Test Bank for Corporate Finance

13th Edition By Stephen Ross, Randolph

Westerfield,

Chapters 1 - 21, Complete

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Chapter 1

Student name:_
MULTIPLE CHOICE - Choose the one alternative that best completes the
statement or answers the question.
1) Generally, among those who report directly to the are the treasurer and
the controller of a corporation.

A) board of directors
B) chairperson of the board
C) chief executive officer
D) president
E) chief financial officer

2) A typical chain of command in a corporation is described by which one of the

following statements?

A) The information systems manager reports to the treasurer.

B) The credit manager reports to the treasurer.
C) The controller reports to the chief executive officer.
D) The tax manager reports to the treasurer.
E) The capital expenditures manager reports to the controller.

3) Answering which one of the following questions involves making a capital

budgeting decision?

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 A) How much debt should the firm borrow from a particular lender?
B) Should the firm build a new production facility?
C) Should the firm issue new equity to pay for its growth goals?
D) How much inventory should the firm keep on hand?
E) How much credit should the firm extend to a particular customer?

4) Which one of the following statements is accurate?

A) Net working capital equals current assets plus current liabilities.

B) Current liabilities are debts that must be repaid in 18 months or less.
C) Current assets are assets with short lives, such as accounts receivable.
D) Long-term debt is defined as a residual claim on a firm’s assets.
E) Tangible assets are fixed assets such as patents.

5) Among the typical responsibilities of the corporate controller is:

A) capital expenditures management.

B) cash management.
C) tax reporting.
D) financial planning.
E) credit management.

6) is typically the responsibility of the corporate treasurer.

A) Financial planning
B) Cost accounting
C) Tax reporting
D) Information systems
E) Financial accounting

7) A firm’s define(s) its capital structure.

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 A) mixture of various types of production equipment
B) investment selections for its excess cash reserves
C) combination of cash and cash equivalents
D) combination of accounts appearing on the left side of its balance sheet
E) proportions of financing from debt and equity

8) The focus of short-term finance is on:

A) the timing of cash flows.

B) acquiring and selling fixed assets.
C) financing long-term projects.
D) capital budgeting.
E) issuing additional shares of common stock.

9) Net working capital includes:

A) copyrights.
B) manufacturing equipment.
C) common stock.
D) long-term debt.
E) inventory.

10) is defined as planning and managing a firm’s long-term assets.

A) Working capital management

B) Cash management
C) Cost accounting management
D) Capital budgeting
E) Capital structure management

11) An amount the firms owes, which it must repay within twelve months, is called
a(n):

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 A) current liability.
B) long-term debt.
C) intangible asset.
D) accounts receivable.
E) current asset.

12) The business entity that is typically the least expensive to form is the:

A) limited liability company.

B) joint stock company.
C) general partnership.
D) limited partnership.
E) sole proprietorship.

13) A is a business owned by a single individual.

A) corporation
B) sole proprietorship
C) general partnership
D) limited partnership
E) limited liability company

14) Regarding a sole proprietorship, which one of the following statements is

accurate?

A) It is more difficult to form than other forms of business.

B) Its business profits are taxed twice at the federal level.
C) Its business profits are taxed separately from the personal income of the
owner.
debt D) The owner may be forced to sell his or her personal assets to pay the
s. company's

E) It has an unlimited life span.

15) Regarding a sole proprietorship, which one of the following statements is

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 accurate?

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 A) The ability to raise capital is limited by the owner’s personal wealth.
B) It pays taxes at the corporate tax rate.
C) Ownership of the firm is easy to transfer to another individual.
D) It must pay income taxes separately from the taxes paid by the owner.
E) The legal costs to form it are usually substantial.

16) The primary advantage of being a limited partner rather than a general partner
is:

A) being entitled to a larger portion of the partnership’s income.

B) having responsibility for day-to-day management of the business.
C) earning profits that are free from income taxation.
D) the ability to have overall control of the partnership.
E) one’s personal financial liability is limited to the amount of capital invested.

17) A general partner:

A) has less legal liability than a limited partner.

B) can end the partnership by withdrawing.
C) faces double taxation of profits whereas a limited partner does not.
D) cannot lose more than the amount of his or her equity investment.
E) is the term applied only to corporations that invest in partnerships.

18) A partnership:

A) is taxed in the same fashion that a corporation is taxed.

B) terminates upon the death of any limited partner.
C) creates for all general partners an unlimited liability for the partnership's
debts.
D) has the same ability as a corporation to raise capital.
E) allows for easy transfer of ownership from one general partner to another.

19) One advantage of a partnership is the:

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 A) personal liability for all of the firm’s debts.
B) limited life of the entity.
C) limited liability protection for all of the partners.
D) relatively low cost of formation.
E) ease of transferring full ownership to others.

20) One disadvantage of the corporate form of business ownership is the:

A) limited liability protection provided for all owners.

B) firm’s ability to raise cash.
C) unlimited life of the firm.
D) difficulties encountered when changing ownership.
E) double taxation of business profits.

21) Which one of the following statements is correct?

A) Both partnerships and corporations are subject to double taxation.

B) Sole proprietorships and partnerships are taxed in a similar fashion.
C) Partnerships are the most complicated type of business to form.
D) Both partnerships and corporations have limited liability for all owners.
E) All types of business formations have limited lives.

22) The articles of incorporation:

A) can be used to remove the firm’s management.

B) are amended annually by the firm’s stockholders.
C) set forth the rights granted to shareholders.
D) set forth the rules by which the corporation regulates its existence.
E) can set forth the conditions under which the firm can avoid double taxation.

23) Corporate bylaws:

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 A) establish the name of the corporation.
B) establish the rights granted to its shareholders.
C) set forth the purpose of the firm.
D) establish the rules by which the corporation regulates its existence.
E) set forth the number of members of the initial board of directors.

24) Regarding corporations, which one of the following statements is accurate?

A) After a predetermined number of years, ownership can no longer be

transferred.
B) The ability to raise capital is limited by the personal wealth of the owners.
C) Primary shareholders have unlimited liability for corporate debts.
D) The entity can outlive all of its initial owners.
E) When the last original owner dies or withdraws, the entity is terminated.

25) If a business is formed as a corporation, ownership of the business:

A) must be granted with equal rights assigned to each and every shareholder.
B) can be transferred an unlimited number of times.
C) can only be transferred with the approval of the board of directors.
D) is controlled by the corporate officers.
E) must be held by non-management owners.

26) The owners of a limited liability company typically would prefer to:

A) be taxed like a corporation.

B) have liability exposure similar to that of a sole proprietor.
C) be taxed personally on all business income.
D) have liability exposure similar to that of a general partner.
E) be taxed like a corporation, and have liability like a partnership.

27) In a general partnership, the general partners have liability for the firm’s debts
and have control over day-to-day
operations.

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 A) limited; no
B) unlimited; total
C) limited; total
D) unlimited; no
E) unlimited; limited

28) Which one of the following business types is best for raising large amounts of
capital?

A) Sole proprietorship
B) Limited liability company
C) Corporation
D) General partnership
E) Limited partnership

29) Which type of business organization has the same rights and privileges
accorded to a legal person?

A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company

30) A is a business formed by two or more individuals who each have

unlimited personal liability for all of the firm’s debts.

A) corporation
B) sole proprietorship
C) general partnership
D) limited partnership
E) limited liability company

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31) The describes the fraction of the work and cash to be
contributed to a partnership by each member of that partnership.

A) indemnity clause
B) indenture contract
C) statement of purpose
D) partnership agreement
E) group charter

32) A(n) is a business created as a distinct legal entity, separate from its
owners.

A) corporation
B) sole proprietorship
C) general partnership
D) limited partnership
E) unlimited liability company

33) In a limited partnership, each limited partner’s liability for the partnership’s debts
is:

A) limited to his or her personal net worth.

B) limited to the amount he or she invested into the partnership.
C) limited to his or her total earnings received from the partnership.
D) unlimited.
E) limited to the total amount invested by all partners.

34) A provides each owner with limited liability, and is operated and taxed
like a partnership.

A) limited liability company

B) general partnership
C) limited proprietorship
D) limited partnership
E) corporation

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35) The profits earned by a partnership are:

A) fully distributed as taxable income to the partners.

B) distributed to general partners after interest is paid to limited partners.
C) distributed to the partners after the partnership pays its income taxes.
D) generally reinvested in the firm to fund future growth, rather than being
distributed to owners.
E) generally held by the partnership for several years before being
distributed as dividend payments.

36) Financial managers primarily create firm value by:

A) maximizing current dividends.

B) investing in assets that generate cash in excess of their cost.
C) lowering the earnings per share.
D) increasing the firm’s market share.
E) maximizing current sales.

37) Accounting profits and cash flows are generally:

A) equal because they reflect current laws and accounting standards.

B) equal because accounting profits reflect the timing of cash flows.
C) unequal because of how income is recognized according to GAAP.
D) unequal because cash inflows must occur before revenue recognition.
E) equal because of the requirements of GAAP.

38) Which one of thefollowing transactions will result in a cash outflow

from the corporation?

A) Selling an asset
B) Paying income taxes
C) Issuing common stock
D) Borrowing from a lender
E) Retaining profit earned by the firm

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39) A firm creates value by:

A) having a greater cash inflow from its stockholders than its outflow to them.
B) paying more cash to its creditors and stockholders than the amount it
them received from
.
C) borrowing long-term debt.
D) generating sales whether or not payment is received for all of those sales.
E) purchasing assets that create cash inflows equal to the cost of those assets.

40) If a firm is profitable, it follows that:

A) its cash inflows exceed its cash outflows.

B) its sales exceed its costs.
C) its cash flows are known with certainty.
D) it has sufficient cash to pay its bills in a timely manner.
E) the timing of its cash flows is irrelevant.

41) Which one of the following statements is accurate?

A) Individuals generally prefer later cash flows rather than current cash flows.
B) The value of an investment depends on the size, timing, and risk of the
investment’s cash flows.
C) When selecting one of two projects, managers should select the project
with the higher total expected cash flow.
D) Most investors prefer greater risk rather than less risk.
E) Accountants record sales and expenses after the related cash flows occur.

42) A firm is considering a new project. Analysts at the firm would be justified in
having the greatest level of certainty in the:

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 A) amount of the project’s cash inflow in Year 3.
B) timing of the last cash inflow from the project.
C) project’s initial cost.
D) risk of a pessimistic scenario occurring.
E) amount of the cash inflow from the project in Year 1.

43) Financial managers should primarily strive to:

A) minimize costs while increasing current dividends.

B) maximize the current profits of the firm.
C) maximize the current value per share of existing stock.
D) maximize current dividends even if doing so adds financial distress costs to
the firm.
E) maximize current market share in every market in which the firm participates.

44) Financial managers should make decisions in such a way as to increase the:

A) size of the firm.

B) growth rate of the firm.
C) marketability of the managers.
D) market value of the existing owners’ equity.
E) firm’s current sales.

45) Which one of the following actions by a financial manager creates an agency
problem?

A) Borrowing money, when doing so creates value for the firm

B) Lowering selling prices, which will result in increased firm value
C) Agreeing to expand the company at the expense of stockholders’ value
D) Agreeing to pay management bonuses based on the market value of the
firm’s stock
E) Refusing to spend current cash on an unprofitable project

46) The primary goal of financial management is to:

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 A) maximize current dividends per share of the existing stock.
B) maximize the current value per share of the existing stock.
C) avoid financial distress.
D) minimize operational costs and maximize firm efficiency.
E) maintain steady growth in both sales and net earnings.

47) Of the following choices, _ is the best way to increase current shareholder
value.

A) maximizing the firm’s amount of available cash

B) increasing the current value of the overall firm
C) postponing all new projects
D) minimizing the overall size of the firm
E) decreasing the number of employees

48) A financial manager should make decisions based on:

A) the effects those decisions will have on current profits.

B) the best interests of the manager and his or her peers.
C) the welfare of the current shareholders.
D) minimizing the firm's tax liability.
E) their personal goals and ambitions.

49) A(n) is defined as a conflict of interest between the stockholders and

managers of a firm.

A) stockholders’ liability
B) corporate breakdown
C) agency problem
D) corporate activist
E) legal liability

50) Of the following choices, is most likely to create an agency problem.

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 A) increasing the dividend payments to shareholders
B) paying off debt in a timely manner
C) increasing the sales of a profitable division
D) abandoning a profitable project because it involves some risk
E) selling an unprofitable division of the firm

51) Of the following choices, is least likely to convince managers to work in

the best interest of the stockholders.

A) being threatened with a takeover of the firm by unsatisfied stockholders

B) implementing a stock option plan
C) raising managers’ salaries based on their length of service
D) tying management compensation to the market value of the firm’s stock
E) receiving a threat of a proxy fight

52) Which form of business structure typically has the greatest potential for
agency problems?

A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Corporation
E) Limited liability company

53) A proxy fight occurs when:

A) the board of directors disagree on the members of the management team.

B) a group solicits voting rights to replace the board of directors.
C) a competitor offers to sell its ownership interest in the firm.
D) the firm files for bankruptcy.
E) the firm is declared insolvent.

54) Ultimately, the control(s) the corporation.

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 A) board of directors
B) stockholders
C) president
D) chief executive officer
E) chairperson of the board

55) Members of the board of directors are selected by:

A) shareholder voting.
B) company management.
C) the firm’s chief executive officer.
D) the largest five shareholders.
E) the firm’s managers and employees.

56) What is the main reason that corporations grant stock options to managers?
To:

A) reduce agency costs.

B) increase current profits.
C) replace salary increases.
D) reward long-term employment.
E) replace promotions.

57) Of the following choices, which one best fits the description of an agency cost?

A) The costs of increasing the dividend payment per share

B) The benefits received from reducing production costs per unit
C) The payment of corporate income taxes
D) The payment required for an outside audit of the firm
E) The payment of interest on a firm’s debts

58) Which one of the following parties is considered a stakeholder of a firm?

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 A) Customer
B) Short-term creditor
C) Long-term creditor
D) Preferred stockholder
E) Common stockholder

59) A stakeholder is any person or entity:

A) owning shares of stock of a corporation.

B) owning bonds or other long-term debt issued by a corporation.
C) that initially started a firm and currently has management control over that
firm.
D) to whom the firm currently owes money.
E) other than a stockholder or creditor who potentially has a financial interest in
a firm.

60) One intent of the Sarbanes-Oxley Act of 2002 is to:

A) prevent minority investors from making demands on corporations.

B) protect corporate directors from frivolous lawsuits.
C) guarantee the repayment of all future personal loans to corporate
officers and directors.
D) protect investors from corporate abuses.
E) require all public corporations to “go dark” within the next twenty years.

61) The Sarbanes-Oxley Act requires public corporations to:

A) assess the company’s internal control structure at least quarterly.

B) distribute at least 90 percent of their profits as dividends on an annual basis.
C) list any deficiencies in internal controls.
D) file annual audit reports if the firm has “gone dark.”
E) disclose all personal loans to corporate officers or directors made after 2002.

62) Insider trading is:

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 A) prohibited by the Securities Act of 1933.
B) prohibited by the Securities Exchange Act of 1934.
C) impossible in today’s efficient markets.
D) highly discouraged, but still legal.
E) prohibited by the Sarbanes-Oxley Act of 2002.

63) The established the basic regulatory framework for the public
trading of securities in the United States.

A) New York Stock Exchange, when it was founded,

B) Securities Exchange Act of 1934
C) Federal Reserve Bank, when it was first authorized by Congress,
D) Securities Act of 1933 and the Securities Exchange Act of 1934
E) Sarbanes-Oxley Act of 2002

64) The Securities Act of 1933 focuses on:

A) all stock transactions.

B) the sales of existing securities.
C) the issuance of new securities.
D) insider trading.
E) Federal Deposit Insurance Corporation (FDIC) insurance.

65) The intent of the registration statement required for all new securities by the
Securities Act of 1933 is to:

A) provide a governmental evaluation of the risks associated with those new

securities.
B) set the price at which the securities will be offered.
C) guarantee the profitability of the new securities.
D) prevent any insider trading.
E) provide all necessary information to allow a potential investor to make an
informed decision.

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66) Which one of the following results have been reported as a consequence of a
corporation
“going dark?”

A) Increased market liquidity and lower costs

B) Lower audit costs and lower interest rates on bank loans
C) Increased access to capital and lower costs associated with that capital
D) Increased audit costs and stock price increases
E) Limited access to capital markets and stock price declines

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
67) List and briefly describe the three basic areas addressed by a financial manager.

68) What advantages and disadvantages does the corporate form of

organization have compared to sole proprietorships and general partnerships?

69) Why might a professional group select the LLC form of business over a
general partnership or a corporate structure?

70) Why might a highly successful sole proprietor change the structure of his or her
firm to the corporate form of ownership if that change results in the sharing of profits
with other investors?

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71) What should be the primary goal of the financial manager of a corporation?
Explain why this is appropriate.

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Answer Key

Test name: chapter 1

1) E
2) B
3) B
4) C
5) C
6) A
7) E
8) A
9) E
10) D
11) A
12) E
13) B
14) D
15) A
16) E
17) B
18) C
19) D
20) E
21) B
22) C
23) D
24) D
25) B
26) C

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27) B
28) C
29) D
30) C
31) D
32) A
33) B
34) A
35) A
36) B
37) C
38) B
39) B
40) B
41) B
42) C
43) C
44) D
45) C
46) B
47) B
48) C
49) C
50) D
51) C
52) D
53) B
54) B
55) A
56) A

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57) D
58) A
59) E
60) D
61) C
62) B
63) D
64) C
65) E
66) E
67) The three areas are:
a.Capital budgeting: The identification and management of
investment opportunities that are worth more to the firm than
they cost to acquire.
b.Capital structure: The determination of the optimal
mixture of current and long-term debt and equity used to
finance a firm‟s operations.
c.Working capital management: The daily control over the firm‟s
short-term assets and liabilities.

68) The advantages of the corporate form of organization over

sole proprietorships and general partnerships are the ease of
transferring ownership, the owners‟ limited liability for business
debts, the ability to raise more capital, and the opportunity of an
unlimited life for the business. The key disadvantages are double
taxation and higher formation costs.

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69) A limited liability company (LLC) limits the liability of each
partner for the debts of the partnership to the amount that
partner invested in the firm. Under a general partnership, each
partner is fully liable for all of the partnership‟s debts. An LLC
avoids the double taxation of profits since the profits are
distributed to partners and taxed as personal income. Thus, an
LLC is taxed like a partnership while offering the limited liability
to owners like a corporation.
70) A sole proprietorship has a limited life, limited access to
additional capital, and unlimited liability for the owner. By
switching to the corporate form, the sole proprietor can obtain
additional capital while reducing his or her potential liability to the
amount he or she invested in the firm. Also, the sole proprietor
can sell a portion of the business enabling him or her to diversify
their holdings while still maintaining majority control if desired.
The primary downside of the change is the incurrence of double
taxation.
71) The appropriate goal is to maximize the current value of
the outstanding stock. This goal focuses on enhancing the
returns to the current stockholders who are the owners of the
firm. Other goals, such as maximizing sales or earnings, focus
too narrowly on accounting profits and ignore the importance of
market values in managerial finance.

Student name:_
MULTIPLE CHOICE - Choose the one alternative that best completes the
statement or answers the question.
1) The right-hand side of the balance sheet is where _ is reported.

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 A) property, plant, and equipment
B) accumulated retained earnings
C) accumulated depreciation
D) cash and equivalents
E) intangible assets

2) The line on the balance sheet called represents the entire book value
of the residual ownership of a corporation.

A) total equity
B) total long-term liabilities
C) retained earnings
D) capital surplus
E) total assets

3) The book value of all of a corporation’s net profits, minus all of its dividend
payments, is reported on the line of the balance sheet.

A) capital surplus
B) accumulated retained earnings
C) treasury stock
D) common stock
E) total equity

4) Which one of the following is a current liability?

A) An invoice due to a supplier 14 months from today

B) A note payable to a lender in nine months
C) Estimated income taxes which were just paid today
D) A loan payment due to a bank 14 months from today
E) An invoice due from a customer in 30 days

5) If total assets increase:

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 A) net working capital must also increase.
B) an investment in fixed assets must have occurred.
C) stockholders’ equity must also increase.
D) the change must be offset by an equal increase in liabilities and stockholders’
equity.
E) net income must be positive.

6) Of the following choices, the most liquid asset is typically:

A) inventory.
B) land.
C) accounts receivable.
D) equipment.
E) patents.

7) Regarding liquidity, which one of the following statements is accurate?

A) Liquid assets generally earn higher rates of return than fixed assets.
B) If you can sell an asset next year at a price equal to its actual value,
the asset is highly liquid.
C) Liquid assets are defined as those assets obtained within the past year.
D) The less liquidity a firm has, the lower the probability the firm will
encounter financial difficulties.
E) Balance sheet accounts are listed in order of decreasing liquidity.

8) Liquidity is:

A) a measure of the use of debt in a firm’s capital structure.

B) equal to the book value of a firm’s total assets minus its total liabilities.
C) equal to the market value of a firm’s total assets minus its total liabilities.
D) valuable to a firm even though liquid assets tend to be less profitable to own.
E) generally most closely associated with intangible, rather than tangible, assets.

9) is a component of total stockholders’ equity.

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 A) Long-term debt
B) Deferred taxes
C) Property, plant and equipment
D) Accumulated retained earnings
E) Dividends paid

10) Which of the following statements is accurate? Book value is:

A) equivalent to market value for firms with fixed assets.

B) based on historical cost.
C) always more than market value.
D) more of a financial than an accounting valuation.
E) adjusted whenever the market value of an asset changes.

11) Assume you sell an asset today. Which of the following amounts are you most
likely to receive?

A) Market value
B) Original cost minus accumulated depreciation
C) Historical value
D) Book value
E) Carrying value

12) The accounting definition that underlies the balance sheet can be expressed
accurately as:

A) Assets ≡ Liabilities − Stockholders’ equity

B) Stockholders’ equity ≡ Assets + Liabilities
C) Liabilities ≡ Stockholders’ equity − Assets
D) Assets ≡ Stockholders’ equity − Liabilities
E) Stockholders’ equity ≡ Assets − Liabilities

13) On a balance sheet, is (are) reported with fixed assets.

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 A) intangible assets
B) accounts payable
C) preferred stock
D) inventory
E) accounts receivable

14) Deferred taxes are a component of on a balance sheet.

A) stockholders’ equity
B) current assets
C) long-term liabilities
D) fixed assets
E) current liabilities

15) If a firm’s financial managers successfully meet their primary goal, then the
firm’s:

A) debts will exceed its equity.

B) market value will exceed its book value.
C) net working capital will exceed its long-term debt.
D) carrying value will exceed its market value.
E) equity will exceed its assets.

16) A(n) asset is one that can be readily converted into cash without a
significant loss in its value.

A) marketable
B) tangible
C) intangible
D) liquid
E) fixed

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17) Assume a profitable firm has neither issued nor repurchased any shares of its
common stock, nor has it ever paid dividends. If the book value of the firm’s
stockholders’ equity has increased, it follows that the:

A) book value of the firm’s inventory has decreased.

B) firm’s earnings per share has increased.
C) market value of the firm’s buildings has increased.
D) market value of the firm’s long-term debt has increased.
E) noncash expenses have increased.

18) The balance sheet reports assets in order of:

A) decreasing liquidity.
B) date of acquisition.
C) increasing size.
D) market value relative to book value.
E) book value.

19) If a firm’s treasury stock balance increases, the:

A) total equity of the firm increases.

B) firm has issued new shares of stock to the federal government.
C) number of shares outstanding increases.
D) firm repurchased outstanding shares of stock.
E) total liabilities of the firm increases.

20) The book value of a firm’s assets:

A) is determined under Generally Accepted Accounting Principles (GAAP) and

is based on the cost of those assets.
B) represents the true market value of those assets according to GAAP.
C) is always the best measure of the company’s value to an investor.
D) is always higher than the replacement cost of the assets.
E) is reported on the firm’s income statement.

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21) Under Generally Accepted Accounting Principles (GAAP), a firm’s assets are
reported at:

A) market value.
B) liquidation value.
C) market value less accumulated depreciation.
D) historical cost less accumulated depreciation.
E) liquidation value less accumulated depreciation.

22) The income statement:

A) measures performance of the firm for one specific day.

B) ignores any income other than operating revenues.
C) excludes deferred tax expense.
D) treats dividends paid as a cash expense.
E) includes noncash expenses.

23) Generally Accepted Accounting Principles (GAAP) require revenue to be

recognized as income when:

A) a contract is signed to perform a service or deliver a good.

B) the transaction is complete and the goods or services are delivered.
C) payment is requested.
D) income taxes are paid on the revenue earned.
E) the end of the financial reporting period arrives.

24) A firm’s accounting performance during a particular period of time is reported on

the:

A) income statement.
B) balance sheet.
C) statement of cash flows.
D) tax reconciliation statement.
E) statement of equity.

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25) The term “noncash items” is referring to:

A) the credit sales of a firm.

B) the accounts payable of a firm.
C) the costs incurred for the purchase of intangible fixed assets.
D) expenses charged against revenues that do not directly affect cash flow.
E) all accounts on the balance sheet other than cash on hand.

26) If a firm has long-term debt, net income must equal:

A) Pretax income − Interest expense − Taxes.

B) EBIT − Taxes.
C) Taxes + Addition to retained earnings.
D) Operating income × (1 − Marginal tax rate).
E) Dividends + Addition to retained earnings.

27) As seen on the income statement of a tax-paying firm:

A) interest is deducted from income and increases the total taxes incurred.
B) the tax rate is applied to the earnings before interest and taxes when the
firm pays interest.
C) depreciation is shown as an expense but does not affect the tax expense.
D) depreciation reduces both the pretax income and the net income.
E) interest expense is added to earnings before interest and taxes to
compute pretax income.

28) All else held constant, the earnings per share will decrease as the:

A) net income increases.

B) number of shares outstanding increases.
C) total revenue of the firm increases.
D) tax rate decreases.
E) costs decrease.

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29) Which one of the following statements is correct?

A) Pretax income is equal to net income minus taxes.

B) The addition to retained earnings is equal to net income plus dividends.
C) Operating income is equal to operating revenue minus cost of goods sold.
D) Only current taxes are included in the tax expense.
E) Earnings per share can be negative but dividends per share cannot.

30) Earnings per share:

A) will increase if net income increases and the number of shares outstanding
decreases.
B) will increase if net income decreases and the number of shares outstanding
increases.
C) is defined as the addition to retained earnings divided by the number
of shares outstanding.
D) is the total amount of dividends paid per year on a per share basis.
E) must increase at the same rate as the net income.

31) Earnings per share will increase when:

A) depreciation decreases.
B) the number of shares outstanding increases.
C) operating income decreases.
D) dividends per share decrease.
E) the average tax rate increases.

32) If the number of shares outstanding and total earnings both remain constant, an
increase in dividends per share will:

A) reduce the earnings per share.

B) reduce the addition to retained earnings.
C) reduce net income.
D) increase total equity.
E) increase total assets.

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33) Which one of the following items is a noncash item?

A) Deferred taxes
B) Interest expense
C) Current taxes
D) Dividends
E) Selling expenses

34) Assume a firm is profitable and pays income taxes. For each $1 increase in
the firm’s depreciation expense:

A) net income will decrease by $1.

B) net income will increase by $1.
C) net income will decrease by more than $1.
D) net income will decrease by less than $1.
E) net income will increase by less than $1.

35) According to Generally Accepted Accounting Principles (GAAP), the cost of

goods sold is:

A) recorded when inventory is acquired.

B) recorded when payables are paid.
C) matched with revenues.
D) matched with production levels.
E) expensed at the end of the production cycle.

36) If a firm is profitable and pays income taxes, depreciation expense:

A) decreases both operating income and net income.

B) increases net fixed assets.
C) reduces both net fixed assets and total operating costs.
D) is a noncash expense that increases net operating income.
E) decreases net fixed assets, net income, and operating cash flows.

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37) During a period of one year, which one of the following choices is most likely
to be a fixed, rather than variable, cash expense?

A) Raw materials cost

B) Bond interest
C) Commissions paid to sales representatives
D) Depreciation
E) Manufacturing labor costs

38) Assume a firm is either a proprietorship, partnerships, or LLC. When an

analyst at the firm is evaluating a financial decision, the analyst should employ the
tax rate.

A) average
B) fixed
C) marginal
D) total
E) variable

39) The tax rate applies to the next dollar of taxable income earned.

A) deductible
B) residual
C) total
D) average
E) marginal

40) As of 2018, the U.S. corporate tax rate is:

A) based on a progressive tax rate schedule.

B) based on a tiered, multi-rate flat tax.
C) a flat tax of 34 percent.
D) zero with all corporate taxable income passed to shareholders.
E) a flat rate of 21 percent.

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41) A firm starts its year with positive net working capital. During the year, the firm
acquires more short-term debt than it does short-term assets. This means that:

A) the ending net working capital must be negative.

B) both accounts receivable and inventory decreased during the year.
C) the beginning current assets were less than the beginning current liabilities.
D) accounts payable and inventory increased during the year.
E) the ending net working capital can be positive, negative, or equal to zero.

42) For a growing firm, the change in net working capital is generally:

A) positive.
B) negative.
C) highly erratic.
D) highly negative.
E) equal to zero.

43) An increase in will cause the operating cash flow of a profitable

firm to increase.

A) depreciation
B) cash
C) net working capital
D) taxes
E) administrative expenses

44) The cash flow to creditors is not impacted by:

A) interest paid on long-term debt.

B) a new mortgage on a building.
C) an increase in accounts payable.
D) a mortgage interest payment.
E) a reduction in long-term debt.

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45) A firm’s equals its dividend payments less any net new equity raised.

A) operating cash flow

B) capital spending
C) net working capital
D) cash flow from creditors
E) cash flow to stockholders

46) will cause the current year’s cash flow to creditors to increase.

A) Collection of a refund for the overpayment of a loan

B) Payoff of a 36-month loan after the first 15 months
C) Payment of a late charge on an account payable to a supplier
D) Acquiring a new loan that will be repaid in one lump sum 24 months from
now
E) Purchasing inventory using credit offered by a supplier

47) The cash flow to stockholders must be positive when:

A) the dividends paid are less than the amount of net new equity raised.
B) the net sale of common stock exceeds the amount of dividends paid.
C) no income is distributed but new shares of stock are sold.
D) the cash flow from assets is positive and exceeds the cash flow to
creditors.
E) both the cash flow to assets and the cash flow to creditors are positive.

48) Cash flow from assets:

A) equals net income plus noncash items.

B) can be positive, negative, or equal to zero.
C) equals operating cash flow minus net capital spending.
D) equals the addition to retained earnings.
E) equals operating cash flow minus the cash flow to creditors.

49) Net capital spending is equal to the:

Version 1 36
 A) net change in total assets plus depreciation.
B) net change in fixed assets plus depreciation.
C) net income plus depreciation.
D) difference between the market and book values of the total assets.
E) change in total assets.

50) Cash flow to stockholders is defined as:

A) cash dividends paid.

B) repurchases of equity less new equity sold minus cash dividends paid.
C) cash flow from financing less cash flow to creditors.
D) cash dividends paid plus repurchases of equity minus new equity financing.
E) cash flow from assets plus cash flow to creditors.

51) Free cash flow refers to:

A) the money generated from the sale of new shares of stock.

B) operating cash flow.
C) the cash generated by decreasing net working capital.
D) cash that the firm can distribute to creditors and stockholders.
E) the net income of a firm after taxes have been paid.

52) The cash flow of the firm must be equal to the:

A) cash flow to stockholders minus the cash flow to creditors.

B) cash flow to creditors minus the cash flow to stockholders.
C) cash flow to governments plus the cash flow to stockholders.
D) cash flow to stockholders plus the cash flow to creditors.
E) aftertax operating cash flow.

53) is the cash flow resulting from a firm’s ongoing, normal business
activities.

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 A) Operating cash flow
B) Net capital spending
C) Additions to net working capital
D) Free cash flow
E) Cash flow to investors

54) Capital spending is equal to:

A) ending net fixed assets minus beginning net fixed assets.

B) ending net fixed assets minus beginning net fixed assets plus depreciation.
C) ending total assets minus beginning total assets.
D) ending total assets minus beginning total assets plus depreciation.
E) beginning total assets plus asset purchases minus asset sales.

55) Operating cash flow is defined as:

A) Pretax income − Taxes.

B) Net income − Dividends.
C) EBIT + Depreciation − Taxes.
D) Pretax income + Depreciation.
E) Cash flow to investors + Taxes.

56) Payments to creditors that include both interest and repayment of principal are
referred to as:

A) the cash flow to stockholders.

B) deferred tax payments.
C) debt service payments.
D) operating cash flow.
E) net working capital payments.

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57) In the accounting statement of cash flows, is calculated by adding back
noncash expenses to net income, and then adjusting for changes in current assets
and current liabilities.

A) cash flow from investing activities

B) cash flow from financing activities
C) net working capital
D) cash flow from operations
E) cash flow to investors

58) The accounting statement of cash flows reports the cash flows from:

A) operations, investing activities, and financing activities.

B) operations, investing activities, and divesting activities.
C) internal activities, external activities, and financing activities.
D) balance sheet accounts only.
E) income statement accounts only.

59) In the accounting statement of cash flows, interest expense is:

A) ignored completely.
B) included as a financing activity.
C) included both as an operating and as a financing activity.
D) included as an investing activity.
E) included in operations.

60) One of the reasons why cash flow analysis is popular is because:

A) cash flows are more subjective than net income.

B) deferred taxes require future cash payment.
C) cash flows are strictly defined by Generally Accepted Accounting
Principles (GAAP).
D) it is difficult to manipulate, or spin the cash flows.
E) operating cash flows are found on the income statement.

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61) Tejado Supply has total equity of $1,830, fixed assets of $2,170, long-term debt
of $740, and short-term debt of $430. What is the amount of Tejado’s current assets?

A) $400
B) $830
C) $340
D) $660
E) $1,09
0

62) Olmos Packaging has equipment with a book value of $3,560 that could be sold
today for
$3,900. Its inventory is valued at $1,780 and could be sold immediately to a competitor
at a discount of 25 percent. The firm has $260 in cash and customers owe the firm
$950, of which 98 percent is collectible. What is the current market value of the firm's
assets?

A) $6,08
B) 6
$5,53
C) 6
$6,42
D) 6$6,31
E) 6
$5,946

63) Hudson Enterprises spent $6,400 to purchase equipment three years ago. This
equipment is currently valued at $4,600 on today’s balance sheet but could actually be
sold for $5,100. Net working capital is $800 and long-term debt is $3,700. Assuming
the equipment is the firm’s only fixed asset, what is the book value of shareholders’
equity?

A) $1,70
B) 0
$3,50
C) 0
$2,20
D) 0
$100
E) $600

64) Soto Marketing has sales of $760,000 and costs of $630,000. Interest expense
is $21,000 and depreciation is $48,000. The tax rate is 23 percent. What is the net

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income?

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 A) $83,930
B) $61,000
C) $46,970
D) $63,140
E) $115,97
0

65) Arroyo Industries has revenues of $64,480, interest expense of $1,740,

depreciation of
$3,960, cost of goods sold of $25,840, dividends paid of $5,200, and administrative
expenses of
$7,040. The combined federal and state income tax rate is 22 percent. What is the
addition to retained earnings?

A) $18,09
B) 1
$20,70
C) 0
$16,35
D) 9$15,00
E) 2
$20,202

66) Yang Services has annual revenue of $37,800, cost of goods sold of $23,200,
and administrative expenses of $6,300. The firm paid $700 in dividends, $280 in
interest, and has a total tax rate of 21 percent. The firm will add $2,810 to retained
earnings. What is the depreciation expense?

A) $2,30
B) 0
$3,70
C) 9
$2,64
D) 0
$780
E) $3,577

67) Margolin & Li has total revenues of $4,315, selling and administrative expenses
of $611, depreciation of $309, cost of goods sold of $2,403, taxes of $178, dividends
of $80, and interest expense of $168. What is the amount of the noncash items?

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 A) $481
B) $477
C) $248
D) $309
E) $567

68) Mahesri Excavations added $411 to retained earnings last year on sales of
$24,646. The administrative expenses were $4,370, depreciation was $812, dividends
paid were $285, and the interest expense was $103. What was the cost of goods sold
if the total tax rate was 23 percent?

A) $20,22
B) 5
$24,38
C) 5
$18,45
D) 7$14,81
E) 5
$21,393

69) Gupta Global has operating income of $68,200, interest expense of $210,
dividends paid of $320, depreciation of $12,400, other income of $2,100, common
stock of $48,500 with a par value of $1 per share, and retained earnings of $29,700.
What is the earnings per share if the tax rate is 21 percent?

A) $1.1
B) 4
$1.21
C) $.82
D) $.96
E) $1.33

70) Given the personal income tax rates as shown, what is the average tax
rate for an individual with taxable income of $96,000?

Taxable Income Tax Rate

$0 − 9,950 10%
9,950 − 40,525 12
40,525 − 86,375 22
86,375 − 164,925 24
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 A) 24.00%
B) 2.41%
C) 11.38%
D) 17.77%
E) 21.00%

71) Rahman Motors is a sole proprietorship that earned $156,000 in taxable

income. Given the personal income tax rates shown below, what is the total tax?

Taxable Income Tax Rate

$0 − 9,950 10%
9,950 − 40,525 12
40,525 − 86,375 22
86,375 − 164,925 24

A) $16,710.0
B) 0
$37,440.0
C) 0
$25,326.5
D) 0$32,760.0
E) 0
$31,461.0
0

72) Hasan Restaurant Group is a sole proprietorship that has taxable income of
$147,200. Based on the partial individual tax schedule shown below, how much
additional tax will be owed if the taxable income increases by $12,800? Assume this is
the sole source of income for the owner.

Taxable Income Tax Rate

$0 − 9,950 10%
9,950 − 40,525 12
40,525 − 86,375 22
86,375 − 164,925 24

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 A) $3,072.0
B) 0
$2,816.0
C) 0
$2,688.0
D) 0$1,338.5
E) 0
$1,536.0
0

73) Assume Kiolbassa Books paid $368,060 in taxes on taxable income of

$1,673,000 last year. This year, the firm paid $401,545 in taxes on taxable income of
$1,818,586. Assume the tax rates were the same for both years. What are the marginal
and average tax rates for this year?

A) 21%; 21%
B) 22%; 21%
C) 23%; 22%
D) 22%; 22%
E) 23%; 21%

74) A firm has $1,120 in inventory, $2,780 in fixed assets, $1,470 in accounts
receivable,
$930 in accounts payable, and $540 in cash. What is the amount of the net working
capital?

A) $4,98
B) 0
$2,20
C) 0
$3,13
D) 0$4,06
E) 0
$5,910

75) A firm has $760 in inventory, $2,740 in fixed assets, $930 in accounts receivable,
$480 in accounts payable, $270 in long-term debt, and $120 in cash. What is the
amount of the net working capital?

A) $3,80
B) 0
$1,81
C) 0
$1,33
D) 0$2,29
0
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 E) $4,550

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76) At the end of the year, Kiehnau Kicks had $11,400 in inventory, $23,470 in fixed
assets,
$13,240 in accounts receivable, $9,760 in accounts payable, $5,350 in long-term debt,
and
$4,820 in cash. How much net working capital did the firm have?

A) $19,70
B) 0
$37,82
C) 0
$29,46
D) 0$39,22
E) 0
$52,930

77) At the beginning of the year, a firm had total assets of $51,400, fixed assets of
$32,800, and current liabilities of $13,280. At the end of the year, the current assets
are $14,800, the fixed assets are $34,100, and the current liabilities are $14,210. What
is the change in net working capital for the year?

A) −$18,930
B) −$6,950
C) $11,470
D) −$4,730
E) $9,110

78) Wilson Corporation started the year with $280 in cash, $924 in inventory, $361
in accounts payable, $1,687 in equipment, and $414 in accounts receivable. At year's
end, the firm had $311 in cash, $1,594 in equipment, $1,003 in inventory, $426 in
accounts receivable, and
$398 in accounts payable. What was the change in net working capital during the year?

A)
−$860
B) $191
C) $85
D) −$94
E)
−$206

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79) Gonzalez Awnings has net fixed assets of $38,215, long-term debt of $22,400,
cash of
$560, accounts payable of $4,611, inventory of $11,408, and accounts receivable of
$3,462. How much net working capital does the firm have?

A) $11,63
B) 4
$26,63
C) 4
$13,11
D) 7$10,81
E) 9
$14,736

80) A firm with no debt has total sales of $22,980, costs of $14,715, and depreciation
of
$6,045. The combined federal and state tax rate is 23 percent. What is the operating
cash flow?

A) $1,465.2
B) 0
$2,410.8
C) 0
$8,340.0
D) 0$7,754.4
E) 0
$9,019.8
0

81) McSherry Interiors has beginning net fixed assets of $234,100 and ending net
fixed assets of $243,600. Assets valued at $42,500 were sold during the year.
Depreciation was $62,500. What is the amount of net capital spending?

A) −$42,50
B) 0
$9,500
C) $72,000
D) $53,000
E) $29,500

82) At the beginning of the year, long-term debt of a firm was $2,400 and total debt
was
$3,150. At the end of the year, long-term debt is $2,800 and total debt is $4,370. The
interest paid was $40. What is the amount of the cash flow to creditors?

Version 1 47
 A) $440
B) −$40
C)
$1,260 D)
$1,180 E)
−$360

83) Walker Custom Boots has beginning long-term debt of $840 and ending long-
term debt of $790. The beginning and ending total debt balances are $1,220 and
$1,360, respectively. The interest paid is $30. What is the amount of the cash flow to
creditors?

A) $80
B)
−$110
C) $110
D) $20
E) −$80

84) For the year, Andrus Event Management had net income of $8,110. The firm
paid out 30 percent of the net income to its shareholders as dividends and also paid
$210 in interest. During the year, the company repurchased $500 worth of common
stock and borrowed $250. What is the cash flow to stockholders?

A) $2,93
B) 3
$1,89
C) 3
$1,93
D) 3$2,43
E) 3
$2,893

85) Zhao Pediatrics has operating cash flow of $11,618. Depreciation is $2,345 and
interest paid is $395. A net total of $485 was paid on long-term debt. The firm spent
$6,180 on fixed assets and decreased net working capital by $420. What is the cash
flow of the firm?

Version 1 48
 A) $5,85
B) 8
$8,20
C) 3
$9,22
D) 8$5,01
E) 8
$7,363

86) Trevino Pet Care has total revenues of $3,811, costs of $2,902, depreciation of
$315, interest expense of $168, and taxes of $89. At the beginning of the year, the
firm had current assets of $2,150, total assets of $4,908, and total liabilities of $1,964.
At the end of the year, the current assets are $2,202, total assets are $5,103, and
total liabilities are $1,952. What is the amount of net capital spending for the year?

A) −$18
B) 2$133
C) $458
D) $510
E) $285

87) Grimaldi, Incorporated, has total revenue of $4,116, depreciation of $319,

selling and administrative expenses of $554, interest expense of $162, dividends of
$75, cost of goods sold of $2,354, and taxes of $186. What is the operating cash
flow?

A) $1,118
B) $795
C) $1,14
D) 7$1,02
E) 2
$720

88) Reed & Barr has interest expense of $168, total revenues of $38,411, costs of
$28,515, depreciation of $306, and taxes of $1,979. The beginning balance sheet
has total assets of
$48,354, net fixed assets of $31,202, current liabilities of $14,207, and total liabilities of
$29,407. The ending balance sheet shows total assets of $49,305, net fixed assets of
$33,406, current liabilities of $17,318, and total liabilities of $30,404. What is the
annual cash flow of the firm?
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 A) $9,771
B) −$2,16
C) 0
D) $15,16
$8,474
E) $2,857

89) Batiste Corporation had taxable income of $1,630 and a tax rate of 23
percent for the year. The firm neither issued nor repurchased shares of stock but
did decrease its retained earnings by $310. What is the cash flow to stockholders?

A) $1,749.50
B) $535.50
C) $959.50
D) $1,242.5
E) 0
$1,565.1
0

90) Goodwin Transport paid $85 in dividends and $110 in interest expense during
a given year. During that same year, the firm issued $40 in new equity shares,
issued new debt of $65, and repaid $23 of old debt. What is the cash flow to
creditors for that year?

A) $152
B) $146
C) $237
D) $68
E) $46

91) At the beginning of this year, Basit Framing had net fixed assets of $21,506
and total assets of $32,687. At year’s end, net fixed assets are $20,492 and total
assets are $32,915. The annual depreciation expense is $1,520. What is net capital
spending for this year?

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 A) −$850
B) $506
C) −$1,292
D) −$2,534
E) $1,748

92) For the year, Gripka Fashion has depreciation of $2,058, dividends paid of $125,
interest expense of $382, an addition to retained earnings of $3,408, and an increase
in common stock of
$2,500. The total tax rate is 21 percent. What is the operating cash flow?

A) $6,46
B) 0
$5,97
C) 3
$5,32
D) 5$5,73
E) 5
$6,408

93) Kotara Equipment has the following financial information:

Current Year Prior Year

Revenues $ 48,915 $ 43,610

Administrative expenses 12,106 11,602
Interest expense 816 468
Cost of goods sold 29,715 26,309
Depreciation 1,408 1,387
Net fixed assets 32,711 31,984
Current liabilities 14,652 14,625
Common stock 15,000 14,000
Current assets 16,506 14,687
Long-term debt 12,200 ?
Retained earnings 7,365 4,246
Dividends paid 290 275

What is the cash flow of the firm for the current year if the tax rate is 22 percent?

Version 1 50
 IF YOU WANT THIS TEST BANK OR
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SOLUTION MANUAL EMAIL ME
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CHAPTERS IN PDF FORMAT

Version 1 50