Question

18) A firm's balance sheet shows the following changes over the most recent quarter: Cash increases by $1,000,000, long-term assets increase by $3,000,000, accounts payable increase by $750,000, long-term-debt increases by $1,000,000, retained earnings increase by $1,250,000, and new equity increases by $1,000,000. Which of the following statements must be TRUE?

A) Cash was a $1,000,000 source of funds for the firm.

B) Long-term debt was a $1,000,000 source of funds for the firm.

C) Because retained earnings increased by more than $500,000, the firm could not have realized a profit for the quarter.

D) All of the new equity must have been provided by investors who were not shareholders prior to the issuance of new equity.

19) A firm's balance sheet shows the following changes over the most recent quarter: Cash increases by $1,000,000, long-term assets increase by $3,000,000, accounts payable increase by $750,000, long-term-debt increases by $1,000,000, retained earnings increase by $1,250,000, and new equity increases by $1,000,000. Which of the following statements must be FALSE?

A) Cash was a $1,000,000 source of funds for the firm.

B) Long-term debt was a $1,000,000 source of funds for the firm.

C) The purchase of long-term assets was a use of funds by the firm.

D) Retained earnings are considered an INTERNAL source of financing.

20) A firm has a net income (after-tax profit) of $500,000 and pays dividends of $150,000. Which of the following statements is TRUE?

A) Cash decreased by $150,000

B) Retained earnings increased by $350,000

C) Long-term debt increased by $350,000

D) All of the statements are true.

Answer 1

18.

Ans- Option B.

As the long term funds are the source of funds and cash is not a source of funds but a fund which is increased due to increase in long term debts.

19. Option A.

As the long term funds are the source of funds and cash is not a source of funds but a fund which is increased due to increase in long term debts. And Retained earnings are profits that are not paid to shareholder's and are retained and are source of Internal source of financing. Purchase of long term assets are use of funds.

20. Option B

Retained earnings = Net Income after tax - dividends

Dividends are generally paid in cash, through bank or through stocks and since question does not mention specifically considering it to be false.

Long-term debt does not increase as Retained earnings are part of Owner's Equity.