Exam 3: Financial Statements

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 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 information--audited financial statements.

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B

A) The more depreciation a firm reports, the higher its tax bill, other things held constant.
B) People sometimes talk about the firm's cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."
C) Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's 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 firm's reported profits.

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A) -$5,415,000
B) -$5,700,000
C) -$6,000,000
D) -$6,300,000
E) -$6,615,000

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A) 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.
B) After-tax operating income is calculated as EBIT(1 - T) + Depreciation.
C) Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition.
D) 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.
E) Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.

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A) $1,670
B) $1,758
C) $1,850
D) $1,943
E) $2,040

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True

A) The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.
B) The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, the firm's value is based on its future cash flows. After all, future cash flows tells us how much the firm can distribute to its investors.
C) The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide.
D) The standard statements focus on cash flows, but managers should be less concerned with cash flows than with accounting income as defined by GAAP.
E) The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

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A) $1.93
B) $2.03
C) $2.14
D) $2.25
E) $2.36

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A) The firm's reported net fixed assets would increase.
B) The firm's EBIT would increase.
C) The firm's reported 2012 earnings per share would increase.
D) The firm's cash position in 2012 and 2013 would increase.
E) The provision will increase the company's tax payments.

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A) $17.83
B) $18.72
C) $19.66
D) $20.64
E) $21.67

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A

A) In the statement of cash flows, a decrease in accounts receivable is subtracted from net income in the operating activities section.
B) Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.
C) In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section.
D) In the statement of cash flows, depreciation is subtracted from net income in the operating activities section.
E) In the statement of cash flows, a decrease in inventories is subtracted from net income in the operating activities section.

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