Projecting Cash Flow and Earnings
Multiple Choice Questions
1. You are interested in reviewing the information corporations file with the SEC. Which one of the following is the archive of these filings?
A. SAMSON
B. REG FD
C. EDGAR
D. Nonpublic information files
E. ROA filings
2. How frequently do corporations file 10K reports with the SEC?
A. monthly
B. quarterly
C. semi-annually
D. annually
E. only when the firm engages in a merger or an acquisition
3. Better Products just filed its quarterly report with the SEC. This report is referred to as which one of the following?
A. 10F
B. 10K
C. 10Q
D. EDGAR 10
E. 10FD
4. Regulation FD requires companies to do which one of the following when disclosing material non-public information?
A. advise the SEC 7 working days prior to such disclosure
B. disclose the information without preference to any party or parties
C. only disclose the information to professional analysts
D. only disclose the information after a 7-day advance notice of an announcement
E. disclose the information only after a 24-hour delay
5. Material nonpublic information is defined as any information that could reasonably be expected to do which one of the following?
A. affect the price of the firm's securities
B. cause great embarrassment to the firm
C. cause one or more of the senior executives of the firm to resign
D. cause the SEC to halt the trading of the firm's securities should that information become public
E. affect the manner in which the firm presents its financial information
6. Which one of the following provides information on a firm's assets and liabilities as of a particular date?
A. cash flow statement
B. pro-forma income statement
C. income statement
D. tax return
E. balance sheet
7. Which one of the following is an accounting statement that provides information on a firm's revenues and expenses?
A. balance sheet
B. cash budget
C. pro-forma balance sheet
D. income statement
E. cash flow statement
8. Which one of the following is an analysis of a firm's sources and uses of cash over a period of time?
A. income statement
B. pro-forma income statement
C. cash flow statement
D. tax return
E. balance sheet
9. Which one of the following is defined as anything a firm owns that has value?
A. equity
B. asset
C. liability
D. cash inflow
E. cash outflow
10. Which one of the following represents the amounts owed by a firm to other parties?
A. assets
B. cash inflows
C. equities
D. liabilities
E. expenses
11. Which one of the following is an ownership interest in a firm?
A. asset
B. expense
C. net income
D. liability
E. equity
12. Which one of the following is used to pay dividends or kept as retained earnings by a firm?
A. equity
B. net cash flow
C. revenue
D. net income
E. expense
13. Which one of the following is income realized in cash form?
A. net income
B. revenue
C. cash flow
D. retained earnings
E. dividends
14. Income and expense items NOT realized in cash form are called which one of the following?
A. deductible expenses
B. noncash items
C. intangible assets
D. operating income
E. financing activities
15. Which one of the following is the definition of operating cash flow?
A. revenue minus expenses
B. cash realized from the sale of assets
C. cash flow originating from the issuance of securities
D. cash generated by a firm's normal business activities
E. pre-tax income
16. Which one of the following is the definition of investment cash flow?
A. revenue minus expenses
B. cash flow from the purchases and sales of fixed assets and investments
C. cash flow originating from the issuance of securities
D. cash generated by a firm's normal business activities
E. pre-tax income
17. Which one of the following is the cash flow resulting from the payment of dividends and the issuance or repurchase of equity securities?
A. balance sheet cash flow
B. operating cash flow
C. financing cash flow
D. business cash flow
E. investment cash flow
18. Which one of the following is equal to net income expressed as a percentage of total assets?
A. return on equity
B. return on the balance sheet
C. operating yield
D. net yield
E. return on assets
19. Return on equity is equal to which one of the following?
A. dividend yield divided by total equity
B. retained earnings divided by total equity
C. revenue divided by total equity
D. net income divided by total equity
E. operating cash flow divided by total equity
20. Pro forma financial statements are statements based on which one of the following?
A. projected future income, cash flows, and other non-cash items
B. historical revenue and expenses
C. historical asset and liability values
D. current period cash flows
E. current period revenues and expenses
21. Which one of the following is a financial planning method wherein some account values vary in relation to expected sales?
A. common size approach
B. linear method
C. percentage of net income method
D. adjusted sales method
E. percentage of sales approach
22. Which one of the following ratios tells you the amount of assets a firm needs to generate $1 in sales?
A. capital intensity ratio
B. return on assets
C. asset turnover rate
D. profit margin
E. earnings ratio
23. Which of the following reports are always included in a 10K filing with the SEC?
I. statement of cash flows
II. balance sheet
III. pro-forma statement
IV. income statement
A. I only
B. IV only
C. II, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
24. Which one of the following means of communication do most firms use for announcements in order to comply with Regulation FD?
A. TV spots
B. e-mail alerts
C. public newspapers
D. radio
E. analyst networks
25. Which of the following are current assets?
I. inventory
II. goodwill
III. fixed assets
IV. cash
A. III only
B. IV only
C. II and III only
D. I and IV only
E. I, II, and IV only
26. Which one of the following is an intangible fixed asset?
A. accounts receivable
B. patent
C. inventory
D. equipment
E. building
27. Which one of the following is a tangible fixed asset?
A. cash
B. equipment
C. accounts receivable
D. right
E. inventory
28. Stephen's Auto recently purchased Auto Express for $9.8 million. Auto Express had a market value of $9.5 million at the time of acquisition. The additional $0.3 million that Stephen's Auto paid for Auto Express will be treated on Stephen's Auto's balance sheet as which type of account?
A. patent
B. depreciation
C. licenses
D. goodwill
E. acquisition expense
29. Winter's Clothing has a loan payable to a bank which is due 18 months from now. How is this loan classified on the firm's financial statements?
A. fixed asset
B. current liability
C. long-term debt
D. equity
E. expense
30. Sugar Tree Cookies has current net income of $268,000 of which $110,000 was paid out in dividends. The remaining $158,000 will be shown in which account on the firm's financial statements for next year?
A. long-term debt
B. common stock
C. net income
D. retained earnings
E. paid in surplus
31. Which of the following are classified as equity accounts on a balance sheet?
I. goodwill
II. paid in capital
III. net income
IV. retained earnings
A. IV only
B. I and III only
C. II and IV only
D. I, II, and IV only
E. II, III, and IV only
32. Sales minus cost of goods sold are equal to which one of the following?
A. net sales
B. operating income
C. gross profit
D. pretax income
E. net income
33. The costs of materials used in the production of a product are recorded in which one of the following accounts?
A. net sales
B. fixed costs
C. operating income
D. depreciation
E. cost of goods sold
34. Which one of the following is NOT included in operating income?
A. sales
B. depreciation
C. interest expense
D. cost of goods sold
E. other operating expenses
35. Net income is equal to which one of the following?
A. operating income plus interest expense minus taxes
B. gross profit minus depreciation and interest expense
C. pretax income plus income taxes
D. dividends plus the change in retained earnings
E. pretax income minus taxes and dividends
36. Which one of the following statements is correct?
A. Pretax income is equal to gross profit minus interest expense.
B. Gross profit is equal to sales minus costs of goods sold and depreciation.
C. Operating expenses are indirect costs.
D. Costs that vary directly with production are classified as operating expenses.
E. The change in retained earnings is equal to net income plus dividends paid.
37. Which one of the following is the primary difference between operating cash flow and net income?
A. interest expense
B. indirect costs
C. taxes
D. fixed costs
E. depreciation
38. Which one of the following will increase the investment cash flow?
A. purchase of an investment
B. issuing new shares of stock
C. repaying a bond issue
D. sale of a building
E. payment of interest on a bond issue
39. Which one of the following is NOT a financing cash flow according to standard accounting practice?
A. new issue of stock
B. repurchase of stock
C. new issue of debt
D. interest payments
E. dividend payments
40. The summation of the operating, investment, and financing cash flows for a stated period of time must equal which one of the following for the same time period?
A. net income
B. total assets
C. ending cash balance
D. change in the cash balance
E. taxable income
41. A decrease in which one of the following will increase the gross margin?
A. taxes
B. sales
C. depreciation
D. variable costs
E. fixed costs
42. Which one of the following is generally used as the basis for computing the cash flow per share?
A. operating cash flow
B. investment cash flow
C. financing cash flow
D. net cash increase
E. retained cash earnings
43. A decrease in which one of the following will increase the return on assets?
A. long-term debt
B. sales
C. inventory
D. retained earnings
E. dividends paid
44. Which one of the following will increase the return on equity?
A. increase in the corporate tax rate
B. decrease in fixed costs
C. issuance of debt to purchase equipment
D. increase in variable costs per unit
E. decrease in net sales
45. Which of the following affect the earnings per share?
I. decrease in interest expense
II. share repurchase
III. increase in tax rates
IV. preferred stock dividend
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
46. Which one of the following statements related to book value per share (BVPS) is correct?
A. BVPS is equal to total assets divided by the number of shares outstanding.
B. An increase in the market value of a firm's fixed assets will increase the firm's BVPS.
C. The payment of a dividend increases BVPS.
D. BVPS is equal to the market price of a share of stock.
E. The issuance of new shares at market value may increase the BVPS.
47. Which one of the following accounts is least likely to vary directly with the level of sales?
A. accounts payable
B. inventory
C. cost of goods sold
D. interest expense
E. accounts receivable
48. Which one of the following is most apt to be constant given the percentage of sales approach to creating pro forma statements?
A. book value per share
B. gross margin
C. earnings per share
D. return on equity
E. cash flow per share
49. A firm maintains a constant dividend payout ratio of .40. What must the plowback ratio be?
A. 1 + .40
B. 1 - .40
C. 1 × .40
D. 1/.40
E. .40
50. Which one of the following is most apt to vary directly with sales?
A. current assets
B. long-term debt
C. shareholders' equity
D. paid-in capital
E. retained earnings
51. Which two of the following are generally used to fund the external financing need?
I. sale of fixed assets
II. increase in accounts payable
III. issuance of long-term debt
IV. sale of equity securities
A. I and II
B. I and III
C. II and III
D. II and IV
E. III and IV
52. The management of the Uptown Bikes recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?
A. increased the profit margin
B. lowered income taxes
C. maximized future dividends
D. maximized future retained earnings
E. limited future growth
53. A firm has $2,500 of cash, equipment worth $45,000, inventory of $16,300, $14,000 worth of patents, and $12,200 of accounts receivable. What is the value of the total current assets?
A. $1,500
B. $14,700
C. $16,700
D. $31,000
E. $72,900
54. A firm has $4,200 of cash, equipment worth $46,300, inventory of $38,400, a building worth $130,500, and $21,500 of accounts receivable. What is the value of the total fixed assets?
A. $176,800
B. $203,500
C. $196,400
D. $223,100
E. $226,900
55. Young Industries has a 3-year bank loan of $85,000, a 6-month note payable of $6,000, a $67,300 mortgage, and accounts payable of $22,500. What is the amount of the total current liabilities? (Ignore the current portion of any long-term debt.)
A. $5,000
B. $16,200
C. $28,500
D. $64,200
E. $117,000
56. ABC Construction, Inc. has buildings and equipment of $315,600, long-term debt of $154,700, accounts payable of $52,000, cash of $9,800, accounts receivable of $18,300, inventory of $62,000, and retained earnings of $147,000. What is the total equity of the firm?
A. $5,200
B. $97,000
C. $147,000
D. $199,000
E. $228,000
57. GH Enterprises has annual sales of $5.2 million, depreciation of $350,000, operating expenses of $390,000, and cost of goods sold of $3.1 million. What is the gross profit?
A. $460,000
B. $850,000
C. $2,100,000
D. $2,650,000
E. $3,710,000
58. Behrend Corporation has annual sales of $4.5 million, depreciation of $425,000, operating expenses of $679,000, cost of goods sold of $2.3 million, and interest expense of $230,000. What is the operating income?
A. $1,096,000
B. $2,036,000
C. $3,525,000
D. $4,000,000
E. $4,811,000
59. Gold Jewelry, Inc. has annual sales of $4.5 million and a gross profit margin of 55 percent. The operating expenses are $540,750 and depreciation is $170,300. Interest expense is $95,000 and the tax rate is 35 percent. What is the net income?
A. $1,002,980
B. $1,084,818
C. $1,356,220
D. $1,589,200
E. $2,385,000
60. The Cruise Ship Co. has taxable income of $4,000,000. The company paid out $550,000 in interest expense. The tax rate is 35 percent and the dividend payout ratio is 30 percent. What is the amount that was paid out in dividends?
A. $420,000
B. $550,000
C. $682,500
D. $780,000
E. $980,000
61. Handy Man Services, Inc. has net income of $525,000. What is the addition to retained earnings if the dividend payout ratio is 40 percent?
A. $123,253
B. $157,250
C. $183,750
D. $221,813
E. $315,000
62. HNW Manufacturing, Inc. has 255,000 shares of stock outstanding. The firm paid out $255,000 in dividends, $195,000 in interest, and added $193,700 to retained earnings for the year. What is the amount of the earnings per share?
A. $0.70
B. $0.78
C. $1.47
D. $1.63
E. $1.76
63. O'Hara's Market has net income of $1.6 million and 525,000 shares of stock outstanding. What is the amount of the dividends per share if the plowback ratio is 60 percent?
A. $0.94
B. $1.07
C. $1.22
D. $1.67
E. $1.98
64. Glassmakers, Inc. purchased $137,600 of new equipment this year and also increased the inventory by $36,800. Thirty-three thousand dollars worth of old equipment was sold. What is the investment cash flow for the year?
A. -$49,300
B. -$98,000
C. -$104,600
D. -$125,500
E. -$133,300
65. For the year, Widgets Manufacturing, Inc. increased its current accounts by $52,000, decreased its current liabilities by $38,000, and decreased its fixed assets by $31,000. What is the investment cash flow for the year?
A. -$31,000
B. -$12,000
C. $19,000
D. $31,000
E. $48,000
66. Healthy Supplements, Inc. paid $7,300 in interest and $4,300 in dividends for the year. The firm also issued $15,000 worth of new equity securities. What is the amount of the financing cash flow?
A. $2,500
B. $5,200
C. $6,800
D. $7,700
E. $10,700
67. Whole Wheat Farms, Inc. has a net income of $20,000 and a dividend payout ratio of 30 percent. The firm issued $12,000 worth of common stock during the period. The firm has no long-term debt. What is the financing cash flow for the period?
A. $2,500
B. $3,000
C. $6,000
D. $9,000
E. $25,000
68. Marley Enterprises has financing cash flow of -$41,400 and investment cash flow of $28,600 for the year. The beginning cash balance was $65,300 and the ending cash balance was $44,800. What was the operating cash flow for the period?
A. -$15,500
B. -$9,600
C. -$7,700
D. $8,900
E. $15,500
69. A firm has net sales of $35,000, operating expenses of $6,100, depreciation of $1,700, and cost of goods sold of $18,300. What is the gross margin?
A. 31.1 percent
B. 35.4 percent
C. 47.7 percent
D. 52.9 percent
E. 59.2 percent
70. A firm has net sales of $65,000, operating expenses of $21,300, depreciation of $5,000, cost of goods sold of $36,500, and interest expense of $4,500. What is the operating margin?
A. -2.8 percent
B. 2.6 percent
C. 3.4 percent
D. 9.2 percent
E. 10.3 percent
71. Smith's Corner Market had annual sales of $425,300 and total assets of $366,000. What is the return on assets if the profit margin is 11 percent?
A. 8.2 percent
B. 9.8 percent
C. 10.6 percent
D. 11.0 percent
E. 12.8 percent
72. Wholesale Grocer's has total assets of $580,000 and total liabilities of $375,000. Net sales for the year are $523,000 and the profit margin is 10.5 percent. What is the return on equity?
A. 10.6 percent
B. 26.8 percent
C. 31.2 percent
D. 37.4 percent
E. 44.6 percent
73. A firm has a price-cash flow ratio of 12.5 and a price-book value ratio of 7.6. If the cash flow per share is $4.67, what is the book value per share?
A. $2.84
B. $3.55
C. $4.44
D. $6.45
E. $7.6
74. A company has a price-earnings ratio of 23 and a price-cash flow ratio of 11.5. If the earnings per share are $1.75, what is the cash flow per share?
A. $2.16
B. $2.51
C. $3.06
D. $3.14
E. $3.50
75. Green Recycling, Inc. has 150,000 shares of stock outstanding. The firm has total assets of $568,000 and total liabilities of $415,000. The firm's stock is selling for $31 a share. What is the price-book ratio?
A. 22.3
B. 26.5
C. 27.5
D. 30.4
E. 37.8
76. A firm has net income of $22,500 and a book value per share of $3.10. The firm has 30,000 shares of stock outstanding and a price-earnings ratio of 15.9. What is the price-book ratio?
A. 1.7
B. 2.4
C. 2.7
D. 3.8
E. 4.3
77. Children's Books, Inc. has net income of $48,000 and a plowback ratio of 85 percent. There are 25,000 shares of stock outstanding at a market price of $18.64 a share. What is the price-earnings ratio?
A. 6.9
B. 7.1
C. 9.7
D. 11.1
E. 11.6
78. Bay Marina, Inc. has net income of $53,700 and has 30,000 shares of stock outstanding. Similar firms have a price-earnings ratio of 20. Given this, what should the market price of Bay Marina, Inc. stock be per share?
A. $28.91
B. $29.29
C. $30.40
D. $33.91
E. $35.80
79. A firm has earnings per share of $3.50 and cash flow per share of $3.84. The price-earnings ratio is 24.1. What is the price-cash flow ratio?
A. 19.8
B. 20.1
C. 22.0
D. 26.0
E. 27.1
80. A company has net income of $65,430, a price-earnings ratio of 22.6, and 25,800 shares of stock outstanding. If the price-cash flow ratio is 20.4, what is the cash flow per share?
A. $2.05
B. $2.34
C. $2.50
D. $2.81
E. $3.14
81. A firm has total equity of $61,600 and total liabilities of $18,900. Current assets are $44,700 and current liabilities are $15,200. What is the value of the net fixed assets?
A. $8,300
B. $10,600
C. $29,500
D. $35,800
E. $42,700
82. A company has the following account balances. How much cash does the firm have assuming there are no other accounts?
A. $27,300
B. $27,900
C. $30,900
D. $47,300
E. $50,300
83. The Erie Bay Liner Company has sales of $2.6 million and operating expenses of $175,000. The firm uses the percentage of sales approach and estimates next year's sales at $2.8 million. What are the operating expenses expected to be next year?
A. $171,231
B. $175,123
C. $179,400
D. $182,549
E. $188,462
84. A firm has sales of $685,000 and cost of goods sold of $435,000. The firm expects sales to increase by 6 percent next year. What is the gross profit amount expected to be next year if the firm uses the percentage of sales approach when compiling pro forma statements?
A. $235,100
B. $265,000
C. $335,000
D. $355,100
E. $536,100
85. Your company has pretax income of $52,000 on sales of $506,000. Sales are expected to increase by 6 percent next year and the tax rate is 40 percent. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?
A. $28,938
B. $31,835
C. $33,072
D. $35,582
E. $44,520
86. A firm has net income of $25,000 on sales of $210,000. Sales are expected to increase by 8 percent next year and the dividend payout ratio is 35 percent. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?
A. $14,300
B. $15,400
C. $15,686
D. $17,550
E. $21,600
87. Last year, a firm had net income of $62,000 on sales of $595,000. The projected sales for next year are $654,500. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?
A. $59,500
B. $65,500
C. $68,200
D. $71,500
E. $71,900
88. Zonvier, Inc. has sales of $53,800, a profit margin of 10.5 percent, and a plowback ratio of 40 percent. The company has 15,000 shares of stock outstanding. The firm uses the percentage of sales method for pro forma statements and estimates next year's sales will increase by 15 percent.
What is the dividend per share expected to be next year?
A. $0.249
B. $0.250
C. $0.260
D. $0.268
E. $0.274
89. A firm has current sales of $32,000. Projected sales for next year are $35,520. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The expected increase in retained earnings is $2,200. What is the projected external financing need given the following current account values?
A. -$3,532
B. -$1,969
C. -$1,390
D. $231
E. $1,341
90. A firm has the following account balances for this year. Sales for the year are $500,000. Projected sales for next year are $545,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $5,000 next year. Retained earnings is expected to increase by $3,500 next year. What is the projected external financing need?
A. $10,520
B. $14,720
C. $18,520
D. $20,720
E. $25,620
91. A firm has the following account balances for this year. Sales for the year are $420,000. Projected sales for next year are $441,000. The percentage of sales approach is used for pro forma purposes. All balance sheet accounts, except long-term debt and common stock, change according to that approach. The firm plans to decrease the long-term debt balance by $23,500 next year. Retained earnings is expected to increase by $5,400 next year. What is the projected external financing need?
A. -$14,150
B. -$6,850
C. $32,850
D. $36,000
E. $56,350
Essay Questions
92. Explain the role the external financing need plays in the future growth outlook for a firm.
93. Why is the expected rate of sales growth so critical to pro forma statements?
94. What value does the Statement of Cash Flows add to the financial statements of a firm?