Question: Which of the following is true?

1. Depreciation has no effect on taxes.

2. B. Taxable income equals net income divided by (1 + Average tax rate).

3. C. Interest paid is a noncash item.

4. D. Taxable income must be a positive value.

5. E. Net income is distributed either to dividends or retained earnings.

6. Answer: E. Net income is distributed either to dividends or retained earnings

7. Question: Given a profitable firm, depreciation:

8. Answer: lowers taxes.

9. Question: A firm has $728 in inventory, $1,365 in fixed assets, $473 in accounts receivable, $251 in net working capital, and $141 in cash. What is the amount of current liabilities?

10. Answer: $1091

11. Question: Cash flow from assets equals:

12. Answer: cash flow to creditors − cash flow to stockholders

13. Question: The market value:

14. Answer: of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

15. Question: Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

16. Answer: Noncash item

17. Question: A firm’s liquidity level decreases when:

18. Answer: inventory is purchased with cash.

19. Question:

20. Answer: Cash coverage ratio = 2.6; debt-equity ratio = .3

21. Question: Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

22. Answer: Cash payment of an account payable

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24. Question: A common-size balance sheet helps financial managers determine:

25. Answer: if changes are occurring in a firm’s mix of assets.