Question 1

Which of the following items is NOT normally considered to be a current asset?

Accepted Answer

A)   Accounts receivable.
B)   Inventory.
C)   Bonds.
D)   Cash.
E)   Short-term,highly-liquid,marketable securities.F) C) and D)
G) A) and E)

Question 2

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Since companies can deduct dividends paid but not interest paid,our tax system favors the use of equity financing over debt financing,and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.
B)   Interest paid to an individual is counted as income for federal tax purposes and taxed at the individual's regular tax rate,which in 2015 could go up to 39.6%,but qualified dividends received were taxed at a maximum rate of 15% for individuals earning less than $411,500 and married taxpayers filing jointly earning less than $464,850.
C)   The maximum federal tax rate on corporate income in 2015 was 50%.
D)   Corporations obtain capital for use in their operations by borrowing and by raising equity capital,either by selling new common stock or by retaining earnings.The cost of debt capital is the interest paid on the debt,and the cost of the equity is the dividends paid on the stock.Both of these costs are deductible from income when calculating income for tax purposes.
E)   The maximum federal tax rate on personal income in 2015 was 50%.F) A) and B)
G) B) and C)

Question 4

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Accepted Answer

A) True 
 B)False

Question 5

A corporate bond currently yields 8.20%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places. )

Accepted Answer

A)   36.22%
B)   38.20%
C)   32.93%
D)   33.59%
E)   35.56%F) A) and C)
G) D) and E)

Question 6

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 specific changes in accounts over that period of time.

Accepted Answer

A) True 
 B)False

Question 7

Mays Industries was established in 2010.Since its inception,the company has generated the following levels of taxable income (EBT) :  Assume that each year the company has faced a 40% income tax rate.Also,assume that the company has taken full advantage of the Tax Code's carry-back,carry-forward provisions,and assume that the current provisions were applicable in 2010.What is the company's tax liability for 2015?

Accepted Answer

A)   $24,960
B)   $24,480
C)   $24,000
D)   $29,520
E)   $24,720F) C) and D)
G) B) and E)

Question 8

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accepted Answer

A)   Accounts payable.
B)   Short-term notes payable to the bank.
C)   Accrued wages.
D)   Cost of goods sold.
E)   Accrued payroll taxes.F) D) and E)
G) B) and E)

Question 9

Your corporation has the following cash flows:  ​ If the applicable income tax rate is 40% (federal and state combined) ,and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

Accepted Answer

A)   $87,708
B)   $86,840
C)   $72,077
D)   $96,392
E)   $71,209F) C) and E)
G) B) and C)

Question 10

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 the tax rate.Prior to the new provision,BBI's net income 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.

Accepted Answer

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

Question 11

For managerial purposes,i.e. ,making decisions regarding the firm's operations,the standard financial statements as prepared by accountants under generally accepted accounting principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations.Related to these modifications,which of the following statements is CORRECT?

Accepted Answer

A)   The standard statements make adjustments to reflect the effects of inflation on asset values,and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B)   The standard statements focus on accounting income for the entire corporation,not cash flows,and the two can be quite different during any given accounting period.However,the firm's value is based on its future cash flows.After all,future cash flows tells us how much the firm can distribute to its investors.
C)   The standard statements provide useful information on the firm's individual operating units,but management needs more information on the firm's overall operations than the standard statements provide.
D)   The standard statements focus on cash flows,but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
E)   The best feature of standard statements is that,if they are prepared under GAAP,the data are always consistent from firm to firm.Thus,under GAAP,there is no room for accountants to "adjust" the results to make earnings look better.F) D) and E)
G) All of the above

Question 12

Casey Motors recently reported the following information: ∙ Net income = $600,000.
∙ Tax rate = 40%.
∙ Interest expense = $200,000.
∙ Total invested capital employed = $9 million.
∙ After-tax cost of capital = 10%.
What is the company's EVA?

Accepted Answer

A)   -198,000
B)   -135,000
C)   -203,400
D)   -180,000
E)   -216,000F) B) and C)
G) A) and C)

Question 13

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.

Accepted Answer

A) True 
 B)False

Question 14

​Alan and Sara Winthrop are a married couple who file a joint income tax return.They have two children,so they claim a total of 4 exemptions.In addition,they have legitimate itemized deductions totaling $25,750.Their total income from wages is $237,500.Assume the following tax table is applicable: ​​  ​
What is their marginal tax rate?

Accepted Answer

A)   10%
B)   15%
C)   25%
D)   28%
E)   33%F) C) and E)
G) A) and B)

Question 15

Arvo Corporation is trying to choose between three alternative investments.The three securities that the company is considering are as follows:  ​ The company's tax rate is 16.00%.What is the after-tax return on the best investment alternative? Assume a 70% dividend exclusion for tax on dividends.(Round your final answer to 3 decimal places. )

Accepted Answer

A)   9.870%
B)   10.956%
C)   8.883%
D)   10.660%
E)   10.857%F) A) and B)
G) None of the above

Question 16

​Assume that two firms are both following generally accepted accounting principles.Both firms commenced operations two years ago with $1 million of identical fixed assets,and neither firm sold any of those assets or purchased any new fixed assets.The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.

Accepted Answer

A) True 
 B)False

Question 17

The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Accepted Answer

A) True 
 B)False

Question 18

​Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

Accepted Answer

A)   ​The company repurchases common stock.
B)   ​The company pays a dividend.
C)   ​The company issues new common stock.
D)   ​The company gives customers more time to pay their bills.
E)   ​The company purchases a new piece of equipment.F) C) and E)
G) A) and B)

Question 19

Last year,Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow,and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Accepted Answer

A)   The company had a sharp increase in its inventories.
B)   The company had a sharp increase in its accrued liabilities.
C)   The company sold a new issue of common stock.
D)   The company made a large capital investment early in the year.
E)   The company had a sharp increase in depreciation expenses.F) B) and E)
G) A) and C)

Question 20

An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank.An increase in accounts payable has an effect similar to taking out a new bank loan.However,these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.

Accepted Answer

A) True 
 B)False

Exam 3: Financial Statements,cash Flow,and Taxes

Correct Answer
verified

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Correct Answer
verified

The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Correct Answer
verified

Which of the following items is NOT normally considered to be a current asset?

Correct Answer
verified

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Correct Answer
verified

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct Answer
verified

A corporate bond currently yields 8.20%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places. )

Correct Answer
verified

Your corporation has the following cash flows: If the applicable income tax rate is 40% (federal and state combined) ,and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
verified

Last year,Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow,and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Correct Answer
verified

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 specific changes in accounts over that period of time.

Correct Answer
verified

Correct Answer
verified

Casey Motors recently reported the following information: ∙ Net income = $600,000. ∙ Tax rate = 40%. ∙ Interest expense = $200,000. ∙ Total invested capital employed = $9 million. ∙ After-tax cost of capital = 10%. What is the company's EVA?

Correct Answer
verified

Correct Answer
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Correct Answer
verified

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

Correct Answer
verified

Exam 3: Financial Statements,cash Flow,and Taxes

Correct AnswerverifiedShow Answer

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Correct AnswerverifiedShow Answer

The alternative minimum tax (AMT)was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.

Correct AnswerverifiedShow Answer

Which of the following items is NOT normally considered to be a current asset?

Correct AnswerverifiedShow Answer

If a firm is reporting its income in accordance with generally accepted accounting principles,then its net income as reported on the income statement should be equal to its free cash flow.

Correct AnswerverifiedShow Answer

Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Correct AnswerverifiedShow Answer

A corporate bond currently yields 8.20%.Municipal bonds with the same risk,maturity,and liquidity currently yield 5.5%.At what tax rate would investors be indifferent between the two bonds? (Round your final answer to two decimal places. )

Correct AnswerverifiedShow Answer

Your corporation has the following cash flows: ​ If the applicable income tax rate is 40% (federal and state combined) ,and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Last year,Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow,and (3) an increase in cash as reported on its balance sheet.Which of the following factors could explain this situation?

Correct AnswerverifiedShow Answer

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 specific changes in accounts over that period of time.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Casey Motors recently reported the following information: ∙ Net income = $600,000. ∙ Tax rate = 40%. ∙ Interest expense = $200,000. ∙ Total invested capital employed = $9 million. ∙ After-tax cost of capital = 10%. What is the company's EVA?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

​Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Your corporation has the following cash flows: If the applicable income tax rate is 40% (federal and state combined) ,and if 70% of dividends received are exempt from taxes,what is the corporation's tax liability?

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Other things held constant,which of the following actions would increase the amount of cash on a company's balance sheet?

Correct Answer
verified