Chapter 02

Chapter2
Student:___________________________________________________________________________
1.Whichoneoftheseequationsisanaccurateexpressionofthebalancesheet?
A.AssetsLiabilitiesStockholdersequity
B.StockholdersequityAssets+Liabilities
C.LiabilitiesStockholdersequityAssets
D.AssetsStockholdersequityLiabilities
E.StockholdersequityAssetsLiabilities
2.Whichoneoftheseaccountsisclassifiedasacurrentassetonthebalancesheet?
A.intangibleasset
B.accountspayable
C.preferredstock
D.inventory
E.netplantandequipment
3.Onabalancesheet,deferredtaxesareclassifiedas:
A.stockholdersequity.
B.acurrentasset.
C.alongtermliability.
D.afixedasset.
E.acurrentliability.
4.Networkingcapitalisdefinedas:
A.currentassetsplusfixedassets.
B.currentassetsplusstockholders'equity.
C.fixedassetsminuslongtermliabilities.
D.totalassetsminustotalliabilities.
E.currentassetsminuscurrentliabilities.
5.Anassetthatcanbequicklyconvertedintocashwithoutsignificantlossinvalueisreferredtoasbeing:
A.marketable.
B.tangible.
C.intangible.
D.liquid.
E.fixed.
6.Thefinancialstatementsummarizingafirm'saccountingperformanceoveraperiodoftimeisthe:
A.incomestatement.
B.balancesheet.
C.statementofcashflows.
D.taxreconciliationstatement.
E.statementofequity.
7.Noncashitemsreferto:
A.thecreditsalesofafirm.
B.theaccountspayableofafirm.
C.thecostsincurredforthepurchaseofintangiblefixedassets.
D.expenseschargedagainstrevenuesthatdonotdirectlyaffectcashflow.
E.allaccountsonthebalancesheetotherthancashonhand.
8.Forafirmwithlongtermdebt,netincomeisequalto:
A.PretaxincomeInterestexpenseTaxes.
B.EBITTaxes.
C.Taxes+Additiontoretainedearnings.
D.Pretaxincome(1Marginaltaxrate).
E.Dividends+Additiontoretainedearnings.
9.Whichtermdefinesthetaxratethatappliestothenextdollaroftaxableincomeearned?
A.deductible
B.residual
C.total
D.average
E.marginal
10.U.S.corporatetaxesswitchtoaconstantflatratetaxoncetheaveragetaxratereaches:
A.32percent.
B.33percent.
C.28percent.
D.40percent.
E.35percent.
11.Thecashflowresultingfromafirm'songoing,normalbusinessactivitiesisreferredtoasthe:
A.operatingcashflow.
B.netcapitalspending.
C.additionstonetworkingcapital.
D.cashflowtoretainedearnings.
E.cashflowtoinvestors.
12.Capitalspendingisequalto:
A.endingnextfixedassetsminusbeginningnetfixedassets.
B.endingnetfixedassetsminusbeginningnetfixedassetsplusdepreciation.
C.endingtotalassetsminusbeginningtotalassets.
D.endingtotalassetsminusbeginningtotalassetsminusdepreciation.
E.beginningtotalassetsplusassetpurchasesminusassetsales.
13.Operatingcashflowisdefinedas:
A.PretaxincomeTaxes.
B.NetincomeDividends.
C.EBIT+DepreciationTaxes.
D.Pretaxincome+Depreciation.
E.Cashflowtoinvestors+Taxes.
14.Intheaccountingstatementofcashflows,whichoneoftheseiscalculatedbyaddingbacknoncash
expensestonetincomeandadjustingforchangesincurrentassetsandliabilities?
A.cashflowfrominvestingactivities
B.cashflowfromfinancingactivities
C.networkingcapital
D.cashflowfromoperatingactivities
E.cashflowtoinvestors
15.Whichoneofthesetermsreferstothefirm'sinterestpaymentslessanynetnewborrowing?
A.operatingcashflow
B.capitalspending
C.networkingcapital
D.cashflowtostockholders
E.cashflowtocreditors
16.Afirm'sdividendpaymentslessanynetnewequityraisedisreferredtoasthefirms:
B.capitalspending.
C.networkingcapital.
D.cashflowfromcreditors.
E.cashflowtostockholders.
17.Earningspersharewillincreasewhen:
A.depreciationdecreases.
B.thenumberofsharesoutstandingincrease.
C.operatingincomedecreases.
D.dividendspersharedecrease.
E.theaveragetaxrateincreases.
18.Assumingthenumberofsharesoutstandingremainsconstant,anincreaseindividendspersharewillreduce
the:
A.earningspershare.
B.additiontoretainedearnings.
C.netincome.
D.cashflowtostockholders.
E.cashflowfromassets.
19.Whichoneoftheseisanoncashitem?
A.depreciation
B.interestexpense
C.currenttaxes
D.dividends
E.sellingexpenses
20.Whichoneofthefollowingisacurrentliability?
A.amountduetoasupplierin18months
B.debtpayabletoamortgagecompanyinninemonths
C.estimatedtaxesjustpaid
D.loanpaymentduein13months
E.amountduefromacustomerin30days
21.Anincreaseintotalassets:
A.meansthatnetworkingcapitalisalsoincreasing.
B.requiresaninvestmentinfixedassets.
C.meansthatstockholders'equitymustalsoincrease.
D.mustbeoffsetbyanequalincreaseinliabilitiesandstockholders'equity.
E.canonlyoccurwhenafirmhaspositivenetincome.
22.Whichoneofthefollowingassetsisgenerallythemostliquid?
A.inventory
B.buildings
C.accountsreceivable
D.equipment
E.patents
23.Whichoneofthefollowingstatementsconcerningliquidityiscorrect?
A.Ifyousoldanassettoday,itwasaliquidasset.
B.Ifyoucansellanassetnextyearatapriceequaltoitsactualvalue,theassetishighlyliquid.
C.Trademarksandpatentsarehighlyliquid.
D.Thelessliquidityafirmhas,thelowertheprobabilitythefirmwillencounterfinancialdifficulties.
E.Balancesheetaccountsarelistedinorderofdecreasingliquidity.
24.Liquidityis:
A.ameasureoftheuseofdebtinafirm'scapitalstructure.
B.equaltocurrentassetsminuscurrentliabilities.
C.equaltothemarketvalueofafirm'stotalassetsminusitstotalliabilities.
D.valuabletoafirmeventhoughliquidassetstendtobelessprofitabletoown.
E.generallyassociatedwithintangibleassets.
25.Whichoneofthefollowingaccountsisincludedinstockholders'equity?
A.longtermdebt
B.deferredtaxes
C.plantandequipment
D.accumulatedretainedearnings
E.intangibleassets
26.Bookvalue:
A.isequivalenttomarketvalueforfirmswithfixedassets.
B.isbasedonhistoricalcost.
C.generallytendstoexceedmarketvaluewhenfixedassetsareincluded.
D.ismoreofafinancialthananaccountingvaluation.
E.isadjustedtomarketvaluewheneverthemarketvalueexceedsthestatedbookvalue.
27.Ifyousellanasset,youaremostapttoreceivewhichvalueforthatasset?
A.marketvalue
B.originalcostminusaccumulateddepreciation
C.historicalvalue
D.bookvalue
E.carryingvalue
28.Asseenonanincomestatement:
A.interestisdeductedfromincomeandincreasesthetotaltaxesincurred.
B.thetaxrateisappliedtotheearningsbeforeinterestandtaxeswhenthefirmhasbothdepreciationand
interestexpenses.
C.depreciationisshownasanexpensebutdoesnotaffectthetaxexpense.
D.depreciationreducesboththepretaxincomeandthenetincome.
E.interestexpenseisaddedtoearningsbeforeinterestandtaxestocomputepretaxincome.
29.Allelseheldconstant,theearningspersharewill:
A.decreaseasnetincomeincreases.
B.decreaseasthenumberofsharesoutstandingincrease.
C.decreaseasthetotalrevenueofthefirmincreases.
D.increaseasthetaxrateincreases.
E.decreaseasthecostsdecrease.
30.Whichoneofthesestatementsiscorrect?
A.Pretaxincomeisequaltonetincomeminustaxes.
B.Theadditiontoretainedearningsisequaltonetincomeplusdividends.
C.Operatingincomeisequaltooperatingrevenueminuscostofgoodssold.
D.Onlycurrenttaxesareincludedinthetaxexpense.
E.Earningspersharecanbenegativebutdividendspersharecannot.
31.Earningspershare:
A.willincreaseifnetincomeincreasesandnumberofsharesoutstandingdecreases.
B.willincreaseifnetincomedecreasesandnumberofsharesoutstandingincreases.
C.isdefinedastheadditiontoretainedearningsdividedbythenumberofsharesoutstanding.
D.isthetotalamountofdividendspaidperyearonapersharebasis.
E.mustincreaseatthesamerateasthetotaloperatingrevenue.
32.AccordingtotheGenerallyAcceptedAccountingPrinciples,costsare:
A.recordedasincurred.
B.recordedwhenpaid.
C.matchedwithrevenues.
D.matchedwithproductionlevels.
E.expensedasmanagementdesires.
33.Depreciationforaprofitablefirm:
A.decreasesnetincomebylessthan$1forevery$1ofdepreciationexpense.
B.increasesthenetfixedassetsasshownonthebalancesheet.
C.reducesboththenetfixedassetsandthecostsofafirm.
D.isanoncashexpensewhichincreasesthenetoperatingincome.
E.decreasesnetfixedassets,netincome,andoperatingcashflows.
34.Whenyouaremakingafinancialdecision,themostrelevanttaxrateisthe____rate.
A.average
B.fixed
C.marginal
D.total
E.variable
35.Anincreaseinwhichoneofthefollowingwillcausetheoperatingcashflowtoincreaseforaprofitable
firm?
A.depreciation
B.changesintheamountofnetfixedcapital
C.networkingcapital
D.taxes
E.administrativeexpenses
36.Afirmstartsitsyearwithapositivenetworkingcapital.Duringtheyear,thefirmacquiresmoreshortterm
debtthanitdoesshorttermassets.Thismeansthat:
A.theendingnetworkingcapitalwillbenegative.
B.bothaccountsreceivableandinventorydecreasedduringtheyear.
C.thebeginningcurrentassetswerelessthanthebeginningcurrentliabilities.
D.accountspayableincreasedandinventorydecreasedduringtheyear.
E.theendingnetworkingcapitalcanbepositive,negative,orequaltozero.
37.Thecashflowtocreditorsincludesthefirmscash:
A.outflowwhenpaymentsarepaidtosuppliers.
B.outflowwhennewdebtisacquired.
C.outflowwheninterestispaidonoutstandingdebt.
D.inflowwhenaccountspayableincreases.
E.Inflowwhenlongtermdebtispaidoff.
38.Thecashflowtostockholdersmustbepositivewhen:
A.thedividendspaidarelessthantheamountofnetnewequityraised.
B.thenetsaleofcommonstockexceedstheamountofdividendspaid.
C.noincomeisdistributedbutnewsharesofstockaresold.
D.thecashflowfromassetsispositiveandalsoexceedsthecashflowtocreditors.
E.boththecashflowtoassetsandthecashflowtocreditorsarepositive.
39.Whichoneofthesewillincreasethebookvalueofthestockholdersequityinaprofitable,nondividend
payingfirm?Assumenosharesofstockarerepurchasedorsold.
A.adecreaseinthebookvalueofinventory
B.anincreaseinearningspershare
C.anincreaseinthemarketvalueofthefirmsbuildings
D.anincreaseinthemarketvalueofthefirmslongtermdebt
E.anincreaseinnoncashexpenses
40.Assetsarelistedonthebalancesheetinorderof:
A.decreasingliquidity.
B.decreasingsize.
C.increasingsize.
D.marketvaluerelativetobookvalue.
E.increasingliquidity.
41.Anincreaseintreasurystock:
A.increasesthetotalequityofthefirm.
B.istheresultofafirmissuingnewsharestostocktothefederalgovernment.
C.increasesthenumberofsharesoutstanding.
D.resultsfromarepurchaseofoutstandingsharesofstock.
E.requiresrepaymentatsomepointinthefuture.
42.Thecarryingvalueorbookvalueofassets:
A.isdeterminedunderGAAPandisbasedonthecostoftheasset.
B.representsthetruemarketvalueaccordingtoGAAP.
C.isalwaysthebestmeasureofthecompany'svaluetoaninvestor.
D.isalwayshigherthanthereplacementcostoftheassets.
E.isshownonthefirmsincomestatement.
43.Undergenerallyacceptedaccountingprinciples(GAAP),afirm'sassetsarereportedat:
A.marketvalue.
B.liquidationvalue.
C.marketvaluelessaccumulateddepreciation.
D.historicalcostlessaccumulateddepreciation.
E.liquidationvaluelessaccumulateddepreciation.
44.Theincomestatement:
A.measuresperformanceforonespecificday.
B.ignoresanyincomeotherthanoperatingrevenues.
C.excludesdeferredtaxexpense.
D.treatsdividendspaidasacashexpense.
E.includesnoncashexpenses.
45.Accordingtogenerallyacceptedaccountingprinciples(GAAP),revenueisrecognizedasincomewhen:
A.acontractissignedtoperformaserviceordeliveragood.
B.thetransactioniscompleteandthegoodsorservicesaredelivered.
C.paymentisrequested.
D.incometaxesarepaidontherevenueearned.
E.managersdecidetorecognizeit.
46.Cashflowfromassets:
A.equalsnetincomeplusnoncashitems.
B.canbepositive,negative,orequaltozero.
C.equalsoperatingcashflowminusnetcapitalspending.
D.equalstheadditiontoretainedearnings.
E.equalsoperatingcashflowminusthecashflowtocreditors.
47.Netcapitalspendingisequaltothe:
A.netchangeintotalassetsplusdepreciation.
B.netchangeinfixedassetsplusdepreciation.
C.netincomeplusdepreciation.
D.differencebetweenthemarketandbookvaluesofthetotalassets.
E.changeintotalassets.
48.Cashflowtostockholdersisdefinedas:
A.cashdividendspaid.
B.repurchasesofequitylessnewequitysoldminuscashdividendspaid.
C.cashflowfromfinancinglesscashflowtocreditors.
D.cashdividendspaidplusrepurchasesofequityminusnewequityfinancing.
E.cashflowfromassetspluscashflowtocreditors.
49.Freecashflowis:
A.themoneygeneratedfromthesaleofnewsharesofstock.
B.anothertermforoperatingcashflow.
C.thecashgeneratedbydecreasingnetworkingcapital.
D.cashthatthefirmcandistributetocreditorsandstockholders.
E.thenetincomeofafirmaftertaxeshavebeenpaid.
50.Thecashflowofthefirmmustbeequalto:
A.cashflowtostockholdersminuscashflowtocreditors.
B.cashflowtocreditorsminuscashflowtostockholders.
C.cashflowtogovernmentspluscashflowtostockholders.
D.cashflowtostockholderspluscashflowtocreditors.
E.theaftertaxoperatingcashflow.
51.Thestatementofcashflowsconsistsofthecashflowsfrom:
A.operations,investingactivities,andfinancingactivities.
B.operations,investingactivities,anddivestingactivities.
C.internalactivities,externalactivities,andfinancingactivities.
D.balancesheetaccountsonly.
E.incomestatementaccountsonly.
52.Oneofthereasonswhycashflowanalysisispopularisbecause:
A.cashflowsaremoresubjectivethannetincome.
B.deferredtaxesrequirefuturecashpayment.
C.cashflowsarestrictlydefinedbygenerallyacceptedaccountingprinciples(GAAP).
D.itisdifficulttomanipulate,orspinthecashflows.
E.operatingcashflowsarefoundontheincomestatement.
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
54.Totalassetsare$1,450,fixedassetsare$790,longtermdebtis$750,andshorttermdebtis$300.Whatis
theamountofcurrentassets?
A.$660
B.$360
C.$300
D.$40
E.$790
55.Brad'sCompanyhasequipmentwithabookvalueof$500thatcouldbesoldtodayata50percentdiscount.
Itsinventoryisvaluedat$450andcouldbesoldtoacompetitorforthatamount.Thefirmhas$100incashand
customersowethefirm$250,allofwhichiscollectible.Whatisthecurrentmarketvalueofthefirmsassets?
A.$100
B.$550
C.$1,050
D.$1,300
E.$600
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
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
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%
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
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
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
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
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
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
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
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.$7,363
67.
WoodlandsInc.
2015IncomeStatement
($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.
$674million
68.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
2015
$503
418
1,239
2,290
360
Totalassets
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Whatistheamountofthenoncashitemsfor2015?
A.$481million
B.$0
C.$227million
D.$311million
E.$473million
69.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Whatistheamountofthenetcapitalspendingfor2015?
A.$29million
B.$26million
C.$337million
D.$1,66million
E.$285million
70.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Whatistheoperatingcashflowfor2015?
A.$485million
B.$1,030million
C.$867million
D.$783million
E.$451million
71.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Whatisthecashflowofthefirmfor2015?
A.$295million
B.$485million
C.$1,340million
D.$590million
E.$310million
72.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
Whatisthecashflowtostockholdersfor2015?
A.$152million
B.$25million
C.$0
D.$25million
E.$75million
73.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
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
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
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
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
75.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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
76.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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
77.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.$6,460
B.$9,069
C.$10,325
D.$3,753
E.$12,408
78.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets
A.$885
B.$8,042
C.$7,297
D.$6,425
E.$5,517
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
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
80.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.$1,230
B.$8,025
C.$9,135
D.$5,565
E.$2,705
81.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.
$1,200
B.
$2,800
C.
$1,520
D.
$1,600
E.
$2,800
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
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
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
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
86.Defineliquidityandexplainwhatafirmwouldneedtodotoensureallofthecurrentassetsdisplayedonits
balancesheetareliquid.
87.Whyisinterestexpenseexcludedfromtheoperatingcashflowcalculation?
88.Explainwhytheincomestatementisnotagoodrepresentationofcashflow.
89.Discussthedifferencebetweenbookvaluesandmarketvaluesonthebalancesheetandexplainthebest
methodfordeterminingthevalueofafirmtoitsstockholders.
90.Notethatinallofourcashflowcomputationstodeterminecashflowofthefirm,weneverincludethe
additiontoretainedearnings.Whynot?Isthisanoversight?
91.Depreciationisclassifiedasanoncashitembecausenocashisspentwhendepreciationisrecorded.Why
areexpensesthathavebeenaccrued,butnotyetpaid,notalsoconsideredtobenoncashitemsandtherefore
excludedfromoperatingcashflowjustasdepreciationisexcluded?
92.Sometimeswhenbusinessesarecriticallydelinquentontheirtaxliabilities,thetaxauthoritycomesinand
literallyseizesthebusinessbychasingalloftheemployeesoutofthebuildingandchangingthelocks.What
doesthistellyouabouttheimportanceoftaxesrelativetoourdiscussionofcashflow?Whymightabusiness
ownerwanttoavoidsuchanoccurrence?
93.Interpret,inwords,whatcashflowofthefirmrepresentsbydiscussingoperatingcashflow,changesinnet
workingcapital,andadditionstofixedassets.
94.Whyiscashflowmanagementimportant?
95.Explainthedifferencebetweenproductcostsandperiodcostsastheyrelatetotheincomestatement.Are
thesetermssynonymouswithshortrunandlongrun?
c2Key
1.Whichoneoftheseequationsisanaccurateexpressionofthebalancesheet?
A.AssetsLiabilitiesStockholdersequity
B.StockholdersequityAssets+Liabilities
C.LiabilitiesStockholdersequityAssets
D.AssetsStockholdersequityLiabilities
E.StockholdersequityAssetsLiabilities
AACSB:AnalyticalThinking
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:1Basic
RossChapter02#1
Section:2.1
Topic:Balancesheet
2.Whichoneoftheseaccountsisclassifiedasacurrentassetonthebalancesheet?
A.intangibleasset
B.accountspayable
C.preferredstock
D.inventory
E.netplantandequipment
Blooms:Remember
Difficulty:1Basic
RossChapter02#2
Section:2.1
Topic:Balancesheet
3.Onabalancesheet,deferredtaxesareclassifiedas:
A.stockholdersequity.
B.acurrentasset.
C.alongtermliability.
D.afixedasset.
E.acurrentliability.
Blooms:Remember
Difficulty:1Basic
RossChapter02#3
Section:2.1
Topic:Balancesheet
4.Networkingcapitalisdefinedas:
A.currentassetsplusfixedassets.
B.currentassetsplusstockholders'equity.
C.fixedassetsminuslongtermliabilities.
D.totalassetsminustotalliabilities.
E.currentassetsminuscurrentliabilities.
Blooms:Remember
Difficulty:1Basic
RossChapter02#4
Section:2.1
Topic:Networkingcapital
5.Anassetthatcanbequicklyconvertedintocashwithoutsignificantlossinvalueisreferredtoasbeing:
A.marketable.
B.tangible.
C.intangible.
D.liquid.
E.fixed.
Blooms:Remember
Difficulty:1Basic
RossChapter02#5
Section:2.1
Topic:Liquidity
6.Thefinancialstatementsummarizingafirm'saccountingperformanceoveraperiodoftimeisthe:
A.incomestatement.
B.balancesheet.
C.statementofcashflows.
D.taxreconciliationstatement.
E.statementofequity.
Blooms:Remember
Difficulty:1Basic
RossChapter02#6
Section:2.2
Topic:Incomestatement
7.Noncashitemsreferto:
A.thecreditsalesofafirm.
B.theaccountspayableofafirm.
C.thecostsincurredforthepurchaseofintangiblefixedassets.
D.expenseschargedagainstrevenuesthatdonotdirectlyaffectcashflow.
E.allaccountsonthebalancesheetotherthancashonhand.
Blooms:Remember
Difficulty:1Basic
RossChapter02#7
Section:2.2
Topic:Noncashitems
8.Forafirmwithlongtermdebt,netincomeisequalto:
A.PretaxincomeInterestexpenseTaxes.
B.EBITTaxes.
C.Taxes+Additiontoretainedearnings.
D.Pretaxincome(1Marginaltaxrate).
E.Dividends+Additiontoretainedearnings.
Blooms:Apply
Difficulty:2Intermediate
RossChapter02#8
Section:2.2
9.Whichtermdefinesthetaxratethatappliestothenextdollaroftaxableincomeearned?
A.deductible
B.residual
C.total
D.average
E.marginal
Blooms:Remember
Difficulty:1Basic
RossChapter02#9
Section:2.3
Topic:Taxes
10.U.S.corporatetaxesswitchtoaconstantflatratetaxoncetheaveragetaxratereaches:
A.32percent.
B.33percent.
C.28percent.
D.40percent.
E.35percent.
Blooms:Remember
Difficulty:1Basic
RossChapter02#10
Section:2.3
Topic:Taxes
11.Thecashflowresultingfromafirm'songoing,normalbusinessactivitiesisreferredtoasthe:
B.netcapitalspending.
C.additionstonetworkingcapital.
D.cashflowtoretainedearnings.
E.cashflowtoinvestors.
Blooms:Remember
Difficulty:1Basic
RossChapter02#11
Section:2.5
Topic:Operatingcashflow
12.Capitalspendingisequalto:
A.endingnextfixedassetsminusbeginningnetfixedassets.
B.endingnetfixedassetsminusbeginningnetfixedassetsplusdepreciation.
C.endingtotalassetsminusbeginningtotalassets.
D.endingtotalassetsminusbeginningtotalassetsminusdepreciation.
E.beginningtotalassetsplusassetpurchasesminusassetsales.
Blooms:Remember
RossChapter02#12
Section:2.5
Topic:Capitalspending
13.Operatingcashflowisdefinedas:
A.PretaxincomeTaxes.
B.NetincomeDividends.
C.EBIT+DepreciationTaxes.
D.Pretaxincome+Depreciation.
E.Cashflowtoinvestors+Taxes.
Blooms:Remember
Difficulty:1Basic
RossChapter02#13
Section:2.5
14.Intheaccountingstatementofcashflows,whichoneoftheseiscalculatedbyaddingbacknoncash
expensestonetincomeandadjustingforchangesincurrentassetsandliabilities?
A.cashflowfrominvestingactivities
B.cashflowfromfinancingactivities
C.networkingcapital
D.cashflowfromoperatingactivities
E.cashflowtoinvestors
Blooms:Understand
RossChapter02#14
Section:2.6
Topic:Statementofcashflows
15.Whichoneofthesetermsreferstothefirm'sinterestpaymentslessanynetnewborrowing?
A.operatingcashflow
B.capitalspending
C.networkingcapital
D.cashflowtostockholders
E.cashflowtocreditors
Blooms:Remember
Difficulty:1Basic
RossChapter02#15
Section:2.5
Topic:Cashflowtocreditors
16.Afirm'sdividendpaymentslessanynetnewequityraisedisreferredtoasthefirms:
B.capitalspending.
C.networkingcapital.
D.cashflowfromcreditors.
E.cashflowtostockholders.
Blooms:Remember
Difficulty:1Basic
RossChapter02#16
Section:2.5
Topic:Cashflowtostockholders
17.Earningspersharewillincreasewhen:
A.depreciationdecreases.
B.thenumberofsharesoutstandingincrease.
C.operatingincomedecreases.
D.dividendspersharedecrease.
E.theaveragetaxrateincreases.
Blooms:Analyze
RossChapter02#17
Section:2.2
Topic:Persharevaluations
18.Assumingthenumberofsharesoutstandingremainsconstant,anincreaseindividendspersharewillreduce
the:
A.earningspershare.
B.additiontoretainedearnings.
C.netincome.
D.cashflowtostockholders.
E.cashflowfromassets.
Blooms:Understand
RossChapter02#18
Section:2.2
19.Whichoneoftheseisanoncashitem?
A.depreciation
B.interestexpense
C.currenttaxes
D.dividends
E.sellingexpenses
Blooms:Remember
Difficulty:1Basic
RossChapter02#19
Section:2.2
Topic:Noncashitems
20.Whichoneofthefollowingisacurrentliability?
A.amountduetoasupplierin18months
B.debtpayabletoamortgagecompanyinninemonths
C.estimatedtaxesjustpaid
D.loanpaymentduein13months
E.amountduefromacustomerin30days
Blooms:Understand
RossChapter02#20
Section:2.1
Topic:Balancesheet
21.Anincreaseintotalassets:
A.meansthatnetworkingcapitalisalsoincreasing.
B.requiresaninvestmentinfixedassets.
C.meansthatstockholders'equitymustalsoincrease.
D.mustbeoffsetbyanequalincreaseinliabilitiesandstockholders'equity.
E.canonlyoccurwhenafirmhaspositivenetincome.
Blooms:Understand
RossChapter02#21
Section:2.1
Topic:Balancesheet
22.Whichoneofthefollowingassetsisgenerallythemostliquid?
A.inventory
B.buildings
C.accountsreceivable
D.equipment
E.patents
Blooms:Understand
RossChapter02#22
Section:2.1
Topic:Liquidity
23.Whichoneofthefollowingstatementsconcerningliquidityiscorrect?
A.Ifyousoldanassettoday,itwasaliquidasset.
B.Ifyoucansellanassetnextyearatapriceequaltoitsactualvalue,theassetishighlyliquid.
C.Trademarksandpatentsarehighlyliquid.
D.Thelessliquidityafirmhas,thelowertheprobabilitythefirmwillencounterfinancialdifficulties.
E.Balancesheetaccountsarelistedinorderofdecreasingliquidity.
Blooms:Understand
RossChapter02#23
Section:2.1
Topic:Liquidity
24.Liquidityis:
A.ameasureoftheuseofdebtinafirm'scapitalstructure.
B.equaltocurrentassetsminuscurrentliabilities.
C.equaltothemarketvalueofafirm'stotalassetsminusitstotalliabilities.
D.valuabletoafirmeventhoughliquidassetstendtobelessprofitabletoown.
E.generallyassociatedwithintangibleassets.
Blooms:Understand
RossChapter02#24
Section:2.1
Topic:Liquidity
25.Whichoneofthefollowingaccountsisincludedinstockholders'equity?
A.longtermdebt
B.deferredtaxes
C.plantandequipment
D.accumulatedretainedearnings
E.intangibleassets
Blooms:Remember
Difficulty:1Basic
RossChapter02#25
Section:2.1
Topic:Balancesheet
26.Bookvalue:
A.isequivalenttomarketvalueforfirmswithfixedassets.
B.isbasedonhistoricalcost.
C.generallytendstoexceedmarketvaluewhenfixedassetsareincluded.
D.ismoreofafinancialthananaccountingvaluation.
E.isadjustedtomarketvaluewheneverthemarketvalueexceedsthestatedbookvalue.
Blooms:Understand
RossChapter02#26
Section:2.1
Topic:Marketandbookvalues
27.Ifyousellanasset,youaremostapttoreceivewhichvalueforthatasset?
A.marketvalue
B.originalcostminusaccumulateddepreciation
C.historicalvalue
D.bookvalue
E.carryingvalue
Blooms:Remember
Difficulty:1Basic
RossChapter02#27
Section:2.1
28.Asseenonanincomestatement:
A.interestisdeductedfromincomeandincreasesthetotaltaxesincurred.
B.thetaxrateisappliedtotheearningsbeforeinterestandtaxeswhenthefirmhasbothdepreciationand
interestexpenses.
C.depreciationisshownasanexpensebutdoesnotaffectthetaxexpense.
D.depreciationreducesboththepretaxincomeandthenetincome.
E.interestexpenseisaddedtoearningsbeforeinterestandtaxestocomputepretaxincome.
Blooms:Understand
RossChapter02#28
Section:2.2
29.Allelseheldconstant,theearningspersharewill:
A.decreaseasnetincomeincreases.
B.decreaseasthenumberofsharesoutstandingincrease.
C.decreaseasthetotalrevenueofthefirmincreases.
D.increaseasthetaxrateincreases.
E.decreaseasthecostsdecrease.
Blooms:Understand
RossChapter02#29
Section:2.2
30.Whichoneofthesestatementsiscorrect?
A.Pretaxincomeisequaltonetincomeminustaxes.
B.Theadditiontoretainedearningsisequaltonetincomeplusdividends.
C.Operatingincomeisequaltooperatingrevenueminuscostofgoodssold.
D.Onlycurrenttaxesareincludedinthetaxexpense.
E.Earningspersharecanbenegativebutdividendspersharecannot.
Blooms:Understand
RossChapter02#30
Section:2.2
31.Earningspershare:
A.willincreaseifnetincomeincreasesandnumberofsharesoutstandingdecreases.
B.willincreaseifnetincomedecreasesandnumberofsharesoutstandingincreases.
C.isdefinedastheadditiontoretainedearningsdividedbythenumberofsharesoutstanding.
D.isthetotalamountofdividendspaidperyearonapersharebasis.
E.mustincreaseatthesamerateasthetotaloperatingrevenue.
Blooms:Understand
RossChapter02#31
Section:2.2
32.AccordingtotheGenerallyAcceptedAccountingPrinciples,costsare:
A.recordedasincurred.
B.recordedwhenpaid.
C.matchedwithrevenues.
D.matchedwithproductionlevels.
E.expensedasmanagementdesires.
Blooms:Understand
RossChapter02#32
Section:2.2
Topic:GenerallyAcceptedAccountingPrinciples(GAAP)
33.Depreciationforaprofitablefirm:
A.decreasesnetincomebylessthan$1forevery$1ofdepreciationexpense.
B.increasesthenetfixedassetsasshownonthebalancesheet.
C.reducesboththenetfixedassetsandthecostsofafirm.
D.isanoncashexpensewhichincreasesthenetoperatingincome.
E.decreasesnetfixedassets,netincome,andoperatingcashflows.
Blooms:Understand
RossChapter02#33
Section:2.2
34.Whenyouaremakingafinancialdecision,themostrelevanttaxrateisthe____rate.
A.average
B.fixed
C.marginal
D.total
E.variable
Blooms:Understand
RossChapter02#34
Section:2.3
Topic:Taxes
35.Anincreaseinwhichoneofthefollowingwillcausetheoperatingcashflowtoincreaseforaprofitable
firm?
A.depreciation
B.changesintheamountofnetfixedcapital
C.networkingcapital
D.taxes
E.administrativeexpenses
Blooms:Apply
RossChapter02#35
Section:2.5
36.Afirmstartsitsyearwithapositivenetworkingcapital.Duringtheyear,thefirmacquiresmoreshortterm
debtthanitdoesshorttermassets.Thismeansthat:
A.theendingnetworkingcapitalwillbenegative.
B.bothaccountsreceivableandinventorydecreasedduringtheyear.
C.thebeginningcurrentassetswerelessthanthebeginningcurrentliabilities.
D.accountspayableincreasedandinventorydecreasedduringtheyear.
E.theendingnetworkingcapitalcanbepositive,negative,orequaltozero.
Blooms:Understand
RossChapter02#36
Section:2.4
37.Thecashflowtocreditorsincludesthefirmscash:
A.outflowwhenpaymentsarepaidtosuppliers.
B.outflowwhennewdebtisacquired.
C.outflowwheninterestispaidonoutstandingdebt.
D.inflowwhenaccountspayableincreases.
E.Inflowwhenlongtermdebtispaidoff.
Blooms:Understand
RossChapter02#37
Section:2.5
38.Thecashflowtostockholdersmustbepositivewhen:
A.thedividendspaidarelessthantheamountofnetnewequityraised.
B.thenetsaleofcommonstockexceedstheamountofdividendspaid.
C.noincomeisdistributedbutnewsharesofstockaresold.
D.thecashflowfromassetsispositiveandalsoexceedsthecashflowtocreditors.
E.boththecashflowtoassetsandthecashflowtocreditorsarepositive.
Blooms:Understand
RossChapter02#38
Section:2.5
39.Whichoneofthesewillincreasethebookvalueofthestockholdersequityinaprofitable,nondividend
payingfirm?Assumenosharesofstockarerepurchasedorsold.
A.adecreaseinthebookvalueofinventory
B.anincreaseinearningspershare
C.anincreaseinthemarketvalueofthefirmsbuildings
D.anincreaseinthemarketvalueofthefirmslongtermdebt
E.anincreaseinnoncashexpenses
Blooms:Apply
RossChapter02#39
Section:2.1
40.Assetsarelistedonthebalancesheetinorderof:
A.decreasingliquidity.
B.decreasingsize.
C.increasingsize.
D.marketvaluerelativetobookvalue.
E.increasingliquidity.
Blooms:Understand
RossChapter02#40
Section:2.1
Topic:Liquidity
41.Anincreaseintreasurystock:
A.increasesthetotalequityofthefirm.
B.istheresultofafirmissuingnewsharestostocktothefederalgovernment.
C.increasesthenumberofsharesoutstanding.
D.resultsfromarepurchaseofoutstandingsharesofstock.
E.requiresrepaymentatsomepointinthefuture.
Blooms:Understand
RossChapter02#41
Section:2.1
Topic:Balancesheet
42.Thecarryingvalueorbookvalueofassets:
A.isdeterminedunderGAAPandisbasedonthecostoftheasset.
B.representsthetruemarketvalueaccordingtoGAAP.
C.isalwaysthebestmeasureofthecompany'svaluetoaninvestor.
D.isalwayshigherthanthereplacementcostoftheassets.
E.isshownonthefirmsincomestatement.
Blooms:Understand
RossChapter02#42
Section:2.1
43.Undergenerallyacceptedaccountingprinciples(GAAP),afirm'sassetsarereportedat:
A.marketvalue.
B.liquidationvalue.
C.marketvaluelessaccumulateddepreciation.
D.historicalcostlessaccumulateddepreciation.
E.liquidationvaluelessaccumulateddepreciation.
Blooms:Understand
RossChapter02#43
Section:2.1
44.Theincomestatement:
A.measuresperformanceforonespecificday.
B.ignoresanyincomeotherthanoperatingrevenues.
C.excludesdeferredtaxexpense.
D.treatsdividendspaidasacashexpense.
E.includesnoncashexpenses.
Blooms:Understand
RossChapter02#44
Section:2.2
45.Accordingtogenerallyacceptedaccountingprinciples(GAAP),revenueisrecognizedasincomewhen:
A.acontractissignedtoperformaserviceordeliveragood.
B.thetransactioniscompleteandthegoodsorservicesaredelivered.
C.paymentisrequested.
D.incometaxesarepaidontherevenueearned.
E.managersdecidetorecognizeit.
Blooms:Remember
Difficulty:1Basic
RossChapter02#45
Section:2.2
46.Cashflowfromassets:
A.equalsnetincomeplusnoncashitems.
B.canbepositive,negative,orequaltozero.
C.equalsoperatingcashflowminusnetcapitalspending.
D.equalstheadditiontoretainedearnings.
E.equalsoperatingcashflowminusthecashflowtocreditors.
Blooms:Understand
RossChapter02#46
Section:2.5
Topic:Cashflowfromassets
47.Netcapitalspendingisequaltothe:
A.netchangeintotalassetsplusdepreciation.
B.netchangeinfixedassetsplusdepreciation.
C.netincomeplusdepreciation.
D.differencebetweenthemarketandbookvaluesofthetotalassets.
E.changeintotalassets.
Blooms:Understand
RossChapter02#47
Section:2.5
48.Cashflowtostockholdersisdefinedas:
A.cashdividendspaid.
B.repurchasesofequitylessnewequitysoldminuscashdividendspaid.
C.cashflowfromfinancinglesscashflowtocreditors.
D.cashdividendspaidplusrepurchasesofequityminusnewequityfinancing.
E.cashflowfromassetspluscashflowtocreditors.
Blooms:Understand
RossChapter02#48
Section:2.5
49.Freecashflowis:
A.themoneygeneratedfromthesaleofnewsharesofstock.
B.anothertermforoperatingcashflow.
C.thecashgeneratedbydecreasingnetworkingcapital.
D.cashthatthefirmcandistributetocreditorsandstockholders.
E.thenetincomeofafirmaftertaxeshavebeenpaid.
Blooms:Remember
Difficulty:1Basic
RossChapter02#49
Section:2.5
Topic:Freecashflow
50.Thecashflowofthefirmmustbeequalto:
A.cashflowtostockholdersminuscashflowtocreditors.
B.cashflowtocreditorsminuscashflowtostockholders.
C.cashflowtogovernmentspluscashflowtostockholders.
D.cashflowtostockholderspluscashflowtocreditors.
E.theaftertaxoperatingcashflow.
Blooms:Remember
Difficulty:1Basic
RossChapter02#50
Section:2.5
51.Thestatementofcashflowsconsistsofthecashflowsfrom:
A.operations,investingactivities,andfinancingactivities.
B.operations,investingactivities,anddivestingactivities.
C.internalactivities,externalactivities,andfinancingactivities.
D.balancesheetaccountsonly.
E.incomestatementaccountsonly.
Blooms:Understand
RossChapter02#51
Section:2.6
52.Oneofthereasonswhycashflowanalysisispopularisbecause:
A.cashflowsaremoresubjectivethannetincome.
B.deferredtaxesrequirefuturecashpayment.
C.cashflowsarestrictlydefinedbygenerallyacceptedaccountingprinciples(GAAP).
D.itisdifficulttomanipulate,orspinthecashflows.
E.operatingcashflowsarefoundontheincomestatement.
Blooms:Understand
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
Blooms:Analyze
RossChapter02#53
Section:2.4
54.Totalassetsare$1,450,fixedassetsare$790,longtermdebtis$750,andshorttermdebtis$300.Whatis
theamountofcurrentassets?
A.$660
B.$360
C.$300
D.$40
E.$790
Blooms:Analyze
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
Blooms:Analyze
RossChapter02#55
Section:2.1
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
Blooms:Analyze
RossChapter02#56
Section:2.1
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
Blooms:Analyze
RossChapter02#57
Section:2.2
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%
Blooms:Apply
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
Blooms:Analyze
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
Blooms:Analyze
RossChapter02#60
Section:2.5
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
Blooms:Analyze
RossChapter02#61
Section:2.5
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
Blooms:Apply
RossChapter02#62
Section:2.4
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
Blooms:Analyze
RossChapter02#63
Section:2.5
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
Blooms:Analyze
RossChapter02#64
Section:2.5
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
Blooms:Analyze
RossChapter02#65
Section:2.5
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.$7,363
Blooms:Analyze
RossChapter02#66
Section:2.5
67.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
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.
$674million
Blooms:Analyze
RossChapter02#67
Section:2.4
68.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
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.$473million
Blooms:Analyze
RossChapter02#68
Section:2.2
Topic:Noncashitems
69.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
Whatistheamountofthenetcapitalspendingfor2015?
A.$29million
B.$26million
C.$337million
D.$1,66million
E.$285million
Blooms:Analyze
RossChapter02#69
Section:2.5
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
70.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560

A.$485million
B.$1,030million
C.$867million
D.$783million
E.$451million
Blooms:Analyze
RossChapter02#70
Section:2.5
71.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
A.$295million
B.$485million
C.$1,340million
D.$590million
E.$310million
Blooms:Analyze
RossChapter02#71
Section:2.5
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560
72.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
2015
$686
1,300
1,500
745
579
2014
$613
1,350
1,500
745
352
$4,810
$4,560

A.$152million
B.$25million
C.$0
D.$25million
E.$75million
Blooms:Apply
RossChapter02#72
Section:2.5
73.
WoodlandsInc.
2015IncomeStatement
($inmillions)
Costofgoodssold
Depreciation
$3,806
2,315
546
311
Interestexpense
$634
170
Pretaxincome
Taxes
$464
162
Netincome
$302
Dividends
75
WoodlandsInc.
BalanceSheet
($inmillions)
Assets
Cashandequivalents
Accountsreceivable
Inventory
Intangibleassets
Totalassets
2015
$503
418
1,239
2,290
360
$4810
2014
$227
522
1,187
2,264
360
$4,560
A.$120million
B.$50million
C.$120million
D.$220million
E.$170million
Blooms:Analyze
RossChapter02#73
Section:2.5
74.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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
Accountspayable
Longtermdebt
Commonstock
Capitalsurplus
Retainedearnings
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
Blooms:Analyze
RossChapter02#74
Section:2.4
75.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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
Blooms:Analyze
RossChapter02#75
Section:2.2
76.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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
Blooms:Analyze
RossChapter02#76
Section:2.5
77.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.$6,460
B.$9,069
C.$10,325
D.$3,753
E.$12,408
Blooms:Analyze
RossChapter02#77
Section:2.5
78.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
Cash
Inventory
Accountspayable
Longtermdebt
Accountsreceivable
Commonstock
Netfixedassets
A.$885
B.$8,042
C.$7,297
D.$6,425
E.$5,517
Blooms:Analyze
RossChapter02#78
Section:2.5
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
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
Blooms:Analyze
RossChapter02#79
Section:2.5
80.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.$1,230
B.$8,025
C.$9,135
D.$5,565
E.$2,705
Blooms:Analyze
RossChapter02#80
Section:2.5
81.
NewTownIndustries
Taxrate35%
Revenues
Costofgoodssold
Interest
Dividends
Depreciation
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

A.
$1,200
B.
$2,800
C.
$1,520
D.
$1,600
E.
$2,800
Blooms:Analyze
RossChapter02#81
Section:2.5
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
Blooms:Analyze
RossChapter02#82
Section:2.2
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
Blooms:Analyze
RossChapter02#83
Section:2.5
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
Blooms:Analyze
RossChapter02#84
Section:2.2
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
Blooms:Analyze
RossChapter02#85
Section:2.5
86.Defineliquidityandexplainwhatafirmwouldneedtodotoensureallofthecurrentassetsdisplayedonits
balancesheetareliquid.
Liquidassetsarethosethatcanbesoldquicklywithlittleornolossinvalue.Toensurethecurrentassetsare
liquid,thefirmneedstoreviewitsaccountsreceivabletoensuretheaccountsarecollectibleandalsoreviewits
inventorytoensureitissalableforatleasttheamountatwhichitisrecorded.
AACSB:ReflectiveThinking
Blooms:Apply
RossChapter02#86
Section:2.1
Topic:Balancesheet
87.Whyisinterestexpenseexcludedfromtheoperatingcashflowcalculation?
Operatingcashflowisdesignedtorepresentthecashflowafirmgeneratesfromitsdaytodayoperating
activities.Interestexpensearisesfromafinancingdecisionandthusisconsideredasacashflowtocreditors.

Blooms:Apply
RossChapter02#87
Section:2.5
88.Explainwhytheincomestatementisnotagoodrepresentationofcashflow.
Mostincomestatementscontainsomenoncashitems,sothesemustbeaccountedforwhencalculatingcash
flows.Moreimportantly,however,sinceGAAPisusedtocreateincomestatements,revenuesandexpensesare
bookedwhentheyaccrue,notwhentheircorrespondingcashflowsoccur.
Blooms:Analyze
RossChapter02#88
Section:2.5
Topic:Cashflows
89.Discussthedifferencebetweenbookvaluesandmarketvaluesonthebalancesheetandexplainthebest
methodfordeterminingthevalueofafirmtoitsstockholders.
Theaccountsonthebalancesheetaregenerallycarriedathistoricalcost,notmarketvalues.Althoughthebook
valueofcurrentassetsandcurrentliabilitiesmaycloselyapproximatemarketvalues,thesamecannotbesaid
fortherestofthebalancesheetaccounts.Ultimately,stockholdersshouldfocusonthefirm'sstockprice,which
isamarketvaluemeasure,forthevalueoftheirinvestmentinthefirm.
Blooms:Analyze
RossChapter02#89
Section:2.1
90.Notethatinallofourcashflowcomputationstodeterminecashflowofthefirm,weneverincludethe
additiontoretainedearnings.Whynot?Isthisanoversight?
Theadditiontoretainedearningsisnotacashflow.Itissimplyanaccountingentrythatlinkstheincome
statementtothebalancesheetandallowsthebalancesheettobalance.Anyadditionstoretainedearningswill
showupascashflowchangesinotherbalancesheetaccounts.
Blooms:Analyze
Difficulty:3Challenge
RossChapter02#90
Section:2.2
91.Depreciationisclassifiedasanoncashitembecausenocashisspentwhendepreciationisrecorded.Why
areexpensesthathavebeenaccrued,butnotyetpaid,notalsoconsideredtobenoncashitemsandtherefore
excludedfromoperatingcashflowjustasdepreciationisexcluded?
Accruedexpensesthathavenotbeenpaidwillappearinaccountspayableandthechangeinnetworking
capital.Viathechangeinnetworkingcapital,theseunpaidexpensesaresubtractedfromtheoperatingcash
flowtodeterminethecashflowofthefirm.Thismethodallowsforthecomputationofthecashflowsbased
solelyonfinancialstatementinformation.Depreciation,ontheotherhand,istheexpensingofafixedassetcost
thatwaspaidforwhentheassetwasacquired.
Blooms:Evaluate
RossChapter02#91
Section:2.5
92.Sometimeswhenbusinessesarecriticallydelinquentontheirtaxliabilities,thetaxauthoritycomesinand
literallyseizesthebusinessbychasingalloftheemployeesoutofthebuildingandchangingthelocks.What
doesthistellyouabouttheimportanceoftaxesrelativetoourdiscussionofcashflow?Whymightabusiness
ownerwanttoavoidsuchanoccurrence?
Taxesmustbepaidincash,andinthiscase,theyareoneofthemostimportantcomponentsofcashflow.The
reputationofabusinesscanundergoirreparableharmifwordgetsoutthatthetaxauthoritieshaveconfiscated
thebusiness,evenifonlyforacoupleofhoursuntilthebusinessownercancomeupwiththemoneytoclearup
thetaxproblem.Thebottomlineisiftheownercan'tcomeupwiththecash,thetaxauthorityhaseffectively
putthemoutofbusiness.
Blooms:Analyze
RossChapter02#92
Section:2.5
Topic:Cashflows
93.Interpret,inwords,whatcashflowofthefirmrepresentsbydiscussingoperatingcashflow,changesinnet
workingcapital,andadditionstofixedassets.
Operatingcashflowisthecashflowafirmgeneratesfromitsdaytodayoperations.Inotherwords,itisthe
cashinflowgeneratedasaresultofputtingthefirm'sassetstowork.Changesinnetworkingcapitalandfixed
assetsrepresentinvestmentsafirmmakesintheseassets.Thatis,afirmtypicallytakessomeofthecashflowit
generatesfromusingassetsandreinvestsitinnewassets.Cashflowofthefirm,then,isthecashflowafirm
generatesbyemployingitsassets,netofanyacquisitions.
Blooms:Evaluate
RossChapter02#93
Section:2.5
94.Whyiscashflowmanagementimportant?
GAAPaccountingprinciplesallowsignificantsubjectivedecisionstobemadeinmanykeyareas.Theuseof
cashflowasametrictoevaluateacompanycomesfromtheideathatthereislesssubjectivityinvolvedand
therefore,itishardertospinthenumbers.
Blooms:Analyze
RossChapter02#94
Section:2.7
Topic:Cashflows
95.Explainthedifferencebetweenproductcostsandperiodcostsastheyrelatetotheincomestatement.Are
thesetermssynonymouswithshortrunandlongrun?
Productcostsarethetotalproductioncostsincurredduringaperiodrawmaterials,directlabor,and
manufacturingoverheadandarereportedascostofgoodssold.Periodcostsarecostsmanagementandoffice
salaries,officeexpenses,insurancethatareallocatedtoatimeperiodandarerecordedasselling,general,and
administrativeexpenses.Thetermsshortrunandlongrunareusedtodifferentiatebetweenfixedandvariable
costs,dependinguponthelengthoftimerequiredtovarythecostamount.
Blooms:Apply
RossChapter02#95
Section:2.2
c2 Summary
Category
#ofQuestions
10
85
85
Blooms:Analyze
36
Blooms:Apply
Blooms:Evaluate
Blooms:Remember
20
Blooms:Understand
28
Difficulty:1Basic
19
74
Difficulty:3Challenge
RossChapter02
95
Section:2.1
23
Section:2.2
21
Section:2.3
Section:2.4
Section:2.5
37
Section:2.6
Section:2.7
Topic:Taxes
Topic:Balancesheet
Topic:Cashflows
Topic:Freecashflow
13
Topic:Liquidity
Topic:Noncashitems
10
Topic:Taxes

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