NC Finance Chap 3

In general, what is changing as you read down the left-hand side of a balance sheet? A. The assets are becoming more fully depreciated.B. The assets are increasing in value.C. The assets are increasing in maturity.D. The assets are becoming less liquid. D. The assets are becoming less liquid.
A balance sheet portrays the value of a firm’s assets and liabilities: A. over an annual period.B. over any stated period of time.C. at any stated point in time.D. only at the end of the calendar year. C. at any stated point in time.
Which of the following items should not be included in a listing of current assets? A. Marketable securitiesB. Accounts payableC. Accounts receivableD. Inventories B. Accounts payable
Which of the following assets is likely to be considered the most liquid? A. Marketable securitiesB. Net fixed assetsC. Accounts payableD. Inventories A. Marketable securities
If the value of a firm’s net fixed assets equals the value of the accumulated depreciation, from an accounting context the fixed assets are: A. new.B. fully depreciated.C. one-half depreciated.D. equal in value to the firm’s current assets. C. one-half depreciated.
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders’ equity, then the firm has: A. no retained earnings.B. long-term debt.C. no accumulated depreciation.D. current assets. B. long-term debt.
Which one of the following is an intangible asset? A. GoodwillB. Retained earningsC. Deferred income taxesD. Treasury stock A. Goodwill
Suppose Dee’s just acquired the assets of Flo’s Flowers. The book value of Flo’s Flowers assets was $68,000 but Dee’s paid a total of $75,000. The additional $7,000 paid by Dee’s will be recorded on Dee’s balance sheet as: A. accounts payable.B. goodwill.C. other current assets.D. property, plant, and equipment. B. goodwill.
What happens to a firm’s net worth as it uses cash to repay accounts payable? A. Net worth increases.B. Net worth decreases.C. Net worth remains constant.D. Net worth decreases temporarily, until cash is replenished. C. Net worth remains constant
If a payment of principal is due in 13 months on a long-term liability, that payment will now appear on the balance sheet as: A. a current liability.B. long-term debt.C. cash.D. interest expense. B. long-term debt.
Net working capital is a measure of a company’s: A. goodwill.B. short-term liabilities.C. estimated cash reservoir.D. shareholders’ equity. C. estimated cash reservoir.
Net working capital is calculated by taking the difference between: A. total assets and total liabilities.B. inventory and accounts payable.C. current assets and current liabilities.D. cash and accounts payable. C. current assets and current liabilities.
Which of the following statements about net working capital (NWC) is correct? A. NWC is positive for all firms.B. As NWC decreases, potential liquidity increases.C. NWC excludes inventory, which is deemed illiquid.D. Decreases in NWC can increase the firm’s risk. D. Decreases in NWC can increase the firm’s risk.
The existence of goodwill on a corporate balance sheet indicates that the corporation has: A. been profitable in the past.B. depreciated its tangible assets.C. intangible assets from past acquisitions.D. retained earnings resulting from past income. C. intangible assets from past acquisitions.
A balance sheet may be considered backward-looking from the perspective that it: A. works backward, starting with net income.B. records historic, not current values.C. cannot forecast the future.D. records costs over many previous periods. B. records historic, not current values.
According to GAAP, assets and liabilities are typically recorded on the balance sheet at: A. historical cost plus depreciation.B. market value.C. salvage value.D. historical cost less depreciation. D. historical cost less depreciation.
Which of the following is correct for a fully depreciated asset? A. Market value is zero.B. Market value is greater than book value.C. Book value is greater than market value.D. The relationship between market and book values is indeterminable. D. The relationship between market and book values is indeterminable.
Depreciation expense is used to: A. allocate costs to all departments of the firm.B. determine when an asset is fully paid off.C. allocate historical cost over the life of an asset.D. equate the historical cost and market values of an asset. C. allocate historical cost over the life of an asset.
When subtracting an asset’s accumulated depreciation from its historic cost, the resulting value is termed the: A. book value of the asset.B. market value of the asset.C. depreciation expense.D. current asset value. A. book value of the asset.
ABC Corp.’s balance sheet shows its long-term debt to be $20 million. The debt was issued with a 10% interest rate, and the current interest rate is 7%. Based on this information alone, the market value of this debt is most likely: A. less than $20 million.B. more than $20 million.C. equal to $20 million.D. unknown without knowing the maturity of the debt. B. more than $20 million.
Which of the following statements about depreciation is correct? A. Depreciation is subtracted from cost of goods sold to calculate net income.B. When depreciation expense is incurred, cash balances are reduced.C. Depreciation expense does not affect net income.D. Depreciation reduces the book value of assets. D. Depreciation reduces the book value of assets.
If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be: A. greater than their book value.B. less than their book value.C. equal to their book value.D. unknown without knowing the maturity of the debt. B. less than their book value.
Which of the following values would most likely interest a shareholder? A. Book value of equityB. Market value of equityC. Retained earningsD. Net working capital B. Market value of equity
What happens to the market value of a firm’s equity as the book value of the firm’s equity increases? A. It increases by the same amount.B. It decreases by the same amount.C. It remains constant.D. There is no set relationship to determine this outcome. D. There is no set relationship to determine this outcome.
Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock? A. Market value of liabilities exceeds book value of liabilities.B. Market value of liabilities equals $1 million.C. Book value per share equals $1,000.D. Market value per share equals $2,000. B. Market value of liabilities equals $1 million.
Which of the following is more likely to be correct if market value of equity is less than book value of equity? A. Investors anticipate excellent earning potential.B. Investors anticipate low earning potential.C. Assets have been fully depreciated.D. The company is bankrupt. B. Investors anticipate low earning potential.
Market-value balance sheets differ from book-value balance sheets in that market values: A. are higher than book values.B. are lower than book values.C. conform more to GAAP accounting.D. conform to investors’ expectations. D. conform to investors’ expectations.
If market values of equity exceed book values of equity, then: A. equity has been depreciated too rapidly.B. the firm uses accrual-based accounting.C. profit potential is expected to be attractive.D. the firm is holding too much cash. C. profit potential is expected to be attractive.
Perhaps the best method for estimating the market value of shareholders’ equity is to: A. review the firm’s balance sheet.B. review the firm’s income statement.C. multiply number of shares outstanding by the price of each share.D. add the retained earnings to the total liabilities. C. multiply number of shares outstanding by the price of each share.
In which of the following asset accounts are you least likely to find a difference between market value and book value? A. CashB. InventoryC. LandD. Shareholders’ equity A. Cash
Amy wants to know if inventory is increasing as a percentage of total assets. Which one of these statements most easily provides the information she is seeking? A. Statement of cash flowsB. Balance sheetC. Common-size balance sheetD. Income statement C. Common-size balance sheet
Which one of the following expense categories is subtracted from total revenues to help arrive at a firm’s EBIT? A. Cash dividendsB. Depreciation expenseC. Interest expenseD. Tax liability B. Depreciation expense
Which one of the following does not reduce a firm’s net income? A. Income taxesB. Interest expenseC. DividendsD. Depreciation expense C. Dividends
Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense. A. $500,000B. $380,000C. $0D. ($120,000) C. $0EBIT = $4,000,000 – 3,500,000 – 500,000 = $0
The net income figure on an income statement is calculated before deducting the: A. interest expense.B. depreciation expense.C. cash dividends.D. tax liability. C. cash dividends.
An increase in depreciation expense will (other things equal): A. increase net income.B. decrease net income.C. increase taxable income.D. decrease the market value of assets. B. decrease net income.
Current period depreciation expense is listed: A. on the balance sheet.B. in the investment section of the cash flow statement.C. on the income statement.D. on neither the balance sheet nor the income statement; it is a noncash expense. C. on the income statement.
Retained earnings result from: A. the sale of additional shares of stock to investors.B. income not paid to shareholders.C. an excess of assets over liabilities.D. market values that exceed book values. B. income not paid to shareholders.
The gathering of related revenues and expenses into the same period, regardless of when they were incurred, is: A. cash-basis accounting.B. market-value accounting.C. book-value accounting.D. accrual accounting. D. accrual accounting.
According to accrual accounting, when goods are not sold until the period after they were produced, then the cost of goods sold will be: A. recognized when the goods are produced.B. recognized when the goods are sold.C. recognized when payment is received.D. split between the production and the sale periods. B. recognized when the goods are sold.
Accrual accounting, which attempts to match sales revenues and the expenses associated with the production of the goods, is conducted in an attempt to: A. reduce income-tax liability.B. reduce bias in reported profitability measures.C. speed up the receipt of accounts receivable.D. reduce the time necessary to depreciate assets. B. reduce bias in reported profitability measures.
Which of the firm’s financial statements most clearly recognizes the payment for new equipment? A. Balance sheetB. Income statementC. Statement of cash flowsD. Common-size balance sheet C. Statement of cash flows
If a firm pays taxes, which one of these will reduce net income but increase cash flow? A. Depreciation expenseB. Income taxesC. Cash salesD. Interest expense A. Depreciation expense
Which one of the following best explains the combination of a high level of net income combined with a low level of cash flow during an accounting period? A. High depreciation expenseB. Reduction of inventory levelsC. Acquisition of equipmentD. Increase in accounts payable C. Acquisition of equipment
Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period. Based solely on this information, cash flow will increase by: A. $2,500.B. $2,000.C. $1,500.D. $500. C. $1,500.
In a statement of cash flows, which category includes depreciation expense as a line item? A. OperationsB. InvestmentsC. FinancingD. None of these; depreciation is a noncash expense. A. Operations
Which of the following will occur in a statement of cash flows as a result of paying cash dividends? A. Cash flows from operations will increase.B. Cash flows from investments will decrease.C. Cash flows from financing will decrease.D. Cash balances will not be affected. C. Cash flows from financing will decrease.
Which of the following changes in working capital will result in an increase in cash flows? A. Increase in accounts payableB. Increase in inventoriesC. Increase in accounts receivableD. Decrease in other current liabilities A. Increase in accounts payable
Which of the following statements is more likely if cash and marketable securities increase by $5,000 during a period in which cash provided by operations increases by $1,000 and cash used by investments decreases by $500? A. Cash provided by financing increases by $6,500.B. Cash used by financing decreases by $1,000.C. Debt increases by more than cash dividends paid.D. Debt is reduced by more than cash dividends paid. C. Debt increases by more than cash dividends paid.Cash provided by financing increased. This could occur by increasing debt by a larger amount than the amount paid out in dividends.
If a firm’s net income is positive and its noncash expenses are positive, which of the following could account for a negative amount of cash provided by operations? A. Current assets decrease more than current liabilities decrease.B. Current assets increase more than current liabilities increase.C. Current assets decrease more than current liabilities increase.D. A large addition is made to plant and equipment. B. Current assets increase more than current liabilities increase.
What is the most likely conclusion for a firm whose statement of cash flows shows an increase in cash balances and has negative cash flows from both operations and financing? A. The firm has low depreciation expense.B. The firm did not pay any dividends.C. The firm sold more equipment than it purchased.D. The firm has a low interest rate on its debt. C. The firm sold more equipment than it purchased.
Johnson’s Nursery has net income of $42,500, depreciation expense of $1,800, interest expense of $900, taxes of $1,600, additions to net working capital of $2,300, and capital expenditures of $11,700. What is the amount of the free cash flow? A. $30,300B. $34,400C. $31,200D. $28,700 C. $31,200Free cash flow = $42,500 + 900 + 1,800 – 2,300 – 11,700 = $31,200
According to the statement of cash flows, cash flows from financing could be positive if: A. the firm repaid more debt than it added.B. the firm added more debt than it repaid.C. interest rates were low on outstanding debt.D. the firm sold portions of its plant and equipment. B. the firm added more debt than it repaid.
Which of the following categories of a statement of cash flows is affected by the payment of interest expense? A. Cash flows from operationsB. Cash flows from noncash expensesC. Cash flows from investmentsD. Cash flows from financing A. Cash flows from operations
Which of the following could account for a firm that has a negative net income, yet has a positive amount of cash provided by operations? A. The net loss was greater than the amount of depreciation expense.B. Inventory increased significantly more than accounts payable.C. Accounts receivable decreased by significantly more than accounts payable.D. The cash balance increased significantly. C. Accounts receivable decreased by significantly more than accounts payable.
If a firm’s statement of cash flows shows that cash was used for investments, which of the following would seem most likely? A. The inventory balance increased.B. Common stock was repurchased.C. New machines were acquired.D. Cash dividends were paid. C. New machines were acquired.
Interest expense appears in the operations section of the statement of cash flows because: A. firms cannot operate without incurring interest expense.B. its payment is not within managerial discretion.C. it is paid to finance a firm’s inventory.D. none of these; interest expense appears in the financing section of the statement of cash flows. B. its payment is not within managerial discretion.
Which one of these would not be paid from free cash flow? A. Cash dividendsB. Repayment of principal on a long-term debtC. Repurchase of outstanding shares of common stockD. New equipment purchase D. New equipment purchase
Which of the following statements correctly compares international accounting standards? A. The standards are becoming less similar over time.B. The standards are typically more lenient in the United States.C. The standards are stricter in the United States in some regards.D. Balance sheets differ, but income statements are similar in all countries. C. The standards are stricter in the United States in some regards.
Which of these statements related to free cash flow is correct? A. Free cash flow must be fully distributed to the firm’s debtors and shareholders.B. Free cash flow must be positive for a firm to acquire new fixed assets.C. All, or part, of free cash flow can be used to increase a firm’s cash reserves.D. When capital expenditures are positive, free cash flow will exceed the cash flow from operations. C. All, or part, of free cash flow can be used to increase a firm’s cash reserves.
What is the fundamental difference between IFRS and GAAP? A. GAAP relies more on general principles but ignores the spirit of those principles.B. GAAP relies more on specific rules and the spirit of the rules.C. GAAP relies more on specific rules but not the spirit of the rules.D. GAAP relies more on general principles as well as the spirit of those rules. C. GAAP relies more on specific rules but not the spirit of the rules.
What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 18% if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000? A. 15%B. 33%C. 18%D. 25% D. 25%18 × $60,000 = (.15 × $50,000) + (x × ($60,000 – 50,000))$10,800 = $7,500 + $10,000xx = .33, or 33%
Assuming at the $50,000 income level that the corporate tax rate increases from 15 to 25%, which of the following statements is correct for a firm with $75,000 of taxable income? A. Its marginal tax rate is 15%.B. Its average tax rate is 25%.C. Its marginal tax rate is 18.33%.D. Its average tax rate is 18.33%. D. Its average tax rate is 18.33%.Average tax rate: [(.15 x 50,000) + (.25 x (75,000 – 50,000))]/75,000 = 18.33
What is the highest marginal rate at which corporate income is taxed? A. 15%B. 34%C. 35%D. 39% D. 39%
Which of the following cannot be used to reduce taxable corporate income? A. Cash dividendsB. Depreciation expenseC. Interest expenseD. Administrative expenses A. Cash dividends
Assume a firm increases its revenue by $100 while increasing its cost of goods sold by $85. How much additional tax will the firm owe if its marginal tax rate is 25%? A. $3.75B. $7.50C. $13.75D. $25.00 A. $3.75Increase in taxes = .25 × ($100 – 85) = $3.75
According to the U.S. tax code at the beginning of 2014, the highest marginal tax rate for personal taxpayers is: A. 25.0%.B. 28.5%.C. 35.0%.D. 39.6%. D. 39.6%
Which one of the following statements is correct for a corporation with a negative net income in both the present and the last fiscal year? A. This year’s loss can be carried back, but last year’s loss cannot be used.B. Neither of the losses can be used to reduce taxes.C. Both losses can be carried forward but not backward.D. Both losses can be carried forward and backward, within certain time limits. D. Both losses can be carried forward and backward, within certain time limits.
Assume a single taxpayer is taxed at 10% on the first $9,075 of taxable income, 15% on the next $27,825 of income, and at 25% for the following $52,450 of income. What is the average tax rate for that individual if her taxable income is $41,350? A. 14.98%B. 16.67%C. 16.13%D. 19.98% A. 14.98%Average Tax Rate= [(.10 x 9.075) + (.15 x 27,825) + (.25 x 41,350 – 36,900))] / 41,350= 6,193.75 / 41,350= 14.98%
An individual’s income for the year includes both dividend and interest payments. Which of these statements correctly applies to that individual’s tax liability? A. Dividends are taxed; tax on interest payments is paid at the corporate level.B. Interest is taxed; tax on dividend payments is paid at the corporate level.C. Both dividend and interest payments are taxed at the personal level.D. All taxes on dividend and interest payments are paid at the corporate level. C. Both dividend and interest payments are taxed at the personal level.
A major goal of the Sarbanes-Oxley Act is to: A. increase transparency in the financial reporting of a firm’s activities.B. require firms to provide common-size balance sheets to shareholders.C. lower corporate tax rates.D. require U.S. firms to abide by international accounting standards. A. increase transparency in the financial reporting of a firm’s activities.
Which one of the following is not a requirement imposed by the Sarbanes-Oxley Act? A. Accounting firms may not offer other services to companies they audit.B. Any one individual is prohibited from serving as the chairman of a firm’s board of directors for more than 5 years.C. A board’s audit committee must consist of directors who are independent of the firm’s management.D. Management must certify that the financial statements present a fair view of the firm’s financial position. B. Any one individual is prohibited from serving as the chairman of a firm’s board of directors for more than 5 years.
Who pays taxes on earnings distributed as dividends? A. The issuing corporationB. The shareholder receiving the dividendC. Both the issuing corporation and the shareholderD. Neither the issuing corporation nor the shareholder C. Both the issuing corporation and the shareholder
Assume tax rates on single individuals are 10% on taxable income up to $9,075, 15% on income of $9,076 to $36,900 and 25% on income of $36,901 to $89,350. What is the tax liability for a single individual with $52,000 of taxable income, which includes $2,000 of dividends? A. $8,856.25B. $9,103.50C. $8,603.50D. $8,356.25 A. $8,856.25Tax= (.10 x 9,075) + [.15 x (36,900 – 9,075)] + [.25 x (52,000 – 36,900)] = 8,856.25
Which of the following forms of income can individuals defer from taxation? A. DividendsB. InterestC. Realized capital gainsD. Unrealized capital gains D. Unrealized capital gains
Which type of income is subject to “double taxation”? A. Dividends and wagesB. Capital gainsC. DividendsD. Wages C. Dividends
Professor Diehard found an effective antibiotic for the DEPRESS bacteria, and patented the drug. He believes that he can sell the patent for $20 million. He then formed a corporation and invested $400,000 in setting up a production plant. There are 2 million shares of stock outstanding. If the professor’s belief is correct, what would be the price per share and the book value per share? A. $10.20; $.20B. $10.00; $.20C. $9.80; $.40D. $9.80; $.20 A. $10.20; $.20Book value equals the $400,000 Professor Diehard has contributed in tangible assets. Market value equals the value of his patent plus the value of the production plant, or $20.4 million. Price per share = $20.4 million/2 million shares = $10.20. Book value per share = $400,000/2 million shares = $.20.
You have gathered this information on a firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%. What is the free cash flow? A. $141,000B. $168,000C. $128,000D. $142,000 C. $128,000Net income = ($500,000 – 300,000 – 20,000 – 20,000 – 40,000) × (1 – .35) = $78,000Cash flow from operations = $78,000 + 40,000 + 20,000 = $138,000Free cash flow = $138,000 – 10,000 = $128,000
What is the overall change in cash resulting from: $300 increase in inventories, $150 increase in accounts payable, $120 decrease in accounts receivable, $60 decrease in other current assets, $150 decrease in other current liabilities? A. -$120B. -$240C. $180D. $120 A. -$120Net change in cash = -$300 + 150 + 120 + 60 – 150 = -$120
What is the change in cash for a firm with the following: $10,000 cash flow from operations, $1,600 cash used for new investment, a reduction in the level of debt of $2,000, $1,000 in cash dividends, and $200 in depreciation expense? A. $5,600B. $9,600C. $9,400D. $5,400 D. $5,400Change in cash = $10,000 – 1,600 – 2,000 – 1,000 = $5,400
What are the average and marginal tax rates for a corporation that has $97,648 of taxable income? The tax rates are as follows: A. 21.97%; 25%B. 21.97%; 34%C. 23.08%; 34%D. 34%; 34% B. 21.97%; 34%Tax= (.15 x 50,000) + [.25 x (75,000 – 50,000)] + [.34 x (97,648 – 75,000)] = 21,450.32Average tax rate = $21,450.32/$97,648 = .2197, or 21.97%Marginal tax rate = 34%
Which one of these will increase a firm’s cash balance? A. An increase in inventoryB. A decrease in accounts payableC. An increase in common stockD. An increase in new equipment C. An increase in common stock

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