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21. If a company has a current ratio of 2.0, the effect of repaying $150,000 in short-term borrowing will most likely decrease: A. the current ratio, but not the cash flow from operations. B. the cash flow from operations, but not the current ratio. C. neither the current ratio nor the cash flow from operations.

Ans: C. Financing activities include cash flows that result from: borrowing or repaying debt principal, issuing or repurchasing equity capital, and paying cash dividends. Operating activities include cash flows from the sale of a company’s goods/services, the cash impact of changes in operating assets and liabilities, and adjustments for noncash items reported on the income statement (using the indirect method). The repayment of short-term debt would reduce cash flow from financing, not cash flow from operations. Current ratio= Any time the current ratio is above 1, equal changes in a current asset and a current liability will result in an increase in the current ratio: if current assets = 550 and current liabilities are 275, current ratio = 550/275 = 2.0. After the bank borrowing has been paid, the ratio becomes (550-150)/(275-150) = 3.2. Had the ratio initially been below 1, current assets = 250 and current liabilities are 275, current ratio = 250/275 = 0.91, the equal change in current assets and liabilities would decrease the current ratio: 100/125=0.80.

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22. At the end of the year, a company sold equipment for $30,000 cash. The company paid $110,000 for the equipment several years ago and had recorded accumulated depreciation of $70,000 at the time of its sale. All else equal, the equipment sale will result in the company’s cash flow from: A. investing activities increasing by $30,000. B.  B. investing activities decreasing by $10,000. C.  C. operating activities being $10,000 less than net income.

Ans: A. The book value of the equipment at the time of sale is $110,000 - $70,000 = $40,000. The proceeds are $30,000; therefore a loss of $10,000 is reported on the income statement. The loss reduces net income, but it is a non-cash amount, so is added back to net income in the calculation of the cash from operations. Therefore, cash from operations is higher than net income, not lower. The total amount of the proceeds, $30,000, is the cash inflow from the transaction and is shown as a cash inflow from investing activities.

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23.An analyst gathers the following annual information ($ millions) about a company that pays no dividends and has no debt: Net income 45.8 Depreciation 18.2 Loss on sale of equipment 1.6 Decrease in accounts receivable 4.2 Increase in inventories 3.4 Increase in accounts payable 2.5 Capital expenditures 7.3 Proceeds from sale of stock 8.5 The company’s annual free cash flow to equity ($ millions) is closest to: A. 53.1. B. 58.4. C. 61.6.

Ans: C. Free cash flow to equity in a company without any debt is equal to cash flow from operations (CFO) less capital expenditures. CFO = net income + depreciation + loss on sale of equipment + decrease in accounts receivable – increase in inventories + increase in accounts payable. (The loss on sale of equipment is added back when calculating CFO. It would have been deducted in the calculation of net income but the loss is not the cash impact of the transaction (the proceeds received, if any, would be the cash effect) and cash flows related to equipment transactions are investing activities, not operating activities. CFO = 45.8 + 18.2 +1.6 + 4.2 – 3.4 +2.5 = $68.9 million $68.9 – $7.3 = $61.6 million free cash flow to equity.

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24. An analyst gathers the following information about three equipment sales that a company made at the end of the year: Original Cost Accumulated Depreciation at Date of Sale Sales Proceeds 1 $200,000 $150,000 $70,000 2 $200,000 $200,000 $30,000 3 $300,00 $250,000 $40,000 All else equal for that year, the company’s cash flow from operations will most likely be: A. the same as net income. B. $40,000 less than net income C. $140,000 less than net income.		Ans: B. (000) Book value=Ori. Cost-Accu. Depre. Sales proceeds Gain=sales proceed-BV 1 200-150=50 70 70-50=20 2 200-200=0 30 30-0=30 3 300-250=50 40 40-50=(10) Total 40 The net gain is $40,000. The amount that would be deducted from net income to determine cash flow from operations is equal to the net gain of $40,000.

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25. An analyst has gathered the following information about a company: Cdn $ millions Cash flow from operating activities (CFO) 105.9 Cash flow from investing activities (CFI) (11.8) Cash flow from financing activities (CFF) 46.5 Net changed in the cash for the year 140.6 Interest paid (included in CFO) 22.4 Taxes paid (tax rate of 30%) 18.0 Total debt, end of year 512.8 The cash flow debt coverage ratio for the year is closest to: A. 20.6%. B. 23.7%. C. 27.4%.

Ans: A. cash flow debt coverage ratio =CFO/Total debt =105.9/512.8=20.6%

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26. If a company has a current ratio of 2.0, that company’s repayment of $510,000 in short-term borrowing obtained from a bank would most likely decrease: A. current ratio, but not cash flow from operations. B. cash flow from operations, but not current ratio. C. neither current ratio nor cash flow from operations

Ans: D. The current ratio is above 1.0, so the payment of short-term borrowing would increase the current ratio; it would reduce both the numerator ad denominator by the same amount. The repayment of short-term debt would reduce cash flow from financing, not cash flow from operations.

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27. At the end of the year, a company sold equipment for $30,000 cash. The company paid $110,000 for the equipment several years ago and had accumulated depreciation of $70,000 doe the equipment at the time of sale. All else equal, the equipment sale will result in the company’s cash flow: A. investing activities decreasing by $10,000. B. investing activities increasing by $30,000. C. operating activities being $10,000 less than net income.

Ans: B. Investing activities include cash flows that result from the purchase or sale of any long-term assets, including fixed assets, long-term investments, and business acquisitions. The total amount of the proceeds ($30,000) would be shown as a cash inflow from investing activities. A is incorrect. The cash proceeds received from the sale of long-term assets should be recorded as CFI. A is incorrect. The book value of the equipment would been $110,000-$70,000=$40,000 at the time of the sale, so a loss of $10,000 (=$30,000-40,000) for financial statement purposes would be realized. The net loss would reduce net income and would be adjusted in the statement of cash flow by adding the net loss to net income. So CFO would be $10,000 more that net income.

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27. In 2012, a company reported net income of $130 million and cash flow from operations of $120 million. All else equal, the most likely explanation for the difference between net income and CFO in 2012 is that the company: A. tightened credit policies and increased collection efforts during the year. B. purchased new PP&E at the beginning of the year. C. increased raw material inventory in anticipation of increased sales at the end of the year.

Ans: C. The increase in inventory (working capital investment) would reduce CFO relative to net income. Reference: question 23. A is incorrect. This would increase CFO relative to net income. B is incorrect. This would decrease CFI.

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28. an analyst gathered the following annual information ($millions) about a company that pays no dividends and has no debt: Net income 45.8 Depreciation 18.2 Loss on sale of equipment 1.6 Decrease in AR 4.2 Increase in inventories 3.4 Increase in AP 2.5 Capital expenditures 7.3 Proceeds from sale of stock 8.5 The company’s annual free cash flow to equity ($million) is closet to: A. 53.1. B. 58.4. C. 61.6.

Ans: C. FIFE=CFO-Capital expenditures+/-net borrowing CFO =Net income + depreciation + loss on sale of equipment +decrease in AR- increase in inventories + increase in AP =45.8+18.2+1.6+4.2-3.4+2.5 =$68.9million FCFE=68.9-7.3=$61.6.

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29. Financial data for Woodview Corporation, a company that uses U.S.GAAP, are as follows: 2012 2011 Net income $40,000 $35,000 Dividends paid 15,000 13,000 Depreciation 25,000 20,000 Capital expenditures 60,000 50,000 Sale of equipment* 3,500 Net property and equipment 530,000 500,000 Long-term investments 10,000 12,000 Long-term debt 170,000 150,000 *Cost basis of equipment sold was $5,000. Using the information above, cash from operations and cash from financing activities reported on the company’s statement of cash flows for 2012 would be closest to? A. $66,500 for CFO and $5,000 for CFF. B. $65,000 for CFO and -$15,000 for CFF. C. $66,500 for CFO and -$15,000 for CFF.

Ans: A. Cash from operating activities: Net income $40,000 Depreciation 25,000 Loss on sale of equipment* 1,500 Total cash from operating activities $66,500 *Loss on sale of equipment Proceeds $3,500 Book value (5,000) Loss $(1,500) Cash from financing activities: Dividends paid (15,000) Increase in long-term debt 20,000 Total cash from financing activities 5,000