Question Details

Aubey Aircraft recently announced that its net income increased sharply 


	1.	Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?
a.	The company's operating income declined.
b.	The company's expenditures on fixed assets declined.
c.	The company's cost of goods sold increased.
d.	The company's depreciation and amortization expenses declined.
e.	The company's interest expense increased.



	2.	Which of the following statements is CORRECT?
a.	The statement of cash flows shows how much the firm's cashthe total of currency, bank deposits, and short-term liquid securities (or cash equivalents)increased or decreased during a given year.
b.	The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
c.	The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
d.	The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
e.	The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.


		

	3.	Which of the following statements is CORRECT?
a.	In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.
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 reported as a use of cash.
d.	In the statement of cash flows, depreciation charges are reported as a use of cash.
e.	In the statement of cash flows, a decrease in inventories is reported as a use of cash.


	4.	For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?
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, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.
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 are 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.



	5.	Which of the following statements is CORRECT?
a.	Net cash flow (NCF) is defined as follows: 
NCF = Net income -  Depreciation and Amortization.
b.	Changes in working capital have no effect on free cash flow.
c.	Free cash flow (FCF) is defined as follows:
FCF = EBIT(1  T)
        + Depreciation and Amortization
         Capital expenditures required to sustain operations
         Required changes in net operating working capital.
d.	Free cash flow (FCF) is defined as follows:
FCF = EBIT(1  T)+ Depreciation and Amortization + Capital expenditures.
e.	Net cash flow is the same as free cash flow (FCF).




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