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Homework answers / question archive / Virginia Commonwealth University - FIRE 623 Chapter 4 - Cash Flow and Financial Planning 4
Virginia Commonwealth University - FIRE 623
Chapter 4 - Cash Flow and Financial Planning
4.1Understand tax depreciation procedures and the effect of depreciation on the firm's cash flows.
1) Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.
2) Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.
3) Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.
4) Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.
5) Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.
6) For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.
7) The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.
8) Allocation of the historic costs of fixed assets against the annual revenue they generate is called .
A) arbitraging
B) securitization
C) depreciation
D) amortization
9) The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for purposes.
A) tax
B) financial reporting
C) budget
D) cost accounting
10) A corporation .
A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes
11) The depreciable value of an asset, under MACRS, is the .
A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value
MACRS RATE
Recovery year 3 years 5 years 7 years 10 years
1 33% 20% 14% 10%
2 45 32 25 18
3 15 19 18 14
4 7 12 12 12
5 12 9 9
6 5 9 8
7 9 7
8 4 6
9 6
10 6
11 4
12) Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?
A) $1,900 B) $1,200
C) $1,500
D) $2,100
13) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 5 is .
A) $10,000
B) $12,000
C) $21,000
D) $ 9,000
14) Under MACRS, an asset which originally cost $100,000 is being depreciated using a 10-year normal recovery period. The depreciation expense in year 11 is .
A) $3,000
B) $4,000
C) $0
D) $6,000
15) Given a financial manager's preference for faster receipt of cash flows, .
A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a noncash expense
D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost
16) In general, .
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life
17) The depreciable value of an asset, under MACRS, is .
A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value
MACRS RATE
Recovery year 3 years 5 years 7 years 10 years
1 33% 20% 14% 10%
2 45 32 25 18
3 15 19 18 14
4 7 12 12 12
5 12 9 9
6 5 9 8
7 9 7
8 4 6
9 6
10 6
11 4
18) Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?
A) $15,000
B) $12,750
C) $11,250
D) $22,000
4.1 Discuss the firm's statement of cash flows, operating cash flow, and free cash flow.
1) In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.
2) Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT minus taxes plus depreciation.
3) A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.
4) The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.
5) The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.
6) A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.
7) A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.
8) Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges.
9) In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.
10) Depreciation is considered to be an outflow of cash.
11) The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.
12) To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.
13) It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.
14) Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.
15) Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.
16) Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.
17) A firm's operating cash flow (OCF) is defined as .
A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation
18) Which of the following is an example of noncash charges?
A) depreciation
B) accruals
C) interest expense
D) dividends paid
19) Which of the following is a source of cash flows?
A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock
20) is a noncash charge.
A) Labor expense
B) Depreciation
C) Salaries
D) Rent
21) In the statement of cash flows, retained earnings are handled through the adjustment of .
A) "Revenue" and "Cost" accounts
B) "Current Assets" and "Current Liabilities" accounts
C) "Depreciation" and "Purchases" accounts
D) "Net Profits After Taxes" and "Dividends Paid" accounts
22) The cash flows from operating activities section of the statement of cash flows includes .
A) principal received
B) cost of raw materials
C) dividends paid
D) stock repurchases
23) The cash flows from operating activities section of the statement of cash flows includes . A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid
24) The cash flows from financing activities section of the statement of cash flows includes .
A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid
25) The three categories of a firm's statement of cash flows are .
A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities
26) Which of the following is a cash inflow?
A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities
27) Which of the following is a cash outflow?
A) an increase in accounts payable
B) a decrease in notes receivable
C) an increase in accounts receivable
D) an increase in accrued liabilities
28) Which of the following line items of the statement of cash flows must be obtained from the income statement?
A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks
29) Cash flows directly related to production and sale of a firm's products and services are called .
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities
30) Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from .
A) operating activities
B) investment activities
C) financing activities
D) equity activities
31) Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from .
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities
Table 4.1
True Sandpaper Co.
Balance Sheets
For the Years Ended 2014 and 2015
32) The largest single source of funds for the firm in 2015 is .
A) an increase in net profits after taxes
B) an increase in notes payable
C) an increase in long-term debt
D) an increase in inventory
33) Common stock dividends paid in 2015 amounted to .
A) $100
B) $50
C) $600
D) $150
34) The firm may have increased long-term debts to finance .
A) an increase in net fixed assets
B) an increase in current assets
C) accounts receivable payments
D) an increase in dividends
E)
35) The firm fixed assets worth .
A) purchased; $0
B) purchased; $200
C) sold; $0
D) sold; $200
36) The firm's cash flow from operating activities is .
A) $50
B) $350
C) $150
D) $200
37) The depreciation expense for 2015 is .
A) $0
B) $200
C) $50
D) $1,000
38) A corporation sold a fixed asset for $100,000. This is .
A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds
39) A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as
.
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively
40) Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
41) Which of the following represents a cash flow from operating activities?
A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock
42) For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a .
A) net decrease of $3,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net increase of $3,000 in cash and marketable securities
D) net increase of $5,000 in cash and marketable securities
43) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The statement of cash flows would show a .
A) net increase of $5,000 in cash and marketable securities
B) net decrease of $5,000 in cash and marketable securities
C) net decrease of $15,000 in cash and marketable securities
D) net increase of $25,000 in cash and marketable securities
44) For the year ended December 31, 2014, a corporation had cash flow from operating activities of $12,000, cash flow from investment activities of - $10,000, and cash flow from financing activities of $4,000. The statement of cash flows would show a .
A) net decrease of $18,000 in cash and marketable securities
B) net decrease of $6,000 in cash and marketable securities
C) net increase of $6,000 in cash and marketable securities
D) net increase of $2,000 in cash and marketable securities
45) A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is .
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage
46) Calculate net operating profit after taxes (NOPAT) if a firm has sales of $1,000,000, operating profit (EBIT) of $100,000, interest expense of $50,000, and a tax rate of 30%.
A) $35,000
B) $700,000
C) $70,000
D) $45,000
47) Calculate a firm's free cash flow if it has net operating profit after taxes of $60,000, depreciation expense of
$10,000, net fixed asset investment requirement of $40,000, a net current asset requirement of $30,000 and a tax rate of 30%.
A) $0
B) $30,000
C) -$30,000
D) $60,000
48) NICO Corporation had net fixed assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, the firm had a depreciation expense of $200,000 during 2015 and $180,000 during 2014. Using this information, NICO's net fixed asset investment for 2015 was .
A) $20,000
B) $0
C) $380,000
D) $400,000
49) NICO Corporation had net current assets of $2,000,000 at the end of 2015 and $1,800,000 at the end of 2014. In addition, NICO had net spontaneous current liabilities of $1,000,000 in 2015 and $1,500,000 in 2014. Using this information, NICO's net current asset investment for 2014 was .
A) $700,000
B) -$300,000
C) $300,000
D) -$700,000
50) During 2015, NICO Corporation had EBIT of $100,000, a change in net fixed assets of $400,000, an increase in net current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $50,000, and a tax rate of 30%. Based on this information, NICO's free cash flow is
. A) -$630,000
B) -$50,000
C) $650,000
D) -$30,000
4.2 Understand the financial planning process, including long-term (strategic) financial plans and short-term (operating) financial plans.
1) Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.
2) A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.
3) Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.
4) Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both, tend to use shorter planning horizons.
5) The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.
6) The financial planning process begins with financial plans that in turn guide the formation of
plans and budgets.
A) short-term; long-term
B) short-term; short-term
C) long-term; long-term
D) D) long-term; short-term
7) Short-term financial plans and long-term financial plans generally cover periods ranging from
years and years, respectively.
A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen
8) The key aspects of a financial planning process are .
A) cash planning and investment planning
B) operations planning and investment planning
C) investment planning and profit planning
D) cash planning and profit planning
9) Pro forma financial statements are used for .
A) cash budgeting
B) preparing financial statements
C) profit planning
D) auditing
10) Which of the following would be the least likely to utilize a cash budget?
A) top management
B) middle management
C) public investors
D) lenders
11) The primary purpose in preparing pro forma financial statements is .
A) for cash planning
B) to ensure the ability to pay dividends
C) to reduce risk
D) for profit planning
12) consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
A) Short-term financial plans
B) Long-term financial plans
C) Pro forma statements
D) Cash budgeting
13) generally reflect(s) the anticipated financial impact of planned long-term actions.
A) A cash budget
B) Strategic financial plans
C) Operating financial plans
D) A pro forma income statement
tend to use shorter planning horizons.
A) profitability
B) financial certainty
C) operating uncertainty
D) financial planning
15) The key outputs of the short-term financial planning process are the .
A) cash budget, pro forma income statement, and pro forma balance sheet
B) sales forecast and capital assets journal
C) sales forecast and schedule of changes in working capital
D) income statement, balance sheet, and source and use statement
16) Key inputs to short-term financial planning are .
A) cash flow statements and income statement
B) pro forma financial statements
C) sales forecasts, and operating and financial data
D) leverage analysis and pro forma income statement
17) Once sales are forecasted, must be generated to estimate required raw materials.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement
4.3 Discuss the cash-planning process and the preparation, evaluation, and use of the cash budget.
1) The more seasonal and uncertain a firm's cash flows, the greater the number of intervals and the shorter time intervals.
2) An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.
3) The is a financial projection of a firm's short-term cash surpluses or shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal
4) The primary purpose in preparing a cash budget is .
A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm's short-term cash requirements
C) for risk analysis
D) to estimate sales
5) Cash budget is a statement of a firm's planned inflows and outflows of cash that is used to estimate its long- term cash requirement.
6) Cash planning involves the preparation of a firm's cash budget. Without adequate cash—regardless of the level of profits—any firm could fail.
7) Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).
8) A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.
9) Since depreciation and other noncash charges represent a scheduled write-off of an earlier cash outflow, they should not be included in a cash budget.
10) In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.
11) In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales.
12) A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.
13) The excess cash balance is the amount available for investment by a firm if the desired minimum cash balance is less than the period's ending cash.
14) The required total financing figures in a cash budget refer to the monthly changes in borrowing.
15) If the net cash flow is less than the minimum cash balance, financing is required.
16) If the ending cash is greater than the minimum cash balance, excess cash exists.
17) Using simulations, a firm can determine the amount of financing needed to protect it adequately against a cash shortage.
18) As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.
19) As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.
20) An external sales forecast is based on .
A) the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence
B) a buildup, or consensus of sales forecasts through a firm's own sales channels
C) the prediction of a firm's sales over a given period through the analysis of the sales trends of its competitors
D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
21) An internal forecast is based on .
A) a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities
B) the relationships between a firm's sales and certain economic indicators
C) the prediction of a firm's sales over a given period through surveys sent to financial analysts
D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
22) A firm's final sales forecast is usually a function of .
A) its net income
B) the salesperson's estimates of demand
C) internal and external factors in combination
D) its accounts receivable
23) The key input to the short-term financial planning process is .
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
24) A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is .
A) $220
B) $200
C) $180
D) $140
25) In preparing a cash budget, the seasonal and uncertain a firm's cash flows, the the number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer
26) The key input to any cash budget is . A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws
27) Of the following components of a cash budget, generally the easiest to estimate would be the .
A) cash sales
B) cash receipts
C) cash disbursements
D) month-to-month short-term borrowing
28) Cash disbursements include .
A) amortization expense
B) rent payments
C) depreciation expense
D) depletion
29) A projected excess cash balance for a month may be .
A) financed with short-term securities
B) financed with long-term securities
C) invested in marketable securities
D) invested in long-term securities
30) If a firm expects short-term cash surpluses, it can plan .
A) long-term investments
B) short-term borrowing
C) short-term investments
D) leverage decisions
31) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and
$4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in November is .
A) $1,000
B) $100
C) $700
D) $400
32) A firm has actual sales in November of $1,000 and projected sales in December and January of $3,000 and
$4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January is .
A) $700
B) $2,100
C) $1,900
D) $300
33) In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm had .
A) an excess cash balance of $25,000
B) an excess cash balance of $0
C) required financing of $10,000
D) required financing of $25,000
34) In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of
$40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had
.
A) an excess cash balance of $50,000
B) an excess cash balance of $75,000
C) required total financing of $15,000
D) required total financing of $5,000
35) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The ending cash balance for August totals .
A) $1,500
B) $5,500 C) $2,500 D) $3,500
36) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. At the end of August, the firm .
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500
37) Which of the following represents a way of coping with uncertainty in a cash budget?
A) careful estimation of cash budgets outputs
B) developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
C) always using the prior year's data for estimates of the future
D) using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances
38) One way a firm can reduce the amount of cash it needs in any month is to .
A) slow down the payment of receivables
B) delay the payment of wages
C) accrue taxes
D) speed up payment of accounts payable
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