1. EBITDA stands for earnings before Interest, taxes, depreciation, and amortization. True or false?
a. Trueb. False
2. Stockholders' equityconsists ofpaid-in capital, which is the amount of money the firm has raised by issuing newly created shares to stockholders, andretained earnings,which is the sum of all past earnings minus all past dividends. True or false?
a. Trueb. False
3. If a corporation had positive income and thus paid taxes in 2011 and 2010, but it incurred a loss in 2012, it could carry that loss back to those 2 prior years, reduce the taxable income in those years, and get a credit (in the form of a check) for any overpayments of past taxes. Moreover, if its 2012 loss was greater than the taxable income in those past 2 years, then it could carry the loss forward to reduce income in 2013 and beyond—up to 20 years. True or false?
a. Trueb. False
4. Last year Frm X had sales of $100,000, labor costs of $30,000, material costs of $30,000, and depreciation of $10,000. Assume that labor and material costs were paid in cash. The tax rate on its net income was 40%. What was the firm's net income?
a. $12,000b. $14,000
c. $16,000
d. $18,000
e. $20,000
5. All publicly-owned firms must use the same SEC-approved depreciation methods; hence, companies only prepare a GAAP set of financial statements to use for reporting to investors. True or false?
a. Trueb. False
6. In any given year, even a very profitable company with growing sales might see a reduction in its cash and equivalents as shown in the statement of cash flows. The most likely reason for this to happen is that the firm decides to reduce its inventories, receivables, and fixed assets.
a. Trueb. False
7. A firm's balance sheet is designed to show what has happened to it over some past period, say from January 1, 2012 to December 31, 2012. True or false?
a. Trueb. False
8. If all sales and all costs were for cash, then a firm's annual net income would equal its cash flow. However, depreciation is reported as a cost, but since it is not a cash cost, it must be added back to net income to find cash flow. True or false?
a. Trueb. False
9. Since firms' verbal statements might be false and misleading, the SEC permits firms to include in their annual report only numerical data that analysts can use to help forecast the firm's future earnings. True or false?
a. Trueb. False
10. If a firm began the year showing $10 million as retained earnings on its balance sheet, had $2 million of net income for the year, and paid $3 million in dividends, what would be the amount of its retained earnings at the end of the year?
a. $6,000,000b. $7,000,000
c. $8,000,000
d. $9,000,000
e. $10,000,000
11. Depreciationis the decline in the value of fixed assets during a given period.Amortizationis similar to depreciation, but it reflects the decline in the value of intangible assets such as goodwill, patents, and copyrights. True or false?
a. Trueb. False
12. Last year Firm X had sales of $100,000, labor costs of $30,000, material costs of $30,000, and depreciation of $10,000. Assume that labor and material costs were paid in cash. The tax rate on its net income was 40%. Assume that the firm made no capital expenditures and had no changes in net operating working capital during the year. What was Firm X's free cash flow?
a. $20,000b. $22,000
c. $24,000
d. $26,000
e. $28,000
13. After the recent corporate scandals, Congress and the SEC tightened reporting rules and began to impose stiff penalties on corporations and their officers who put out misleading information. Consequently, we can be positive that the information firms publish in their annual reports and release to the press is accurate and truthful, and that all numbers were calculated in a consistent manner by different firms. True or false?
a. Trueb. False
14. Which of the following doesNOTincrease cash and cash equivalents during the year?
a. An increase in accounts payableb. A decrease in accounts receivable
c. Repayment of long-term bonds
d. An increase in notes payable
e. A decrease in inventories
15. Which of the following doesNOTincrease cash and cash equivalents during the year?
a. An increase in accounts payableb. A decrease in accounts receivable
c. Repayment of long-term bonds
d. An increase in notes payable
e. A decrease in inventories
16. Free cash flow (FCF) is the cash flow from operations, after investments necessary to maintain future cash flows, that is available for payment to investors, and it is found using the following equation. True or false?
FCF = EBIT(1 − T) + Deprn and Amort − Req'd Capital expenditures & increase in NOWC
a. Trueb. False
17. A firm has $10 million of EBIT, depreciation and amortization charges of $2 million, and a tax rate of 40%. To maintain its current operations, it must invest $4 million in fixed assets and increase its operating working capital by $3 million. What is its free cash flow?
a. $500,000b. $1,000,000
c. $2,000,000
d. $2,500,000
e. $3,000,000
18. Some firms are classified as S Corporations and some as C corporations. From a tax standpoint, C Corporation status is generally better.
a. Trueb. False