Chapter 02
Financial Statements, Taxes, and Cash Flow
Multiple Choice Questions
1. Net working capital is defined as:
A. the depreciated book value of a firm's fixed
assets.
B. the value of a firm's current
assets.
C. available cash minus current
liabilities.
D. total assets minus total
liabilities.
E. current assets minus current
liabilities.
2. The accounting statement that measures the revenues, expenses, and net income of
a firm over a period of time is called the:
A. statement of cash
flows.
B. income
statement.
C. GAAP
statement.
D. balance
sheet.
E. net working capital
schedule.
3. The financial statement that summarizes a firm's accounting value as of a particular
date is called the:
A. income
statement.
B. cash flow
statement.
C. liquidity
position.
D. balance
sheet.
E. periodic operating
statement.
2-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,4. Which one of the following decreases net income but does not affect the operating
cash flow of a firm that owes no taxes for the current year?
A. Indirect
cost
B. Direct
cost
C. Noncash
item
D. Period
cost
E. Variable
cost
5. Which one of the following terms is defined as the total tax paid divided by the total
taxable income?
A. Average tax
rate
B. Variable tax
rate
C. Marginal tax
rate
D. Absolute tax
rate
E. Contingent tax
rate
6. Which one of the following is the tax rate that applies to the next dollar of taxable
income that a firm earns?
A. Average tax
rate
B. Variable tax
rate
C. Marginal tax
rate
D. Absolute tax
rate
E. Contingent tax
rate
2-2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,7. Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to
creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to
shareholders.
C. operating cash flow minus the change in net working capital minus net
capital spending.
D. operating cash flow plus net capital spending plus the change in net
working capital.
E. cash flow to shareholders minus net capital spending plus the change in net
working capital.
8. Operating cash flow is defined as:
A. a firm's net profit over a specified period
of time.
B. the cash that a firm generates from its normal business
activities.
C. a firm's operating
margin.
D. the change in the net working capital over a stated
period of time.
E. the cash that is generated and added to retained
earnings.
9. Which one of the following has nearly the same meaning as free cash flow?
A. Net
income
B. Cash flow from
assets
C. Operating cash
flow
D. Cash flow to
shareholders
E. Addition to retained
earnings
2-3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, 10. Cash flow to creditors is defined as:
A. interest paid minus net new
borrowing.
B. interest paid plus net new
borrowing.
C. the operating cash flow minus net capital spending minus change in net
working capital.
D. dividends paid plus net new
borrowing.
E. cash flow from assets plus net new
equity.
11. Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to
creditors.
B. operating cash flow minus cash flow to
creditors.
C. dividends paid plus the change in retained
earnings.
D. dividends paid minus net new equity
raised.
E. net income minus the addition to retained
earnings.
12. Which one of the following is an intangible fixed asset?
A. Invento
ry
B. Machiner
y
C. Copyrig
ht
D. Account
receivable
E. Buildin
g
2-4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial Statements, Taxes, and Cash Flow
Multiple Choice Questions
1. Net working capital is defined as:
A. the depreciated book value of a firm's fixed
assets.
B. the value of a firm's current
assets.
C. available cash minus current
liabilities.
D. total assets minus total
liabilities.
E. current assets minus current
liabilities.
2. The accounting statement that measures the revenues, expenses, and net income of
a firm over a period of time is called the:
A. statement of cash
flows.
B. income
statement.
C. GAAP
statement.
D. balance
sheet.
E. net working capital
schedule.
3. The financial statement that summarizes a firm's accounting value as of a particular
date is called the:
A. income
statement.
B. cash flow
statement.
C. liquidity
position.
D. balance
sheet.
E. periodic operating
statement.
2-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,4. Which one of the following decreases net income but does not affect the operating
cash flow of a firm that owes no taxes for the current year?
A. Indirect
cost
B. Direct
cost
C. Noncash
item
D. Period
cost
E. Variable
cost
5. Which one of the following terms is defined as the total tax paid divided by the total
taxable income?
A. Average tax
rate
B. Variable tax
rate
C. Marginal tax
rate
D. Absolute tax
rate
E. Contingent tax
rate
6. Which one of the following is the tax rate that applies to the next dollar of taxable
income that a firm earns?
A. Average tax
rate
B. Variable tax
rate
C. Marginal tax
rate
D. Absolute tax
rate
E. Contingent tax
rate
2-2
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
,7. Cash flow from assets is defined as:
A. the cash flow to shareholders minus the cash flow to
creditors.
B. operating cash flow plus the cash flow to creditors plus the cash flow to
shareholders.
C. operating cash flow minus the change in net working capital minus net
capital spending.
D. operating cash flow plus net capital spending plus the change in net
working capital.
E. cash flow to shareholders minus net capital spending plus the change in net
working capital.
8. Operating cash flow is defined as:
A. a firm's net profit over a specified period
of time.
B. the cash that a firm generates from its normal business
activities.
C. a firm's operating
margin.
D. the change in the net working capital over a stated
period of time.
E. the cash that is generated and added to retained
earnings.
9. Which one of the following has nearly the same meaning as free cash flow?
A. Net
income
B. Cash flow from
assets
C. Operating cash
flow
D. Cash flow to
shareholders
E. Addition to retained
earnings
2-3
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
, 10. Cash flow to creditors is defined as:
A. interest paid minus net new
borrowing.
B. interest paid plus net new
borrowing.
C. the operating cash flow minus net capital spending minus change in net
working capital.
D. dividends paid plus net new
borrowing.
E. cash flow from assets plus net new
equity.
11. Cash flow to stockholders is defined as:
A. cash flow from assets plus cash flow to
creditors.
B. operating cash flow minus cash flow to
creditors.
C. dividends paid plus the change in retained
earnings.
D. dividends paid minus net new equity
raised.
E. net income minus the addition to retained
earnings.
12. Which one of the following is an intangible fixed asset?
A. Invento
ry
B. Machiner
y
C. Copyrig
ht
D. Account
receivable
E. Buildin
g
2-4
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
