MID-TERM EXAM 1

Question 1. 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?
E. $34,296.00
Net income = $3,200 + 11,920= $15,120
Taxable income = $15,120/(1 − .21)
Taxable income = $19,139.24
EBIT = $19,139.24 + 4,608 = $23,747.24
Taxes = $19,139.24 − 15,120 = $4,019.24
OCF = $23,747.24 + 14,568 − 4,019.24
OCF = $34,296.00
Question 2. Net capital spending:
A. is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
B. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net
working capital.
C. is equal to ending net fixed assets minus beginning net fixed assets
D. is equal to the net change in the current accounts.
E. reflects the net changes in total assets over a stated period of time.
Net capital spending = Ending Net Fixed Assets – Beginning Net Fixed Assets + Depreciation.
If the decrease in net fixed assets equals the depreciation, it means no actual capital spending occurred
— only depreciation reduced the asset value. So, net capital spending = 0.

Question 3. 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?
Ans: Net use of cash of $25
Sources(uses) of cash = $160 - 115 - 70 = -$25

Question 4. Which one of the following statements related to the cash flow to creditors must be
correct?
A. If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid.
B. If the cash flow to creditors is zero, then a firm has no long-term debt.
C. If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets.
D. A positive cash flow to creditors represents a net cash outflow from the firm.
E. A positive cash flow to creditors means that a firm has increased its long-term debt.
A positive cash flow to creditors meaning that the firm is repaying the creditor principal and interest,
which represents net cash flow from the firm

Question 5. 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?
The correct answer is: −$2,550
Total Change in Current Assets = –1,200 + 200 – 150 = –1,150
Change in NWC=Change in Current Assets−Change in Current Liabilities
Change in NWC= –1,150–1,400=–2,550

Question 6. Which one of the following is a use of cash?

A. Decrease in accounts receivables
B. Increase in long-term debt
C. Decrease in accounts payable
D. Decrease in inventory
E. Decrease in fixed assets
Because only a decrease in AP among these options is a representation of cash outflows (using cash)

Question 7. Which one of the following is a source of cash?

A. Repurchase of common stock
B. Granting credit to a customer
C. Acquisition of debt
D. Purchase of inventory
E. Payment to a supplier
Because among all of the given options, only the acquisition of debt represent a cash inflow, other options
represent cash outflows

Question 8. Cash flow from assets is also known as the firm's:

A. Hidden cash flow
B. Historical cash flow
C. Free cash flow
D. Equity structure
E. Capital structure

Cash flow from assets is the cash a firm generates from its operations after paying for capital
expenditures. This is also called free cash flow, as it is available to be distributed to creditors and
shareholders.

Question 9. 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. $1,993
B. $2,801
C.−$382
D. $2,037
E. $1,172
Net capital spending = $21,878 − 23,616 + 1,356 + 2,419
Net capital spending = $2,037

Question 10. Which two of the following require liquidity but do not necessarily require cash
reserves?
A. Compensating balance requirement and transaction motive
B. Transaction and precautionary motives
C. Precautionary and speculative motives
D. Speculative and transaction motives
E. Compensating balance requirement and precautionary motive

Both require liquidity to handle unexpected needs (precautionary) or take advantage of opportunities
(speculative).
They don’t require actual cash, just assets that can quickly be converted to cash.

Question 11. Cash management primarily involves:

A. reconciling a company's book balance with its bank balance.
B. maximizing the income earned on cash reserves.
C. determining the best method of raising capital.
D. determining the optimal level of liquidity that should be maintained.
E. optimizing the collections and disbursements of cash.

Cash management focuses on ensuring that a company has enough cash for operations by efficiently
managing inflows (collections) and outflows (disbursements) to maintain liquidity and reduce idle cash.

Question 12. 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?
The correct answer is: $17,301
CFC = $2,808 − ($36,714 − 51,207)
CFC = $17,301
Question 13. 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?
The correct answer is: $20,680
Cash flow to stockholders = Cash flow from assets − Cash flow to creditors.
Cash flow from assets = Operating cash flow − Net capital spending − Changes in
NWC = 48,450 − 24,000 − (−1,330) = $25,780.
Cash flow to creditors = Interest paid + Net debt repayment = 2,480 + 2,620 = $5,100.
Cash flow to stockholders = 25,780 − 5,100 = $20,680.
Question 14. 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?
The correct answer is: $11,129
Cash flow to creditors = Interest paid + Net debt repayment.
Long-term debt decreased by 72,918 − 68,219 = $4,699 (net repayment).
Total = 6,430 + 4,699 = $11,129.
Question 15. 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?
The correct answer is: $5,630
Total Debt = Current Liabilities + Long-term Debt
Beginning total debt = $68,847
Beginning current liabilities = $15,932
⇒ Beginning long-term debt = $68,847 – $15,932 = $52,915
Ending total debt = $72,415
Ending current liabilities = $13,870
⇒ Ending long-term debt = $72,415 – $13,870 = $58,545
Net new borrowing = Ending long-term debt – Beginning long-term debt
⇒ $58,545 – $52,915 = $5,630
Question 16. A positive cash flow to stockholders indicates which one of the following with
certainty?
A. Both the cash flow to assets and the cash flow to creditors must be negative.
B. Both the cash flow to assets and the cash flow to creditors must be positive.
C. The dividends paid exceeded the net new equity raised.
D. No dividends were distributed, but new shares of stock were sold.
E. The amount of the sale of common stock exceeded the amount of dividends paid.
Explain: A positive cash flow to stockholders means the company gave more cash to shareholders than it
raised from them. This only happens if dividends paid > net new equity raised.
Question 17. Cash flow to stockholders is defined as:
A. the change in total equity over the past year.
B. operating cash flow minus the cash flow to creditors.
C. dividend payments less net new equity raised.
D. the total amount of interest and dividends paid during the past year.
E. cash flow from assets plus the cash flow to creditors.
Explain: Cash flow to stockholders = Dividends paid − Net new equity raised
Question 18. Which term relates to the cash flow that results from a company's ongoing, normal
business activities?
A. Operating cash flow
B. Net working capital
C. Capital spending
D. Cash flow to creditors
E. Cash flow from assets
Explain: The cash generated from a company’s core operations (revenues −
operating expenses, excluding financing and investing) is called operating cash flow
(OCF).
Question 19. Which one of the following must be true if a firm had a negative cash flow from
assets?
A. The firm had a net loss for the period.
B. The firm borrowed money.
C. Newly issued shares of stock were sold.
D. The firm acquired new fixed assets.
E. The firm utilized outside funding.
Explain: If cash flow from assets is negative, the firm didn't generate enough from operations to cover
investments — so it must have used external financing (e.g., debt or equity).
Question 20. Which one of the following is an expense for accounting purposes but is not an
operating cash flow for financial purposes?
A. Taxes
B. Cost of goods sold
C. Administrative expenses
D. Interest expense
E. Labor costs
Explain: Interest expense is an accounting cost but not included in operating cash flow because it relates
to financing activities, not core operations. OCF focuses on the firm's business performance, and interest
is excluded to avoid mixing financial decisions with operational results.
OCF = EBIT + Depreciation − Taxes.
Question 21. An increase in the interest expense for a firm with a taxable income of $123,000 will:
A. increase gross income.
B. decrease the cash flow from equity.
C. increase the cash flow from assets.
D. increase net income.
E. decrease the operating cash flow.
Explain: When interest expense increases, taxable income decreases, reducing taxes paid. Although
interest is not part of operating cash flow, the tax savings increase overall cash flow from assets due to the
interest tax shield.
Others are wrong because:
A. Gross income is calculated before interest expense. Interest doesn’t affect gross income.
B. Higher interest payments affect creditors, not equity holders directly. Cash flow to equity depends
on dividends and equity financing.
D. More interest expense reduces NI because it’s a cost deducted before calculating NI.
E. OCF excludes interest expense. It’s based on EBIT.
Question 22. 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?
The correct answer is: −$918
Explain:
Long-term debt increased (inflow) = Net new borrowing = $2,200
Cash Flow to Creditors = Interest − Net New Borrowing = 1,282 − 2,200 = −$918
Question 23. 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?
The correct answer is: $44,067
Explain:
Net Capital Spending = Ending NFA − Beginning NFA + Depreciation
= 679,426 − 684,218 + 48,859 = $44,067
Question 24. Which one of the following is a source of cash?
A. Increase in accounts receivable
B. Decrease in accounts payable
C. Decrease in common stock
D. Decrease in inventory
E. Increase in fixed assets
Explain:
Decrease in inventory = using less cash to hold inventory = cash inflow = a source of cash. Other choices
are outflows = use of cash:
A. Increase AR => More sales were made on credit, cash hasn’t been collected yet.
B. Decrease AP => the firm paid off more debts to suppliers, cash went out.
C. Decrease common stock => buying back shares, uses cash.
E. Increase FA => Buying equipment or buildings uses cash.
Question 25. The sources and uses of cash over a stated period of time are reflected on the:
A. tax reconciliation statement.
B. statement of cash flows.
C. income statement.
D. balance sheet.
E. statement of operating position
Explain: Only the statement of cash flows breaks down where cash came from and where it went:
operations, investing, and financing.

MID-TERM EXAM 2
Question 1 (25 point): Multiple choice: Giống Mid-term 1

Question 2 (Chưa học) (15 point): The variance of the daily cash flows for the Pele Bicycle Shop is
$890,000. The opportunity cost to the firm of holding cash is 4.1 percent per year. What should the
target cash level and the upper limit be if the tolerable lower limit has been established as
$160,000? The fixed cost of buying and selling securities is $300 per transaction.
Question 3 (50 point): The comparative balance sheets for Rothlisberger Company as of December
31 are presented below.
Rothlisberger Company Comparative Balance Sheets December 31
Assets 2020 2019
Cash $ 81,000 $ 45,000
Accounts receivable 41,000 62,000
Inventory 151,450 142,000
Prepaid expenses 15,280 21,000
Land 105,000 130,000
Buildings 200,000 200,000
Accumulated depreciation—buildings (60,000) (40,000)
Equipment 221,000 155,000
Accumulated depreciation—equipment (45,000) (35,000)
Total $709,730 $680,000
Liabilities and Stockholders’ Equity
Accounts payable $ 47,730 $ 40,000

Bonds payable 260,000 300,000

Common stock, $1 par 200,000 160,000
Retained earnings 202,000 180,000
Total $709,730 $680,000

Additional information:
1. Operating expenses include depreciation expense of $42,000 and charges from prepaid
expenses of $5,720.
2. Land was sold for cash at book value.
3. Cash dividends of $20,000 were paid.
4. Net income for 2020 was $42,000.
5. Equipment was purchased for $88,000 cash. In addition, equipment costing $22,000 with a
book value of $10,000 was sold for $6,000 cash.
6. Bonds were converted at face value by issuing 40,000 shares of $1 par value common stock.
Requirement: Prepare a statement of cash flows for the year ended December 31, 2020, using the
indirect method.
—----------------
Decrease in account receivable: $62,000 - $41,000 = $21,000
Increase in inventories: $151,450 - $142,000 = $9,450
Decrease in prepaid expenses: $21,000 - $15,280 = $5,720
Increase in account payable: $47,730 - $40,000 = $7,730
Loss of sale of equipment: $10,000 - $6,000 = $4,000
Sale of land: $130,000 - $105,000 = $25,000