Deck 4: Cash Flow and Financial Planning

Question 1

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

A) $15,000
B) $12,750
C) $11,250
D) $22,000

Answer 1

$22,000

Question 2

For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.

Answer 2

True

Question 3

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is ________.

A) $3,000
B) $4,000
C) $0
D) $6,000

Answer 3

$4,000

Question 4

The depreciable value of an asset, under MACRS, is the ________.

A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value

Question 5

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Question 6

Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.

Question 7

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

Question 8

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?

A) $1,900
B) $1,200
C) $1,500
D) $2,100

Question 9

In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

Question 10

Given a financial manager's preference for faster receipt of cash flows, ________.

A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a noncash expense
D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost

Question 11

Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.

Question 12

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.

A) tax
B) financial reporting
C) budget
D) cost accounting

Question 13

A corporation ________.

A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes

Question 14

In general, ________.

A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life

Question 15

Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is ________.

A) $10,000
B) $12,000
C) $21,000
D) $ 9,000

Question 16

Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.

Question 17

The depreciable value of an asset, under MACRS, is ________.

A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value

Question 18

Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.

Question 19

Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.

A) arbitraging
B) securitization
C) depreciation
D) amortization

Question 20

Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.

Question 21

Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.

Question 22

Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT minus taxes plus depreciation.

Question 23

A firm's operating cash flow (OCF) is defined as ________.

A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation

Question 24

In the statement of cash flows, retained earnings are handled through the adjustment of ________.

A) "Revenue" and "Cost" accounts
B) "Current Assets" and "Current Liabilities" accounts
C) "Depreciation" and "Purchases" accounts
D) "Net Profits After Taxes" and "Dividends Paid" accounts

Question 25

A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Question 26

To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.

Question 27

In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.

Question 28

A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.

Question 29

Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.

Question 30

Which of the following is a source of cash flows?

A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock

Question 31

The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.

Question 32

Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges.

Question 33

A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.

Question 34

Depreciation is considered to be an outflow of cash.

Question 35

________ is a noncash charge.

A) Labor expense
B) Depreciation
C) Salaries
D) Rent

Question 36

Which of the following is an example of noncash charges?

A) depreciation
B) accruals
C) interest expense
D) dividends paid

Question 37

Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.

Question 38

The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.

Question 39

It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.

Question 40

The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.

Question 41

A corporation sold a fixed asset for $100,000. This is ________.

A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds

Question 42

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The largest single source of funds for the firm in 2015 is ________. (See Table 4.1)

A) an increase in net profits after taxes
B) an increase in notes payable
C) an increase in long-term debt
D) an increase in inventory

Question 43

The cash flows from operating activities section of the statement of cash flows includes ________.

A) principal received
B) cost of raw materials
C) dividends paid
D) stock repurchases

Question 44

The three categories of a firm's statement of cash flows are ________.

A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities

Question 45

Cash flows directly related to production and sale of a firm's products and services are called ________.

A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities

Question 46

The cash flows from financing activities section of the statement of cash flows includes ________.

A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid

Question 47

A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________.

A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively

Question 48

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The firm may have increased long-term debts to finance ________. (See Table 4.1)

A) an increase in net fixed assets
B) an increase in current assets
C) accounts receivable payments
D) an increase in dividends

Question 49

Which of the following is a cash inflow?

A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities

Question 50

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The firm ________ fixed assets worth ________. (See Table 4.1)

A) purchased; $0
B) purchased; $200
C) sold; $0
D) sold; $200

Question 51

Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________.

A) operating activities
B) investment activities
C) financing activities
D) equity activities

Question 52

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
Common stock dividends paid in 2015 amounted to ________. (See Table 4.1)

A) $100
B) $50
C) $600
D) $150

Question 53

Which of the following is a cash flow from financing activities?

A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock

Question 54

Which of the following represents a cash flow from operating activities?

A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock

Question 55

Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.

A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities

Question 56

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The firm's cash flow from operating activities is ________. (See Table 4.1)

A) $50
B) $350
C) $150
D) $200

Question 57

The cash flows from operating activities section of the statement of cash flows includes ________.

A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid

Question 58

Which of the following is a cash outflow?

A) an increase in accounts payable
B) a decrease in notes receivable
C) an increase in accounts receivable
D) an increase in accrued liabilities

Question 59

Which of the following line items of the statement of cash flows must be obtained from the income statement ?

A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks

Question 60

Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
The depreciation expense for 2015 is ________. (See Table 4.1)

A) $0
B) $200
C) $50
D) $1,000

Question 61

Given the financial data for New Electronic World, Inc. (NEW), compute the following measures of cash flows for the NEW for the year ended December 31, 2015.
(a) Operating cash flow
(b) Free cash flow
For the year ended December 31,

Question 62

Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.

A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen

Question 63

Table 4.2 Magna Fax, Inc.
Balance Sheet
For the Years Ended December 31, 2014 and 2015
The credit manager at First National Bank has just received the income statement and balance sheet for Magna Fax, Inc. for the year ended December 31,2015. (See Table 4.2.) The bank requires the firm to report its earnings performance and financial position quarterly as a condition of a loan agreement. The bank's credit manager must prepare two key financial statements based on the information sent by Magna Fax, Inc. This will be passed on to the commercial loan officer assigned to this account, so that he may review the financial condition of the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2015.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2015.
(c) Prepare a statement of cash flows for the year ended December 31, 2015, organized by cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities.

Question 64

For the year ended December 31, 2014, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a ________.

A) net decrease of $18,000 in cash and marketable securities
B) net decrease of $6,000 in cash and marketable securities
C) net increase of $6,000 in cash and marketable securities
D) net increase of $2,000 in cash and marketable securities

Question 65

A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________.

A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage

Question 66

Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.

A) $35,000
B) $700,000
C) $70,000
D) $45,000

Question 67

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both, tend to use shorter planning horizons.

Question 68

For the year ended December 31, 2014, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a ________.

A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities

Question 69

A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.

Question 70

NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of $200,000 during 2015 and $180,000 during 2014. Using this information, NICO's net fixed asset investment for 2015 was ________.

A) $20,000
B) $0
C) $380,000
D) $400,000

Question 71

The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.

Question 72

NICO Corporation had net current assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO's net current asset investment for 2014 was ________.

A) $700,000
B) -$300,000
C) $300,000
D) -$700,000

Question 73

Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

Question 74

Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of $10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%.

A) $0
B) $30,000
C) -$30,000
D) $60,000

Question 75

The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.

A) short-term; long-term
B) short-term; short-term
C) long-term; long-term
D) long-term; short-term

Question 76

Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

Question 77

Identify each expense or revenue as a cash flow from operating activities (O), a cash flow from investment activities (I), or a cash flow from financing activities (F).
Administrative expenses
Rent payment
Interest on a note payable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long-term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets

Question 78

Calculate the change in the key balance sheet accounts between 2014 and 2015 and classify each as a source (S), a use (U), or neither (N), and indicate which type of cash flow it is: an operating cash flow (O), and investment cash flow (I) or a financing cash flow (F).
ABC Corp.
Balance Sheet Changes and Classification
of Key Accounts between 2014 and 2015

Question 79

For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________.

A) net decrease of $3,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net increase of $3,000 in cash and marketable securities
D) net increase of $5,000 in cash and marketable securities

Question 80

During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is ________.

A) -$630,000
B) -$50,000
C) $650,000
D) -$30,000