Taxes Reduce Both Net Income And Operating Cash Flow

QUIZ CHAPTER 2: 1. Which one of the following statements related to an income statement is correct? A. Taxes reduce both net income and operating cash flow. 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. Interest expense increases the amount of tax due. E. Interest expense is included in operating cash flow. 2. Which one of the following statements is correct concerning a corporation with taxable income of $125,000? A. Net income minus dividends paid will equal the ending retained earnings for the year. B. An increase in the tax rate will increase both net income and operating cash flow. C. Net income divided by the number of shares outstanding will equal the dividends per share. D. An increase in depreciation will increase the operating cash flow. E. Interest paid will be included in both net income and operating cash flow. 3. A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities? A. $4,130 B. $7,950 C. $6,890 D. $2,920 E. $2,050 Answer: Current assets = $7,390 - 3,910 = $3,480 Current liabilities = $3,480 - 560 = $2,920 Total liabilities = $2,920 + 3,970 = $6,890 4. A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital? A. $3,110 B. $2,860 C. $640 D. $970 E. $720 Answer: Net working capital = $680 + 210 + 80 - 250 = $720 5. At the beginning of the year the balance sheet of The Outlet showed $800,000 in the common stock account and $2.6 million in the additional paid-in surplus account. The end-of-year balance sheet showed $872,000 and $4.8 million in the same two accounts, respectively. The company paid out $150,000 in cash dividends during the year. What is the cash flow to stockholders for the year? A. -$628,000 B. $222,000 C. $78,000 D. -$1,972,000 E. -$2,122,000 Answer: Cash flow to stockholders = $150,000 - [($872,000 + 4,800,000) - ($800,000 + 2,600,000) = -$2,122,000 6. Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. Dividend statement. B. Balance sheet. C. Statement of cash flows. D. Creditor's statement. E. Income statement. 7. The following information pertains to Galaxy Interiors: Given these financial statements, which one of the following is correct for 2015? A. The average tax rate is 34 percent. B. The firm reduced its total debt. C. Current assets increased. D. The firm paid more to its suppliers than it borrowed. E. The non-cash expenses totaled $2,893. Answer: Accounts payable decreased indicating the firm paid more to its suppliers than it borrowed. 8. Use the below information to answer the following question. What is the operating cash flow given the above information? A. $31,543.38 B. $40,825.00 C. $42,122.42 D. $36,462.58 E. $36,741.42 Answer: Net income = $14,308 + 3,200 = $17,508 Taxable income = $17,508 / (1 - .35) = $26,935.38 Earnings before interest and taxes = $26,935.38 + 4,608 = $31,543.38 Operating cash flow = $31,543.38 + 18,709 - .35($26,935.38) = $40,825.00 9. Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings? A. $103,460 B. $121,680 C. $81,700 D. $76,320 E. $95,200 Answer: Net income = ($546,000 - 295,000 - 37,000 - 15,000) (1 - .32) = $135,320 Addition to retained earnings = $135,320 - 59,000 = $76,320 10. Which one of the following statements related to taxes is correct? A. The marginal tax rate for a firm can be either higher than or the same as the average tax rate. B. Given the tax structure in 2014, the highest average corporate tax rate is 34 percent. C. The marginal tax rate must be equal to or lower than the average tax rate for a firm. D. The tax for a firm is computed by multiplying the firm's current marginal tax rate times the taxable income. E. Additional income is taxed at a firm's average tax rate.