Student name:

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) The income statement is the primary financial
statement for measuring the profitability of a firm over a
period of time.

© true
© false

2) The income statement measures the increase in the

assets of a firm over a period of time.

© true
© false

3) Accounting income is based on verifiably completed

transactions.

© true
© false

4) For private companies, asset accounts are listed in

order of their liquidity.

© true © false

5) Book value per share and market value per share are
usually the same dollar amount.

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© true © false

6) Book value per share is of greater concern to the

financial manager than market value per share.

© true
© false

7) Book value is equal to net worth.

© true
© false

8) Equity is a measure of the monetary contributions that shareholders of the

have been made directly or indirectly on behalf of the company.

© true
© false

9) Shareholders' equity is equal to liabilities plus assets.

© true
© false

10) Shareholders' equity is equal to assets minus

liabilities.

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© true © false

11) — Shareholders' equity minus preferred stock is the same

thing as what is sometimes called net worth or book value.

© true
© false

12) The statement of cash flows helps measure how the

changes in a balance sheet are financed between two time
periods.

© true

© false

13) An increase in an asset represents a source of funds.

© true
© false

14) Accumulated amortization shows up in the income

statement.

© false

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15) ~The change in accumulated amortization is usually
equal to the amortization expense charged in the income
statement.

© true
© false

16) Net working capital is the difference between current

assets and current liabilities.

© true

© false

17) Amortization is an accounting entry and does not

involve a cash expense.

© true
© false

18) Anadvantage of the net working capital approach over account of the statement of
the cash approach is that it looks at the changes of every cash flows.

© true
© false

19) Cash flow is equal to earnings before taxes minus

amortization.

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© true © false

20) The corporate tax rate is 25% on the first $200,000 of

income and 50% on any amount over $200,000.

© true
© false

21) Interest expense is deductible before taxes and

therefore has an after-tax cost equal to the interest paid times
(1-tax rate).

© true

© false

22) Preferred stock dividends are paid out before income

taxes.

© false

23) Total assets of a firm are financed with liabilities and

shareholders' equity.

© false

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24) Retained earnings shown on the balance sheet earnings but not paid out in
represents available cash on hand generated from prior year's dividends.

© true
© false

25) Current cost accounting adjusts financial statements

by using the consumer price index.

© true

© false

26) An increase in a liability account represents a source

of funds.

© true

© false

27) The statement of cash flows includes the effects of

dividends paid and amortization expense.

© true

© false

28) = The net working capital approach to funds flow

analysis looks at the difference between total assets and total
liabilities.

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© true © false

29) The marginal corporate tax rate for incomes over

$1,000,000 is 50%.

© true
© false

30) — Preferred stock is always excluded from shareholders'

equity because it is a hybrid security and does not have full
voting rights.

© true
© false

31) — Current cost accounting undervalues plant and

equipment because it does not adjust for inflation.

© true
© false

32) | The investments account includes marketable

securities.

© false

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33) The investments account represents a commitment of
funds of at least one year.

© true
© false

34) A $125,000 credit sale could be a part of a firm's cash

flow from operations if paid off within a firm's fiscal year.

© true

© false

35) An increase in accounts receivable represents a

reduction in cash flows from operations.

© true

© false

36) — An increase in accounts payable represents a reduction

in cash flows from operations.

© true

© false

37) — The purchase of a new factory would reduce the cash

flows from investing activities.

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© true © false

38) The sale of corporate bonds held by the firm as a long-

term investment would increase cash flows from investing
activities.

©) true
© false

39) Paying dividends to common shareholders will not

affect cash flows from financing activities.

© true

© false

40) — It is not possible for a company with a high profit

margin to have a low operating profit.

© true
© false

41) Operating profit is essentially a measure of how

efficient management is in generating revenues and
controlling expenses.

© true
© false

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42) The P/E ratio provides no indication of investors'
expectations about the future of a company.

© true
© false

43) = The real value of a firm is the same in an economic

and accounting sense.

© true
© false

44) A balance sheet represents the assets, liabilities, and

shareholders’ equity of a company at a given point in time.

© true
© false

45) Balance sheet items are usually adjusted for inflation.

© true
©) false

46) Marketable securities are temporary investments of

excess cash and are carried at the lower of cost or market.

© true © false

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47) — Retained earnings represent the firm's cumulative
earnings since inception, minus dividends, and other
adjustments.

© true
© false

48) Cash flow consists of illiquid cash equivalents which

are difficult to convert to cash within 90 days.

© true

© false

49) The sale of a firm's securities is a source of funds,

whereas the payment of dividends is a use of funds.

© true
© false

50) The use of amortization is an attempt to allocate the

past and future cost of an asset over its useful life.

© true
© false

51) Free cash flow is equal to cash flow from operating

activities plus amortization.

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© false

52) Free cash flow is equal to cash flow from operating

activities minus necessary capital expenditures and normal
dividend payments.

©) true
© false

53) Taxes on individuals have traditionally been the higher your marginal
progressive, meaning that the more taxable income you have, tax rate.

© true

© false

54) ‘The P/E ratio is strongly related to the past

performance of the firm.

© true
© false

55) An increase in assets represents a source of funds.

© true
© false

56) — Sales less cost of goods sold is equal to earnings before taxes.

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© true © false

57) Sales less cost of goods sold is equal to gross profit.

© true
© false

58) | When a firm has a sharp drop off in earnings, its P/E
ratio may be artificially high.

© true

© false

59) The investments account does not directly affect cash

and cash equivalents.

© true
© false

60) Amortization expense is charged in the income

statement.

© true
©) false

61) Anincrease in inventory represents a source of funds.

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© true © false

62) |The income statement allows analysts and investors to

measure a firm's profitability of over a period of a month,
quarter, or year.

©) true
© false

63) Earnings available to common shareholders includes

potential dividends to be paid to preferred shareholders.

© true
© false

64) The effective tax rate on dividend income is lower to reduce the effects of
than interest income because of the dividend tax credit (DTC). double taxation.
Canadians can claim the DTC because the government wants

© true
© false

65) — Prior Adjustments may be added or subtracted from a

firm's Retained Earnings. These "adjustments" are usually for
accounting errors or substantive changes to historical cost of
assets or liabilities.

© true © false

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66) Preferred and/or Common Share dividends are added
to Cash Flow from Operations in determining Free Cash
Flow.

© false

67) The sale of a firm's preferred shares is a source of

funds, whereas the payment of preferred dividends is a use of
funds.

© false

MULTIPLE CHOICE - Choose the one alternative that Private Enterprises

best completes the statement or answers the question. (ASPE)?
68) Which of the following is not one of the four basic
financial statements required by Accounting Standards for

C) Statement of
A) Income Statement Cash Flows
B) Statement of Financial Position D) Balance Sheet

69) Which of the following would not be classified as a

current asset?

C) Prepaid
A) Marketable securities expenses
B) Long term Investments D) Inventory

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70) | Anitem that may be converted to cash within one year
or one operating cycle of the firm is classified as a:

C) current asset.
A) current liability. D) long-term
B) long-term asset. liability.

71) Which of the following is not a primary source of

capital to the firm?

C) Preferred stock
A) Assets D) Bonds
B) Common stock

72) The residual income of the firm belongs to:

C) common
A) creditors. shareholders.
B) preferred shareholders. D) bondholders.

73) Book value is the same as

C) net worth.
A) stockholders' equity. D) current assets
B) fixed assets minus long-term debt. minus current debt.

74) | Which account represents the cumulative earnings of

the firm since its formation, minus dividends paid?

D) Accumulated
A) Share price amortization
B) Common stock
C) Retained earnings

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75) A firm has $3,500,000 in its common stock account original issue price if only
and $2,500,000 in its retained earnings account. The firm one stock issue has ever
issued 100,000 shares of common stock. What was the been sold?

C) $60 per share

A) $35 per share D) Not enough
B) $25 per share information to tell

76) A firm has $2,000,000 in its common stock account accumulated earnings per
and $20,000,000 in its retained earnings account. The firm share?
issued 500,000 shares of common stock. What are

C) $40 per share

A) $4 per share D) $5 per share
B) $44 per share

77) The major limitation of financial statements is:

D)_ in their lack of

A) in their complexity. detail.
B) in their lack of comparability.
C) in their use of historical cost accounting.

78) Inflation has its major impact on balance sheets in

which of the following areas?

D) Interest
A) Inventory and accounts payable expense and earnings per
B) Plant and equipment and long-term debt share
C) Plant and equipment and inventory

79) "Inventory profits" are most likely to occur in an

inflationary economy under which of the following inventory
cost assumptions?

A) Weighted

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average D) Lower of cost
B) Specific item or market
C) FIFO

80) = The orientation of book value per share is

, while the orientation of market value per share
is

D) long term;
A) short term; long term short term
B) future; historical
C) historical; future

81) = Which of the following factors do not influence the

firm's P/E ratio?

D) All of the
A) Past earnings options influence the firm's
B) Shares outstanding P/E ratio.
C) Volatility in business performance

82) Earnings per share is:

D) net income
A) operating profit divided by number of shares minus preferred dividends
outstanding. divided by number of
B) net income divided by number of shares common shares
outstanding. outstanding.
C) net income divided by shareholders' equity.

83) = Which of the following is an outflow of cash?

D) The payment
A) Profitable operations of cash dividends
B) The sale of equipment
C) The sale of the company's common stock

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84) = Which of the following is an inflow of cash?

D) The retirement
A) Funds spent in normal business operations of the firm's bonds
B) The purchase of a new factory
C) The sale of the firm's bonds

85) Amortization is a source of cash inflow because:

D) itisa taxable
A) itis a tax-deductible noncash expense. expense.
B) it supplies cash for future asset purchases.
C) itis a tax-deductible cash expense.

86) Assuming a tax rate of 35%, amortization expenses of

$400,000 will:

D) have no effect
A) reduce income by $140,000. on income or taxes, since
B) reduce taxes by $140,000. amortization is not a cash
C) reduce taxes by $400,000. expense.

87) Assuming a tax rate of 30%, the after-tax cost of

interest expense of $200,000 is:

C) $200,000.
A) $60,000. D) $120,000.
B) $140,000.

88) = Allen Lumber

Company had earnings
after taxes of $750,000 in
the year 2015 with 300,000
shares outstanding on
December 31, 2015. On

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January 1, 2016, the firm issued 50,000 new shares. The after taxes in 2016.
company took the proceeds from these new shares as well as Earnings per share for the
other operating improvements and earned $937,500 earnings year 2016 were

C) $3.13.
A) $2.14. D) None of the
B) $2.68. options.

89) | Candy Company had sales of $320,000 and cost of

goods sold of $112,000. What is the gross profit margin (ratio
of gross profit to sales)?

C) 35%
A) 55% D) 73.3%
B) 65%

90) Total shareholders' equity consists of:

D) preferred
A) preferred stock and common stock. stock, common stock,
B) common stock and retained earnings. contributed surplus, and
C) common stock and contributed surplus. retained earnings.

91) — Density Farms Inc. had sales of $750,000, cost of value of amortization
goods sold of $200,000, selling and administrative expense of expense?
$70,000, and operating profit of $150,000. What was the

C) $330,000
A) $150,000 D) $0
B) $230,000

92) Well prepared accounting statements:

replacements.
A) let management know if cash flow from internal B) provide no new
operations is large enough to make necessary equipment information to financial

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Managers. making.
C) determine the market price of common stock.
D) eliminate the effects of inflation from decision

93) A firm with earnings per share of $3 and a price-

earnings (P/E) ratio of 24 will have a stock market price of

C) $6.67.
A) $72.00. D) $3.00.
B) $15.00.

94) Book value of a firm:

D) none of the
A) is usually the same as the firm's market value. choices are correct.
B) is based on current asset costs.
C) is the same as net worth.

95) A statement of cash flows allows a financial analyst to

determine:

long-term or short-term
A) whether a cash dividend is affordable. financing.
B) how increases in asset accounts have been D)_ all the choices
financed. are correct.
C) whether long-term assets are being financed with

96) Net worth is equal to stockholders' equity

D) minus
A) plus dividends. liabilities.
B) minus preferred stock.
C) plus preferred stock.

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D) Cash flows
A) Cash flows from operating activities from financing activities
B) Cash flows from sales activities
C) Cash flows from investing activities

98) Assuming a tax rate of 40%, the after-tax cost of a

$200,000 dividend payment is:

C) $130,000.
A) $200,000. D) None of the
B) $70,000. choices are correct

99) = Which of the following would not be included in the

balance sheet investment account?

D) Investments in
A) Shares of other corporations other corporations
B) Long term government bonds
C) Marketable securities

100) Which of the following is not true of current cost

accounting?

C) Dividends and
A) The book value of equipment is near replacement income are adjusted for
value inflation
B) The book value of the common stock equals D) All of the
market value choices are correct

101) The primary

disadvantage of accrual
accounting is that:

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D) it does not
A) it does not match revenues and expenses in the adequately show the actual
period in which they are incurred. cash flow position of the
B) it does not appropriately measure accounting firm.
profit.
C) it does not recognize the actual exchange of cash.

102) The statement of cash flows does not include which of

the following sections?

D) Cash flows
A) Cash flows from operating activities from financing activities
B) Cash flows from sales activities
C) Cash flows from investing activities

103) Which of the following would represent a use of funds

and, indirectly, a reduction in cash balances?

D) The sale of
A) An increase in inventories. new bonds by the firm.
B) A decrease in marketable securities.
C) An increase in accounts payable.

104) Which of the following would represent a source of

funds and, indirectly, an increase in cash balances?

D) A reduction in
A) A reduction in accounts receivable. notes payable.
B) The repurchase of shares of the firm's stock.
C) A decrease in net income.

105) A firm's purchase

of plant and equipment
would be considered as a:

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D) use of cash for
A) use of cash for financing activities. investment activities.
B) use of cash for operating activities.
C) source of cash for investment activities.

106) Reinvested funds from retained earnings theoretically

belong to:

C) employees.
A) bondholders. D) all the choices
B) common shareholders. are correct.

107) For private companies, asset accounts on the balance

sheet are listed in the order of:

C) size.
A) liquidity. D) importance.
B) profitability.

108) Which of the following is an outflow of cash?

D) The payment
A) Profitable operations of cash dividends
B) The sale of equipment
C) The sale of the company's common stock

109) Free cash flow is equal to cash flow from operating

activities:

D) minus capital
A) plus capital expenditures, minus dividends. expenditures, minus
B) plus capital expenditures, plus dividends. dividends.
C) plus dividends, minus capital expenditures.

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110) In the last decade, free cash flow has been associated with special financial

A) leveraged buyouts.
B) Registered Retirement Savings Plan (RRSPs).
C) stock options.
D)_ golden parachutes.

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111) How many of the following items are found on the ¢ Amortization expense
income statement, rather than the balance sheet? ¢ Inventories
* Capital in excess of par
* Sales value
* Notes payable (due in six months) ¢ Net income (earnings
* Bonds payable (mature in 10 years) after taxes)
* Common stock Income tax payable

statement.
A) Two of these items are found on the income D) Five of these
statement. items are found on the
B) Three of these items are found on the income income statement.
statement.
C) Four of these items are found on the income

112) Which of the following is not a primary source of

raising money or capital for the firm?

C) Preferred stock
A) Assets D) Bonds
B) Common stock

113) When a firm's earnings are falling more rapidly than

its stock price, its P/E ratio will:

C) go down.
A) remain the same. D) could go either
B) goup. up or down.

114) Net worth is equal to shareholders' equity:

D) minus
A) plus dividends. liabilities.
B) minus preferred stock.
C) plus preferred stock.

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115) Net worth for an individual is the same as fora
corporation.

C) book value
A) shareholders' equity D) current assets
B) capital assets minus long-term debt minus current debt

116) Amortization tends to:

D) affect only
A) increase cash flow and decrease income. income.
B) decrease cash flow and increase income.
C) affect only cash flow.

117) Accrual based accounting results in income and cash

flow being:

D) equal except
A) the same. for dividends.
B) different.
C) equal except for amortization.

118) The P/E ratio is determined by:

D) market value
A) net worth divided by earnings. per share divided by
B) market capitalization divided by dividend. earnings per share.
C) net worth per share divided by earnings per share.

119) A balance sheet valuation measure is:

D) market value
A) earnings per share. to book value.
B) the P/E ratio.
C) the dividend yield.

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120) Preferred share dividends earnings available
to common shareholders.

C) do not effect
A) increase D) not enough
B) decrease information to tell

121) Which of the following is not subtracted to arrive at

operating profit?

C) Amortization
A) Interest expense D) Selling and
B) Cost of goods sold administration expense

122) How many of the following balance sheet items are

classified as a current asset or current liability?

¢ Retained earnings
¢ Accounts payable
¢ Plant and equipment
¢ Inventory
¢ Common stock
¢ Bonds payable
¢ Accrued wages payable
« Accounts receivable
¢ Preferred stock

D) Six of these
A) Three of these items. items.
B) Four of these items.
C) Five of these items.

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Cash flow from operations $175,000
Capital expenditures 35,000 A) $115,000
dividends 25,000 B) $235,000
C) $150,000
D) $140,000

124) All the following would be included in Cash Flows

from Investing, except:

D) sale of Long-
A) investments in Plant. Term Investments.
B) merchandise Purchases.
C) purchases of Investments.

125) Which of the following would not be classified as a

current asset?

C) Prepaid
A) Marketable securities expenses
B) Plant property and equipment D) Inventory

126) Assuming no conversion rights of bond holders or

preferred shareholders, the retained earnings of the firm
belongs to:

D) Canada
A) creditors. Revenue Agency.
B) preferred shareholders.
C) common shareholders.

127) A firm has $4,000 in its common stock account and

$10,000 in its paid-in capital account. The firm issued 1,000
shares of common stock. What is the par value of the common
stock?

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C) $4 per share
A) $40 per share D) $14 per share
B) $10 per share

128) Assuming a tax rate of 35%, amortization expenses of

$800,000 will:

D) have no effect
A) reduce income by $280,000. on income or taxes since
B) reduce taxes by $280,000. amortization is not a cash
C) reduce taxes by $800,000. expense.

129) Assuming a tax rate of 30%, the after-tax cost of

interest expense of $400,000 is:

C) $400,000.
A) $120,000. D) $240,000.
B) $280,000.

SHORT ANSWER. Write the word or phrase that best as it relates to financial
completes each statement or answers the question. management?
130) What is an income statement and what is its purpose

131) What is the P/E ratio? Why is it an important ratio?

List 3 factors that influence the P/E ratio.

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132) In the text, the author said that "Earnings are flexible." What was meant by this?

133) Several theories have been suggested about the factors earnings. List and explain
contributing to the management or "manipulation" of reported them.

134) Explain these terms found on a typical balance sheet. Accumulated amortization,
Provide examples of each if applicable: Accounts payable, Notes
payable, Accrued expense,
Marketable securities, Accounts receivable, Inventory, Shareholders' equity.
Prepaid expenses, Investments, Plant and equipment,

135) List and describe the limitations of the balance sheet.

136) What is a cash flow statement? What information can

it provide? Why is a cash flow statement important to small
business?

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137) List the 3 primary sections on the cash flow statement.

138) Describe and briefly explain the steps used in the

indirect method to compute cash flows from typical operating
activities of a company.

139) Define free cash flow. Explain what it is equal to and

why it is important a finance manager needs to know the
value of free cash flow.

140) What causes the after-tax cash flow to the individuals

to vary?

141) What is a tax savings?

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142) Valley Home Improvements (VHI) earned $350,000
after taxes in its most recent fiscal year. If VHI's Board of
Directors declared a total of $45,000 in preferred dividends
what would be the total amount available to pay common
shareholders?

143) Two-by-Four Wood Products (TBF) report net income stock is $4 what is TBF's
of $2 per share in its most recent financial statements. If TBF P/E ratio?
has no preferred shares outstanding and the market price of its

144) Jane is considering an investment in Fauna Flowers

(FF). FF is trading at $33 a share. It the company's current
dividend is $1.50 a share, what is FF's dividend yield?

145) Blink and Wink (BW) manufactures contact lens. In

its most recent fiscal year BW reported after-tax interest
expense on a new bond issue of $550,000. If BW's effective
tax rate is 35%, what was the firm's before tax interest
expense?

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146) Cool Ties and Things (CTT) has Total Shareholder's outstanding what is CTT's
Equity of $350,000. CTT issued $85,000 in preferred stock book value per share?
two years ago. If CTT has 37,000 common shares issued and

147) The following is the December 31, 20X4 balance

sheet for Epics Corporation.

Assets Liabilities
Cash $70,000 Accounts $100,000
payable
Accounts 150,000 Notes payable 120,000
receivable
Inventory 280,000 Bonds payable 300,000
Total current 500,000 Total liabilities 520,000
assets

Plant and 1,250,000 Equity

equipment
Less: acc. 250,000Common stock 500,000
amortization
INet plant and 1,000,000 Retained 480,000
Equipment earnings
Total equity 980,000

Total assets 1,500,000 Total liab. & $1,500,000

equity

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A) Prepare an income
Sales for 20X5 were $2,000,000, with the cost of goods sold statement.
being 55% of sales. Amortization expense was 10% of the B) If the dividend payout
gross plant and equipment at the beginning of the year. ratio for Epics is 35%,
Interest expense was 9% on the notes payable and 11% on the what is the value of the
bonds payable. Selling, general, and administrative expenses retained earnings account
were $200,000 and the firm's tax rate is 40%. on December 31, 20X5?

148) Given the financial information for the A.E. Neuman

Corporation,

A) Prepare a Statement of Cash Flows for the year ended

December 31, 20X5.
B) What is the dividend payout ratio?
C) If we increased the dividend payout ratio to 100%, what
would happen to retained earnings?

A.E Neuman Balance Sheet Total current $760,000 $760,000

Corporation assets
Assets 20X4 20X5 Plant and 1,300,000 1,550,000
Cash $45,000 $50,000 Equipment

Marketable 175,000 160,000 Less 450,000 600,000

Securities Accumulated
Amortization
Accounts 240,000 220,000
Receivable Net plant and $850,000 $950,000
Equipment
Inventories 230,000 275,000
Total Assets 1,610,000 1,710,000
Investments 70,000 55,000
LIABILITIES AND
SHAREHOLDERS’ EQUITY

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Accounts $110,000 $85,000 Retained 400,00¢ 500,00¢
payable Earnings
Notes payable 65,000 10,000 Total $1,610,000 $1,710,000
Accrued 30,000 5,000 Liabilities’
Expenses and
Income Taxes 5,000 10,000 Shareholders’
Payable Equity

Bonds 800,000 900,000

Payable
(20X6) A.E. Neuman
Common 200,000 200,000 Corporation
Stock Income Statement
(100,000 For the Year Ended
shares) December 31, 20X5

Sales $ 5,500,000
Less: Cost of Goods Sold 4,200,000 Earnings 800,000
Gross Profit 1,300,000 Before Taxes

Less: Selling, General & 260,000 Less: Taxes 400,000

Administrative Expenses (50%)

Operating profit 1,040,000 Net Income $ 400,000

Less: Amortization Expense 150,000

Earnings Before Interest and 890,000
Taxes
Less: Interest Expense 90,000

149) Calculate the tax bill for a corporation that earned

$250,000 in 20X5 in Manitoba as a manufacturer.

150) Calculate the after-

tax cost of the interest.
Assume the company has

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issued 10,000 bonds with a coupon rate of 8% and a face
value of $1,000 per bond, and the company has a marginal tax
rate of 42%.

151) ElectroWizard Company produces a popular video common shares

game called Destructo, which sells for $32. Last year outstanding.
ElectroWizard sold 50,000 Destructo games, each of which Prepare an income
costs $6 to produce. ElectroWizard incurred selling and statement for
administrative expenses of $80,000 and amortization expense ElectroWizard in good
of $10,000. In addition, ElectroWizard has a $100,000 loan form (include EPS).
outstanding at 12%. Its tax rate is 40%. There are 100,000

152) Identify each of the

following as increasing (+)
or decreasing (-) cash
flows from operating
activities (O), investment
activities (I), or financing
activities (F). (EXAMPLE:
the sale of plant and
equipment would increase
cash flows from investing
activities, and the correct
answer would be + I).
1. Increase in accounts
payable
2. Decrease in inventory
3. Net income from
operations

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4. Payment of common share dividends using ASPE 16. Repurchase of common
5. Sale of preferred stock shares outstanding
6. Increase in accrued expenses 17. Increase in prepaid
7. Purchase of new equipment expense
8. Decrease in current portion of long-term debt 18. Decrease in income
9. Increase in accounts receivable taxes payable
10. Decrease in notes payable 19. Retirement of long-
11. Increase in net worth term bonds payable
12. Increase in long-term liabilities 20. Sale of new common
13. Increase in investments stock
14. Decrease in marketable securities
15. Reduction in retained earnings

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Answer Key

Test name: Chapter 02 Test Bank

1) TRUE
2) FALSE
3) TRUE
4) TRUE
5) FALSE
6) FALSE
7) TRUE
8) TRUE
9) FALSE
10) TRUE
11) TRUE
12) TRUE
13) FALSE
14) FALSE
15) TRUE
16) TRUE
17) TRUE
18) FALSE
19) FALSE
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20) FALSE
21) TRUE
22) FALSE
23) TRUE
24) FALSE
25) FALSE
26) TRUE
27) TRUE
28) FALSE
29) FALSE
30) FALSE
31) FALSE
32) FALSE
33) TRUE
34) TRUE
35) TRUE
36) FALSE
37) TRUE
38) TRUE
39) FALSE
40) FALSE

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41) TRUE
42) FALSE
43) FALSE
44) TRUE
45) FALSE
46) TRUE
47) TRUE
48) FALSE
49) TRUE
50) FALSE
51) FALSE
52) TRUE
53) TRUE
54) FALSE
55) FALSE
56) FALSE
57) TRUE
58) TRUE
59) TRUE
60) TRUE
61) FALSE

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62) TRUE
63) FALSE
64) TRUE
65) TRUE
66) FALSE
67) TRUE
68) B
69) B
70) C
71) A
72) C
73) C
74) C
75) A
76) C
77) C
78) C
79) C
80) C
81)D
82) D

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83) D
84) C
85) A
86) B
87) B
88) B
Year 2015 Shares
Earnings per share = (Earnings after outstanding =
taxes/Shares outstanding) = 300,000 + 50,000
($750,000/300,000) = $2.50 = 350,000
Earnings per
Year 2016 share =
Earnings after taxes = $750,000 x $937,500/350,000
1.25 = $937,500 = $2.68.

89) B
90) D
91)C
92) A
93) A
94) C
95)D
96) B
97) B

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98)A
99) C
100)B
101)D
102)B
103)A
104)A
105)D
106) B
107)A
108)D
109)D
110)A
111)B
112)A
113)B
114) B
115)C
116)A
117)B
118)D

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119)D
120) B
121) A
122) B
123) A
124) B
125) B
126) C
127) C
Par value = Common. stock/number of
shares outstanding = $4,000/1,000 =
$4.

128) B
129) B
130) The income statement the timing,
uncertainty, and
¢ Measures the profitability of a firm over a amount of future
time period (month, year) earnings and cash
¢ Assists financial decision making and flows.
analysis, utilizing past patterns for predicting

131) The P/E ratio is Market share share. Firms

price/Earnings per share. This ratio allows expected to provide
comparison of the relative market value of greater than average
many companies based on $1 of earnings per future returns often

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have P/E ratios higher than the market average structure)
P/E ratio. As investors' expectations for future ¢ Dividend payment
returns change, a company's P/E ratio can shift policy
substantially. * Quality of
The price/earnings ratio (P/E ratio) of a firm is management
influenced by ¢ Many other factors

¢ Earnings and sales growth

* Risk (business performance and debt-equity

132) In efforts to meet earnings targets, Management has

accountants and managers had resorted to this discretion due
stretching accounting standards beyond their to its experience and
reasonable limits. Earnings can be managed or the need to make
"manipulated" because professional estimates of many
accounting bodies allow latitude. Accruals, of the revenues and
such as allowance for doubtful accounts or expenses that will
warranty expenses, and write-downs of assets flow through the
(inventories and capital) are by their nature firm.
discretionary. Margins can also be managed,
by classification of "overhead" as a cost of
goods rather than administrative expenses.

133) « Bonuses (Compensation 1s tied to * Big bath (New

reported earnings.) CEOs will look
¢ Political considerations (High reported better in the future
earnings attract societal attention.) if assets are written
¢ Smoothing (Less volatile earnings are down as they take
viewed favourably by the market.) over, avoiding
¢ Debt covenants (Debt contracts are often future amortization
based on book value calculations.) charges.)

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134) Marketable securities are temporary Notes payable
investments of excess cash (lower of cost or are generally short-
current market value). term signed
Accounts receivable include an allowance obligations to the
for bad debts (based on historical evidence) to banker or other
suggest their anticipated collection value. creditors.
Inventory may be in the form of raw Accrued
materials, goods in process, or finished goods. expense is an
obligation incurred
Prepaid expenses represent future but payment has not
expenses that have already been paid yet occurred
(insurance premiums, rent). (additional wages
Investments, unlike marketable securities, for services
are a longer-term commitment of funds, provided and owed
including stocks, bonds, or investments in workers).
other corporations (often for acquisition). Shareholders'
Plant and equipment is identified as equity represents
original cost minus accumulated amortization. the total
contribution and
Accumulated amortization is the sum of
ownership interest
all past and present amortization charges on
of preferred and
currently owned assets, whereas amortization
common
expense is the current year's charge.
shareholders.
Accounts payable represent amounts owed
on open account to suppliers.

135) The values on the balance sheet are often be worth

subject to interpretation or revaluation. considerably more
than their original
¢ Values are stated on an historical or original cost or may require
cost basis, not market values (some assets may many times the

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original cost for replacement). liabilities should be
¢ Accounting policy choice, which should be disclosed in
disclosed in the financial notes, will influence footnotes on the
the recorded values. balance sheet,
¢ Contingent liabilities omitted from the alerting us to their
balance sheet, or items such as intangibles that possible impact.
are included, may have a hard-to-determine
influence on economic value. Contingent

136) The cash flow statement reports changes ¢ The

in cash and cash equivalents (rather than appropriateness and
working capital) resulting from the activities the future
of the firm during a given period. implications of the
For many internal and external users of a financing used
firm's financial information, cash flow
information is critical. The cash flow
statements for the
The cash flow statement allows an analyst to small business are
identify: particularly
important, as cash
¢ Cash flow generated from the firm's assets flow 1s more
¢ Financial obligations (interest and dividends) relevant to the
firm's short-term
¢ Commitment to new assets survival than its
reported income.
The statement of cash flows can highlight: One 1s likely to be
concerned about the
¢ The relative build up in short-term and long- quality, timing, and
term assets amount of earnings,
¢ The means of financing used to support any and hence the firm's
growth in the firm's asset base ability to acquire

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assets and meet its obligations. In the essential for a firm's
extremely competitive corporate environment survival.
of today exacting cash flow analysis is

137) These sections are: 3. Financing

activities
1. Operating activities
2. Investing activities

138) We follow these procedures to compute funds tied up in

cash flows from operating activities inventory.
using the indirect method. ¢ Recognize that
increases in current
¢ Start with net income. liabilities are a
* Recognize that noncash deductions in source of funds and
computing net income should be added back increase the cash
to net income to increase the cash balance. balance (indirectly)
These include such items as amortization, —that is, the firm
deferred income taxes, restructuring charges, gets more funds
and foreign exchange losses. This from creditors.
produces cash flow from operations. ¢ Recognize that
¢ Next identify changes in noncash working decreases in current
capital. liabilities are a use
¢ Recognize that increases in current assets are of funds and
a use of funds and reduce the cash balance decrease the cash
(indirectly)—as an example, the firm spends balance (indirectly)
more funds on inventory. —that is, the firm
¢ Recognize that decreases in current assets pays off creditors.
are a source of funds and increase the cash
balance (indirectly )}—that is, the firm reduces

139) Free cash flow is equal to:

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Cash flow from operating activities buyouts, in which a
firm borrows money
Minus: Capital expenditures (required to to buy its stock and
maintain the productive capacity of the firm) take itself private
Minus: Dividends (needed to maintain the with the hope of
necessary pay-out on common stock and to restructuring its
cover any preferred stock obligation) balance sheet and
perhaps going
The concept of free cash flow forces the stock public again ina
analyst or banker not only to consider how few years at a
much cash is generated from operating higher price than it
activities, but also to subtract out the paid. The analyst or
necessary capital expenditures on plant and banker normally
equipment to maintain normal activities. looks at free cash
Similarly, dividend payments to shareholders flow to determine
must be subtracted out, as these dividends whether there are
must generally be paid to keep shareholders sufficient excess
satisfied. The balance, free cash flow, is then funds to pay back
available for special financial activities. In loans associated
the last decade, special financing activities with special
have often been synonymous with leveraged financial activities.

140) The after-tax cash flow to the individual capital gain.

varies depending on whether investment (Highest to lowest
income is in the form of interest, dividends, or marginal tax rate.)

141) A tax savings is the reduction of taxes

otherwise payable because of an allowable
deduction of an expense from taxable income.

142) Earnings Available to Common Preferred Dividends

Shareholders (EAT) = Earnings After Taxes -

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EAT = $350,000 - $45,000 = $305,000

143) P= $4 For every $1 earned

E $2 by TBF you would
be paying $2 in
P/E = 2 times price.

144)
Dividend Yield = Dividend
Price

Dividend Yield =
($1.50/$33) x 100 =
4.55%

145)
Before Tax Interest = $550,000
Expense 1 — Tax Rate

Before Tax Interest = $550,000 Before Tax Interest

Expense 1-0.35 Expense = $846,154

146)
IBV per Share = Shareholder’s Equity
—Value
of Preferred
Shares O/S
Common Share O/S BV per Share =
$265,000/37,000 =
BV per Share = $350,000 - $85,000
37,000
$7.16

147)
A) Income Statement [Sales |$2,000]$318,7| Net

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,000 20 Income EBT /531,20 207,16 Amou
Less: Cost of 1,100,000 x 0.35) Payout ratio 0 8 n
Goods Sold Retain
Gross Profit 900,000 $111.552 Dividends Paid ed

Less: Selling, 200,000 Less: |212,48+480,0 Retain

general and Taxes 0 600 ed
administrative (40%) | Earnir
expense gs
204
Amortization 125,000
Net | $318,7 $687,1) Retain
Expense
Earnin 20 68 ed
EBIT 575,000 $318,720 Net Income
gs Earnin
Less: Interest 43,800 111,552 Dividends Paid
gs
Expense (10,800 20X45
+ 33,000)
148) A)

Operating Activities Cash used in (235,000

investing
Net Income (earnings after taxes) $400,000 activities
Add items not requiring on Financing
outlay of cash: Activities
Amortization 150,000 Increase in 100,000
Cash flow from operations 550,000 bonds payable
Change in non-cash working Dividends (300,000
capital: paid
Decrease in accounts receivable 20,000 Cash used in (200,000
financing
Increase in inventories (45,000)
activities
Decrease in accounts payable (25,000)
Net increase (10,000
Decrease in notes payable (55,000)
in cash and
Decrease in accrued expenses (25,000) equivalents
Increase in income taxes payable 5,000 during year
Net Change in non-cash working 125,000 Cash and 220,000
capital equivalents,
Cash provided by operating 425,000 beginning of
activities year

Investing Activities Cash and $210,000

equivalents, at
Decrease in investments 15,000 year end
Increase in plant & equipment (250,000)

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B)
Dividend payout ratio Dividends paid, 20X5
Net income, 20X5

= $300,000 = 0.75=75%

$400,000

C) The 20X5 value for retained earnings

would decrease by $100,000. In addition,
assets would have to decrease by $100,000 or
other liabilities would have to increase by the
same amount.

149)
Tax Rate Incremental Income Tax Liability 150)
13% $250,000 = $32,500

Annual interest 10,000 x $1,000 x 8% 151)

$800,000
ElectroWizard
After tax cost $800,000 x (1 — tax Company
irate)
Income
$800,000 x (1 — 0.42)
Statement
$464,000 for the year
ended 12/31/_

Sales (50,000 @ $32) $1,600,000 Gross 1,300,00

Profit 0
Less: Cost of Goods 300,000 Less:
Sold Operatin
g

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Expenses 152) +01.
Selling and $80,000
Increase in accounts
administrative
Amortization 10,000 90,000 payable
Operating Profit 1,210,000 +O 2. Decrease in
(EBIT)
inventory
Less: Interest expense 12,000
($100,000 @ 12%) +O 3. Net income
Earnings Before 1,198,000 from operations
Taxes
Less: Taxes @ 40% 479,200
-F 4, Payment of
common share
Net Income $718,800
dividends using
Common Shares 100,000 ASPE
Earnings Per Share $7.189 +F 5. Sale of
preferred stock
-O 6. Increase in
accrued expenses
-1 7. Purchase of
new equipment
-O 8. Decrease in
current portion of
long-term debt
-O 9. Increase in
accounts receivable

-O 10. Decrease in
notes payable
+F 11. Increase in
net worth
+F 12. Increase in
long-term liabilities

-I 13. Increase in

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investments -F 19. Retirement
+O 14. Decrease in marketable securities of long-term bonds
-F 15. Reduction in retained earnings payable
-F 16. Repurchase of common shares +F 20. Sale of
outstanding new common stock
-O 17. Increase in prepaid expense
-O 18. Decrease in income taxes payable

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