CORPORATE FINANCE 63C_CFM EXAM REMASTERED

Noted Qs: 10, 13, 17

Q1: Which one of the following is a source of cash?

A. Payment to a supplier

B. Purchase of inventory

C. Granting credit to a customer

D. Repurchase of common stock

E. Acquisition of debt

Explanation:

E is correct because among all of the given options, only the acquisition of debt represent a cash
inflow, other options represent cash outflow.

Q2: Carlisle Express paid $1,282 in interest and $975 in dividends last year. Current assets increased
by $2,700, current liabilities decreased by $420, and long-term debt increased by $2,200. What was
the cash flow to creditors?

A. $3,094

B. −$530

C. −$918

D. 2,132

E. $1,839

Explanation:

Cash flow to creditors = Interest expense – Change in long-term debt = $1,282 - $2,200 = $918

Q3: Which term relates to the cash flow that results from a company's ongoing, normal business
activities?

A. Operating cash flow

B. Cash flow from assets

C. Net working capital

D. Capital spending

E. Cash flow to creditors

Operating cash flow represents the cash flow results from a company’s primary ongoing, normal
business activities

Q4: During the year, Al's Tools decreased its accounts receivable by $160, increased its inventory by
$115, and decreased its accounts payable by $70. How did these three accounts affect the sources of
uses of cash by the firm?

A. Net use of cash of $115

B. Net source of cash of $205

C. Net source of cash of $45

D. Net source of cash of $120

E. Net use of cash of $25

Explanation:

Δ AR = -$160

Δ Invent. = $115

Δ AP = $70

Net change in CF = - Δ AR - Δ Invent. + Δ AP = 160 – 115 – 70 = -$25

Q5: Ernie's Home Repair had beginning long-term debt of $51,207 and ending long-term debt of
$36,714. The beginning and ending total debt balances were $59,513 and $42,612, respectively. The
interest paid was $2,808. What is the amount of the cash flow to creditors?

A. $17,301

B. $17,418

C. −$11,685

D. −$11,272

E. $11,174

Explanation:

Cash flow to creditors = -Δlong-term + Int. expenses = -(36,714 –51,207) + 2,808 = $17,301

Q6: Which one of the following is a use of cash?

A. Decrease in inventory

B. Decrease in accounts receivables

C. Decrease in accounts payable

E. Increase in long-term debt

Explanation:

C is correct because only a decrease in AP among these options is a representation of cash outflows
(using cash).

Q7: Which one of the following is a source of cash?

A. Decrease in accounts payable

B. Decrease in common stock

C. Increase in fixed assets

D. Decrease in inventory

E. Increase in accounts receivable

Explanation:

C is correct because only a decrease in AP among these options is a representation of cash outflows
(using cash).

Q8: A positive cash flow to stockholders indicates which one of the following with certainty?

A. The dividends paid exceeded the net new equity raised.

B. Both the cash flow to assets and the cash flow to creditors must be negative.

C. The amount of the sale of common stock exceeded the amount of dividends paid.

D. Both the cash flow to assets and the cash flow to creditors must be positive.

E. No dividends were distributed, but new shares of stock were sold.

Explanation:

A is correct because the dividends paid represent the cash inflow of the stockholders, while the net
new equity raised represents the cash outflow of the stockholders. Therefore, if the dividends paid
exceed the cash inflow of the stockholders meaning that there is a positive cash flow to stockholders.

Q9: Which one of the following is an expense for accounting purposes but is not an operating cash
flow for financial purposes?

A. Labor costs

B. Interest expense

C. Cost of goods sold

D. Administrative expenses
E. Taxes

Explanation:

B is correct, because the interest expense matters in computing Operating profit therefore it is
classified an expense for accounting purposes. The interest expense represents the financing cash
flow, therefore cannot be classified as an operating cashflow.

Q10: An increase in the interest expense for a firm with a taxable income of $123,000 will:

A. increase net income.

B. decrease the cash flow from equity.

C. increase gross income.

D. increase the cash flow from assets.

E. decrease the operating cash flow.

Explanation:

Q11: Which one of the following statements related to the cash flow to creditors must be correct?

A. A positive cash flow to creditors represents a net cash outflow from the firm.

B. A positive cash flow to creditors means that a firm has increased its long-term debt.

C. If the cash flow to creditors is zero, then a firm has no long-term debt.

D. If the cash flow to creditors is positive, then the firm must have borrowed more money than
it repaid.

E. If the cash flow to creditors is negative, then the firm must have a negative cash flow from
assets.

Explanation:

A positive cash flow to creditors meaning that the firm is repaying the creditor principal and interest,
which represents net cash outflow from the firm.

Q12: At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was
$138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The
interest paid was $6,430. What is the amount of the cash flow to creditors?

A. $11,129

B. $13,861

C. $1,731
D. $19,172

E. −$1,001

Explanation:

Cash flow to creditors = -Δlong-term + Int. expenses = -(68,219 –72,918) + 6,430 = $11,129

Q13: Which two of the following require liquidity but do not necessarily require cash reserves?

A. Precautionary and speculative motives

B. Transaction and precautionary motives

C. Compensating balance requirement and precautionary motive

D. Speculative and transaction motives

E. Compensating balance requirement and transaction motive

Explanation:

Q14: For the past year, Galaxy Interiors had depreciation of $2,419, beginning total assets of
$23,616, and ending total assets of $21,878. Current assets decreased by $1,356. What was the
amount of net capital spending for the year?

A. −$382

B. $1,993

C. $1,172

D. $2,801

E. $2,037

Explanation:

Changes in total assets = $21,878 - $23,616 = -$1,738

Changes in long-term assets = Changes in total assets – Changes in current assets = -$1,738 – (-
$1,356) = -$382

Changes in long-term assets = Ending long-term assets – Beginning long-term assets = CAPEX –
Depreciation

CAPEX = Changes in long-term assets + Depreciation = -$382 + $2419 = $2,037

Q15: Cash flow to stockholders is defined as:

A. the change in total equity over the past year.

B. cash flow from assets plus the cash flow to creditors.

D. operating cash flow minus the cash flow to creditors.

E. the total amount of interest and dividends paid during the past year.

Explanation:

Cash flow to stockholders is defined as the net off of cash inflows to stockholders (including
dividends received) and cash outflows of the stockholders (including new equity raised).

Q16: Net capital spending:

A. reflects the net changes in total assets over a stated period of time.

B. is equal to ending net fixed assets minus beginning net fixed assets

C. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

D. is equal to the net change in the current accounts.

E. is equivalent to the cash flow from assets minus the operating cash flow minus the change in
net working capital.

Explanation:

Net change in fixed assets = Ending fixed assets – Beginning fixed assets = Capital spending –
Depreciation

Capital spending = (Ending fixed assets – beginning assets) + Depreciation

Therefore, if the decrease in the net fixed assets equal to the depreciation expense, net capital
spending is equal to zero.

Q17: Cash management primarily involves:

A. determining the best method of raising capital.

B. optimizing the collections and disbursements of cash.

C. determining the optimal level of liquidity that should be maintained.

D. maximizing the income earned on cash reserves.

E. reconciling a company's book balance with its bank balance.

Explanation:

Q18: The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid
was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets
and decreased net working capital by $1,330. What was the amount of the cash flow to
stockholders?
A. $7,830

B. $18,020

C. $19,998

D. $5,100

E. $20,680

Explanation:

Q19: Which one of the following must be true if a firm had a negative cash flow from assets?

A. The firm borrowed money.

B. The firm utilized outside funding.

C. The firm acquired new fixed assets.

D. Newly issued shares of stock were sold.

E. The firm had a net loss for the period.

Q20: Webster's has beginning net fixed assets of $684,218, ending net fixed assets of $679,426, and
depreciation expense of $48,859. What is the net capital spending for the year if the tax rate is 25
percent?

A. $42,920

B. $35,255

C. $48,600

D. $44,067

E. $53,651

Q21: The sources and uses of cash over a stated period of time are reflected on the:

A. income statement.

B. statement of cash flows.

C. tax reconciliation statement.

D. statement of operating position

E. balance sheet.

Q22: At the beginning of the year, Trees Galore had current liabilities of $15,932 and total debt of
$68,847. By year end, current liabilities were $13,870 and total debt was $72,415. What is the
amount of net new borrowing for the year?

A. $3,568
B. −$2,480

C. −$2,062

D. $4,677

E. $5,630

Q23: Cash flow from assets is also known as the firm's:

A. Free cash flow

B. Hidden cash flow

C. Historical cash flow

D. Capital structure

E. Equity structure

Q24: Carlisle Carpets has cost of goods sold of $92,511, interest expense of $4,608, dividends paid of
$3,200, depreciation of $14,568, an increase in retained earnings of $11,920, and a tax rate of 21
percent. What is the operating cash flow?

A. $34,296.00

B. $36,462.58

C. $31,543.10

D. $42,122.42

E. $36,741.42

Q25: For the year, B&K United increased current liabilities by $1,400, decreased cash by $1,200,
increased net fixed assets by $340, increased accounts receivable by $200, and decreased inventory
by $150. What is the annual change in net working capital?

A. −$2,550

B. −$70

C. $550

D. −$2,210

E. $590