TEST BANK FOR CORPORATE
FINANCE A FOCUSED
APPROACH 5TH EDITION
EHRHARDT
,CHAPTER 2—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
TRUE/FALSE
1. The annual report contains four basic financial statements: the income statement, balance sheet,
statement of cash flows, and statement of stockholders' equity.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Annual report KEY: Bloom’s: Knowledge
2. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Annual report and expectations KEY: Bloom’s: Knowledge
3. 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
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Analytic
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings versus cash KEY: Bloom’s: Knowledge
4. On the balance sheet, total assets must always equal total liabilities and equity.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Balance sheet KEY: Bloom’s: Knowledge
5. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
, LOC: TBA TOP: Balance sheet: non-cash assets KEY: Bloom’s: Knowledge
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
6. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Income statement KEY: Bloom’s: Knowledge
7. Net operating working capital is equal to operating current assets minus operating current liabilities.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Net operating working capital KEY: Bloom’s: Knowledge
8. Total net operating capital is equal to net fixed assets.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Total net operating capital KEY: Bloom’s: Knowledge
9. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Net operating profit after taxes (NOPAT)
KEY: Bloom’s: Knowledge
10. The fact that 70% of the interest income received by a corporation is excluded from its taxable income
encourages firms to use more debt financing than they would in the absence of this tax law provision.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest income
KEY: Bloom’s: Knowledge
, 11. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was
allowed as a tax-deductible expense, this would probably encourage companies to use more debt
financing than they presently do, other things held constant.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest expense
KEY: Bloom’s: Knowledge
12. The interest and dividends paid by a corporation are considered to be deductible operating expenses,
hence they decrease the firm's tax liability.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest expense and dividends
KEY: Bloom’s: Knowledge
13. The balance sheet is a financial statement that measures the flow of funds into and out of various
accounts over time, while the income statement measures the firm's financial position at a point in time.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Financial statements KEY: Bloom’s: Knowledge
14. Its retained earnings is the actual cash that the firm has generated through operations less the cash that
has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts
and, thus, these cash accounts, when added together, will always be equal to the firm's total retained
earnings.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings KEY: Bloom’s: Comprehension
15. The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of
stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact
stockholders' reinvested earnings.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings KEY: Bloom’s: Comprehension
16. In accounting, emphasis is placed on determining net income in accordance with generally accepted
accounting principles. In finance, the primary emphasis is also on net income because that is what
investors use to value the firm. However, a secondary financial consideration is cash flow, because cash
is needed to operate the business.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
FINANCE A FOCUSED
APPROACH 5TH EDITION
EHRHARDT
,CHAPTER 2—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES
TRUE/FALSE
1. The annual report contains four basic financial statements: the income statement, balance sheet,
statement of cash flows, and statement of stockholders' equity.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Annual report KEY: Bloom’s: Knowledge
2. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Annual report and expectations KEY: Bloom’s: Knowledge
3. 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
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Analytic
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings versus cash KEY: Bloom’s: Knowledge
4. On the balance sheet, total assets must always equal total liabilities and equity.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Balance sheet KEY: Bloom’s: Knowledge
5. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
, LOC: TBA TOP: Balance sheet: non-cash assets KEY: Bloom’s: Knowledge
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
6. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Income statement KEY: Bloom’s: Knowledge
7. Net operating working capital is equal to operating current assets minus operating current liabilities.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Net operating working capital KEY: Bloom’s: Knowledge
8. Total net operating capital is equal to net fixed assets.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Total net operating capital KEY: Bloom’s: Knowledge
9. 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.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Net operating profit after taxes (NOPAT)
KEY: Bloom’s: Knowledge
10. The fact that 70% of the interest income received by a corporation is excluded from its taxable income
encourages firms to use more debt financing than they would in the absence of this tax law provision.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest income
KEY: Bloom’s: Knowledge
, 11. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was
allowed as a tax-deductible expense, this would probably encourage companies to use more debt
financing than they presently do, other things held constant.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest expense
KEY: Bloom’s: Knowledge
12. The interest and dividends paid by a corporation are considered to be deductible operating expenses,
hence they decrease the firm's tax liability.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-9 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Federal income taxes: interest expense and dividends
KEY: Bloom’s: Knowledge
13. The balance sheet is a financial statement that measures the flow of funds into and out of various
accounts over time, while the income statement measures the firm's financial position at a point in time.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Financial statements KEY: Bloom’s: Knowledge
14. Its retained earnings is the actual cash that the firm has generated through operations less the cash that
has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts
and, thus, these cash accounts, when added together, will always be equal to the firm's total retained
earnings.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings KEY: Bloom’s: Comprehension
15. The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of
stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact
stockholders' reinvested earnings.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
LOC: TBA TOP: Retained earnings KEY: Bloom’s: Comprehension
16. In accounting, emphasis is placed on determining net income in accordance with generally accepted
accounting principles. In finance, the primary emphasis is also on net income because that is what
investors use to value the firm. However, a secondary financial consideration is cash flow, because cash
is needed to operate the business.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-6 NAT: BUSPROG: Reflective Thinking
STA: DISC: Financial statements, analysis, forecasting, and cash flows
