Which of the following statements are true? Select all that apply. a. By adding

Question

Which of the following statements are true? Select all that apply.

a. By adding the current market value of a publicly traded stock and the current market value of the firm’s debt, will equal the total market value of the firm.

b. An asset which is sold quickly no matter the price, is considered a liquid asset.

c. The income statement accurately measures a firm’s operating cash flows.

d. Depreciation expense is a non-cash item on the balance sheet.

e. The cash flow from assets include operating cash flow, net capital spending and additions to net working capital.

f. Cash flow to stockholders is equal to dividends paid less net new equity.

g. Cash flow from assets may still be positive even though operating cash flow is negative.

h. Cash flow to creditors minus cash flow to stockholders is equal to cash flow from assets.

Explanation / Answer

a. False. Market value of the firm is equal to current market value of the stock. Current share price multiplied by number of shares outstanding.

b. True. Liquidity is the measure how easily an asset can be converted into cash. An asset which can be sold quickly and easily in market to get the cash when needed, is called a liquid asset.

c. False. Income statement has all the income and expenses, which a firm has earned or incurred whether in cash or credit for a given period of time, thus it is not a measure of operating cash flow.

d. True. Depreciation is reduction in the value of an asset over a period of time due to wear and tear, which is not a cash expense.

e. True. Cash flow from assets = Operating Cash flow - Net Capital spending - Additions to net working capital.

f. True. Cash flow to stockholders is equal to dividends paid but if any stockholder has bought any new share/equity then, it has to be deducted from the amount of dividend paid to get the cash flow to stockholders.

g. True. A company can sell its assets to cover its negative operating cah flow and turn it in positive cash flow from assets.

h. False. Cash flow from assets = Cash flow to creditors + cash flow to stockholders.

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