Test Bank for Financial Management Theory Practice 14th Edition by Eugene F Brigham Michael C Ehrhardt Sample PDF

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Test Bank for Financial Management: Theory & Practice 14th Edition Brigham Ehrhardt Complete Download: https://testbankarea.com/download/test-bank-financial-management-

theory-practice-14th-edition-brigham-ehrhardt/ Solutions manual for Fundamentals of Financial Management 14th Edition Brigham Complete Download: https://testbankarea.com/download/solutions-manual-fundamentals-

financial-management-14th-edition-brigham-houston/ CHAPTER 03—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

This chapter has a lot of definitions. They are important, but we don't like to make students memorize too many of them early in the course. We let our students use a formula sheet that includes the key definitions. Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in multiple-choice questions. Multiple Choice: True/False 1. The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity. a. True b. False True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-1 Financial Statements and Reports REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.01 - Financial Statements and Reports NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Annual report TOPICS: Bloom’s: Knowledge KEYWORDS: 2. 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 True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-1 Financial Statements and Reports REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.01 - Financial Statements and Reports NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Annual report TOPICS: Bloom’s: Knowledge KEYWORDS: Cengage Learning Testing, Powered by Cognero

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3. 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 False ANSWER: POINTS: 1 EASY DIFFICULTY: 3-1 Financial Statements and Reports REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.01 - Financial Statements and Reports NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: TOPICS: Financial statements Bloom’s: Knowledge KEYWORDS: 4. On the balance sheet, total assets must always equal the sum of total liabilities and equity. a. True b. False True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-2 The Balance Sheet REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.02 - The Balance Sheet NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Balance sheet TOPICS: Bloom’s: Knowledge KEYWORDS: 5. 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 True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-2 The Balance Sheet REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.02 - The Balance Sheet NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Balance sheet TOPICS: Bloom’s: Knowledge KEYWORDS: 6. The amount shown on the December 31, 2015, balance sheet as "retained earnings" is equal to the firm's net income for 2015 minus any dividends it paid. a. True Cengage Learning Testing, Powered by Cognero

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b. False ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS:

False 1 EASY 3-2 The Balance Sheet FOFM.BRIG.16.03.02 - The Balance Sheet United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Balance sheet Bloom’s: Knowledge

7. The income statement shows the difference between a firm's income and its costs--i.e., its profits--during 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 True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-3 The Income Statement REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.03 - The Income Statement NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Income statement TOPICS: Bloom's: Comprehension KEYWORDS: 8. If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot. a. True b. False True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-3 The Income Statement REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.03 - The Income Statement NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Income statement TOPICS: Bloom’s: Knowledge KEYWORDS: 9. EBIT stands for earnings before interest and taxes, and it is often called "operating income." a. True b. False Cengage Learning Testing, Powered by Cognero

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ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS:

True 1 EASY 3-3 The Income Statement FOFM.BRIG.16.03.03 - The Income Statement United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows Income statement Bloom’s: Knowledge

10. EBITDA stands for earnings before interest, taxes, debt, and assets. a. True b. False False ANSWER: 1 POINTS: EASY DIFFICULTY: 3-3 The Income Statement REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.03 - The Income Statement NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Income statement TOPICS: Bloom’s: Knowledge KEYWORDS: 11. 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 Inventory Accounts receivable Total CA Net fixed assets

$

50,000 200,000 250,000 $ 500,000 $ 900,000

Total assets

$1,400,000

Accounts payable Accruals Total CL Long-term debt Common stock Retained earnings Total L & E

$ 100,000 100,000 $ 200,000 200,000 200,000 800,000 $1,400,000

a. True b. False ANSWER: RATIONALE:

False Note that the firm has only $50,000 of cash. It would have to either sell assets or borrow $150,000 to pay cash for the new asset. That might not be possible. POINTS: 1 EASY DIFFICULTY: 3-5 Statement of Stockholders’ Equity REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.05 - Statement of Stockholders' Equity NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Retained earnings TOPICS: Cengage Learning Testing, Powered by Cognero

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KEYWORDS:

Bloom's: Comprehension

12. 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 up 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, and will result in a substantial amount of retained earnings shown on the balance sheet. a. True b. False True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-5 Statement of Stockholders’ Equity REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.05 - Statement of Stockholders' Equity NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Stockholders' equity statement TOPICS: Bloom's: Comprehension KEYWORDS: 13. 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 True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-7 Free Cash Flow REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.07 - Free Cash Flow NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Free cash flow TOPICS: Bloom’s: Knowledge KEYWORDS: 14. 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 True ANSWER: 1 POINTS: EASY DIFFICULTY: 3-7 Free Cash Flow REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.07 - Free Cash Flow NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Free cash flow TOPICS: KEYWORDS: Bloom’s: Knowledge Cengage Learning Testing, Powered by Cognero

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15. 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 False ANSWER: There is no reason to think that net income would be equal to FCF. For example, a company RATIONALE: that is not growing might report zero net income yet have high FCF because of depreciation. 1 POINTS: EASY DIFFICULTY: 3-7 Free Cash Flow REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.07 - Free Cash Flow NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function TOPICS: Free cash flow Bloom's: Comprehension KEYWORDS: 16. The fact that 70% of the 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 False ANSWER: 1 POINTS: EASY DIFFICULTY: 3-9 Income Taxes REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.09 - Income taxes NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Income taxes TOPICS: Bloom’s: Knowledge KEYWORDS: 17. Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes. a. True b. False False ANSWER: 1 POINTS: EASY DIFFICULTY: 3-9 Income Taxes REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.09 - Income taxes NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Income taxes TOPICS: Bloom’s: Knowledge KEYWORDS: 18. 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. Cengage Learning Testing, Powered by Cognero

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a. True b. False ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS:

False 1 EASY Comprehensive FOFM.BRIG.16.03.00 - Comprehensive United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Financial statements Bloom’s: Knowledge

19. 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 False ANSWER: One firm might choose to use straight-line depreciation, the other an accelerated method, and RATIONALE: this would lead to differences in reported depreciation and therefore reported net fixed assets. 1 POINTS: MODERATE DIFFICULTY: 3-2 The Balance Sheet REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.02 - The Balance Sheet NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Retained earnings TOPICS: Bloom's: Comprehension KEYWORDS: 20. Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no "excess" cash. a. True b. False True ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-2 The Balance Sheet REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.02 - The Balance Sheet NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Net operating working capital TOPICS: Bloom’s: Knowledge KEYWORDS: 21. The next-to-last line on the income statement shows the firm's earnings, while the last line shows the dividends the Cengage Learning Testing, Powered by Cognero

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company paid. Therefore, the dividends are frequently called "the bottom line." a. True b. False False ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-3 The Income Statement REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.03 - The Income Statement NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function TOPICS: Income statement Bloom’s: Knowledge KEYWORDS: 22. 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 True ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-4 Statement of Cash Flows REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.04 - Statement of Cash Flows NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: Statement of cash flows TOPICS: Bloom’s: Knowledge KEYWORDS: 23. An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has 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 True ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-4 Statement of Cash Flows REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.04 - Statement of Cash Flows NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Statement of cash flows TOPICS: Bloom's: Comprehension KEYWORDS: 24. An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected. Cengage Learning Testing, Powered by Cognero

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a. True b. False ANSWER: POINTS: DIFFICULTY: REFERENCES: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: TOPICS: KEYWORDS:

False 1 MODERATE 3-4 Statement of Cash Flows FOFM.BRIG.16.03.04 - Statement of Cash Flows United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Statement of cash flows Bloom's: Comprehension

25. 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 False ANSWER: Rapidly growing firms often require additions to inventory and receivables that are larger RATIONALE: than net income, with the deficit being made up by borrowings and/or the sale of new stock. 1 POINTS: MODERATE DIFFICULTY: 3-4 Statement of Cash Flows REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.04 - Statement of Cash Flows NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Statement of cash flows TOPICS: Bloom's: Comprehension KEYWORDS: 26. To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue in the net income calculation. a. True b. False True ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-4 Statement of Cash Flows REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.04 - Statement of Cash Flows NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.03 - Analytic skills United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.06 - Finance function Statement of cash flows TOPICS: Bloom’s: Knowledge KEYWORDS: Cengage Learning Testing, Powered by Cognero

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27. 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 True ANSWER: 1 POINTS: MODERATE DIFFICULTY: 3-4 Statement of Cash Flows REFERENCES: LEARNING OBJECTIVES: FOFM.BRIG.16.03.04 - Statement of Cash Flows NATIONAL STANDARDS: United States - BUSPROG.FOFM.BRIG.16.06 - Reflective thinking STATE STANDARDS: United States - OH - DISC.FOFM.BRIG.16.05 - Financial analysis and cash flows Cash flow and net income TOPICS: Bloom’s: Knowledge KEYWORDS: 28. Its retained earnings is...