3.1 An Overview of the Firm's Financial
Statements
1) Which of the basic financial statements is best used to
answer the question, "How profitable is the business?"
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Accounts receivable aging schedule
2) Who owns the retained earnings of a public firm?
A) The IRS
B) Common stockholders
C) Bondholders
D) Preferred stockholders
3) Which of the following represents an attempt to measure
the earnings of the firm's operations over a given time period?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) None of the above
4) Stock that is repurchased by the issuing company is
called
A) paid in capital.
B) treasury stock.
C) retained capital.
D) par value stock.
5) Which of the basic financial statements is best used to
answer the questions "What does the company own and how is it
financed?"
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Cash flow statement
6) Which of the basic financial statements is best used to answer
the questions "Where did the company's money come from and how was it
spent over the preceding year?"
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Cash flow statement
7) Which of the basic financial statements is best used to
answer questions about changes in owner's equity that are not explained by the
income statement?
A) Balance sheet
B) Statement of shareholder's equity
C) Income statement
D) Cash flow statement
8) The income statement shows a company's earnings since it
has been in business.
Answer: FALSE
9) The balance includes information about the company's
assets and liabilities.
Answer: TRUE
10) The cash flow statement shows amounts that the company
has earned but for which it has not yet received cash.
Answer: FALSE
11) The cash flow statement is an alternative term for the
balance sheet.
Answer: FALSE
3.2 The Income Statement
1) On the income statement, sales revenue, minus cost of
goods sold and operating expenses, equals which of the following?
A) Net profit
B) Retained earnings
C) Net income available to preferred shareholders
D) EBIT
2) Which of the following streams of income is not affected
by how a firm is financed (whether with debt or equity)?
A) Net profit after tax but before dividends
B) Net working capital
C) Operating income
D) Income before tax
3) Which of the following is not included in computing EBT
(earnings before taxes)?
A) Marketing expenses
B) Depreciation expense
C) Cost of goods sold
D) Dividends
4) Your firm has the following income statement items:
sales of $50,250,000; income tax of $1,744,000; operating expenses of
$10,115,000; cost of goods sold of $35,025,000; and interest expense of
$750,000. What is the amount of the firm's EBIT?
A) $15,552,000
B) $58,000,000
C) $5,110,000
D) $4,630,000
5) Your firm has the following income statement items:
sales of $50,250,000; income tax of $1,744,000; operating expenses of
$10,115,000; cost of goods sold of $35,025,000; and interest expense of
$750,000. What is the amount of the firm's gross profit?
A) $18,000,000
B) $15,225,000
C) $5,000,110
D) $6,632,000
6) Your firm has the following income statement items:
sales of $50,250,000; income tax of $1,744,000; operating expenses of
$10,115,000; cost of goods sold of $35,025,000; and interest expense of
$750,000. What is the amount of the firm's income before tax?
A) $4,360,000
B) $750,000
C) $10,865,000
D) $25,115,000
7) Your firm has the following income statement items:
sales of $50,250,000; income tax of $1,744,000; operating expenses of
$8,750,000; cost of goods sold of $35,025,000; and interest expense of
$750,000. What is the amount of the firm's net income?
A) $255,223
B) $4,731,000
C) $2,616,000
D) $7,775,000
8) Your firm has the following income statement items:
sales of $52,000,000; income tax of $1,880,000; operating expenses of
$9,000,000; cost of goods sold of $36,000,000; and interest expense of
$800,000. Compute the firm's gross
profit margin.
A) 13.5%
B) 8.3%
C) 30.8%
D) 69.2%
Table 1
Jones Company
Financial Information
March
1995 March 1996
Net income $1,500
$3,000
Accounts receivable
750 750
Accumulated
depreciation 1,125 1,500
Common stock 4,500 5,250
Capital surplus 7,500 8,250
Retained earnings 1,500 2,250
Accounts payable 750 750
9) Based on the information given in Table 1, calculate the
dividends paid in 1996.
A) $3,750
B) $3,000
C) $750
D) $2,250
Table 2
Bird Industries, Inc.
Balance Sheets
2011
2012
Cash $1,000
$?
Accounts receivable 5,000 6,000
Inventories 6,500
6,000
Land 10,000
12,000
Other fixed assets 8,000 9,000
Accumulated
depreciation (1,000) (1,600)
Total assets $29,500
$?
Accounts payable $3,200 $ 6,800
Bonds 4,000
4,000
Common stock 17,000 16,000
Retained earnings 5,300 5,000
Total debt and equity
$29,500 $?
Bird
Industries, Inc.
Income
Statement
Sales
$84,000
Cost
of goods sold 66,400
Gross
profit $17,600
Operating
expenses (13,000)
Depreciation
(600)
EBIT
$4,000
Interest
expense (500)
EBT
$3,500
Taxes
(1,500)
Net
Income $2,000
10) Based on the information contained in Table 2, what was
the total amount of Bird Industries' common stock dividend for 2012?
A) $800
B) $2,300
C) $2,000
D) Cannot be determined with available information
11) Based on the information contained in Table 2, what was
Bird Industries' operating profit margin for 22012?
A) 21%
B) 4.8%
C) 4.2%
D) 2.4%
Table 3
Snark Enterprises, Inc.
Balance Sheets
2011
2012
Cash $1,000
$?
Accounts receivable 8,000 9,000
Inventories 4,000
7,000
Land 10,000
10,000
Other fixed assets 5,000 5,500
Accumulated
depreciation (1,600) (2,000)
Total assets $26,400
$?
Accounts payable $4,200 $ 7,000
Bonds 4,000
4,000
Common stock 15,000 16,000
Retained earnings 3,200 3,800
Total debt and equity
$26,400 $?
Snark
Enterprises, Inc.
Income
Statement
Sales
$44,900
Cost
of goods sold (22,000)
Gross
profit $12,900
Operating
expenses (10,000)
Depreciation
(400)
EBIT
$2,500
Interest
expense (500)
EBT
$2,000
Taxes
(1,000)
Net
Income $1,000
12) Based on the information contained in Table 3, what was
the total amount of Snark Enterprise's common stock dividend for 2012?
A) $0
B) $400
C) $600
D) Cannot be determined with available information
13) Based on the information contained in Table 3, what is
Snark Enterprise's gross profit margin in 2012.
A) 5.6%
B) 4.5%
C) 29.7%
D) 2.2%
14) Which of the following best represents operating
income?
A) Income after financing activities
B) Earnings before interest and taxes
C) Income from capital gains
D) Income from discontinued operations
15) Which of the following best represents the stream of
income that is available to stockholders?
A) Net profit after tax
B) Earnings before interest, taxes and dividends
C) Gross profit
D) Operating profit
16) Which of the following is NOT included in operating
income?
A) Cost of goods sold
B) Sales
C) Taxes
D) Operating expenses
17) Using the information provided, calculate net income
for 2013. Assume a tax rate of 35 percent.
Year 2013
Inventory $5,000
Revenues 200,000
Depreciation expense 5,000
Cost of goods sold 100,000
Interest expense 10,000
Operating expenses 30,000
A) $35,750
B) $44,000
C) $50,000
D) $19,250
18) The
practice of shifting income from good years to poor years in order to show a
record of steady growth is
A) known as earnings management and is considered
unethical.
B) highly recommended but not required by GAAP.
C) a basic requirement of accrual accounting.
D) impossible if Generally Accepted Accounting Principles
are followed.
19) Firms
should compare their gross, operating and net profit margins to past years and
other companies in order to
A) evaluate the firm's performance.
B) identify expenses that seem to be out-of-line
C) better manage the reporting of the firm's earnings.
D) Both A and B.
20) The income statement represents a snapshot of account
balances at one point in time.
Answer: FALSE
21) Generally Accepted Accounting Principles (GAAP) require
companies to smooth earnings by shifting some profits from good years to bad
years.
Answer: FALSE
22) The income statement describes the financial
performance of a firm over a fixed period such as a quarter or a year.
Answer: TRUE
23) On an accrual basis income statement, revenues and
expenses always match the firm's cash flow.
Answer: FALSE
24) Corporate income statements are usually compiled on an
accrual, rather than cash, basis.
Answer: TRUE
25) The company's gross profit margin is EBIT divided by
net sales.
Answer: FALSE
Table
4
Financial Data for Dooley Sportswear, December
31, 2013
Inventory $206,250
Interest expense 5,000
Accumulated depreciation 442,500
Cash 180,000
Net sales (all credit) 1,500,000
Accounts receivable 225,000
Operating expenses 525,000
Cost of goods sold 937,500
Accounts payable 168,750
Prepaid insurance 80,000
Accrued wages 65,000
Federal income taxes 5,750
26) From the scrambled list of items presented in Table 4,
prepare an income statement Dooley Sportswear Company. Not all items from Table 4 will be used.
Answer: Dooley
Sportswear Company Income Statement
for the Year Ending
December 31, 2013
Net sales (all
credit) $1,500,000
Cost of goods
sold 937,500
Gross profits 562,500
EBIT 525,000
Net operating
income 37,500
Interest expense
5,000
Net income
before taxes 32,500
Federal income
taxes 5,750
Net income $26,750
3.3 Corporate Taxes
1) 2013 U.S.
Corporate tax rates are shown below:
|
Taxable Income
|
Marginal Tax Rate
|
|
$0-$50,000
|
15%
|
|
$50,001-$75,000
|
25%
|
|
$75,001-$100,000
|
34%
|
|
$100,001-$335,000
|
39%
|
|
$335,001-$10,000,000
|
34%
|
|
$10,000,001-$15,000,000
|
35%
|
|
$15,000,001-$18,333,333
|
38%
|
|
Over $18,333,333
|
35%
|
RJH Inc. has
earnings before taxes of $100,000 in 2013.
The company's tax expense will be
A) $22,250
B) $24,670
C) $25,000
D) $34,000
2) 2013 U.S.
Corporate tax rates are shown below:
|
Taxable Income
|
Marginal Tax Rate
|
|
$0-$50,000
|
15%
|
|
$50,001-$75,000
|
25%
|
|
$75,001-$100,000
|
34%
|
|
$100,001-$335,000
|
39%
|
|
$335,001-$10,000,000
|
34%
|
|
$10,000,001-$15,000,000
|
35%
|
|
$15,000,001-$18,333,333
|
38%
|
|
Over $18,333,333
|
35%
|
Bouffard Co.
has earnings before taxes of $100,000,000 in 2013. The company's tax expense will be
A) $3,500,000
B) $36,500,000
C) $31,875,000
D) $35,000,000
3) A & K Co. expects to have earnings before taxes of
$250,000 to $300,000. The company's
marginal tax rate is 39% and its average tax rate about 33%. For every additional dollar of interest
expense, A & K's taxes will
A) increase by 39 cents.
B) fall by 39 cents.
C) be unaffected.
D) fall by about 33 cents.
4) A & K Co. expects to have earnings before taxes of
$250,000 to $300,000. The company's
marginal tax rate is 39% and its average tax rate about 33%. For every additional dollar A & K pays
out in common dividends, its income tax liability will
A) increase by 39 cents.
B) fall by 39 cents.
C) be unaffected.
D) fall by about 33 cents.
5) Tax tables are based on ________ tax rates.
A) marginal
B) average
C) implied
D) investment
6) The marginal tax rate would equal the average tax rate
for firms with earnings less than $50,000 or more than $18,333,333.
Answer: TRUE
7) The interest payments on corporate bonds are
tax-deductible.
Answer: TRUE
8) A corporation's average tax rate will always be lower
than or equal to its marginal tax rate.
Answer: TRUE
9) The highest marginal corporate tax rate is 35%.
Answer: FALSE
10) When analyzing the cash flows from a new project
proposal, a company should always use its marginal tax rate.
Answer: TRUE
11) Pearls, Inc. had sales in 2013 of $2.1 million. The
common stockholders received $600,000 in cash dividends. Interest totaling $150,000 was paid on
outstanding debts. Operating expenses totaled $300,000, and cost of goods sold
was $500,000. What is the tax liability
of Pearls, Inc.? 2013 U.S. Corporate tax rates are shown below:
|
Taxable Income
|
Marginal Tax Rate
|
|
$0-$50,000
|
15%
|
|
$50,001-$75,000
|
25%
|
|
$75,001-$100,000
|
34%
|
|
$100,001-$335,000
|
39%
|
|
$335,001-$10,000,000
|
34%
|
|
$10,000,001-$15,000,000
|
35%
|
|
$15,000,001-$18,333,333
|
38%
|
|
Over $18,333,333
|
35%
|
Answer: Pearls
Taxable Income
Sales $2,100,000
Less:
Cost of goods sold $500,000
Operating expenses 300,000
Earnings before interest
& taxes $1,300,000
Interest expense 150,000
Taxable income 1,150,000
Total taxes owed $391,000
Taxes on operating
earnings = (.15)(50,000) + (.25)(25,000) + (.34) 25,000) + (.39)(235,000)
+.(34)(735,000)= 7,500 + 6,250 + 8500 + 91,650+277,100 = $391,000 or
Because taxable
income is over $335,000
taxes can be
computed 1,150,000 × .34 =
$391,000
12) Goodwin Enterprises had a gross profit of $2,500,000
for the year. Operating expenses and interest expense incurred in that same
year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of
common stock and 180,000 shares of preferred stock outstanding. Management
declared a $2.50 dividend per share on the common and a $1.50 dividend per
share on the preferred. Securities purchased at a cost of $37,500 in a previous
year were resold at a price of $50,500. Compute the taxable income and the
resulting tax liability for Goodwin Enterprises for the year.
Use the following tax rates:
Income Tax rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
over $335,001 34%
Answer:
Gross profit $2,500,000
Operating expenses (595,000)
Interest expense (362,000)
Income before tax $1,543,000
Add: Gain on sales 13,000
Taxable Income $1,556,000
Income Marginal
Tax Rate Tax Liability
$50,000 × 15% $7,500
$25,000 ×
25% $6,250
$25,000 × 34% $8,500
$235,000 × 39% $91,650
$1,221,000 × 34% $415,140
$1,556,000 $529,040
By
design, the marginal and the average tax rates are the same, 34%, for corporate
incomes between $335,000 and $10,000,000.
3.4 The Balance Sheet
1) Which of the following is not a current asset?
A) Accounts payable
B) Marketable securities
C) Accounts receivable
D) Inventory
2) Net plant and equipment is
A) plant and equipment purchases less amount borrowed to
finance purchases.
B) current year plant and equipment purchases less current
year's depreciation expense.
C) gross plant and equipment less accumulated depreciation.
D) plant and equipment at current market valuations.
3) Your firm has the following balance sheet statement
items: total current liabilities of $805,000; total assets of $2,655,000; fixed
and other assets of $1,770,000; and long-term debt of $200,000. What is the
amount of the firm's total current assets?
A) $885,000
B) $1,550,000
C) $600,000
D) $325,000
4) Your firm has the following balance sheet statement
items: total current liabilities of $805,000; total assets of $2,655,000; fixed
and other assets of $1,770,000; and long-term debt of $200,000. What is the
amount of the firm's net working capital?
A) $25,000
B) $325,000
C) $770,000
D) $80,000
5) Which of the following best describes a balance sheet?
A) Reports cash receipts and cash disbursements for a
specific accounting period
B) Reports investment activities for a specified accounting
period
C) Reports revenues and expenses for a specific accounting
period
D) Reports the amount and composition of assets and
liabilities at a specified point in time
6) Which of the following would NOT be included as an asset
on a corporate balance sheet?
A) Accounts receivable
B) Common stock
C) Inventory
D) Buildings
7) Which of the following would NOT be included as a
liability in a corporate balance sheet?
A) Notes payable
B) Accounts payable
C) Bonds
D) Accumulated Depreciation
8) Which of the following would NOT be included as equity
in a corporate balance sheet?
A) Cash
B) Paid in capital
C) Retained earnings
D) Common stock
9) Patriot Corporation purchased manufacturing equipment
with an expected useful life of five years.
The purchase of the machinery would be shown as
A) an expense on the balance sheet.
B) an expense on the income statement.
C) an asset on the balance sheet.
D) both an expense and an asset.
10) When a company pays a dividend on common stock, it
appears as
A) an expense on the income statement.
B) a reduction in the amount of retained earnings.
C) a current liability on the balance sheet.
D) dividend payments have no effect on the financial
statements.
11) Grass Gadgets had sales of $30 million and net income
of $2 million in 2008. Grass paid a dividend of $1.5 million. Assuming that
their beginning balance for retained earnings was $3 million, calculate their
ending balance for retained earnings.
A) $2.5 million
B) $3 million
C) $3.5 million
D) $4 million
12) Total equity on the balance sheet increases as dividends
paid increases.
Answer: FALSE
13) A balance sheet is a statement of the financial
position of the firm on a given date, including its asset holdings,
liabilities, and equity.
Answer: TRUE
14) Under current accounting rules, plant and equipment
appear on a company's balance sheet valued at replacement value.
Answer: FALSE
15) When a corporation sells common stock to investors, the
amount is added to revenue on the income statement.
Answer: FALSE
16) An advantage of balance sheet numbers is that assets
reflect current market values.
Answer: FALSE
17) A firm's balance sheet provides a representation of the
current market value of the company.
Answer: FALSE
18) Gross plant and equipment minus accumulated
depreciation represents the fair market value of a company's fixed assets.
Answer: FALSE
19) Balance sheet and other accounts for GPA are listed
below in alphabetical order. Use these
accounts to construct GPA's balance sheet for 2013. All balance sheet accounts are shown, but
some accounts will not be used. All
amounts are in millions of dollars.
Accounts payable $1900
Accounts receivable $661
Cash $1,000
Common stock $2,000
EBIT $1,968
Interest expense $8.00
Inventories $1,620
Long-term debt $890
Net plant & equipment $2,563
Other current assets $645
Other long-term assets $576
Retained earnings $2,080
Short-term debt $195
Taxes $778
Answer:
|
Balance
Sheet: GPA Inc.
|
2013
|
|
|
|
Cash
|
$1,000
|
Accounts payable
|
$1,900
|
|
Accounts receivable
|
661
|
Short-term debt
|
195
|
|
Inventories
|
1,620
|
Total current liabilities
|
$2,095
|
|
Other current assets
|
645
|
Long-term debt
|
890
|
|
Total current assets
|
$3,926
|
Common stock
|
2,000
|
|
Net plant & equipment
|
2,563
|
Retained earnings
|
2,080
|
|
Other long-term assets
|
576
|
|
|
|
Total assets
|
$7,065
|
Total liab. & equity
|
$7,065
|
|
|
|
|
|
3.5 The
Cash Flow Statement
1) Which of the following represents a source of cash?
A) A decrease in accounts payable
B) A decrease in accounts receivable
C) Payment of dividends
D) An increase in inventories
2) The change between a firm's beginning cash balance and
ending cash balance would equal
A) cash flow from operations + cash flow from investing
activities + cash flow from financing activities.
B) the change in current assets minus the change in current
liabilities.
C) net income plus new borrowing minus asset purchases.
D) total assets minus total liabilities minus total
stockholders' equity.
3) Which of the following does NOT represent cash outflows
to the firm?
A) Taxes
B) Interest payments
C) Dividends
D) Depreciation
4) The ratio of ________ to ________ is an indicator of the
quality of a firm's earnings.
A) cash flow from operations, net income
B) liabilities, assets
C) dividends, interest expense
D) cash flow from operations, capital expenditures
5) Operating cash flow will increase with a decrease in
A) inventories.
B) current liabilities.
C) depreciation expense.
D) capital expenditures.
6) In a growing business, negative cash flow from investing
activities is normal.
Answer: TRUE
7) Reducing a firm's debt will increase its cash flow.
Answer: FALSE
8) Beginning cash balance + cash flow from operations +
cash flow from investing activities + cash flow from financing activities =
ending cash balance.
Answer: TRUE
