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Exam 2: Statements, CF, Taxes

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Question 21

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Which of the following statements is CORRECT?

A) The more depreciation a firm reports, the higher its tax bill, other things held constant.
B) People sometimes talk about the firm's net cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
C) Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.
D) Net cash flow (NCF) is often defined as follows: Net Cash Flow = Net Income + Depreciation and Amortization Charges.
E) Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.

F) A) and C)
G) A) and E)

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Question 22

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Assume that Congress recently passed a provision that will enable Bev's Beverages Inc.(BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate.Prior to the new provision, BBI's net income after taxes was forecasted to be $4 million.Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

A) The provision will reduce the company's net cash flow.
B) The provision will increase the company's tax payments.
C) Net fixed assets on the balance sheet will increase.
D) The provision will increase the company's net income.
E) Net fixed assets on the balance sheet will decrease.

F) A) and B)
G) B) and E)

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Question 23

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annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

Total net operating capital is equal to net fixed assets.

Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises: $\begin{array}{|l|l|l|}\hline \text { Assets: } &{2009} & {2008} \\\hline \text { Cash } & \$ 200,000 & \$ 170,000 \\\hline \text { Accounts receivable } & 864,000 & 700,000 \\\hline \text { Inventories } & 2,000,000 & 1,400,000 \\\hline \text { Total current assets } & \$ 3,064,000 & \$ 2,270,000 \\\hline \text { Net fixed assets } & 6,000,000 & 5,600,000 \\\hline \text { Total assets } & \$ 9,064,000 & \$ 7,870,000 \\\hline\\\hline \text { Liabilities and equity: } & & \\\hline \text { Accounts payable } & \$ 1,400,000 & \$ 1,090,000 \\\hline \text { Notes payable } & 1,600,000 & 1,800,000 \\\hline \text { Total current liabilities } & \$ 3,000,000 & \$ 2,890,000 \\\hline \text { Long-term debt } & 2,400,000 & 2,400,000 \\\hline \text { Common stock } & 3,000,000 & 2,000,000 \\\hline \text { Retained earnings } & 664,000 & 580,000 \\\hline \text { Total common equity } & \$ 3,664,000 & \$ 2,580,000 \\\hline \text { Total liabilities and equity } & \$ 9,064,000 & \$ 7,870,000 \\\hline\end{array}$ Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2008.As of the end of 2009, none of the principal on this debt had been repaid.Assume that the company's sales in 2008 and 2009 were the same.Which of the following statements must be CORRECT?

accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles.In finance, the primary emphasis is also on net income because that is what investors use to value the firm.However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

the balance sheet, total assets must always equal total liabilities and equity.

During the year, Bascom Bakery Inc.paid out $21,750 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250.How much net income did the firm earn during the year?

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

Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%.How much was its net cash flow?

the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

Assume that Pappas Company commenced operations on January 1, 2010, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes.The company planned to depreciate its fixed assets over 15 years, but in December 2010 management realized that the assets would last for only 10 years.The firm's accountants plan to report the 2010 financial statements based on this new information.How would the new depreciation assumption affect the company's financial statements?

Below is the common equity section (in millions) 2009 2008 Common stock $2,000 $1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 Teweles has never paid a dividend to its common stockholders.Which of the following statements is CORRECT?

CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT) , and its tax rate all remain constant.Which of the following would occur?

the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings.The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share.How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA?

Enterprises has the following income statement.How much net operating profit after taxes (NOPAT) does the firm have?

fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income.Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation.The company had no amortization charges and no non-operating income.It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%.How much was Lindley's operating income, or EBIT?