Corporate Finance - Chapter 2 Review Questions

1.Answer: B 2.Answer: C 3.Answer: C 4.Answer: D 5.Answer: C 6.Answer: E 7.Answer: B 8.Answer: D 9.Answer: E 10.Answer: C 11.Answer: D 12.Answer: E 13.Answer: A 14.Answer: D 15.Answer: C 16.Answer: B 17.Answer: C 18.Answer: A Ch.2 Chapter Review Questions 1) Which one of the following is classified as a tangible fixed asset? A) Accounts receivable B) Production equipment C) Cash D) Patent E) Inventory 2) Which one of the following is a current asset? A) Accounts payable B) Trademark C) Accounts receivable D) Notes payable E) Equipment 3) Which one of the following is a current liability? A) Note payable to a supplier in 13 months B) Amount due from a customer in two weeks C) Account payable to a supplier that is due next week D) Loan payable to the bank in 18 months E) Amount due from a customer that is past due 4) Which one of the following statements concerning net working capital is correct? A) Net working capital increases when inventory is purchased with cash. B) Net working capital excludes inventory. C) Total assets must increase if net working capital increases. D) Net working capital may be a negative value. E) Net working capital is the amount of cash a firm currently has available for spending. 5) Which one of the following accounts is the most liquid? A) Inventory B) Building C) Accounts Receivable D) Equipment E) Land 6) Shareholders' equity: A) is referred to as a firm's financial leverage. B) is equal to total assets plus total liabilities. C) decreases whenever new shares of stock are issued. D) includes patents, preferred stock, and common stock. E) represents the residual value of a firm. 7) The book value of a firm is: A) equivalent to the firm's market value provided that the firm has some fixed assets. B) based on historical cost. C) generally greater than the market value when fixed assets are included. D) more of a financial than an accounting valuation. E) adjusted to the market value whenever the market value exceeds the stated book value. 8) You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value? A) A sudden and unexpected increase in inflation B) The replacement of old inventory items with more desirable products C) Improvements to the surrounding area by other store owners D) Construction of a new restricted access highway located between the store and the surrounding residential areas E) Addition of a stop light at the main entrance to the store's parking lot 9) Net working capital is defined as: A) total liabilities minus shareholders' equity. B) current liabilities minus shareholders' equity. C) fixed assets minus long-term liabilities. D) total assets minus total liabilities. E) current assets minus current liabilities. 10) Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared? A) Matching principle B) Cash flow identity C) Generally Accepted Accounting Principles D) Financial Accounting Reporting Principles E) Standard Accounting Value Guidelines 11) Noncash items refer to: A) fixed expenses. B) inventory items purchased using credit. C) the ownership of intangible assets such as patents. D) expenses that do not directly affect cash flows. E) sales that are made using store credit. 12) The cash flow related to interest payments less any net new borrowing is called the: A) operating cash flow. B) capital spending cash flow. C) net working capital. D) cash flow from assets. E) cash flow to creditors. 13) Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes? A) Interest expense B) Taxes C) Cost of goods sold D) Labor costs E) Administrative expenses 14) Which one of the following statements related to an income statement is correct? A) Interest expense increases the amount of tax due. B) Depreciation does not affect taxes since it is a non-cash expense. C) Net income is distributed to dividends and paid-in surplus. D) Taxes reduce both net income and operating cash flow. E) Interest expense is included in operating cash flow. 15) Which one of the following will increase the cash flow from assets, all else equal? A) Decrease in cash flow to stockholders B) Decrease in operating cash flow C) Decrease in the change in net working capital D) Decrease in cash flow to creditors E) Increase in net capital spending 16) Net capital spending: A) is equal to ending net fixed assets minus beginning net fixed assets. B) is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. C) reflects the net changes in total assets over a stated period of time. D) is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. E) is equal to the net change in the current accounts. 17) Which one of the following statements related to the cash flow to creditors must be correct? A) If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid. B) If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets. C) A positive cash flow to creditors represents a net cash outflow from the firm. D) A positive cash flow to creditors means that a firm has increased its long-term debt. E) If the cash flow to creditors is zero, then a firm has no long-term debt. 18) A positive cash flow to stockholders indicates which one of the following with certainty? A) The dividends paid exceeded the net new equity raised. B) The amount of the sale of common stock exceeded the amount of dividends paid. C) No dividends were distributed, but new shares of stock were sold. D) Both the cash flow to assets and the cash flow to creditors must be negative. E) Both the cash flow to assets and the cash flow to creditors must be positive.