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Chapter2

Key

1.Whichoneoftheseequationsisanaccurateexpressionofthebalancesheet?
A.AssetsLiabilitiesStockholdersequity
B.StockholdersequityAssets+Liabilities
C.LiabilitiesStockholdersequityAssets
D.AssetsStockholdersequityLiabilities
E.StockholdersequityAssetsLiabilities

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RossChapter02#1
Section:2.1
Topic:Balancesheet

2.Whichoneoftheseaccountsisclassifiedasacurrentassetonthebalancesheet?
A.intangibleasset
B.accountspayable
C.preferredstock
D.inventory
E.netplantandequipment

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RossChapter02#2
Section:2.1
Topic:Balancesheet

3.Onabalancesheet,deferredtaxesareclassifiedas:
A.stockholdersequity.
B.acurrentasset.
C.alongtermliability.
D.afixedasset.
E.acurrentliability.

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RossChapter02#3
Section:2.1
Topic:Balancesheet

4.Networkingcapitalisdefinedas:
A.currentassetsplusfixedassets.
B.currentassetsplusstockholders'equity.
C.fixedassetsminuslongtermliabilities.
D.totalassetsminustotalliabilities.
E.currentassetsminuscurrentliabilities.

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RossChapter02#4
Section:2.1
Topic:Networkingcapital

5.Anassetthatcanbequicklyconvertedintocashwithoutsignificantlossinvalueisreferredtoasbeing:
A.marketable.
B.tangible.
C.intangible.
D.liquid.
E.fixed.

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RossChapter02#5
Section:2.1
Topic:Liquidity

6.Thefinancialstatementsummarizingafirm'saccountingperformanceoveraperiodoftimeisthe:
A.incomestatement.
B.balancesheet.
C.statementofcashflows.
D.taxreconciliationstatement.
E.statementofequity.

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RossChapter02#6
Section:2.2
Topic:Incomestatement

7.Noncashitemsreferto:
A.thecreditsalesofafirm.
B.theaccountspayableofafirm.
C.thecostsincurredforthepurchaseofintangiblefixedassets.
D.expenseschargedagainstrevenuesthatdonotdirectlyaffectcashflow.
E.allaccountsonthebalancesheetotherthancashonhand.

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RossChapter02#7
Section:2.2
Topic:Noncashitems

8.Forafirmwithlongtermdebt,netincomeisequalto:
A.PretaxincomeInterestexpenseTaxes.
B.EBITTaxes.
C.Taxes+Additiontoretainedearnings.
D.Pretaxincome(1Marginaltaxrate).
E.Dividends+Additiontoretainedearnings.

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RossChapter02#8
Section:2.2
Topic:Incomestatement

9.Whichtermdefinesthetaxratethatappliestothenextdollaroftaxableincomeearned?
A.deductible
B.residual
C.total
D.average
E.marginal

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RossChapter02#9
Section:2.3
Topic:Taxes

10.U.S.corporatetaxesswitchtoaconstantflatratetaxoncetheaveragetaxratereaches:
A.32percent.
B.33percent.
C.28percent.
D.40percent.
E.35percent.

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RossChapter02#10
Section:2.3
Topic:Taxes

11.Thecashflowresultingfromafirm'songoing,normalbusinessactivitiesisreferredtoasthe:
A.operatingcashflow.
B.netcapitalspending.
C.additionstonetworkingcapital.
D.cashflowtoretainedearnings.
E.cashflowtoinvestors.

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RossChapter02#11
Section:2.5
Topic:Operatingcashflow

12.Capitalspendingisequalto:
A.endingnextfixedassetsminusbeginningnetfixedassets.
B.endingnetfixedassetsminusbeginningnetfixedassetsplusdepreciation.
C.endingtotalassetsminusbeginningtotalassets.
D.endingtotalassetsminusbeginningtotalassetsminusdepreciation.
E.beginningtotalassetsplusassetpurchasesminusassetsales.

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RossChapter02#12
Section:2.5
Topic:Capitalspending

13.Operatingcashflowisdefinedas:
A.PretaxincomeTaxes.
B.NetincomeDividends.
C.EBIT+DepreciationTaxes.
D.Pretaxincome+Depreciation.
E.Cashflowtoinvestors+Taxes.

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RossChapter02#13
Section:2.5
Topic:Operatingcashflow

14.Intheaccountingstatementofcashflows,whichoneoftheseiscalculatedbyaddingbacknoncash
expensestonetincomeandadjustingforchangesincurrentassetsandliabilities?
A.cashflowfrominvestingactivities
B.cashflowfromfinancingactivities
C.networkingcapital
D.cashflowfromoperatingactivities
E.cashflowtoinvestors

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RossChapter02#14
Section:2.6
Topic:Statementofcashflows

15.Whichoneofthesetermsreferstothefirm'sinterestpaymentslessanynetnewborrowing?
A.operatingcashflow
B.capitalspending
C.networkingcapital
D.cashflowtostockholders
E.cashflowtocreditors

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RossChapter02#15
Section:2.5
Topic:Cashflowtocreditors

16.Afirm'sdividendpaymentslessanynetnewequityraisedisreferredtoasthefirms:
A.operatingcashflow.
B.capitalspending.
C.networkingcapital.
D.cashflowfromcreditors.
E.cashflowtostockholders.

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RossChapter02#16
Section:2.5
Topic:Cashflowtostockholders

17.Earningspersharewillincreasewhen:
A.depreciationdecreases.
B.thenumberofsharesoutstandingincrease.
C.operatingincomedecreases.
D.dividendspersharedecrease.
E.theaveragetaxrateincreases.

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RossChapter02#17
Section:2.2
Topic:Persharevaluations

18.Assumingthenumberofsharesoutstandingremainsconstant,anincreaseindividendspersharewillreduce
the:
A.earningspershare.
B.additiontoretainedearnings.
C.netincome.
D.cashflowtostockholders.
E.cashflowfromassets.

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RossChapter02#18
Section:2.2
Topic:Persharevaluations

19.Whichoneoftheseisanoncashitem?
A.depreciation
B.interestexpense
C.currenttaxes
D.dividends
E.sellingexpenses

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RossChapter02#19
Section:2.2
Topic:Noncashitems

20.Whichoneofthefollowingisacurrentliability?
A.amountduetoasupplierin18months
B.debtpayabletoamortgagecompanyinninemonths
C.estimatedtaxesjustpaid
D.loanpaymentduein13months
E.amountduefromacustomerin30days

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RossChapter02#20
Section:2.1
Topic:Balancesheet

21.Anincreaseintotalassets:
A.meansthatnetworkingcapitalisalsoincreasing.
B.requiresaninvestmentinfixedassets.
C.meansthatstockholders'equitymustalsoincrease.
D.mustbeoffsetbyanequalincreaseinliabilitiesandstockholders'equity.
E.canonlyoccurwhenafirmhaspositivenetincome.

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RossChapter02#21
Section:2.1
Topic:Balancesheet

22.Whichoneofthefollowingassetsisgenerallythemostliquid?
A.inventory
B.buildings
C.accountsreceivable
D.equipment
E.patents

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RossChapter02#22
Section:2.1
Topic:Liquidity

23.Whichoneofthefollowingstatementsconcerningliquidityiscorrect?
A.Ifyousoldanassettoday,itwasaliquidasset.
B.Ifyoucansellanassetnextyearatapriceequaltoitsactualvalue,theassetishighlyliquid.
C.Trademarksandpatentsarehighlyliquid.
D.Thelessliquidityafirmhas,thelowertheprobabilitythefirmwillencounterfinancialdifficulties.
E.Balancesheetaccountsarelistedinorderofdecreasingliquidity.

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RossChapter02#23
Section:2.1
Topic:Liquidity

24.Liquidityis:
A.ameasureoftheuseofdebtinafirm'scapitalstructure.
B.equaltocurrentassetsminuscurrentliabilities.
C.equaltothemarketvalueofafirm'stotalassetsminusitstotalliabilities.
D.valuabletoafirmeventhoughliquidassetstendtobelessprofitabletoown.
E.generallyassociatedwithintangibleassets.

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RossChapter02#24
Section:2.1
Topic:Liquidity

25.Whichoneofthefollowingaccountsisincludedinstockholders'equity?
A.longtermdebt
B.deferredtaxes
C.plantandequipment
D.accumulatedretainedearnings
E.intangibleassets

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RossChapter02#25
Section:2.1
Topic:Balancesheet

26.Bookvalue:
A.isequivalenttomarketvalueforfirmswithfixedassets.
B.isbasedonhistoricalcost.
C.generallytendstoexceedmarketvaluewhenfixedassetsareincluded.
D.ismoreofafinancialthananaccountingvaluation.
E.isadjustedtomarketvaluewheneverthemarketvalueexceedsthestatedbookvalue.

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RossChapter02#26
Section:2.1
Topic:Marketandbookvalues

27.Ifyousellanasset,youaremostapttoreceivewhichvalueforthatasset?
A.marketvalue
B.originalcostminusaccumulateddepreciation
C.historicalvalue
D.bookvalue
E.carryingvalue

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RossChapter02#27
Section:2.1
Topic:Marketandbookvalues

28.Asseenonanincomestatement:
A.interestisdeductedfromincomeandincreasesthetotaltaxesincurred.
B.thetaxrateisappliedtotheearningsbeforeinterestandtaxeswhenthefirmhasbothdepreciationand
interestexpenses.
C.depreciationisshownasanexpensebutdoesnotaffectthetaxexpense.
D.depreciationreducesboththepretaxincomeandthenetincome.
E.interestexpenseisaddedtoearningsbeforeinterestandtaxestocomputepretaxincome.

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RossChapter02#28
Section:2.2
Topic:Incomestatement

29.Allelseheldconstant,theearningspersharewill:
A.decreaseasnetincomeincreases.
B.decreaseasthenumberofsharesoutstandingincrease.
C.decreaseasthetotalrevenueofthefirmincreases.
D.increaseasthetaxrateincreases.
E.decreaseasthecostsdecrease.

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RossChapter02#29
Section:2.2
Topic:Persharevaluations

30.Whichoneofthesestatementsiscorrect?
A.Pretaxincomeisequaltonetincomeminustaxes.
B.Theadditiontoretainedearningsisequaltonetincomeplusdividends.
C.Operatingincomeisequaltooperatingrevenueminuscostofgoodssold.
D.Onlycurrenttaxesareincludedinthetaxexpense.
E.Earningspersharecanbenegativebutdividendspersharecannot.

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RossChapter02#30
Section:2.2
Topic:Incomestatement

31.Earningspershare:
A.willincreaseifnetincomeincreasesandnumberofsharesoutstandingdecreases.
B.willincreaseifnetincomedecreasesandnumberofsharesoutstandingincreases.
C.isdefinedastheadditiontoretainedearningsdividedbythenumberofsharesoutstanding.
D.isthetotalamountofdividendspaidperyearonapersharebasis.
E.mustincreaseatthesamerateasthetotaloperatingrevenue.

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RossChapter02#31
Section:2.2
Topic:Persharevaluations

32.AccordingtotheGenerallyAcceptedAccountingPrinciples,costsare:
A.recordedasincurred.
B.recordedwhenpaid.
C.matchedwithrevenues.
D.matchedwithproductionlevels.
E.expensedasmanagementdesires.

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RossChapter02#32
Section:2.2
Topic:GenerallyAcceptedAccountingPrinciples(GAAP)

33.Depreciationforaprofitablefirm:
A.decreasesnetincomebylessthan$1forevery$1ofdepreciationexpense.
B.increasesthenetfixedassetsasshownonthebalancesheet.
C.reducesboththenetfixedassetsandthecostsofafirm.
D.isanoncashexpensewhichincreasesthenetoperatingincome.
E.decreasesnetfixedassets,netincome,andoperatingcashflows.

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RossChapter02#33
Section:2.2
Topic:Incomestatement

34.Whenyouaremakingafinancialdecision,themostrelevanttaxrateisthe____rate.
A.average
B.fixed
C.marginal
D.total
E.variable

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RossChapter02#34
Section:2.3
Topic:Taxes

35.Anincreaseinwhichoneofthefollowingwillcausetheoperatingcashflowtoincreaseforaprofitable
firm?
A.depreciation
B.changesintheamountofnetfixedcapital
C.networkingcapital
D.taxes
E.administrativeexpenses

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RossChapter02#35
Section:2.5
Topic:Operatingcashflow

36.Afirmstartsitsyearwithapositivenetworkingcapital.Duringtheyear,thefirmacquiresmoreshortterm
debtthanitdoesshorttermassets.Thismeansthat:
A.theendingnetworkingcapitalwillbenegative.
B.bothaccountsreceivableandinventorydecreasedduringtheyear.
C.thebeginningcurrentassetswerelessthanthebeginningcurrentliabilities.
D.accountspayableincreasedandinventorydecreasedduringtheyear.
E.theendingnetworkingcapitalcanbepositive,negative,orequaltozero.

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RossChapter02#36
Section:2.4
Topic:Networkingcapital

37.Thecashflowtocreditorsincludesthefirmscash:
A.outflowwhenpaymentsarepaidtosuppliers.
B.outflowwhennewdebtisacquired.
C.outflowwheninterestispaidonoutstandingdebt.
D.inflowwhenaccountspayableincreases.
E.Inflowwhenlongtermdebtispaidoff.

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RossChapter02#37
Section:2.5
Topic:Cashflowtocreditors

38.Thecashflowtostockholdersmustbepositivewhen:
A.thedividendspaidarelessthantheamountofnetnewequityraised.
B.thenetsaleofcommonstockexceedstheamountofdividendspaid.
C.noincomeisdistributedbutnewsharesofstockaresold.
D.thecashflowfromassetsispositiveandalsoexceedsthecashflowtocreditors.
E.boththecashflowtoassetsandthecashflowtocreditorsarepositive.

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RossChapter02#38
Section:2.5
Topic:Cashflowtostockholders

39.Whichoneofthesewillincreasethebookvalueofthestockholdersequityinaprofitable,nondividend
payingfirm?Assumenosharesofstockarerepurchasedorsold.
A.adecreaseinthebookvalueofinventory
B.anincreaseinearningspershare
C.anincreaseinthemarketvalueofthefirmsbuildings
D.anincreaseinthemarketvalueofthefirmslongtermdebt
E.anincreaseinnoncashexpenses

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RossChapter02#39
Section:2.1
Topic:Marketandbookvalues

40.Assetsarelistedonthebalancesheetinorderof:
A.decreasingliquidity.
B.decreasingsize.
C.increasingsize.
D.marketvaluerelativetobookvalue.
E.increasingliquidity.

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RossChapter02#40
Section:2.1
Topic:Liquidity

41.Anincreaseintreasurystock:
A.increasesthetotalequityofthefirm.
B.istheresultofafirmissuingnewsharestostocktothefederalgovernment.
C.increasesthenumberofsharesoutstanding.
D.resultsfromarepurchaseofoutstandingsharesofstock.
E.requiresrepaymentatsomepointinthefuture.

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RossChapter02#41
Section:2.1
Topic:Balancesheet

42.Thecarryingvalueorbookvalueofassets:
A.isdeterminedunderGAAPandisbasedonthecostoftheasset.
B.representsthetruemarketvalueaccordingtoGAAP.
C.isalwaysthebestmeasureofthecompany'svaluetoaninvestor.
D.isalwayshigherthanthereplacementcostoftheassets.
E.isshownonthefirmsincomestatement.

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RossChapter02#42
Section:2.1
Topic:GenerallyAcceptedAccountingPrinciples(GAAP)

43.Undergenerallyacceptedaccountingprinciples(GAAP),afirm'sassetsarereportedat:
A.marketvalue.
B.liquidationvalue.
C.marketvaluelessaccumulateddepreciation.
D.historicalcostlessaccumulateddepreciation.
E.liquidationvaluelessaccumulateddepreciation.

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RossChapter02#43
Section:2.1
Topic:GenerallyAcceptedAccountingPrinciples(GAAP)

44.Theincomestatement:
A.measuresperformanceforonespecificday.
B.ignoresanyincomeotherthanoperatingrevenues.
C.excludesdeferredtaxexpense.
D.treatsdividendspaidasacashexpense.
E.includesnoncashexpenses.

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RossChapter02#44
Section:2.2
Topic:Incomestatement

45.Accordingtogenerallyacceptedaccountingprinciples(GAAP),revenueisrecognizedasincomewhen:
A.acontractissignedtoperformaserviceordeliveragood.
B.thetransactioniscompleteandthegoodsorservicesaredelivered.
C.paymentisrequested.
D.incometaxesarepaidontherevenueearned.
E.managersdecidetorecognizeit.

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RossChapter02#45
Section:2.2
Topic:Incomestatement

46.Cashflowfromassets:
A.equalsnetincomeplusnoncashitems.
B.canbepositive,negative,orequaltozero.
C.equalsoperatingcashflowminusnetcapitalspending.
D.equalstheadditiontoretainedearnings.
E.equalsoperatingcashflowminusthecashflowtocreditors.

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RossChapter02#46
Section:2.5
Topic:Cashflowfromassets

47.Netcapitalspendingisequaltothe:
A.netchangeintotalassetsplusdepreciation.
B.netchangeinfixedassetsplusdepreciation.
C.netincomeplusdepreciation.
D.differencebetweenthemarketandbookvaluesofthetotalassets.
E.changeintotalassets.

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RossChapter02#47
Section:2.5
Topic:Cashflowfromassets

48.Cashflowtostockholdersisdefinedas:
A.cashdividendspaid.
B.repurchasesofequitylessnewequitysoldminuscashdividendspaid.
C.cashflowfromfinancinglesscashflowtocreditors.
D.cashdividendspaidplusrepurchasesofequityminusnewequityfinancing.
E.cashflowfromassetspluscashflowtocreditors.

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RossChapter02#48
Section:2.5
Topic:Cashflowtostockholders

49.Freecashflowis:
A.themoneygeneratedfromthesaleofnewsharesofstock.
B.anothertermforoperatingcashflow.
C.thecashgeneratedbydecreasingnetworkingcapital.
D.cashthatthefirmcandistributetocreditorsandstockholders.
E.thenetincomeofafirmaftertaxeshavebeenpaid.

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RossChapter02#49
Section:2.5
Topic:Freecashflow

50.Thecashflowofthefirmmustbeequalto:
A.cashflowtostockholdersminuscashflowtocreditors.
B.cashflowtocreditorsminuscashflowtostockholders.
C.cashflowtogovernmentspluscashflowtostockholders.
D.cashflowtostockholderspluscashflowtocreditors.
E.theaftertaxoperatingcashflow.

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RossChapter02#50
Section:2.5
Topic:Cashflowfromassets

51.Thestatementofcashflowsconsistsofthecashflowsfrom:
A.operations,investingactivities,andfinancingactivities.
B.operations,investingactivities,anddivestingactivities.
C.internalactivities,externalactivities,andfinancingactivities.
D.balancesheetaccountsonly.
E.incomestatementaccountsonly.

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RossChapter02#51
Section:2.6
Topic:Statementofcashflows

52.Oneofthereasonswhycashflowanalysisispopularisbecause:
A.cashflowsaremoresubjectivethannetincome.
B.deferredtaxesrequirefuturecashpayment.
C.cashflowsarestrictlydefinedbygenerallyacceptedaccountingprinciples(GAAP).
D.itisdifficulttomanipulate,orspinthecashflows.
E.operatingcashflowsarefoundontheincomestatement.

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RossChapter02#52
Section:2.7
Topic:Cashflows

53.Afirmhas$820ininventory,$3,200infixedassets,$1,210inaccountsreceivable,$890inaccounts
payable,and$360incash.Whatistheamountofthenetworkingcapital?
A.$4,700
B.$5,590
C.$3,600
D.$2,390
E.$1,500

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RossChapter02#53
Section:2.4
Topic:Networkingcapital

54.Totalassetsare$1,450,fixedassetsare$790,longtermdebtis$750,andshorttermdebtis$300.Whatis
theamountofcurrentassets?
A.$660
B.$360
C.$300
D.$40
E.$790

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RossChapter02#54
Section:2.1
Topic:Balancesheet

55.Brad'sCompanyhasequipmentwithabookvalueof$500thatcouldbesoldtodayata50percentdiscount.
Itsinventoryisvaluedat$450andcouldbesoldtoacompetitorforthatamount.Thefirmhas$100incashand
customersowethefirm$250,allofwhichiscollectible.Whatisthecurrentmarketvalueofthefirmsassets?
A.$100
B.$550
C.$1,050
D.$1,300
E.$600

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RossChapter02#55
Section:2.1
Topic:Marketandbookvalues

56.Martha'sEnterprisesspent$4,100topurchaseequipmentthreeyearsago.Thisequipmentiscurrently
valuedat$2,700ontoday'sbalancesheetbutcouldactuallybesoldfor$3,200.Networkingcapitalis$400and
longtermdebtis$2,300.Assumingtheequipmentisthefirm'sonlyfixedasset,whatisthebookvalueof
shareholders'equity?
A.$1,300
B.$800
C.$1,600
D.$1,900
E.$2,200

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RossChapter02#56
Section:2.1
Topic:Marketandbookvalues

57.Mart'sBoutiquehassalesof$820,000andcostsof$540,000.Interestexpenseis$36,000anddepreciation
is$59,000.Thetaxrateis35percent.Whatisthenetincome?
A.$158,600
B.$120,250
C.$105,000
D.$179,250
E.$99,600

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RossChapter02#57
Section:2.2
Topic:Incomestatement

58.
Given the tax rates as shown, what is the average tax rate for a firm with taxable income of
$218,700?
TaxableIncome
$050,000
50,00175,000
75,001100,000
100,001335,000

TaxRate(%)
15
25
34
39


A.
32.09%

B.
33.88%

C.
31.34%

D.
34.64%

E.
39.00%

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RossChapter02#58
Section:2.3
Topic:Taxes

59.
Thetaxratesareasshown.Yourfirmcurrentlyhastaxableincomeof$83,200.Howmuchadditionaltaxwillyouoweifyouincreaseyourtaxable
incomeby$24,600?

TaxableIncome
$050,000
50,00175,000
75,001100,000
100,001335,000

TaxRate(%)
15
25
34
39


A.
$8,364

B.
$9,014

C.
$9,594

D.
$8,754

E.
$8,174

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RossChapter02#59
Section:2.3
Topic:Taxes

60.Yourfirmhastotalsalesof$22,980,costsof$14,715,anddepreciationof$6,045.Thetaxrateis34
percent.Therearenointerestexpensesorotherincome.Whatistheoperatingcashflow?
A.$1,465.20
B.$2,410.80
C.$8,340.00
D.$7,510.20
E.$9,019.80

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RossChapter02#60
Section:2.5
Topic:Operatingcashflow

61.AwningsIncorporatedhasbeginningnetfixedassetsof$234,100andendingnetfixedassetsof$243,600.
Assetsvaluedat$42,500weresoldduringtheyear.Depreciationwas$62,500.Whatistheamountofnet
capitalspending?
A.$42,500
B.$9,500
C.$72,000
D.$53,000
E.$29,500

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RossChapter02#61
Section:2.5
Topic:Capitalspending

62.Atthebeginningoftheyear,afirmhascurrentassetsof$16,200andcurrentliabilitiesof$13,280.Atthe
endoftheyear,thecurrentassetsare$14,800andthecurrentliabilitiesare$14,210.Whatisthechangeinnet
workingcapital?
A.$470
B.$50
C.$470
D.$2,330
E.$2,330

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RossChapter02#62
Section:2.4
Topic:Networkingcapital

63.Atthebeginningoftheyear,longtermdebtofafirmis$2,400andtotaldebtis$3,150.Attheendofthe
year,longtermdebtis$2,800andtotaldebtis$4,370.Theinterestpaidis$40.Whatistheamountofthecash
flowtocreditors?
A.$440
B.$40
C.$1,260
D.$1,180
E.$360

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RossChapter02#63
Section:2.5
Topic:Cashflowtocreditors

64.Pete'sBoatshasbeginninglongtermdebtof$840andendinglongtermdebtof$790.Thebeginningand
endingtotaldebtbalancesare$1,220and$1,360,respectively.Theinterestpaidis$30.Whatistheamountof
thecashflowtocreditors?
A.$80
B.$110
C.$110
D.$20
E.$80

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RossChapter02#64
Section:2.5
Topic:Cashflowtocreditors

65.PeggyGrey'sCookieshadnetincomeof$8,110.Thefirmpaidout30percentofthenetincometoits
shareholdersasdividends.Duringtheyear,thecompanyrepurchased$500worthofcommonstock.Whatisthe
cashflowtostockholders?
A.$2,933
B.$5,177
C.$1,933
D.$2,433
E.$2,967

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RossChapter02#65
Section:2.5
Topic:Cashflowtostockholders

66.Thompson'sJetSkishasoperatingcashflowof$11,618.Depreciationis$2,345andinterestpaidis$395.A
nettotalof$485waspaidonlongtermdebt.Thefirmspent$6,180onfixedassetsanddecreasednetworking
capitalby$420.Whatisthecashflowofthefirm?
A.$5,858
B.$8,203
C.$9,228
D.$5,018
E.$7,363

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RossChapter02#66
Section:2.5
Topic:Cashflowfromassets

67.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560


Whatisthechangeinthenetworkingcapitalfrom2014to2015?

A.
$2,343million

B.
$1,035million

C.
$151million

D.
$305million

E.
$674million

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RossChapter02#67
Section:2.4
Topic:Networkingcapital

68.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560


Whatistheamountofthenoncashitemsfor2015?

A.$481million
B.$0
C.$227million
D.$311million
E.$473million

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RossChapter02#68
Section:2.2
Topic:Noncashitems

69.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

Whatistheamountofthenetcapitalspendingfor2015?

A.$29million
B.$26million
C.$337million
D.$1,66million
E.$285million

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RossChapter02#69
Section:2.5
Topic:Capitalspending

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560

70.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560


Whatistheoperatingcashflowfor2015?

A.$485million
B.$1,030million
C.$867million
D.$783million
E.$451million

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RossChapter02#70
Section:2.5
Topic:Operatingcashflow

71.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

Whatisthecashflowofthefirmfor2015?

A.$295million
B.$485million
C.$1,340million
D.$590million
E.$310million

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RossChapter02#71
Section:2.5
Topic:Cashflowfromassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560

72.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560


Whatisthecashflowtostockholdersfor2015?

A.$152million
B.$25million
C.$0
D.$25million
E.$75million

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RossChapter02#72
Section:2.5
Topic:Cashflowtostockholders

73.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Totaloperatingrevenues
Costofgoodssold
Selling,general,andadministrativeexpenses
Depreciation

$3,806
2,315
546
311

Earningsbeforeinterestandtaxes(EBIT)
Interestexpense

$634
170

Pretaxincome
Taxes

$464
162

Netincome

$302

Dividends

75

WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Netproperty&equipment
Intangibleassets
Totalassets

2015
$503
418
1,239
2,290
360
$4810

2014
$227
522
1,187
2,264
360

$4,560

Whatisthecashflowtocreditorsfor2015?

A.$120million
B.$50million
C.$120million
D.$220million
E.$170million

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RossChapter02#73
Section:2.5
Topic:Cashflowtocreditors

74.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110

LiabilitiesandStockholdersEquity
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Totalliabilities&stockholdersequity

2015
$686
1,300
1,500
745
579

2014
$613
1,350
1,500
745
352

$4,810

$4,560


Whatisthenetworkingcapitalfor2015?

A.
$11,45

B.
$12,240

C.
$4,955

D.
$9,915

E.
$10,005

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RossChapter02#74
Section:2.4
Topic:Networkingcapital

75.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110


Whatistheadditiontoretainedearningsfor2015?

A.
$4,030

B.
$4,630

C.
$3,700

D.
$4,900

E.
$5,230

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RossChapter02#75
Section:2.2
Topic:Incomestatement

76.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110


Whatisnetcapitalspendingfor2015?

A.
$850

B.
$1,759

C.
$311

D.
$2,057

E.
$3,459

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RossChapter02#76
Section:2.5
Topic:Capitalspending

77.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110


Whatistheoperatingcashflowfor2015?

A.$6,460
B.$9,069
C.$10,325
D.$3,753
E.$12,408

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RossChapter02#77
Section:2.5
Topic:Operatingcashflow

78.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

Whatisthecashflowofthefirmfor2015?

A.$885
B.$8,042
C.$7,297
D.$6,425
E.$5,517

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RossChapter02#78
Section:2.5
Topic:Cashflowfromassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110

79.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110

Whatisnetnewborrowingfor2015?

A.$6,795
B.$5,565
C.$8,025
D.$6,795
E.$5,565

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RossChapter02#79
Section:2.5
Topic:Cashflowtocreditors

80.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110


Whatisthecashflowtocreditorsfor2015?

A.$1,230
B.$8,025
C.$9,135
D.$5,565
E.$2,705

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RossChapter02#80
Section:2.5
Topic:Cashflowtocreditors

81.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Administrativeexpenses
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets

2015
$42,629
23,704
1,230
1,200
2,609
7,040
3,671
3,968
2,325
19,105
4,601
22,600
41,260

2014
$37,911
24,832
1,584
600
2,814
6,820
2,969
4,503
3,760
25,900
5,318
19,800

42,110


Whatisthecashflowtostockholdersfor2015?

A.
$1,200

B.
$2,800

C.
$1,520

D.
$1,600

E.
$2,800

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RossChapter02#81
Section:2.5
Topic:Cashflowtostockholders

82.Lastyear,JohnsonMillshadannualrevenueof$37,800,costofgoodssoldof$23,200,andadministrative
expensesof$6,300.Thefirmpaid$700individendsandhadataxrateof35percent.Thefirmadded$2,810to
retainedearnings.Thefirmhadnolongtermdebt.Whatwasthedepreciationexpense?
A.$2,300
B.$1,520
C.$2,640
D.$1,780
E.$2,900

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RossChapter02#82
Section:2.2
Topic:Incomestatement

83.Lastyear,WebsterFarmshadannualrevenueof$87,200,depreciationof$11,600,costofgoodssoldof
$54,700,andadministrativeexpensesof$8,300.Thefirmpaid$3,200individendsandpaidtaxesof$4,300.
Whatwastheoperatingcashflow?
A.$11,500
B.$8,300
C.$23,100
D.$19,900
E.$16,700

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RossChapter02#83
Section:2.5
Topic:Operatingcashflow

84.DeepWaterMiningadded$411toretainedearningslastyearonsalesof$24,646.Theadministrative
expenseswere$4,370,depreciationwas$812,dividendspaidwere$285,andtheinterestexpensewas$103.
Whatwasthecostofgoodssoldifthefirmstaxratewas35percent?
A.$20,225
B.$24,385
C.$18,290
D.$14,815
E.$21,393

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RossChapter02#84
Section:2.2
Topic:Incomestatement

85.OscarsDogTreatshadacashflowtocreditorsof$2,840,acashflowtostockholdersof$1,630lastyear.
Thefirmspentanetof$1,420onfixedassetsandreducednetworkingcapitalby$330.Whatwastheoperating
cashflow?
A.$6,190
B.$5,560
C.$3,500
D.$1,320
E.$4,9001

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RossChapter02#85
Section:2.5
Topic:Operatingcashflow

86.Defineliquidityandexplainwhatafirmwouldneedtodotoensureallofthecurrentassetsdisplayedonits
balancesheetareliquid.
Liquidassetsarethosethatcanbesoldquicklywithlittleornolossinvalue.Toensurethecurrentassetsare
liquid,thefirmneedstoreviewitsaccountsreceivabletoensuretheaccountsarecollectibleandalsoreviewits
inventorytoensureitissalableforatleasttheamountatwhichitisrecorded.<i>

AACSB:ReflectiveThinking
Blooms:Apply
Difficulty:2Intermediate
RossChapter02#86
Section:2.1
Topic:Balancesheet

87.Whyisinterestexpenseexcludedfromtheoperatingcashflowcalculation?
Operatingcashflowisdesignedtorepresentthecashflowafirmgeneratesfromitsdaytodayoperating
activities.Interestexpensearisesfromafinancingdecisionandthusisconsideredasacashflowtocreditors.
<i>

AACSB:ReflectiveThinking
Blooms:Apply
Difficulty:2Intermediate
RossChapter02#87
Section:2.5
Topic:Operatingcashflow

88.Explainwhytheincomestatementisnotagoodrepresentationofcashflow.
Mostincomestatementscontainsomenoncashitems,sothesemustbeaccountedforwhencalculatingcash
flows.Moreimportantly,however,sinceGAAPisusedtocreateincomestatements,revenuesandexpensesare
bookedwhentheyaccrue,notwhentheircorrespondingcashflowsoccur.<i>

89.Discussthedifferencebetweenbookvaluesandmarketvaluesonthebalancesheetandexplainthebest
methodfordeterminingthevalueofafirmtoitsstockholders.
Theaccountsonthebalancesheetaregenerallycarriedathistoricalcost,notmarketvalues.Althoughthebook
valueofcurrentassetsandcurrentliabilitiesmaycloselyapproximatemarketvalues,thesamecannotbesaid
fortherestofthebalancesheetaccounts.Ultimately,stockholdersshouldfocusonthefirm'sstockprice,which
isamarketvaluemeasure,forthevalueoftheirinvestmentinthefirm.<i>

90.Notethatinallofourcashflowcomputationstodeterminecashflowofthefirm,weneverincludethe
additiontoretainedearnings.Whynot?Isthisanoversight?
Theadditiontoretainedearningsisnotacashflow.Itissimplyanaccountingentrythatlinkstheincome
statementtothebalancesheetandallowsthebalancesheettobalance.Anyadditionstoretainedearningswill
showupascashflowchangesinotherbalancesheetaccounts.

AACSB:ReflectiveThinking
Blooms:Analyze
Difficulty:3Challenge
RossChapter02#90
Section:2.2
Topic:Incomestatement

91.Depreciationisclassifiedasanoncashitembecausenocashisspentwhendepreciationisrecorded.Why
areexpensesthathavebeenaccrued,butnotyetpaid,notalsoconsideredtobenoncashitemsandtherefore
excludedfromoperatingcashflowjustasdepreciationisexcluded?
Accruedexpensesthathavenotbeenpaidwillappearinaccountspayableandthechangeinnetworking
capital.Viathechangeinnetworkingcapital,theseunpaidexpensesaresubtractedfromtheoperatingcash
flowtodeterminethecashflowofthefirm.Thismethodallowsforthecomputationofthecashflowsbased
solelyonfinancialstatementinformation.Depreciation,ontheotherhand,istheexpensingofafixedassetcost
thatwaspaidforwhentheassetwasacquired.<i>

92.Sometimeswhenbusinessesarecriticallydelinquentontheirtaxliabilities,thetaxauthoritycomesinand
literallyseizesthebusinessbychasingalloftheemployeesoutofthebuildingandchangingthelocks.What
doesthistellyouabouttheimportanceoftaxesrelativetoourdiscussionofcashflow?Whymightabusiness
ownerwanttoavoidsuchanoccurrence?
Taxesmustbepaidincash,andinthiscase,theyareoneofthemostimportantcomponentsofcashflow.The
reputationofabusinesscanundergoirreparableharmifwordgetsoutthatthetaxauthoritieshaveconfiscated
thebusiness,evenifonlyforacoupleofhoursuntilthebusinessownercancomeupwiththemoneytoclearup
thetaxproblem.Thebottomlineisiftheownercan'tcomeupwiththecash,thetaxauthorityhaseffectively
putthemoutofbusiness.<i>

93.Interpret,inwords,whatcashflowofthefirmrepresentsbydiscussingoperatingcashflow,changesinnet
workingcapital,andadditionstofixedassets.
Operatingcashflowisthecashflowafirmgeneratesfromitsdaytodayoperations.Inotherwords,itisthe
cashinflowgeneratedasaresultofputtingthefirm'sassetstowork.Changesinnetworkingcapitalandfixed
assetsrepresentinvestmentsafirmmakesintheseassets.Thatis,afirmtypicallytakessomeofthecashflowit
generatesfromusingassetsandreinvestsitinnewassets.Cashflowofthefirm,then,isthecashflowafirm
generatesbyemployingitsassets,netofanyacquisitions.<i>

94.Whyiscashflowmanagementimportant?
GAAPaccountingprinciplesallowsignificantsubjectivedecisionstobemadeinmanykeyareas.Theuseof
cashflowasametrictoevaluateacompanycomesfromtheideathatthereislesssubjectivityinvolvedand
therefore,itishardertospinthenumbers.<i>

95.Explainthedifferencebetweenproductcostsandperiodcostsastheyrelatetotheincomestatement.Are
thesetermssynonymouswithshortrunandlongrun?
Productcostsarethetotalproductioncostsincurredduringaperiodrawmaterials,directlabor,and
manufacturingoverheadandarereportedascostofgoodssold.Periodcostsarecostsmanagementandoffice
salaries,officeexpenses,insurancethatareallocatedtoatimeperiodandarerecordedasselling,general,and
administrativeexpenses.Thetermsshortrunandlongrunareusedtodifferentiatebetweenfixedandvariable
costs,dependinguponthelengthoftimerequiredtovarythecostamount.<i>

1.

2.

3.

4.

5.

The financial statement showing a firms accounting value on a particular date is the:
a.

income statement.

b.

balance sheet.

c.

statement of cash flows.

d.

tax reconciliation statement.

e.

shareholders equity sheet.

A firm has a debt-equity ratio of .40. What is the total debt ratio?
a.

.29

b.

.33

c.

.67

d.

1.40

e.

1.50

Financial leverage refers to the:


a.

amount of debt used in a firms capital structure.

b.

ratio of retained earnings to shareholders equity.

c.

ratio of paid-in surplus to shareholders equity.

d.

ratio of cost-of-goods-sold to total sales.

e.

amount of receivables present in the firms asset structure.

The financial statement summarizing a firms performance over a period of time is the:
a.

income statement.

b.

balance sheet.

c.

statement of cash flows.

d.

tax reconciliation statement.

e.

shareholders equity sheet.

_____ refers to the firms interest payments less any net new borrowing.
a.

Operating cash flow

b.

Capital spending

c.

Net working capital

6.

d.

Cash flow from assets

e.

Cash flow to creditors

Ratios that measure a firms financial leverage are known as _____ ratios.
a.

asset management

b.

long-term solvency

c.

short-term solvency

d.

profitability

e. market value

7.

A firm has sales of $1,200, net income of $200, net fixed assets of $500, and current
assets of $300. The firm has $100 in inventory. What is the common-size statement
value of inventory?

8.

a.

8.3 percent

b.

12.5 percent

c.

20.0 percent

d.

33.3 percent

e.

50.0 percent

Jessicas Boutique has cash of $50, accounts receivable of $60, accounts payable of
$200, and inventory of $150. What is the value of the quick ratio?
a.

.30

b.

.55

c.

.77

d.

1.30

e. 1.82

9.

Ivans, Inc. paid $500 in dividends and $600 in interest this past year. Common stock increased by $200 and retained
earnings decreased by $100. What is the net income for the year?
a.

$400

b.

$500

c.

$600

d.

$800

e.

$1,000

10. Tims Playhouse paid $155 in dividends and $220 in interest expense. The addition to retained earnings is $325 and
net new equity is $50. The tax rate is 25 percent. Sales are $1,600 and depreciation is $160. What are the
earnings before interest and taxes?
a.

$480

b.

$640

c.

$860

d.

$1,020

e.

$1,440

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