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Question(s) / Instruction(s):

1.  Which of the following is a reason for the initial need for financial statements?

a. As lending became more complex, physical inspection of assets was not always possible.

b. No investments were made on a share-of-profits basis.

c. Factory owners did not need reports to see how effectively their enterprises were being run.

d. All of the above statements are true.

 

2. Which of the following statements are correct.

a. Undoubtedly, the quantitative financial statements are the most important part of the annual report.

b. Undoubtedly, the verbal materials in the annual report are the most important part of the annual report.

c. The quantitative and verbal materials in the annual report are equally important.

 

3. Which of the following are basic financial reports included in the annual report?

a. balance sheet

b. income statement

c. statement of retained earnings

d. statement of cash flows

e. all of the above

 

4. The balance sheet:

a. summarizes the firm’s revenues and expenses over an accounting period.

b. reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.

c. reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

d. states the firm’s financial position at a specific point in time.

 

5. The income statement:

a. summarizes the firm’s revenues and expenses over an accounting period.

b. reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.

c. reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

d. states the firm’s financial position at a specific point in time.

 

6. The statement of retained earnings:

a. summarizes the firm’s revenues and expenses over an accounting period.

b. reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.

c. reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

d. states the firm’s financial position at a specific point in time.

 

7. The statement of cash flows:

a. summarizes the firm’s revenues and expenses over an accounting period.

b. reports how much of the firm’s earnings were retained in the business rather than paid out in dividends.

c. reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

d. states the firm’s financial position at a specific point in time.

 

8.  On its one year ago balance sheet, Sherman Books had retained earnings equal to $510 million.  On its current year balance sheet, retained earnings were also equal to $510 million.  Which of the following statements is most correct?

a. The company must have had net income equal to zero in the current year.

b. The company did not pay dividends in the current year.

c. If the company’s net income in the current year was $200 million, dividends paid must have also equaled $200 million.

d. If the company lost money in the current year, it must have paid dividends.

e. None of the statements above is correct.

 

9.  Common stockholders’ equity (net worth):

a. represents the amount of fixed assets in a firm.

b. represents the total liabilities for a firm.

c. is the capital supplied by common stockholders; it is the residual book value of the firm after all claims other than the ownership claim of common stockholders are satisfied.

d. is the amount of profit retained in the firm in a particular year.

 

10.  Depreciation:

a. represents allocations of the costs of assets over their useful lives

b. is referred to as a noncash charge

c. applies to tangible assets

d. all of the above are true

 

11. Retained earnings is:

a. the amount of cash the firm currently has available for reinvestment.

b. is the total amount of income over time that has been reinvested in the firm.

c. is the total book value of the shareholder’s equity position

 

12.  Net cash flow is generally defined as net income plus:

a. retained earnings

b. taxes paid

c. interest paid

d. depreciation and amortization

 

13.  Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year.  Which of the following could explain this performance?

a. The company’s taxes increased.

b. The company’s depreciation expense declined.

c. The company’s operating income declined.

d. All of the statements above are correct.

e. None of the statements above is correct.

 

14.  Financial statements are primarily designed for use by managers.

a. True

b. False

 

15.  Net operating profit after taxes:

a. is equal to net income

b. is equal to net cash flow

c. is the amount of profit a firm would generate if it had no debt and held no nonoperating assets

d. all of the above

 

16.  Free cash flow is:

a. equal to net income

b. equal to net cash flow

c. equal to cash available for distribution to investors after the company has made all investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.

d. none of the above

 

17.  Market value added (MVA) is:

a. equal to the firm’s retained earnings

b. equal to the total market value of the firm’s stock

c. equal to the total common equity

d. equal to the total market value of the firm’s stock minus the total common equity.

 

18.  Whereas economic value added focuses on the effects of managerial action since the inception of the company, market value added focuses on managerial effectiveness in a given year.

a. True

b. False

 

19.  Economic value added differs from accounting profit in that it:

a. considers taxes while accounting profit does not.

b. considers interest charges while accounting profit does not.

c. considers the cost of equity capital while accounting profit does not.

d. none of the above are correct.

 

20.  Interest on most state and local government securities (municipals or munis) is not subject to federal income taxes.

a. True

b. False

 

21.  Lower capital gains tax rates tend to encourage investment in productive assets.

a. True

b. False

 

22. Ravings Incorporated recently reported net income of $5.4 million. Its operating income (EBIT) was $15 million, and its tax rate was 40 percent. What was the company’s interest expense?

a. 9.6 million

b. $3.6 million

c. $18 million

d. $6 million

e. $24 million

 

23. Again Incorporated’s net cash flow is $6.2 million. The company’s depreciation expense is $1.2 million.  What is the company’s net income if it has no amortization expense?

a. $5 million

b. $7.4 million

c. $9.2 million

d. $10.2 million

e. $13.3 million

 

24. Jones Inc. reported interest expense of $45 million and net income of $30 million. Its tax rate was 40 percent.  What was the firm’s net operating profit after taxes (NOPAT)?

a. $50 million

b. $95 million

c. $37.8 million

d. $57 million

e. $120 million

 

25. Valuable Incorporated’s stock currently sells for $45 per share. The firm has 20 million share of common outstanding. The firm’s total debt equals $600 million and its common equity equals $400 million.  What is the firm’s market value added?

a. $200 million

b. $250 million

c. $350 million

d. $300 million

e. $500 million

 

26. In its recent income statement, Smith Software Inc. reported $23 million of net income, and in its year-end balance sheet, Smith reported $401 million of retained earnings.  The previous year, its balance sheet showed $389 million of retained earnings.  What were the total dividends paid to shareholders during the most recent year?  (Answers are in $ millions.)

a. $12.00

b. $11.00

c. $23.00

d. $9.00

e. $30.00

 

27. In its recent income statement, Smith Software Inc. reported paying $10 million in dividends to common shareholders, and in its year-end balance sheet, Smith reported $419 million of retained earnings.  The previous year, its balance sheet showed $404 million of retained earnings.  What was the firm’s net income during the most recent year?  (Answers are in $ millions.)

a. $25.00

b. $15.00

c. $10.00

d. $8.00

e. $32.00

 

28. Cox Corporation recently reported an EBITDA of $58 million and $7 million of net income.  The company has $12 million interest expense and the corporate tax rate is 40.0% percent.  What was the company's depreciation and amortization expense?  (Answers are in $ millions.)

a. $39.00

b. $46.00

c. $51.00

d. $34.33

e. $56.00

 

29. Hayes Corporation has $423 million of common equity on its balance sheet and 9,000,000 shares of common stock outstanding.  The company's Market Value Added (MVA) is $151 million.  What is the company's stock price?  (Answers are in $ millions.)

a. $47.00

b. $63.78

c. $16.78

d. $69.20

e. $14.65

 

30. Brooks Sisters' operating income (EBIT) is $194 million.  The company's tax rate is 40.0%, and its operating cash flow is $148.4 million.  The company's interest expense is $39 million.  What is the company's net cash flow?  (Assume that depreciation is the only non-cash item in the firm's financial statements.)  (Answers are in $ millions.)

a. $125.00

b. $93.00

c. $32.00

d. $116.40

e. $155.00

 

31. Casey Motors recently reported net income of $19 million.  The firm's tax rate was 40.0% and interest expense was $6 million.  The company's after-tax cost of capital is 14.0% and the firm's total investor supplied operating capital employed equals $95 million.  What is the company's EVA?  (Answers are in $ millions.)

a. $13.30

b. $19.00

c. $31.67

d. $22.60

e. $9.30

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