Question

1)

Depreciation for a profitable firm

A: decreases both operating and net income.

B: increases the net fixed assets as shown on the balance sheet.

C: reduces both the net fixed assets and the costs of a firm.

D: is a non-cash expense which increases the net operating income.

E: decreases net fixed assets, net income, and operating cash flows.

2) For a growing firm, the change in net working capital is generally:

A: positive.

B: negative.

C: highly erratic.

D: highly negative.

E: equal to zero.

3)The accounting statement of cash flows consists of the cash flows from:

A: operations, investing activities, and financing activities.

B: operations, investing activities, and divesting activities.

C: internal activities, external activities, and financing activities.

D: balance sheet accounts only.

E: income statement accounts only.

4) Total equity is $1,620, fixed assets are $1,810, long-term debt is $650, and short-term debt is $300. What is the amount of current assets?

A: $760

B: $360

C: $1,140

D: $480

E: $790

5) Brewster Mills has total revenues of $684,350, costs of goods sold of $472,500, net income of $11,520, and average inventory of $91,600. What is the days' sales in inventory?

A: 69.84 days

B: 70.76 days

C: 71.51 days

D: 5.16 days

E: 4.08 days

6) Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is:

A: equal to, and only if it is equal to, the discount rate.

B: equal to or greater than the discount rate.

C: less than the discount rate.

D: negative.

E: positive.

Answer 1

Answer 1:

Correct answer is:

A: decreases both operating and net income.

Explanation:

Depreciation being an expense decreases both operating and net income.

It reduces net fixed assets and increases the costs of a firm.

It being a non-cash expense it increases operating cash flow.

Hence option A is correct and other options B, C, D and E are incorrect.

Answer 2:

Correct answer is:

A: positive.

Explanation:

Whe a firm grows both currents assets and current liabilities are expected to increase. But current ratio normally is greater than 1. Hence change in net working capital is generally positive.

Hence option A is correct and other options B, C, D and E are incorrect.

Answer 3:

Correct answer is:

A: operations, investing activities, and financing activities.

Explanation:

Statement of cash flows consists of the cash flows from operations, investing activities, and financing activities.

Hence option A is correct and other options B, C, D and E are incorrect.

Answer 4:

Correct answer is:

A: $760

Explanation:

Total assets = Total liabilities + Equity = Short term debt + long term debt + equity = 1620 + 650 + 300 =$2,570

Current assets = Total assets - Fixed assets = 2570 - 1810 = $760

Hence option A is correct and other options B, C, D and E are incorrect.

Answer 5:

Correct answer is:

B: 70.76 days

Explanation:

Day's sales inventory = 365 / (Cost of goods sold / Average inventory) = 365 / (472500 / 91600) = 70.76 Days

Hence option B is correct and other options A, C, D and E are incorrect.

Answer 6:

Correct answer is:

B: equal to or greater than the discount rate.

Explanation:

The acceptance criteria for IRR method is:

Accept the project if its IRR >= Cost of capital

and reject the project if its IRR < Cost of capital

Positive IRR is not a sufficient condition for acceptance of project.

Normally cost of capital is positive and hence for acceptance of a project its IRR has to be positive and greater than cost of capital.

Hence option B is correct and other options A, C, D and E are incorrect.