Question

Which of the following statements is CORRECT?

Select one:

a. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported net cash flow.

b. The income statement shows us the firm’s financial situation over a period of time.

c. The emphasis in finance is on the determination of accounting income since the value of a firm is determined by the net income generated.

d. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

e. Because companies are required to follow GAAP, two firms in exactly the same operating situation will have exactly the same financial statement.

Complete the Income Statement. What was the company’s interest expense for the year?

Milos To Go, Inc.

Income Statement

	2008
EBIT	20
Interest Expense	??
EBT	?
Taxes (35%)	?
Net Income	10

Select one:

a. $4.615 million.

b. $5.714 million.

c. $15.50 million

d. $10.00 million

e. $11.25 million

Last year, Blanda Brothers had positive cash flow from operation; however, cash on its balance sheet decreased. Which of the following could explain this?

Select one:

a. The company issued new long-term debt.

b. The company issued new common stock.

c. The company purchased a lot of new fixed assets.

d. The company eliminated its dividend.

e. The company sold off some of its assets.

At the end of 2017, Lehnhoff Inc. had $75 million in cash. During 2018, the following events occurred:

•     Cash flow from Lehnhoff’s operating activities totaled $325 million.

•     Lehnhoff issued $500 million in common stock.

•     Lehnhoff’s notes payable decreased by $100 million.

•     Lehnhoff purchased fixed assets totaling $600 million.

How much cash did Lehnhoff Inc. have at the end of 2018?

Select one:

a. $ 200 million

b. $ 100 million

c. $1,400 million

d. $ 400 million

e. $   50 million

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

Select one:

a. The firm’s taxable income would increase.

b. The company’s depreciation would decrease.

c. The firm’s operating income (EBIT) would increase.

d. The firm’s net cash flow would increase.

e. The firm’s tax payments would increase.

A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?

Select one:

a. Issue new stock and use some of the proceeds to purchase additional inventory and hold the remainder of the funds received as cash.

b. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

c. Reduce the company’s days’ sales outstanding ratio to the industry average and use the resulting cash savings to purchase plant and equipment.

d. Use cash to increase inventory holdings.

e. Use cash to repurchase some of the company’s own stock.

Rangoon Corp's sales last year were $700,000, and its year-end total assets were $450,000.   The average firm in the industry has a total assets turnover ratio (TATO) of 2.8. The new CFO believes the firm has excess assets that can be sold so as to bring the TATO to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average?

Select one:

a. $200,000

b. $210,000

c. $140,000

d. $230,000

e. $120,000

Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income after taxes was $25,000.   Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant?

Select one:

a. 9.5%

b. 8%

c. 11%

d. 14%

e. 12.5%

Company A and Company B have the same total assets, Return on Assets (ROA), and profit margin. However, Company A has higher debt ratio and interest expense than Company B. Which of the following statements is most correct?

Select one:

a. Company A has a lower operating income (EBIT) than Company B.

b. Company A has a lower total assets turnover than Company B.

c. Company A has a lower equity multiplier (EM) than Company B.

d. Company A has a lower net income than Company B.

e. Company A has a higher ROE than Company B.

Financial ratio analysis is conducted by different groups of analysts. What is the primary emphasis of each group?

Select one:

a. Short-Term creditors emphasize on the debt, TIE and ROE ratios.

b. Equity investors do not care about the riskiness of equity commitments or the liquidity ratios.

c. Equity investors are interested primarily in profitability.

d. Managers focus only on liquidity and look most carefully at the current ratio.

e. Long-term creditors examine the ratios to get information on the riskiness of equity commitments.

Answer 1

HI,

As per policy we will solve only first question here.

Net Income is different from cash flow. Cash flow is pure cash inflow and outflow for the accounting period while in net income there are many accounting adjustments such as depreciation etc. So From Net Income to cash flow we have to add depreciation, subtract capital expenditure and subtract increase in net working capital.

Income Statement shows us firm's financial statement over the period of time while balance shows the data on a particular date.

Value of firm in not determined by net income but rather its cash flows.

Cash flows of firm tells us about the full picture of cash not only in the form of currency and demand deposit.

Ii GAAP (Generally Accepted Accounting Principles) also there are different kind of accounting such as how to treat capex and inventory etc. SO 2 companies can have different net income if they use GAAP  

Hence option 2 is correct here.

Thanks