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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 31

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The 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.

A) True
B) False

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Question 32

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Olivia Hardison,CFO of Impact United Athletic Designs,plans to have the company issue $500 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?

A) The company would have to pay less taxes.
B) The company's taxable income would fall.
C) The company's interest expense would remain constant.
D) The company would have less common equity than before.
E) The company's net income would increase.

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

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Question 33

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Total net operating capital is equal to net fixed assets.

Swinnerton Clothing Company's balance sheet showed total current assets of $2,250,all of which were required in operations.Its current liabilities consisted of $575 of accounts payable,$300 of 6% short-term notes payable to the bank,and $145 of accrued wages and taxes.What was its net operating working capital that was financed by investors?

DeYoung Devices Inc. ,a new high-tech instrumentation firm,is building and equipping a new manufacturing facility.Assume that currently its equipment must be depreciated on a straight-line basis over 10 years,but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years.If the legislation becomes law,which of the following would occur in the year following the change?

Aubey Aircraft recently announced that its net income increased sharply from the previous year,yet its net cash flow from operations declined.Which of the following could explain this performance?

In 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.

If 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.

NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets.All of these assets were required in operations.The firm's current liabilities consisted of $475,000 of accounts payable,$375,000 of 6% short-term notes payable to the bank,and $150,000 of accrued wages and taxes.Its remaining capital consisted of long-term debt and common equity.What was NNR's total investor-provided operating capital?

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

Meric Mining Inc.recently reported $15,000 of sales,$7,500 of operating costs other than depreciation,and $1,200 of depreciation.The company had no amortization charges,it had outstanding $6,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.

Ullrich Printing Inc.paid out $21,750 of common dividends during the year.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?

The time dimension is important in financial statement analysis.The balance sheet shows the firm's financial position at a given point in time,the income statement shows results over a period of time,and the statement of cash flows reflects changes in the firm's accounts over that period of time.

Which of the following statements is CORRECT?

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

Net operating working capital is equal to operating current assets minus operating current liabilities.

The current cash flow from existing assets is highly relevant to the investor.However,since the value of the firm depends primarily upon its growth opportunities,profit projections from those opportunities are the only relevant future flows with which investors are concerned.

Which of the following statements is CORRECT?

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year,even though the cash on its balance sheet increased?