1. Two methods can be used to construct a statement of cash flows: the direct me
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Question
1. Two methods can be used to construct a statement of cash flows: the direct method & the indirect method. Under the indirect method, data from three financial statements are used. These statements include ____ (A) ____ & ____ (B) ____.
A = two balance sheets, one statement of cash flows or one balance sheet
B = two statement of cash flow, one income statement or two income statements
2. During the year, Intergalactic Broadcasting Co. issued 5,000 shares of preferred stock for $25 per share. This transaction is classified as an
A. Investing cash flow
B. Financing cash flow
C. Operating cash flow
3. Chicago Pork Producers Inc. sold its old computer system for 70,000. This transaction is classified as an
A. Investing cash flow
B. Financing cash flow
C. Operating cash flow
4. A firm engages in a variety of activities that generate & require cash payment. The following questions presents examples of these activities. Classify each transaction according to its serving as a source of cash to the firm (cash inflow) or a use of cash (cash outflow).
A. Tomorrow is the last day of a 2 week pay period. Tomorrow, the wages payable account’s current balance of 254K will reset to $0 as the wages are paid to the company’s workers. The company now owes its employees the most recent week’s salary. Is this a Source or Use?
B. During the year, Intergalactic Broadcasting Co. relocated its corporate HQ & purchased a new office building. Is this a Source or Use?
5. A company reports net sales of $2,500 million. Assume that there were no non-cash sales.
Operating costs (excluding depreciation & amortization) were 65% of its total revenues.
Depreciation & Amortization charges were 5% of total sales.
Interest charges were 15% of EBIT with a tax rate of 40%.
The company’s current cash flow is?
A. $382 million
B. $507 million
C. $253 million
D. $637 million
6. Company A uses long-term debt to finance its assets & Company B uses capital generated from shareholders to finance assets. Which company would be considered a financially leveraged firm, A or B?
7. Which of the following is true about the leveraging effect?
A. Using leverages reduces the potential of gains & losses
B. Using leverage can generate shareholder wealth, but if a company fails to make payments on its debt, credit default can reduce shareholder wealth
8. Niagular Corp. just reported a net income of $9,000,000 & its current stock price is $31.25 per share. Niagular Corp. is forecasting an increase of 25% for its net income next year, but it also expects it will have to issue 2,500,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,000,000)
A. If the forecast turns out to be correct & its price-to-earnings (P/E) ratio does not change, what do they expect their stock price to be one year from now?
1: $26.87
2: $31.25
3: $20.15
4: $33.59
B. One year later its stock is trading at $38.42 & the company reports its common equity value as $42,992,000. Its market-to-book (M/E) ratio is?
1: 1.16x
2: 7.16x
3: 17.16x
4: 10.74x
9. Which of the following statements is TRUE about market ratios?
A. Companies with high research & development expenses tend to have LOW P/E ratios
B. Companies with high research & development expenses tend to have HIGH P/E ratios
Explanation / Answer
Answer 1 ) Two Balance Sheets and one Income statement
Answer 2) Issue of preference Share is a financing Cash Flow
Answer 3) Sale of Computers ( Fixed Assets ) Can be clasified as an Investing CAsh Flow.
Answer 4) A) This is a use of cash as the wages will be paid to the workers in cash, which will reduce the cash Balance
B) Purchase of building will generate cash outflow for the firm as payment would need to be made for the purchases thus it is a use of cash
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