow for taxes. Should the
firm accept additional de't, the li"uidit# of the firm might hae to 'e increased to ensure the
de't o'ligations can 'e met in a timel# manner. ?n the other hand, e"uit# financing does not
create an# re"uirement for future cash outflows as e"uit# does not need to 'e repaid nor are
diidends re"uired. Coweer, if diidends are paid, the# would not lower the firm!s cash
outflow for taxes.

Bloom's: 3!aluation
Section: "%0

88. (iscuss the difference 'etween 'oo+ alues and mar+et alues and explain which one is
more important to the financial manager and wh#.
The accounts on the 'alance sheet are generall# carried at historical cost, not mar+et alues.
%lthough the 'oo+ alue of the current assets and the lia'ilities ma# closel# approximate
mar+et alues, the same cannot 'e said for the rest of the 'alance sheet accounts. Aar+et
alues are more releant as the# reflect toda#!s alues whereas the 'alance sheet reflects
historical costs as ad=usted '# arious accounting methods. To determine the current alue of
a firm, and its worth to the shareholders, financial managers must monitor mar+et alues.

Bloom's: Analysis
Section: "%$
&o'ic: Boo) !ersus mar)et !alue

2-7-
89. %ssume #ou are a credit manager in charge of approing commercial loans to 'usiness
firms. :dentif# three aspects of a firm!s cash flows #ou would reiew and explain the t#pe of
information #ou hope to gain from reiewing each of those fie aspects.
Student answers will ar# 'ut here are some examples,
1H operating cash flow - :s the firm generating positie cash flow from its current operations$
2H cash flow to creditors - :s the firm currentl# repa#ing de't or is it assuming additional de't$
-H net wor+ing capital - :s the firm increasing or decreasing its net wor+ing capital and what
effect, if an#, is this haing on the firm!s li"uidit#$
2H cash flow to stoc+holders - :s the firm currentl# pa#ing an# diidends to its shareholders
and are those shareholders inesting additional capital into the firm$
4H net capital spending - :s the firm currentl# inesting in additional fixed assets$

Bloom's: 3!aluation
Section: "%0


90. &each Front :ndustries has sales of ;425,000, costs of ;294,000, depreciation expense of
;-7,000, interest expense of ;14,000, and a tax rate of -2 percent. The firm paid ;49,000 in
cash diidends. What is the addition to retained earnings$
A. ;75,-20
&. ;81,700
C. ;94,200
(. ;10-,250
). ;121,580
*et income E G;425,000 - ;294,000 - ;-7,000 - ;14,000H G1 - .-2H E ;1-4,-20
%ddition to retained earnings E ;1-4,-20 - ;49,000 E ;75,-20

AACSB: Analytic
Difficulty: Basic
3OC 5: "#-
Section: "%"
&o'ic: Addition to retained earnings

2-72
91. The Widget Co. purchased new machiner# three #ears ago for ;2 million. The machiner#
can 'e sold to the 0oman Co. toda# for ;2 million. The Widget Co.!s current 'alance sheet
shows net fixed assets of ;2,400,000, current lia'ilities of ;1,-74,000, and net wor+ing capital
of ;724,000. :f all the current assets were li"uidated toda#, the compan# would receie ;1.9
million in cash. The 'oo+ alue of the Widget Co.!s assets toda# is 66666 and the mar+et
alue of those assets is 66666.
A. ;2,500,000D ;-,900,000
&. ;2,500,000D ;-,124,000
C. ;4,000,000D ;-,124,000
(. ;4,000,000D ;-,900,000
). ;5,400,000D ;-,900,000
&oo+ alue E G;724,000 F ;1,-74,000H F ;2,400,000 E ;2,500,000
Aar+et alue E ;1,900,000 F ;2,000,000 E ;-,900,000

AACSB: Analytic
Difficulty: Basic
3OC 5: "#6
Section: "%$

2-74
92. &o#er )nterprises had ;200,000 in 2008 taxa'le income. What is the firm!s aerage tax
rate 'ased on the rates shown in the following ta'le$

%. 28.24 percent
!. -0.5- percent
C. -2.28 percent
(. -5.40 percent
). -9.00 percent
Tax E .14G;40,000H F .24G;24,000H F .-2G;24,000H F .-9G;200,000 - ;100,000H E ;51,240
%erage tax rate E ;51,240I;200,000 E -0.5- percent

AACSB: Analytic
Difficulty: Basic
3OC 5: "#7
Section: "%-

9-. We'ster World has sales of ;12,900, costs of ;4,800, depreciation expense of ;1,100, and
interest expense of ;700. What is the operating cash flow if the tax rate is -2 percent$
%. ;2,702
&. ;4,729
C. ;4,202
(. ;7,0-5
). ;7,100
)arnings 'efore interest and taxes E ;12,900 - ;4,800 - ;1,100 E ;5,000
Taxa'le income E ;5,000 - ;700 E ;4,-00
Tax E .-2G;4,-00H E ;1,595
?perating cash flow E ;5,000 F ;1,100 - ;1,595 E ;4,202

AACSB: Analytic
Difficulty: Basic
3OC 5: "#8
Section: "%0

2-75
92. The &lue &onnet!s 2008 'alance sheet showed net fixed assets of ;2.2 million, and the
2009 'alance sheet showed net fixed assets of ;2.5 million. The compan#!s income statement
showed a depreciation expense of ;900,000. What was the amount of the net capital spending
for 2009$
%. -;400,000
&. ;200,000
C. ;1,-00,000
(. ;1,700,000
). ;1,800,000
*et capital spending E ;2,500,000 - ;2,200,000 F ;900,000 E ;1,-00,000

AACSB: Analytic
Difficulty: Basic
3OC 5: "#9
Section: "%0

94. The 2008 'alance sheet of .lo'al Tours showed current assets of ;1,-50 and current
lia'ilities of ;920. The 2009 'alance sheet showed current assets of ;1,520 and current
lia'ilities of ;1,120. What was the change in net wor+ing capital for 2009$
A. ;80
&. ;170
C. ;190
(. ;880
). ;920
Change in net wor+ing capital E G;1,520 - ;1,120H - G;1,-50 - ;920H E ;80

AACSB: Analytic
Difficulty: Basic
3OC 5: "#$:
Section: "%0

2-77
95. The 2008 'alance sheet of The &each Shoppe showed long-term de't of ;2.1 million, and
the 2009 'alance sheet showed long-term de't of ;2.- million. The 2009 income statement
showed an interest expense of ;240,000. What was the cash flow to creditors for 2009$
%. -;200,000
&. -;140,000
C. ;40,000
(. ;200,000
). ;240,000
Cash flow to creditors E ;240,000 - G;2,-00,000 - ;2,100,000H E ;40,000

AACSB: Analytic
Difficulty: Basic
3OC 5: "#$$
Section: "%0

97. The 2008 'alance sheet of The Sports Store showed ;800,000 in the common stoc+
account and ;5.7 million in the additional paid-in surplus account. The 2009 'alance sheet
showed ;872,000 and ;8 million in the same two accounts, respectiel#. The compan# paid
out ;500,000 in cash diidends during 2009. What is the cash flow to stoc+holders for 2009$
%. -;1,-72,000
!. -;772,000
C. -;528,000
(. ;-72,000
). ;1,972,000
Cash flow to stoc+holders E ;500,000 - JG;872,000 F ;8,000,000H - G;800,000 F ;5,700,000H
E -;772,000

AACSB: Analytic
Difficulty: Basic
3OC 5: "#$"
Section: "%0

2-78
98. Suppose #ou are gien the following information for &a#side &a+er#, sales E ;-0,000D
costs E ;14,000D addition to retained earnings E ;2,221D diidends paid E ;259D interest
expense E ;1,-00D tax rate E -0 percent. What is the amount of the depreciation expense$
%. ;2,820
&. ;4,400
C. ;7,000
(. ;8,180
). ;9,400
*et income E ;259 F ;2,221 E ;2,590
)arnings 'efore taxes E ;2,590IG1 - .-0H E ;5,700
)arnings 'efore interest and taxes E ;5,700 F ;1,-00 E ;8,000
(epreciation E ;-0,000 - ;14,000 - ;8,000 E ;7,000

AACSB: Analytic
Bloom's: Analysis
3OC 5: "#$6
Section: "%"

99. (ee (ee!s Aarina is o'ligated to pa# its creditors ;5,200 toda#. The firm!s assets hae a
current mar+et alue of ;4,900. What is the current mar+et alue of the shareholders! e"uit#$
%. -;500
&. -;400
C. ;0
(. ;400
). ;500
Shareholders! e"uit# E Aax JG;4,900 - ;5,200H, 0K. Since the mar+et alue of e"uit# cannot 'e
negatie, the answer is 3ero.

AACSB: Analytic
Bloom's: Analysis
3OC 5: "#$7
Section: "%$

2-79
100. (uring 2009, 0:T Corp. had sales of ;454,500. Costs of goods sold, administratie and
selling expenses, and depreciation expenses were ;275,000, ;48,800, and ;48,800,
respectiel#. :n addition, the compan# had an interest expense of ;112,000 and a tax rate of -2
percent. What is the operating cash flow for 2009$ :gnore an# tax loss carr#-'ac+ or carr#-
forward proisions.
%. ;17,920
&. ;21,820
C. ;-0,800
(. ;42,500
). ;77,820
)arnings 'efore interest and taxes E *et income E ;454,500 - ;275,000 - ;48,800 - ;48,800 E
-;28,000
?perating cash flow E -;28,000 F ;48,800 - ;0 E ;-0,800

AACSB: Analytic
Bloom's: Analysis
3OC 5: "#$9
Section: "%0

2-80

Chapter 02 - Financial Statements, Taxes, and Cash Flow

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