Question #1 of 9 Question ID: 1573572

Joplin Corporation reports the following in its year-end financial statements:

Net income of $43.7 million.

Depreciation expense of $4.2 million.
Increase in accounts receivable of $1.5 million.
Decrease in accounts payable of $2.3 million.
Sold equipment for $15 million.
Purchased equipment for $35 million.

Joplin's free cash flow to the firm (FCFF) is closest to:

A) $39 million.
B) $24 million.
C) $28 million.

Explanation

Free cash flow to the firm = net income + noncash charges + after-tax interest – fixed
capital investment – working capital investment.

Net income is $43.7 million.

Noncash charges are $4.2 million (depreciation expense).

No interest expense is shown.

Fixed capital investment is $35 million purchased – $15 million sold = $20 million.

Working capital investment is $1.5 million increase in accounts receivable + $2.3 million
decrease in accounts payable = $3.8 million. (Both are uses of cash)

FCFF = $43.7 million + $4.2 million – $20 million – $3.8 million = $24.1 million.

(Module 33.1, LOS 33.b)

Question #2 of 9 Question ID: 1573571

The RR Corporation had cash flow from operations of $20 million. RR purchased $5 million in
equipment and sold $3 million of equipment during the period. What is RR's free cash flow
to equity for the period?

A) $15 million.
B) $18 million.
C) $22 million.

Explanation

Free cash flow to equity (FCFE) is generally defined as cash flow from operations (CFO) less
net fixed capital expenditures plus net borrowing. No information on borrowing is given
here, so FCFE = 20 – (5 – 3) = $18 million.

(Module 33.1, LOS 33.b)

Question #3 of 9 Question ID: 1573568

A common-size cash flow statement is least likely to provide payments to employees as a

percentage of:

A) revenues for the period.

B) operating cash flow for the period.
C) total cash outflows for the period.

Explanation

There are two formats for a common-size cash flow statement, expressing each type of
outflow as a percentage of total cash outflows or as a percentage of total revenue for the
period. Operating cash flow for the period mixes inflows and outflows and is not used to
calculate percentage flows for payment made.

(Module 33.1, LOS 33.a)

Question #4 of 9 Question ID: 1573574

A common-size cash flow statement is least likely to show each cash inflow as a percentage
of:

A) revenue.
B) all cash inflows.
C) total cash flows.

Explanation
Common-size cash flow statements show each cash flow item as a percentage of revenue
or show each cash flow outflow as a percentage of all cash outflows and each cash inflow
as a percentage of all cash inflows. (Module 33.1, LOS 33.b)

Question #5 of 9 Question ID: 1573566

How does decreasing accounts payable turnover affect a company's cash flow from
financing activities and is this source of cash sustainable?

Financing cash flow Sustainable source

A) Increase No

B) No impact No

C) No impact Yes

Explanation

Decreasing accounts payable turnover saves cash by delaying payments to suppliers. The
result is an operating source of cash, not a financing source. Decreasing accounts payable
turnover is not a sustainable source of cash flow because suppliers will refuse to extend
credit, at some point, if payment is slower and slower.

(Module 33.1, LOS 33.a)

Question #6 of 9 Question ID: 1573569

Which of the following best describes a ratio that measures a firm's ability to acquire long-
term assets with cash flows from operations, and a performance ratio, respectively?

Acquire assets with CFO Performance ratio

Investing and financing

A) Cash-to-income ratio
ratio

B) Reinvestment ratio Cash-to-income ratio

C) Reinvestment ratio Debt payment ratio

Explanation

The reinvestment ratio measures a firm's ability to acquire long-term assets with cash
flows from operations. In contrast, the investing and financing ratio, which is more
comprehensive, measures the firm's ability to purchase assets, satisfy debts, and pay
dividends.

The cash-to-income ratio measures the ability to generate cash from a firm's operations
and is a performance ratio for cash flow analysis purposes. The debt payment ratio
measures the firm's ability to satisfy long-term debt with cash flow from operations but it
is more of a coverage ratio than a performance ratio.

(Module 33.1, LOS 33.b)

Question #7 of 9 Question ID: 1573570

Selected information from the most recent cash flow statement of Thibault Company
appears below:

Cash collections €8,900

Cash paid to suppliers (€3,700)

Cash operating expenses (€1,500)

Cash taxes paid (€2,400)

Cash from operating activities €1,300

Cash paid for plant and equipment (€2,600)

Cash interest received €700

Cash dividends received €600

Cash from investing activities (€1,300)

Cash received from debt issuance €2,000

Cash interest paid (€400)

Cash dividends paid (€600)

Cash from financing activities €1,000

Total change in cash €1,000

Thibault's reinvestment ratio for this period is closest to:

A) 0.50.
B) 0.75.
C) 1.00.

Explanation

The reinvestment ratio is CFO divided by cash paid for long-term assets: €1,300 / €2,600 =
0.5. (Note that on this cash flow statement, CFI includes interest and dividends received
and CFF includes interest paid, which is acceptable under IFRS.)

(Module 33.1, LOS 33.b)

Question #8 of 9 Question ID: 1573573

David Chance, CFA, is analyzing Grow Corporation. Chance gathers the following
information:

Net cash provided by operating activities $3,500

Net cash used for fixed capital investments $727

Cash paid for interest $195

Income before tax $4,400

Income tax expense $1,540

Net income $2,860

Grow's free cash flow to the firm (FCFF) is closest to:

A) $2,640.
B) $2,900.
C) $2,260.

Explanation

FCFF = CFO + Int(1 − tax rate) − capital expenditures

1,540
FCFF = 3,500 + [195 × (1 − ( ))] − 727 = 2,899.75 ≈ 2,900
4,400

(Module 33.1, LOS 33.b)

Question #9 of 9 Question ID: 1573567

Consider the following:

Statement #1: One approach to presenting a common-size cash flow statement is to express
each inflow of cash as a percentage of total cash inflows and each outflow of cash as a
percentage of total cash outflows.

Statement #2: Expressing each line item of the cash flow statement as a percentage of
revenue is useful in forecasting future cash flows.

Which of these statements regarding a common-size cash flow statement is (are) CORRECT?

A) Only statement #1 is correct.

B) Only statement #2 is correct.
C) Both statements are correct.

Explanation

A cash flow statement can be presented in common-size format by expressing each line
item as a percentage of total revenue or by expressing each inflow of cash as a percentage
of total cash inflows and each outflow as a percentage of total cash outflows. Expressing
each line item of the cash flow statement as a percentage of revenue is useful in
forecasting future cash flows since revenue usually drives the forecast.

(Module 33.1, LOS 33.a)