Ch.3 Financial Statements, Cash Flows, And Exam Questions 5e

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 3 Financial Statements, Cash Flows, and Taxes

1) A firm's annual report contains audited financial statements (balance sheet, income statement, statement of cash flows, and statement of retained earnings).

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

2) Generally accepted accounting principles (GAAP) are a set of authoritative guidelines that define accounting practice at a particular point in time.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

3) Generally accepted accounting principles determine the rules for how a company can issue equity to raise money.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

4) The realization principle assumes that the parties to a transaction are economically rational and are free to act independently of each other.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

5) The realization principle implies that revenue should be recognized only at the time of the sale.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

6) The cost principle calls for the recognition of all accounting transactions at their current market value.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

7) The cost principle assumes that the parties to a transaction are economically rational and are free to act independently of each other.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

8) The going concern assumption states that a business will be shutting down its operation in the near future.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

9) The balance sheet identifies the productive resources (assets) that a firm uses to generate income, as well as the sources of funding from creditors (liabilities) and owners (shareholders' equity) that were used to buy the assets.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

10) The balance sheet identity can be stated as: Total assets = Total liabilities + Total stockholders' equity.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

11) Any shares repurchased by the company in the open market are recorded as treasury stock in the shareholders' equity account in the balance sheet.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Measurement

12) The most common reason for firms to repurchase stock is to increase the number of shares outstanding in the market when the management believes that its firm's stock is undervalued.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

13) Companies repurchase their shares in the open market in the hope that it would boost the share price.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

14) In a balance sheet, assets are listed in order of their liquidity.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

15) During rising prices, a company using the LIFO method assumes that the sale is from the newest, highest-cost inventory.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

16) During rising prices, a company using the FIFO method will sell its newest, highest-cost inventory first.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Resource Management

17) Book value is the amount a firm paid for its assets at the time of purchase.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Reporting

18) The net book value of an asset is the historical cost less the accumulated depreciation.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

19) The market value of an asset is the amount that a firm would receive for the asset if it were sold on the open market.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Resource Management

20) Preparing a marked-to-market balance sheet is rather straightforward because it is easy to obtain market values for all assets and liabilities.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

21) The income statement identifies the major sources of revenues generated by the firm and the corresponding expenses that were required to generate those revenues.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Reporting

22) Depreciation expense is the amount by which a firm's fixed assets are reduced in value after the assets have been used to produce the firm's cash flows for a given year.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

23) Amortization is the amount by which intangible assets like goodwill, patents, licenses, copyrights, and trademarks are reduced in value in any period that they are utilized by the firm to generate benefits.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

24) Both depreciation and amortization are cash expenses that will serve to boost the firm's after-tax cash flows.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

25) Depreciation and amortization are examples of prepaid expenses.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

26) The net cash provided by operating activities is another term used for net income.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

27) Cash flows from operations are the net cash flows that support a firm's principal business activities.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

28) Cash flows from operating activities involve buying and selling of long-term assets.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

29) Making and collecting loans, issuing and paying out on insurance contracts, and buying and selling debt or equity instruments of other firms are examples of financing activities.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Resource Management

30) Typical financing activities include cash payments on the principal of long-term debt, cash payments of dividends to shareholders, and cash purchases of treasury stock.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Resource Management

31) The key financial statement that ties the other three statements together is the statement of cash flows, which summarizes changes in the balance sheet from the beginning of the year to the end.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

32) Rent and insurance are examples of depletion expenses.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

33) The average tax rate is the total tax payment divided by the taxable income.

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

34) Which of the following sections do annual reports typically contain?

A) Financial summary related to the past year's performance

B) Information about the company, its products, and its activities

C) Audited financial statements, including limited historical financial data

D) All three of these sections are included in the annual report.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

35) Annual reports are prepared by a firm's management to:

A) communicate to its shareholders the firm's failures in the previous year.

B) provide a broad overview of the firm's financial and operating performance.

C) highlight the performance of its chief competitors.

D) provide a forecast of the economy in the coming years.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

36) The generally accepted accounting principles (GAAP) are rules:

A) that outline how a firm can operate ethically.

B) on how the firm will be valued in the event of a merger.

C) that define how companies are to maintain financial records and prepare financial statements.

D) for how a company can issue stock to raise money.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

37) Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because they:

A) make the financial statements of all firms standardized.

B) allow one to examine a firm's performance with ease over a period of time.

C) make it possible for management or analysts to compare a firm's performance with that of other competitors.

D) All of these are correct.

Learning Objective: LO 1

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

38) The assumption of arm's-length transaction states that:

A) both parties to a transaction can act independently of each other and make economically rational decisions.

B) both parties to a transaction must have had previous transactions.

C) one of the parties to the transaction is a bank that has full knowledge of the firm's creditworthiness.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

39) Your uncle is planning to sell his second home in Bethany Beach, Delaware in the next few weeks. You are interested in buying this beachside property, so your agent negotiates a price for the house with your uncle's agent. This transaction is an example of the:

A) cost principle.

B) assumption of arm's-length transactions.

C) realization principle.

D) going concern assumption.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Industry/Sector Perspective

40) The going concern assumption implies that a firm will:

A) continue to be in business at least for the next 12 months.

B) be going out of business in the near future.

C) continue to operate in the near future, but only after being acquired by another firm.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Budget Preparation

AICPA: Industry/Sector Perspective

41) The matching principle calls for the accountant of a firm to:

A) identify an asset with each liability of the firm.

B) associate the revenue generated from a sale to the costs or expenses incurred to generate the revenue.

C) match each item of inventory with the historical cost at which it was acquired.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Cost Management

AICPA: Strategic/Critical Thinking

42) Tyson Corporation bought raw materials on April 23, 2022 and also on July 2, 2022. Products produced during the month of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate:

A) the inventory acquired on July 2 with the products sold.

B) the inventory acquired on April 23 with the products sold.

C) Neither of these dates is valid because the products were sold in July.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

43) According to the realization principle, revenue from a sale of a firm's products are recognized when the:

A) products are shipped to the buyer.

B) buyer orders the goods.

C) cash is collected from the sale of the products.

D) sale occurs whether or not cash is actually received.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

44) On June 23, 2022, Mikhal Cosmetics sold $250,000 worth of its products to Rynex Corporation, with the payment to be made in 90 days on September 20. The goods were shipped to Rynex on July 2. The firm's accountants should recognize the sale on:

A) June 23, 2022.

B) July 2, 2022.

C) September 20, 2022.

D) None of these are correct.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Communication

IMA: Reporting

AICPA: Reporting

45) The cost principle states that an asset should be recognized on the balance sheet at the:

A) market value of the asset.

B) market value less the accumulated depreciation on the asset.

C) historical cost.

D) historical cost plus the accumulated depreciation on the asset.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

46) Trekkers Footwear bought a piece of machinery on January 1, 2020 at a cost of $2.3 million, and the machinery is being depreciated annually at an amount of $230,000 for 10 years. Its market value on December 31, 2022 is $1.75 million. The firm's accountant is preparing its financial statement for the fiscal year end on December 31, 2022. The net value of the asset that should be reported on the balance sheet is:

A) $2.3 million.

B) $1.61 million.

C) $230,000.

D) $1.75 million.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

47) The conventional way of preparing a balance sheet is to list all assets in the order of their:

A) market value.

B) risk.

C) liquidity.

D) historical cost.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

48) Petra, Inc., has $400,000 as current assets, $1.225 million as plant and equipment, and $250,000 as goodwill. In preparing the balance sheet, these assets should be listed in which of the following orders?

A) Current assets, goodwill, and plant and equipment

B) Current assets, plant and equipment, and goodwill

C) Goodwill is not an asset and is not listed here

D) None of these are correct

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Reporting

49) When prices are rising, the value of ending inventory using the FIFO method rather than LIFO gives:

A) inventory a higher value but lowers net income.

B) inventory a lower value and also lowers net income.

C) both inventory and net income a higher value.

D) inventory a lower value and net income a higher value.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

50) When prices are falling, the value of inventory using the LIFO method rather than FIFO gives inventory a:

A) higher value but lowers net income.

B) lower value and also lowers net income.

C) higher value and net income a higher value.

D) lower value and net income a higher value.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

51) Which of the following is NOT true about goodwill?

A) It is an intangible asset.

B) It represents the value of all unrecorded assets acquired in a merger.

C) It equals the premium paid over the fair market value of the assets acquired in a merger.

D) It reduces the firm's net worth by that amount.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Communication

IMA: Reporting

AICPA: Reporting

52) Which of the following is NOT true about treasury stock?

A) It is a firm's own shares repurchased in the market by the firm.

B) It can be reissued under stock option and other employee benefit plans.

C) It lowers the value of the company.

D) It increases the net worth of the company.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Resource Management

53) Maddux, Inc., has completed its fiscal year and reported the following information. The company had current assets of $153,413, net fixed assets of $412,331, and other assets of $7,822. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. What is the amount of retained earnings?

A) $405,648

B) $243,648

C) $167,918

D) $573,566

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

54) Shane, Inc., has completed its fiscal year and reported Total Assets of $1,000,000 and Total Liabilities of $300,000. Calculate the value of common equity.

A) $1,300,000

B) $700,000

C) $600,000

D) $800,000

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

55) Galan Associates prepared its financial statement for 2017 based on the information given here. The company had cash worth $1,234, inventory worth $13,480, and accounts receivables worth $7,789. The company's net fixed assets are $42,331, and other assets are $1,822. It had accounts payables of $9,558, notes payables of $2,756, common stock of $22,000, and retained earnings of $14,008. How much long-term debt does the firm have?

A) $54,342

B) $76,342

C) $12,314

D) $18,334

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

56) Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountant. The company had net fixed assets of $356,190, and other assets of $4,176. The firm has current liabilities of $94,792, long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current assets did this firm have?

A) $145,332

B) $505,698

C) $171,217

D) $237,332

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

57) Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountant. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm had long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities did this firm have?

A) $94,792

B) $505,678

C) $171,217

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

58) Teakap, Inc., has current assets of $1,456,312 and total assets of $4,812,369 for the year ending September 30, 2016. It also has current liabilities of $1,041,012, common equity of $1,500,000, and retained earnings of $1,468,347. What is the value of long term debt?

A) $1,844,022

B) $2,303,010

C) $2,123,612

D) $803,010

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

59) Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital?

A) $3,596,632

B) $1,801,784

C) $2,123,612

D) $1,673,421

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

60) What is the difference between FIFO (first in, first out) and LIFO (last in, first out) accounting?

A) FIFO refers to the practice of firms, when making sales, assuming that the inventory that came in first (at a higher price) is being sold first.

B) During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet.

C) During a period of falling prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet.

D) LIFO refers to the practice of firms, when making sales, assuming that the inventory that came in last is being sold first (at a higher price).

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

61) Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of $11,417, and accrued taxes of $6,145. The net working capital of the firm is:

A) $68,931.

B) $63,510.

C) $69,655.

D) None of these are correct.

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

62) Spartan, Inc., is a manufacturer of automobile parts located in Greenville, South Carolina. At the end of the current fiscal year, the company had net working capital of $157,903. The company showed accounts payables of $94,233, accounts receivables of $83,112, inventory of $171,284, and cash and marketable securities of $12,311. Calculate the amount of notes payables. (Assume that notes payable and accounts payable are the only two current liabilities of the company.)

A) $14,571

B) $26,882

C) $15,471

D) None of these are correct

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

63) The major disadvantages of market-value accounting include:

A) the difficulty in estimating the current value for some assets.

B) the difficulty in applying some of the valuation models used to estimate market values.

C) the resulting numbers are potentially open to abuse.

D) All of these choices are disadvantages of market-value accounting.

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Business Economics

AICPA: Industry/Sector Perspective

64) Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item?

A) A firm issued long-term bonds five-years ago that currently sell for par value.

B) A firm sold common stock twenty-years ago for $20.00 a share. The firm's common stock is currently selling for $96.50 per share.

C) A firm has $5 million of accrued liabilities on the books.

D) A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

65) Which of the following statements is NOT a limitation associated with market valuation of balance sheet accounts?

A) It can be difficult to identify the market value of an asset, particularly if there are few transactions involving comparable assets.

B) The estimates of market value can involve complex financial modeling, and the resulting numbers can be open to manipulation and abuse.

C) Marking to market provides decision makers with a better chance of making the correct economic decision, given the information available.

D) Mark-to-market accounting can become inaccurate if market prices deviate from the "fundamental" values of assets and liabilities.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

66) Which of the following does NOT belong to an income statement?

A) Depreciation expense

B) Goodwill

C) Extraordinary items

D) Amortization expense

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

67) Which of the following is NOT a noncash item?

A) Depreciation

B) Taxes

C) Prepaid expenses

D) Prepaid taxes

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Budget Preparation

AICPA: Measurement

68) Centennial Brewery produced revenues of $1,145,227 in 2022. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? Round your final answer to the nearest dollar.

A) $120,140

B) $248,475

C) $79,292

D) $40,848

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

69) Simplex Healthcare had net income of $5,411,623 after paying taxes at 34 percent. The firm had revenues of $20,433,770.Its interest expense for the year was $1,122,376, while depreciation expense was $2,079,112. What was the firm's operating expenses excluding depreciation? Round your intermediate calculations and final answer to the nearest dollar.

A) $8,199,429

B) $9,032,853

C) $9,321,805

D) None of these are correct.

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

70) Triumph Trading Company provided the following information to its auditors. For the year ended March 31, 2022, the company had revenues of $1,122,878, operating expenses (excluding depreciation and leasing expenses) of $612,663, depreciation expenses of $231,415, leasing expenses of $126,193, and interest expenses of $87,125. If the company's average tax rate was 34 percent, what is its net income after taxes? Round your final answer to the nearest dollar.

A) $43,218

B) $65,482

C) $152,607

D) None of these are correct.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

71) Parrino Corporation has announced that its net income for the year ended June 30, 2022, is $1,824,214. The company had an EBITDA of $5,174,366, and its depreciation and amortization expense was equal to $1,241,790. The company's average tax rate is 34 percent. What is the amount of interest expense for the firm?

A) $2,763,961

B) $939,747

C) $1,187,720

D) $1,168,615

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

72) The Brick Company has announced the following financial information for the period ending March 31, 2022: sales of $1.4 million, cost of goods sold of $800,000, depreciation expenses of $175,000, and interest expenses of $90,000. Assume that the firm has an average tax rate of 40 percent. What is the company's net income?

A) $204,000

B) $201,000

C) $203,000

D) $220,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

73) Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2022. Depreciation and amortization for the year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest expense for the year was $9,641,300 and selling, general, and administrative expenses totaled $4,556,520 for the year. What is Arco's EBIT for 2022?

A) $9,641,300

B) $11,391,300

C) $13,275,030

D) $18,490,000

Learning Objective: LO 4

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

74) Which of the following is an income statement item?

A) Accounts payable

B) Accrued taxes

C) Retained earnings

D) Selling and administrative expenses

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Communication

IMA: Reporting

AICPA: Reporting

75) Which of the following is NOT a cash flow from operating activities?

A) Cash payments on the principal of long-term debt

B) Payments for utilities and rent

C) Payments to purchase raw materials

D) Cash receipts from selling goods and services

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Communication

IMA: Reporting

AICPA: Reporting

76) Cash flows from financing activities include all but one of the following:

A) Cash payments on the principal of long-term debt

B) Buying and selling bonds or stock of other firms

C) Cash purchases of treasury stock

D) Cash proceeds from a bank loan

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

77) Which of the following is NOT a cash flow from investing activities?

A) Buying and selling bonds of other firms

B) Buying or selling of land, buildings, and plant and equipment

C) Cash payments of dividends to shareholders

D) Buying and selling stocks of other firms

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

78) Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows?

A) Rent on a warehouse amounting to $1.1 million

B) Purchase of $125,000 worth of five-year bonds issued by Towson Utilities

C) Preferred dividends of $330,000 paid to shareholders

D) Lease income received on a piece of land

Learning Objective: LO 5

Bloomcode: Application

AACSB: Communication

IMA: Reporting

AICPA: Reporting

79) During 2022, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed assets acquisition by $109,455, and had marketable securities of $14,215 mature. What is the net cash provided by (used in) investing activities?

A) $132,085

B) $145,940

C) -$132,085

D) -$145,940

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

80) Trident Manufacturing Company's treasurer identified the following cash flows during this year as significant. The company repaid existing debt of $425,110, while raising additional debt capital of $750,000. It also repurchased stock in the open markets for a total of $63,250 and paid $233,144 in dividends to its shareholders. What is the net cash provided by (used in) financing activities?

A) $28,496

B) $91,746

C) -$28,496

D) -$91,746

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

81) Super Grocers, Inc., provided the following financial information for the quarter ending September 30, 2022:

Depreciation and amortization - $133,414 Net income - $341,463

Increase in receivables - $112,709 Increase in inventory - $81,336

Increase in accounts payables - $62,411

Decrease in marketable securities - $31,225

What is the cash flow from operating activities generated during this quarter by the firm?

A) $308,458

B) $374,468

C) -$374,468

D) -$308,458

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

Reference 3-1 Use the following information to answer the questions below:

Thunderbird Amusement Park–Balance Sheet as of June 30

Assets 2021 2022

Cash $ 13,221 $ 11,729

Accounts receivables 31,323 37,909

Inventory 77,244 91,617

Total current assets $121,788 $141,255

Fixed assets 444,712 563,323

Less: Accumulated depreciation (100,000) (172,487)

Net fixed assets 344,712 390,836

Total assets $466,500 $532,091

Liabilities and Stockholders' Equity

Accounts payable $ 38,549 $ 42,881

Notes payable 12,004 16,753

Deferred taxes 21,934 16,788

Total current liabilities $ 72,487 $ 76,422

Long-term debt 78,445 61,290

Common stock 125,000 175,000

Retained earnings 190,568 219,379

Total liabilities and stockholders' equity $466,500 $532,091

The company had a net income of $248,462, and depreciation expenses were equal to $72,487.

82) Refer to Reference 3-1. What is the firm's net cash flow from operating activities?

A) $304,322

B) $299,176

C) $192,602

D) None of these are correct

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

83) Refer to Reference 3-1. What is the firm's net cash flow provided by (used in) investing activities?

A) $0

B) $46,124

C) -$46,124

D) None of these are correct

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

84) Refer to Reference 3-1. What is the firm's cash flow from financing activities?

A) -$66,405

B) $61,656

C) -$61,656

D) -$182,057

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

85) Which of the following is a cash flow from investing activities?

A) Cash payment of dividends to shareholders

B) Cash from sale of products

C) Purchase of plant and equipment

D) Rent received from industrial property owned

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

86) Natural Lite, Inc. reported the following items during fiscal 2022. The firm purchased marketable securities of $87,500, paid down a long-term loan in the amount of $650,000, purchased $4,250,000 of new equipment. The firm also issued $6,250,000 of common stock, paid $350,225 in dividends to its common shareholders, and repurchased $1,250,000 of common stock in the open market. What is the net cash provided by financing activities?

A) $4,575,210

B) $1,733,285

C) $3,999,775

D) $2,467,915

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

87) Which of the following presents a summary of the changes in a firm's balance sheet from the beginning of an accounting period to the end of an accounting period?

A) The statement of retained earnings

B) The statement of working capital

C) The statement of cash flows

D) The statement of net worth

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Communication

IMA: Reporting

AICPA: Reporting

88) Trimeton Corporation announced that in the year ended June 30, 2021, its earnings before taxes amounted to $2,367,045. Calculate its taxes using the following table. Round your final answer to the nearest dollar.

Tax Rate Taxable Income

15% $0 to $50,000

25 50,001 - 75,000

34 75,001 - 100,000

39 100,001 - 335,000

34 335,001 - 10,000,000

35 10,000,001 - 15,000,000

38 15,000,001 - 18,333,333

35 More than $18,333,333

A) $804,795

B) $690,895

C) $713,145

D) None of these are correct

Learning Objective: LO 7

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

89) Chartworth Associates' financial statements indicated that the company had EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5 percent. Calculate the amount of taxes the company is likely to owe. Round your final answer to the nearest dollar.

Tax Rate Taxable Income

15% $0 to $50,000

25 50,001 - 75,000

34 75,001 - 100,000

39 100,001 - 335,000

34 335,001 - 10,000,000

35 10,000,001 - 15,000,000

38 15,000,001 - 18,333,333

35 More than $18,333,333

A) $1,069,607

B) $1,037,732

C) $822,512

D) none of these answers are correct

Learning Objective: LO 7

Bloomcode: Evaluation

AACSB: Analytic

IMA: Budget Preparation

AICPA: Measurement

90) Chartworth Associates' financial statements indicated that the company has EBITDA of $3,145,903. It had depreciation of $633,000, and its interest rate on debt of $1.25 million was 7.5 percent. The company is likely to owe $822,512 in taxes. What are the marginal and average tax rates for this company?

Tax Rate Taxable Income

15% $0 to $50,000

25 50,001 - 75,000

34 75,001 - 100,000

39 100,001 - 335,000

34 335,001 - 10,000,000

35 10,000,001 - 15,000,000

38 15,000,001 - 18,333,333

35 More than $18,333,333

A) 34%, 35%

B) 35%, 34%

C) 34%, 34%

D) none of these answers are correct

Learning Objective: LO 7

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

91) Which of the following best represents cash flows to investors?

A) Cash flow from operating activity, plus cash flow generated from net working capital

B) Earnings before interest and taxes times 1 minus the firm's tax rate

C) Net income minus dividends paid to preferred stockholders

D) Cash flow from operating activity minus cash flow invested in net working capital minus cash flow invested in long-term assets

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

92) Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is:

A) the average tax rate.

B) the marginal tax rate.

C) either the average tax rate or the marginal tax rate.

D) neither the average tax rate or the marginal tax rate.

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Budget Preparation

AICPA: Measurement

93) The London Bridge Company had $630,125 in taxable income in the year ending September 30, 2022. Calculate the company's tax using the following tax schedule.

Tax rate Income Range

15% (0 - $50,000)

25 (50,001 - 75,000)

34 (75,001 - 100,000)

39 (100,001 - 335,000)

34 (335,001 - 633,125)

A) $215,263

B) $214,243

C) $213,223

D) $211,435

Learning Objective: LO 8

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

94) The London Bridge Company had $630,125 in taxable income in the year ending September 30, 2022. Calculate the company's marginal tax rate using the following tax schedule.

Tax rate Income Range

15% (0 - $50,000)

25 (50,001 - 75,000)

34 (75,001 - 100,000)

39 (100,001 - 335,000)

34 (335,001 -633,125)

A) 15%

B) 25%

C) 34%

D) 39%

Learning Objective: LO 8

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

95) The London Bridge Company had $630,125 in taxable income in the year ending September 30, 2017. Calculate the company's average tax rate using the following tax schedule.

Tax rate Income Range

15% (0 - $50,000)

25 (50,001 - 75,000)

34 (75,001 - 100,000)

39 (100,001 - 335,000)

34 (335,001 - 633,125)

A) 15%

B) 25%

C) 34%

D) 30%

Learning Objective: LO 8

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

96) Which of the following statements is true?

A) Only 20 percent of interest income is taxable for a corporation.

B) Dividend income is fully taxable.

C) Interest paid on debt obligations is a tax-deductible business expense.

D) Dividends paid to stockholders are a tax-deductible business expense.

Learning Objective: LO 8

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

97) United Brands Corp. just completed their latest fiscal year. The firm had sales of $16,650,000. Depreciation and amortization was $832,500, interest expense for the year was $825,000, and selling general and administrative expenses totaled $1,665,000 for the year, and cost of goods sold was $9,990,000 for the year. Assuming a federal income tax rate of 34 percent, what was the United Brands net income after-tax?

A) $2,202,750

B) $1,745,325

C) $3,505,100

D) $2,813,000

Learning Objective: LO 8

Bloomcode: Analysis

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

98) Identify and explain the five fundamental principles that form the basis of accounting standards in the United States.

Learning Objective: LO 1

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Reporting

99) Explain the differences from using FIFO versus LIFO method of valuation in accounting for inventory.

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

100) Explain the following income statement items.

What are the advantages and disadvantages of using market-value accounting?

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Measurement

101) Explain the following income statement items.

a. Amortization expense

b. Extraordinary items

c. EBITDA

Learning Objective: LO 4

Bloomcode: Application

AACSB: Communication

IMA: Reporting

AICPA: Reporting

102) Explain the following income statement items.

Identify the noncash items that a firm may have on its financial statements and explain their impact on the shareholders of the firm.

Learning Objective: LO 5

Bloomcode: Evaluation

AACSB: Analytic

IMA: Reporting

AICPA: Reporting

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