Question 1

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

Accepted Answer

Operating working capital is calculated as operating current assets minus operating current liabilities.

Question 2

retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends.Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.

Accepted Answer

Retained earnings are not necessarily held in cash or near-cash accounts; they represent the cumulative net income retained in the business after dividends, which can be reinvested in the business or used for other purposes.

Question 3

Consider the balance sheet of Wilkes Industries as shown below.Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.
Cash $50,000 Accounts payable $100,000Inventory $200,000 Accruals $100,000Accounts receivable $250,000 Total CL $200,000Total CA $500,000 Debt $200,000Net fixed assets $900,000 Common stock $200,000 Retained earnings $800,000Total assets $1,400,000 Total L & E $1,400,000. Advise the options to buy or not to buy?

Accepted Answer

Retained earnings do not represent cash available for spending; they are part of equity and may not be liquid. The company only has $50,000 in cash, which is insufficient to buy an asset costing $200,000.

Question 4

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.

Accepted Answer

The answer of the tax laws were changed so that...

Question 5

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

Accepted Answer

The annual report does indeed include these four basic financial statements.

Question 6

income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time.However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays.Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

Accepted Answer

This statement is true. Reported income and costs may not reflect actual cash flow.

Question 7

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

The annual report provides important financial and non-financial information about the company, which is used by investors to make informed decisions about the company's future earnings and potential for risk. This information includes financial statements, management discussion and analysis, auditor opinions, and other important data points. Therefore, the annual report is a crucial document for investors and plays an important role in finance.

Question 8

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

This is because interest paid is tax deductible whereas dividends paid are not. Therefore, corporations are incentivized to finance through debt rather than equity.

Question 9

interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Accepted Answer

The answer of interest and dividends paid by a corporation...

Question 10

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

Accepted Answer

The balance sheet follows the accounting equation: Assets = Liabilities + Equity. Therefore, the total assets must always equal total liabilities and equity.

Question 11

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.

Accepted Answer

The answer of fact that 70% of the interest income...

Question 12

operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

Accepted Answer

Operating profit after taxes (NOPAT) is calculated by subtracting the taxes from the operating profit. It is a measure of the profitability of a company's core business operations, without the impact of interest income or expense.

Question 13

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.

Accepted Answer

In finance, the primary emphasis is on cash flow rather than net income, as cash flow is crucial for valuing a firm and ensuring its operational viability.

Question 14

estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

Accepted Answer

Depreciation is a non-cash expense that reduces net income, but it does not actually require an outflow of cash. Therefore, when estimating cash flows from operations, depreciation is added back to net income to account for this non-cash expense.

Question 15

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.

Accepted Answer

Investors consider both current cash flow from existing assets and future growth opportunities, as both contribute to the overall value and financial health of a firm.

Question 16

Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

Accepted Answer

This is because assets such as property, plant, and equipment or investments may appreciate or depreciate in value or may generate different levels of income compared to what was originally anticipated. Therefore, their eventual cash generation may differ from their carrying value on the books.

Question 17

retained earnings account on the balance sheet does not represent cash.Rather, it represents part of stockholders' claims against the firm's existing assets.This implies that retained earnings are in fact stockholders' reinvested earnings.

Accepted Answer

Retained earnings do not represent cash but rather represent the portion of earnings that have been reinvested back into the company by the shareholders.

Question 18

Total net operating capital is equal to net fixed assets.

Accepted Answer

Total net operating capital includes both net fixed assets and net working capital.

Question 19

balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

Accepted Answer

The balance sheet measures the firm's financial position at a point in time, while the income statement measures the flow of funds into and out of various accounts over time.

Question 20

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.

Accepted Answer

The time dimension is crucial in financial statement analysis. The balance sheet reflects the company's financial position at a specific point in time, the income statement shows performance over a specific time period, and the statement of cash flows illustrates changes in accounts over that same time period.

Quiz 2: Statements, CF, Taxes