Financial Statements, Cash Flow, and Taxes

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CHAPTER 2
FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

True/False

Easy:

| (2.1) Annual reportF K| Answer: a| EASY|
.| The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity.| | | | | | | | | |
| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.1) Annual report and expectationsF K| Answer: a| EASY| .| The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.| | | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.2) Retained earnings versus cashC K| Answer: b| EASY| .| Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.| | | | | | | | | |

| Cash| $ 50,000| | Accounts payable| | $ 100,000| | Inventory| 200,000| | Accruals| | 100,000|
| Accounts receivable| 250,000| | Total CL| | $ 200,000| | Total CA| $ 500,000| | Debt| | 200,000|
| Net fixed assets| $ 900,000| | Common stock| | 200,000| | |           | | Retained earnings| | 800,000| | Total assets| $1,400,000| | Total L & E| | $1,400,000| | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.2) Balance sheetF K| Answer: a| EASY|
.| On the balance sheet, total assets must always equal total liabilities and equity.| | | | | | | | | |
| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |

| (2.2) Balance sheet: non-cash assetsF K| Answer: a| EASY| .| Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.| | | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.3) Income statementF K | Answer: a| EASY|
.| The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.| | | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.7) Net operating working capitalF K| Answer: a| EASY| .| Net operating working capital is equal to operating current assets minus operating current liabilities.| | | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.7) Total net operating capitalF K| Answer: b | EASY| .| Total net operating capital is equal to net fixed assets.| | | | | | | | | |
| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.7) Net operating profit after taxes (NOPAT)F K| Answer: a | EASY| .| Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.| | | | | | | | | |

| a.| True| | | | | | |
| b.| False| | | | | | |
| | | | | | | | |
| (2.9)...
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