QUESTION: 1637

The financial statements of Multiverse for 1997 showed the following:

Dividends paid 60
Provision for bad debt 15
Depreciation 90
Interest paid 35
Proceeds from new bonds issued 225
Bonds retired 400
Gain on bonds retired 25
Shares repurchased 195
Net Income 350
Tax rate 50%
-405
-430
-370
N. -380

Answer(s): D

Explanation:

Items a, e, f, g and h are financing items. However, remember that item g, gain on bonds retired, is an extraordinary item under SFAS 4 and presented after-tax. Hence, the total cash spent on retiring bonds = 400 - 25/(1-0.5) = 350.Therefore, financing cash flow = -60 + 225 - (400 - 25/0.5) - 195 = - 380.

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QUESTION: 1638

When a business is acquired, the purchasing company calculates goodwill associated with the acquisition as the difference between the purchase price and the ________.

book value of the identifiable net assets acquired
book value of the net tangible assets acquired
fair value of the net tangible assets acquired
book value of the total assets acquired
fair value of the identifiable net assets acquired

Answer(s): E

Explanation:

Goodwill is the difference between the amount paid for the business and the fair value of this business. The fair value can be calculated using net assets (total assets minus total liabilities), or shareholders' equity.

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QUESTION: 1639

A firm has legal cash expenses of 300 and a tax rate of 40. If it chooses to capitalize the costs and depreciated them over 3 years, the operating cash flow under capitalization, compared to that under expensing, will be ________.

smaller by 220
larger by 180
larger by 220
smaller by 180

Answer(s): C

Explanation:

Under expensing, the operating cash flow will be reduced due to this expense by 300*(1-0.4) = 180 (there is an outflow of 300 but since the expenses are tax deductible, taxes on total income get reduced by 120). Instead, if the firm capitalized the expense, an asset value of 300 will be generated. The entire expense will be charged against investing cash flow. Depreciation of capitalized expense leads to a depreciation expense of 300/3 = 100. This will reduce taxes paid by 100*0.4 = 40. Thus, capitalization leads to an increase in the operating cash flow of 40. In summary, expensing reduces the expense by 180 while capitalization increases operating cash flow by 40. Thus, operating cash flow under capitalization is larger by 40 - (-180) = 220.

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QUESTION: 1640

Which of the following would not be included as equity in a corporate balance sheet?

Common stock
Preferred stock
Cash
Retained earnings

Answer(s): C

Explanation:

Cash does not represent equity; equity consists of the book value of a company; i.e., assets, minus liabilities.

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Free CFA-Level-I Exam Braindumps (page: 410)

QUESTION: 1637

Explanation:

QUESTION: 1638

Explanation:

QUESTION: 1639

Explanation:

QUESTION: 1640

Explanation: