Q&A Hero

Q: Which of the following factors would explain how a company's cash balance could have increased even though the company had a negative cash flow last year? a. The company sold a new issue of bonds. b. The company made a large investment in a new plant and equipment. c. The company paid a large dividend. d. The company had high depreciation expenses. e. The company repurchased 20% of its common stock.

Q: Which of the following statements is CORRECT? a. The more depreciation a firm reports, the higher its tax bill, other things held constant. b. Because a firms cash flow is shown as the lowest entry on the income statement, people often call it "the bottom line. c. Depreciation reduces a firms cash balance, so an increase in depreciation would normally lead to a reduction in the firms cash flow. d. Operating income is derived from the firm's regular core business. Operating income is calculated as Revenues less Operating costs. Operating costs do not include interest or taxes. e. Depreciation is not a cash charge, so it does not have an effect on a firms reported profits.

Q: On its 12/31/19 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the previous year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. If the company lost money in 2019, it must have paid dividends. b. The company must have had zero net income in 2019. c. The company must have paid out half of its 2019 earnings as dividends. d. The company must have paid no dividends in 2019. e. Dividends could have been paid in 2019, but they would have had to equal the earnings for the year.

Q: Which of the following statements is CORRECT? a. Typically, a firms DPS should exceed its EPS. b. Typically, a firms net income should exceed its EBIT. c. If a firm is more profitable than average, we would normally expect to see its stock price exceed its book value per share. d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation. e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

Q: Below is the common equity section (in millions) of Timeless Technologys last two year-end balance sheets: 2019 2018 Common stock 2,000 1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 ​ The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? a. The companys net income in 2019 was higher than in 2018. b. The firm issued common stock in 2019. c. The market price of the firm's stock doubled in 2019. d. The firm had positive net income in both 2018 and 2019, but its net income in 2019 was lower than it was in 2018. e. The company has more equity than debt on its balance sheet.

Q: Below are the 2018 and 2019 year-end balance sheets for Tran Enterprises: Assets: 2019 2018 Cash $ 200,000 $ 170,000 Accounts receivable 864,000 700,000 Inventories 2,000,000 1,400,000 Total current assets $3,064,000 $2,270,000 Net fixed assets 6,000,000 5,600,000 Total assets $9,064,000 $7,870,000 Liabilities and equity: Accounts payable $1,400,000 $1,090,000 Notes payable to bank 1,600,000 1,800,000 Total current liabilities $3,000,000 $2,890,000 Long-term debt 2,400,000 2,400,000 Common stock 3,000,000 2,000,000 Retained earnings 664,000 580,000 Total common equity $3,664,000 $2,580,000 Total liabilities and equity $9,064,000 $7,870,000 The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2018. As of the end of 2019, none of the principal on this debt had been repaid. Assume that the companys sales in 2018 and 2019 were the same. Which of the following statements must be CORRECT? a. The firm increased its short-term bank debt in 2019. b. The firm issued long-term debt in 2019. c. The firm issued new common stock in 2019. d. The firm repurchased some common stock in 2019. e. The firm had negative net income in 2018.

Q: Which of the following statements is CORRECT? a. The focal point of the income statement is the cash account because that account cannot be manipulated by accounting tricks. b. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow generally accepted accounting principles (GAAP). c. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). d. If a firm follows generally accepted accounting principles (GAAP), then its reported net income will be identical to its reported cash flow. e. The income statement for a given year is designed to give us an idea of how much the firm earned during that year.

Q: Which of the following items cannot be found on a firms balance sheet under current liabilities? a. Accounts payable. b. Short-term notes payable to the bank. c. Accrued wages. d. Cost of goods sold. e. Accrued payroll taxes.

Q: Which of the following items is NOT normally considered a current asset? a. Accounts receivable. b. Inventory. c. Bonds. d. Cash. e. Short-term, highly-liquid, marketable securities.

Q: Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? a. The company repurchases common stock. b. The company pays a dividend. c. The company issues new common stock. d. The company gives customers more time to pay their bills. e. The company purchases a new piece of equipment.

Q: Which of the following statements is CORRECT? a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. b. The balance sheet for a given year tells us how much money the company earned during that year. c. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). d. If a company's statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet. e. The assets section of a typical companys balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest-lived assets listed last.

Q: Which of the following statements is CORRECT? a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends and the riskiness of those cash flows. c. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative informationaudited financial statements.

Q: Which of the following statements is CORRECT? a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. b. The balance sheet gives us a picture of the firms financial position at a point in time. c. The income statement gives us a picture of the firms financial position at a point in time. d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. e. The statement of cash flows tells us how much cash the firm will require during some future period, generally a month or a year.

Q: The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects specific changes in accounts over that period of time. a. True b. False

Q: The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions. a. True b. False

Q: Because the U.S. tax system is a progressive tax system, a taxpayer's marginal and average tax rates are the same. a. True b. False

Q: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. a. True b. False

Q: If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, companies would be encouraged to use more debt financing than they presently do, other things held constant. a. True b. False

Q: Free cash flow is the amount of cash that, if withdrawn, would harm the firm's ability to operate and to produce future cash flows. a. True b. False

Q: In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.​ a. True b. False

Q: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way, retained earnings are stockholders' reinvested earnings. a. True b. False

Q: ​Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings. a. True b. False

Q: Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income. a. True b. False

Q: To estimate the cash flow from operations, depreciation must be added back to net income because depreciation is a non-cash charge that has been deducted from revenue in the net income calculation. a. True b. False

Q: The first major section of a typical statement of cash flows is "Operating Activities," and the first entry in this section is "Net Income." Then, also in the first section, we show some items that represent increases or decreases to cash, and the last entry is called "Net Cash Provided by Operating Activities." This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go bankrupt. a. True b. False

Q: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected. a. True b. False

Q: An increase in accounts payable represents an increase in net cash provided by operating activities, an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities. a. True b. False

Q: The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year. a. True b. False

Q: The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the company paid. Therefore, the dividends are frequently called "the bottom line." a. True b. False

Q: Net operating working capital is equal to current assets less excess cash minus the difference between current liabilities and notes payable. a. True b. False

Q: ​Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors. a. True b. False

Q: The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time. a. True b. False

Q: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes. a. True b. False

Q: The fact that interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision. a. True b. False

Q: If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. a. True b. False

Q: The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance. a. True b. False

Q: Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. a. True b. False

Q: Typically, the statement of stockholders' equity starts with total stockholders' equity at the beginning of the year, adds net income, subtracts dividends paid, and ends with total stockholders' equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, resulting in a substantial amount of retained earnings shown on the balance sheet. a. True b. False

Q: Consider the following balance sheet for Games Inc. Because Games has $800,000 of retained earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000. Cash $50,000 Accounts payable $100,000 Inventory $200,000 Accruals $100,000 Accounts receivable $250,000 Total CL $200,000 Total CA $500,000 Long-term debt $200,000 Net fixed assets $900,000 Common stock $200,000 Retained earnings $800,000 Total assets $1,400,000 Total L & E $1,400,000 ​ a. True b. False

Q: EBITDA stands for "earnings before interest, taxes, debt, and assets." a. True b. False

Q: EBIT, often referred to as operating income, stands for "earnings before interest and taxes." a. True b. False

Q: The balance sheet represents a snapshot in time, whereas the income statement reports on operations over a period of time. a. True b. False

Q: The income statement shows the difference between a firm's income and its costsi.e., its profitsduring a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period. a. True b. False

Q: The amount shown on the December 31, 2019 balance sheet as "retained earnings" is equal to the firm's net income for 2019 minus any dividends it paid a. True b. False

Q: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books. a. True b. False

Q: On the balance sheet, total assets must always equal the sum of total liabilities and equity. a. True b. False

Q: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement. a. True b. False

Q: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends and the riskiness of those cash flows. a. True b. False

Q: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statement of stockholders' equity. a. True b. False

Q: Which of the following statements is NOT CORRECT? a. When a corporation's shares are owned by a few individuals, we say that the firm is "closely, or privately, held." b. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public, or an IPO," and the market for such stock is called the new issue or IPO market. e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.

Q: Which of the following statements is CORRECT? a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. b. Capital market transactions involve only preferred stock or common stock. c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding. d. Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks. e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.

Q: Which of the following statements is CORRECT? a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public. b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed. e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

Q: Which of the following statements is CORRECT? a. The New York Stock Exchange is an auction market, and it has a physical location. b. Home mortgage loans are traded in the money market. c. If an investor sells shares of stock through a broker, then it would be a primary market transaction. d. Capital markets deal only with common stocks and other equity securities. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

Q: Which of the following statements is CORRECT? a. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. d. Money markets are markets for long-term debt and common stocks. e. A liquid security is a security whose value is derived from the price of some other "underlying" asset.

Q: Which of the following statements is CORRECT? a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. Hedge funds have more in common with commercial banks than with any other type of financial institution. e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

Q: You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: a. A money market transaction. b. A primary market transaction. c. A secondary market transaction. d. A futures market transaction. e. An over-the-counter market transaction.

Q: ​Which of the following statements is CORRECT? a. ​If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. b. ​If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. c. ​The NYSE is an example of an over-the-counter market. d. ​Only institutions, and not individuals, can engage in derivative market transactions. e. ​As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Q: Money markets are markets for a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper.

Q: Which of the following is an example of a capital market instrument? a. Commercial paper. b. Preferred stock. c. U.S. Treasury bills. d. Banker's acceptances. e. Money market mutual funds.

Q: ​Which of the following is a primary market transaction? a. ​You sell 200 shares of IBM stock on the NYSE through your broker. b. ​You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. c. ​IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. d. ​One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. e. ​IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

Q: Which of the following statements is CORRECT? a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. c. Capital market instruments include both long-term debt and common stocks. d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

Q: You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction? a. This is an example of a direct transfer of capital. b. This is an example of a primary market transaction. c. This is an example of an exchange of physical assets. d. This is an example of a money market transaction. e. This is an example of a derivative market transaction.

Q: ​Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market." a. True b. False

Q: Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market." a. True b. False

Q: The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question. a. True b. False

Q: The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. a. True b. False

Q: If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index. a. True b. False

Q: A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors. a. True b. False

Q: When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held. a. True b. False

Q: In a "Dutch auction" for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price. a. True b. False

Q: The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock. a. True b. False

Q: ​If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction. a. True b. False

Q: The "over-the-counter" market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer. a. True b. False

Q: Trades on the NYSE are generally completed by having a brokerage firm acting as a "dealer" buy securities and adding them to its inventory or selling from its inventory. The NASDAQ, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange. a. True b. False

Q: Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions. a. True b. False

Q: Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage. a. True b. False

Q: A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock. a. True b. False

Q: Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions. a. True b. False

Q: Primary markets are large and important, while secondary markets are smaller and less important. a. True b. False

Q: The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world. a. True b. False