Question Details

The year-end balance sheets for Wolken Enterprise


1.	Which of the following statements is CORRECT?
a.	The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.
b.	The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."
c.	The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).
d.	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).
e.	If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.


		

	2.	Below are the year-end balance sheets for Wolken Enterprises:

Assets:	2013	2012
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	  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

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2012. As of the end of 2013, none of the principal on this debt had been repaid. Assume that the company's sales in 2012 and 2013 were the same. Which of the following statements must be CORRECT?
a.	Wolken increased its short-term bank debt in 2013.
b.	Wolken issued long-term debt in 2013.
c.	Wolken issued new common stock in 2013.
d.	Wolken repurchased some common stock in 2013.
e.	Wolken had negative net income in 2013.


	

	3.	On its 2012 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2013. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
a.	Dividends could have been paid in 2013, but they would have had to equal the earnings for the year.
b.	If the company lost money in 2013, they must have paid dividends.
c.	The company must have had zero net income in 2013.
d.	The company must have paid out half of its earnings as dividends.
e.	The company must have paid no dividends in 2013.


	

	4.	Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets:

	2012	2011
Common stock	$2,000	$1,000
Retained earnings	  2,000	  2,340
Total common equity	$4,000	$3,340

The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?
a.	The company's net income in 2011 was higher than in 2012.
b.	The company issued common stock in 2012.
c.	The market price of the company's stock doubled in 2012.
d.	The company had positive net income in both 2011 and 2012, but the company's net income in 2009 was lower than it was in 2011.
e.	The company has more equity than debt on its balance sheet.


		

	5.	Which of the following statements is CORRECT?
a.	The more depreciation a firm has in a given year, the higher its EPS, other things held constant.
b.	Typically, a firm's DPS should exceed its EPS.
c.	Typically, a firm's EBIT should exceed its EBITDA.
d.	If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.
e.	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.
		





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