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Exam 2: Financial Statements, Cash Flow, and Taxes

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Question 21

True/False

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Income statements must be prepared only on an annual basis.

A) True
B) False

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Question 22

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Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's operating net cash flow increased, yet cash as reported on the balance sheet decreased. Which factor could explain this situation?

A) The company cut its dividend.
B) The company made a large investment in a profitable new plant.
C) The company sold a division and received cash in return.
D) The company issued new long-term debt.

E) B) and C)
F) A) and D)

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Question 23

Multiple Choice

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Which of the following statements is correct?

Which statement regarding financial statements is true?

Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its combined federal and provincial income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?

Assume that Pappas Company commenced operations on January 1, 2011, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2008 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2011 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?

On 12/31/12, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/11, the company had reported $555,000 of retained earnings. No shares were repurchased during 2012. How much in dividends did Heaton pay during 2012?

Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its combined federal and provincial income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Which statement regarding the tax system is true?

Which factor could explain why Dellva Energy had a negative net cash flow last year, even though the cash on its balance sheet increased?

Companies generate income from their "regular" operations and from other sources such as interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its combined federal and provincial income tax rate was 40%. How much was Lindley's operating income, or EBIT?

Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization or depreciation charges and no nonoperating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its combined federal and provincial income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT) ?

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.

The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT) , and its tax rate all remain constant. Which of the following would occur?

In Canada, amortization is a similar concept as depreciation and can be applied to both tangible and intangible assets.

Barnes' Brothers has the following data for the year ending 12/31/07: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA) ?

The Nantell Corporation just purchased an expensive piece of equipment. Originally, the firm planned to depreciate the equipment over 5 years on a straight-line basis, but now wants to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, what will occur as a result of this change? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its combined federal and provincial income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate?

Rao Corporation has the following balance sheet. How much net operating working capital does the firm have? Cash $ 10 Accounts payable $ 20 Short-term investments 30 Accruals 20 Accounts receivable 50 Notes payable 50 Inventory 40 Current liabilities $ 90 Current assets $130 Long-term debt 0 Net fixed assets 100 Common equity 30 Retained earnings 50 Total assets $230 Total liab. & equity $230

Which statement about the income statement is true?